Inbound direct investment

Author: | Published: 1 Jul 2008
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In a concerted effort to increase foreign direct investment in Japan, on May 20 2008, the Expert Committee on FDI Promotion, an advisory group to the Minister of State on Economic and Fiscal Policy, presented five recommendations to the Council on Economic and Fiscal Policy. Given that the ratio of Japanese inbound direct investment to GDP, according to the Expert Committee, was only 2.5% in 2006, the lowest of the world's leading economies, shining the spotlight on Japan's need to expand investment is especially pertinent.

The Expert Committee's recommendations represent the latest step taken with regard to regulation of foreign investment in Japan. Before this presentation of recommendations, the Japanese government had reviewed its regulations to address national security concerns due to changes in the global environment, and on September 28 2007, had amended the Cabinet Order on Inbound Direct Investment and its subordinate rules. These changes may also have been due in part to pressure felt by the Japanese government given that prior to 2007 the previous amendment of the Cabinet Order was in 1991; other leading countries have tightened their regulations to ensure national security much more recently.

The Ministry of Economy, Trade and Industry, responsible for drafting the amendments, proposed the following three principles as guidelines for preparing the 2007 amendments: (i) follow the OECD investment rule; (ii) harmonise with the regulations of other leading countries; and (iii) implement the government's policy of promoting inbound direct investment. However, as the Japanese saying goes, it is often difficult to catch two hares. Interestingly, the 2007 amendments appear to have resulted in restricting rather than promoting inbound direct investment.

For example, the 2007 amendments changed the regulatory scheme from a focus on particular industries to a focus on products, thereby extending the regulations to companies that were previously unregulated. Some non-defence companies that produce parts or components used for manufacturing by defence companies in their manufacturing became subject to regulatory approval, whereas prior to the 2007 amendments those non-defence companies might have been excluded. In addition, the 2007 amendments increased the scope of restricted dealings by including therein non-direct investments in national security-related manufacturers through their parent companies.

Even in instances where these amendments are intended to address national security concerns and promotion of foreign investment, those amendments tend to come up short with regard to inbound direct investment. For example, the amendments include an exception to certain regulatory requirements for investments in companies that are held by foreigners. However, the exception is very limited and applies only if (i) the target company is listed; (ii) more than half of the voting rights of the target company are held by foreign investors; and (iii) no foreign investor of the company holds more than 10% of the company's voting rights. Although it is too early to fully understand the effect that the 2007 will amendments have on inbound direct investment, one thing is certain: Japan must work on improving the rate of its inbound direct investment.

The Expert Committee, in its May 20 recommendation, proposed that the Japanese government initiate comprehensive studies on desirable forms of foreign capital regulation to help increase its inbound direct investment levels. The Committee stated that the goal of these studies is to create and advance a transparent and predictable foreign capital regulatory system: "while maintaining national security, [and] public order".

The Expert Committee further suggested that: "The scope and grounds of cases where foreign capital regulations are necessary should be clarified as exceptions to the principle of nondiscrimination between domestic and foreign parties, and Japan's open approach should be shown to the rest of the world."

Since the Expert Committee recommends that the Japanese government pursue these comprehensive studies during the 2008 fiscal year, the government's attitude toward a more open foreign investment policy and its level of commitment regarding the increasing inbound direct investment will become more apparent after we wait to see whether the government will in fact follow the advice contained in these comprehensive studies.