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- The amendment to the Foreign Exchange and Foreign Trade Act (FEFTA), approved by the Cabinet on March 17, would strengthen regulation of inward foreign direct investment screening and advance its institutional reform in response to rising geopolitical risks.
- As policymakers seek to balance investment promotion with risk management, the United States has pursued tighter regulations while also streamlining procedures for low-risk investors.
- To make a Japanese version of CFIUS effective, it is essential not only to design an appropriate institutional frameworks but also to strengthen foundational capacities, including personnel and information resources.
On March 17, 2026, the Takaichi Cabinet approved a bill to amend the Foreign Exchange and Foreign Trade Act (FEFTA) to strengthen screening of inward investment into Japan. In addition to tightening regulations on indirect investment in Japanese firms by foreign investors, the bill aims to introduce a so-called “Japanese version of CFIUS.”
What do these developments mean for Japan’s economic security? This article examines their significance and challenges through comparison with the U.S. system, widely regarded as the world’s strongest investment screening regime.
Global Trends in Inward Investment Screening and Japan’s Regulatory Framework
Foreign direct investment (FDI)— investment intended to enable participation in management or control of a firm through equity acquisition—has been promoted globally since the 1990s. Both advanced and emerging economies have come to recognize inward FDI as a key driver of economic growth. Japan, which had long taken a cautious stance toward inward investment, began actively promoting it from the 2000s onward, including by adopting numerical targets.
In recent years, however, this trend has been shifting. Against the backdrop of rising geopolitical risks, greater attention has been paid to the national security implications of inward investment. In addition to longstanding concerns such as the leakage of military technologies and foreign control of critical infrastructure, advanced economies have tightened investment screening in response to emerging risks involving dual-use technologies, sensitive personal data, and supply chain vulnerabilities. The growth of investment from emerging economies, particularly China, since the 2000s has also contributed to tighter regulation.
Within this broader trend, Japan’s regulatory framework has undergone significant transformation. Since the 1980 revision of FEFTA, inward direct investment has in principle been free. However, prior notification has long been required for sectors related to national security and critical infrastructure. Since 2007, the scope of those sectors has gradually expanded. Notably, revisions to ministerial ordinances and cabinet orders in 2019 added the IT and telecommunications sectors to the list of industries subject to prior notification, significantly broadening the regulatory scope.
Regulation has also become more stringent. The 2019 amendment to FEFTA lowered the threshold for prior notification of share acquisitions from 10 percent to 1 percent. In addition, a new category of “core sectors” was introduced for areas requiring particularly careful scrutiny.
At the same time, measures have been introduced to avoid discouraging investment. A system was established to exempt certain portfolio investments—those made solely for asset management purposes—from prior notification requirements, provided that conditions are met, such as non-involvement in management and no access to sensitive technological information. Furthermore, since 2020, the Ministry of Finance has also published lists showing which listed companies may be subject to prior notification requirements, thereby improving predictability for investors.
The scope of regulated sectors has continued to expand since then. Pharmaceuticals were added in 2020, followed by rare earth–related industries in 2021. In 2023, following the designation of “Specified Critical Materials” under the Economic Security Promotion Act, sectors such as semiconductors, machine tools, and industrial robots were added to the category of core sectors.
As a result of this expansion, the number of companies subject to prior notification has increased significantly. According to the Ministry of Finance’s lists, the number of listed companies classified as core sectors rose from 518 in May 2020 to 996 in 2025, accounting for 24.6 percent of all listed firms. As of September 2025, 902 companies (22.3 percent) fell into non-core designated sectors. As a result, the number of prior notifications has also risen sharply. According to the FY2024 Annual Report on FEFTA and Investment Screening, filings increased sharply from 594 cases in 2018 to 1,946 in 2019, reaching 2,903 in 2024.
Regulatory strengthening has not been limited to expanding sectoral coverage. Revisions have also been made to enhance the effectiveness of the system. The 2017 amendment to FEFTA introduced corrective measures for cases in which prior notification was not submitted or actual investment activities deviated from the notified content.
Measures have also been strengthened to address transactions that may not formally constitute new inward investment but nonetheless result in foreign control in substance. In 2017, “specified acquisitions”—transactions involving the transfer of shares among foreign investors—were brought within the scope of prior review. Furthermore, a cabinet order revision in May 2025 made prior notification mandatory for investments by entities or individuals subject to obligations to cooperate with foreign government intelligence activities. This measure was intended with firms under the influence of the Chinese government in mind.
The current FEFTA amendment proposal also includes provisions to strengthen regulation of indirect investment by foreign investors. Taken together, these developments reflect a shift toward assessing risk based not on formal structures but on the substantive realities of a transaction.
Screening Architecture: The Significance of a Japanese Version of CFIUS
Japan’s inward investment screening framework is centered on the Ministry of Finance, with the ministries responsible for relevant sectors coordinating in the review process. Among them, the Ministry of Economy, Trade and Industry handles the largest number of cases. However, this inter-ministerial coordination framework has not been formally codified in law.
The proposed amendment to FEFTA, currently under deliberation in the Diet, would require the Minister of Finance and the competent ministers overseeing the relevant industries to seek opinions from the heads of related agencies as necessary. Formalizing this process lies at the core of what is being referred to as a “Japanese version of CFIUS,” under which a committee is envisioned with the Ministry of Finance and the National Security Secretariat (NSS) at its center, joined by agencies such as the Ministry of Economy, Trade and Industry and the Ministry of Defense.
This initiative was driven by political leadership. Prime Minister Sanae Takaichi had included the establishment of a “Committee on Foreign Investment in Japan” as a campaign pledge in the October 2025 Liberal Democratic Party leadership election. This policy direction was subsequently incorporated into the coalition agreement between the Liberal Democratic Party and the Japan Innovation Party, where it was framed as part of a broader policy agenda targeting foreign nationals and linked to a stricter approach to inward investment screening.
At the same time, the policy deliberation process revealed a somewhat different emphasis. Within the Foreign Exchange and Other Transactions Subcommittee of the Ministry of Finance’s Council on Customs, Tariffs, Foreign Exchange and Other Transactions, discussions focused less on the institutional framework itself and more on how to ensure effective screening, particularly in identifying substantive control. Nevertheless, in light of ongoing internal government discussions on establishing a Japanese version of CFIUS, the need to strengthen inter-agency coordination was ultimately incorporated into the final report.
The introduction of a Japanese version of CFIUS would be significant in promoting the centralization of information and the integration of decision-making criteria. It would also mark an important departure from past practice in that the Ministry of Defense would formally participate in the screening process. At the same time, an appropriate balance will be needed to ensure that this framework does not lead to excessive regulation that discourages investment.
The U.S. System: Sources of Its Strength
The U.S. inward investment screening regime is widely regarded as the world’s strongest. At its core is the Committee on Foreign Investment in the United States (CFIUS), an interagency body whose assessments form the basis for final decisions by the President.
In the United States, the Exon-Florio provision of the Omnibus Trade and Competitiveness Act of 1988 enables the review and regulation of foreign direct investment across virtually all sectors. While pre-transaction notices are not mandatory in most cases, CFIUS retains the authority to review transactions even after completion and, if deemed necessary, to order divestment. In practice, more than half of the 11 presidential orders issued to date to block or unwind transactions came after the investment had already been completed.
As in other advanced economies, U.S. inward investment screening has been progressively strengthened in response to changes in the international environment.
The Foreign Investment and National Security Act of 2007 (FINSA) expanded the scope of “national security” considerations in the review process and introduced the “potential for foreign control of critical industrial infrastructure” as a new evaluation criterion. The concept of “critical industrial infrastructure” was deliberately defined broadly, allowing the scope of review to expand flexibly.
Further strengthening occurred with the enactment of the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018. FIRRMA expanded the range of transactions subject to review. Even non-controlling investments became subject to scrutiny if they involved critical technologies, critical infrastructure, or sensitive personal data. Certain real estate transactions were also newly brought within the scope of review.
In addition, pre-transaction filing requirements were made mandatory for specific types of transactions—particularly those involving critical technologies or investments by entities with substantial ties to foreign governments. At the same time, to facilitate low-risk investments, a simplified declaration process was introduced. Even for transactions not subject to mandatory filing, parties may submit short-form declarations to facilitate smoother execution.
As a result of these reforms, the number of filings has increased. Even in areas where filing is not mandatory, firms have increasingly chosen to submit notices or declarations voluntarily in order to avoid the risk of post-transaction review. According to the CFIUS 2024 Annual Report, there were 209 formal notices and 116 declarations in 2024. While the number of investments originating from China has not increased since FIRRMA’s enactment, the share of transactions undergoing prior review has risen.
Revisions to the review system have also continued. Since FIRRMA, particular emphasis has been placed on reassessing past transactions and addressing emerging risk domains. With respect to the former, thousands of non-notified transactions were examined in 2024, with 98 cases proceeding to formal investigation. A notable example of the latter is personal data. The divestment order involving the video-sharing app TikTok—widely reported in Japan—illustrates how the acquisition of large volumes of personal data by China-based ByteDance came to be seen as a national security risk.
Moreover, new regulations that took effect in December 2024 strengthened the government’s information-gathering authority, making it easier to investigate non-notified transactions. At the same time, penalties were significantly increased, enhancing deterrence against non-compliance.
That said, U.S. policy is not focused solely on tighter regulation. Efforts have also been made to streamline procedures for investments considered low-risk. The presidential memorandum released in February 2025, “America First Investment Policy,” outlined a dual approach: strengthening restrictions on Chinese firms while simplifying procedures to promote investment from allied countries. In line with the approach, a “known investor program” that would streamline review procedures for investors with established track records is currently under consideration.
The Reality of Screening: The Risk of Politicization
Following the enactment of FIRRMA, the United States expanded the number of personnel engaged in investment screening and drew on a wide range of intelligence resources to conduct robust reviews. While the number of cases formally blocked stands at 11, many transactions are abandoned or modified before reaching the stage of a presidential blocking order. Of the 209 notices filed in 2024, 25 cases (12 percent) were subject to mitigation measures, which in effect functioned as conditional approvals. In addition, 49 cases (23 percent) were withdrawn; although most were subsequently refiled, four were ultimately abandoned. In other words, roughly one-third of notices underwent some form of modification. Even completed transactions are subject to active ex post review.
At the same time, this strength is inseparable from a distinct set of challenges. The flexibility built into the review criteria leaves room for political considerations to shape decisions For example, in 2018, President Trump blocked Broadcom’s attempted acquisition of Qualcomm. Some observers have suggested that Qualcomm may have leveraged the CFIUS review process as a means of resisting a hostile takeover.
A clearer illustration of the potential politicization of investment screening emerged in January 2025, when President Biden blocked Nippon Steel’s acquisition of U.S. Steel. The decision to prevent an acquisition by a firm from a U.S. ally on national security grounds came as a shock. Behind the decision was opposition from the United Steelworkers (USW), and during the 2024 presidential election campaign, the proposed acquisition of an iconic American company became politicized. Although the blocking order was later revisited under President Trump, Nippon Steel was ultimately compelled to accept conditions, including increased investment commitments and U.S. government veto authority over certain management decisions.
Japan’s Challenges: Volume and Institutional Capacity
One notable feature of Japan’s system is the sheer number of cases it handles. In FY2024, there were 2,903 prior notifications, several times higher than the number in the United States. Compared with other advanced economies such as the United Kingdom, Germany, and France, Japan handles an exceptionally high number of cases.
At the same time, only one case has resulted in a blocking order: the investment fund TCI’s 2008 attempt to acquire J-Power. This raises the question of how often transactions are withdrawn or effectively allowed only after modification. According to FY2024 data, there were 363 withdrawals in FY2024, accounting for approximately 11 percent of total filings. Since FY2020, this ratio has fluctuated between roughly 8 and 12 percent.
The number of cases approved with conditions is not publicly disclosed; strictly speaking, no such legal category exists. Japan’s screening system is based on a prior notification regime rather than a formal approval system. Legally, authorities do not “approve” investments with conditions. Instead, when issues arise, investors must withdraw, revise, and resubmit their notification. To introduce greater flexibility and improve effectiveness, the proposed FEFTA amendment would allow “measures related to national security and similar concerns” to be incorporated into prior notifications and modified both during the review period and after the investment has been made.
Moreover, unlike the United States, Japan lacks a comparably robust intelligence infrastructure, making it necessary to rely heavily on prior notifications. As a result, the system is structured to cover a broad range of sectors and process a large number of cases. However, despite recent increases in staffing, human resources remain insufficient relative to the volume of cases, making effective implementation a continuing challenge.
Conclusion: Balancing an Open Investment Environment and Risk Management
In an era of economic security, inward investment screening is becoming even more important. Governments face the difficult task of balancing two objectives: promoting investment to generate economic benefits and managing national security risks.
Excessive tightening of regulations risks discouraging corporate activity and weakening the economic foundation, potentially undermining security itself. Conversely, insufficient regulation exposes the country to risks such as technology leakage and foreign control of critical infrastructure. While flexibility in implementation is essential, it also creates room for politically motivated or arbitrary decision-making.
The introduction of a Japanese version of CFIUS represents one response to these challenges. Its effectiveness, however, will depend not only on institutional design but also on the development of underlying capacities, including personnel and information resources. Formal institutional arrangements alone will not be enough. The key question is what kind of investment environment and security framework Japan will build.
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(c) Alamy Stock Photo/amanaimages
