Japan's Greater Oversight of Foreign Investments Unlikely to Interrupt M&A Boom

Japan has proposed amendments to its foreign investment screening law, granting authorities the power to retroactively order foreign investors to divest stakes deemed to pose risks to national or economic security. The changes are part of a broader effort to strengthen oversight and protect major firms and supply chains amid rising geopolitical tensions and increased foreign investment inflows. Prime Minister Sanae Takaichi's administration has emphasized the need to safeguard Japan's economic security, aligning the nation with similar policies in the U.S., Britain, and Germany.

Under the current system, overseas investors acquiring stakes in non-critical Japanese companies are not required to notify the government in advance, leaving officials unable to intervene. The new rules would allow authorities to review transactions retroactively for up to five years, particularly for investors categorized as high-risk. Chinese companies are a focal concern, as they are required under Chinese law to cooperate with intelligence agencies.

The amendments mark the first major overhaul of Japan's foreign investment screening law since 2019. At that time, the review threshold for stock purchases was lowered from 10% to 1%, significantly increasing the number of cases the government must evaluate. The proposed updates aim to streamline the process by narrowing the range of businesses subject to review and introducing stricter requirements for indirect investments via foreign parent companies.

What Are the Key Aspects of the Proposed Law?

The revised law would enable the Japanese government to order post-transaction divestments, a move that mirrors policies in major economies like the U.S. and Germany. This change is intended to address national and economic security concerns, especially in high-risk sectors. The proposed five-year window for retroactive reviews aims to ensure legal stability for foreign investments.

The law would also subject domestic investors under the control of high-risk foreign entities to screening. This includes those under the influence of foreign governments, a measure designed to prevent indirect acquisitions of sensitive Japanese companies.

What Do Experts Say About the Impact on M&A Activity?

Analysts suggest the reforms are unlikely to significantly hinder inbound M&A activity. Inbound M&A in Japan increased by 45% in 2025, reaching $33 billion, according to LSEG data. Nicholas Benes, a corporate governance expert, noted that the changes do not stand out as overly burdensome, as they align with policies in other countries.

The government's ability to enforce risk-mitigation conditions will be critical to the effectiveness of the new rules. Lawyers and market participants have acknowledged that the review team is already overwhelmed and may benefit from streamlining to focus on higher-priority cases.

What Are the Global Implications of the Reforms?

Japan's reforms reflect a broader global trend toward tighter foreign investment controls. The nation is not alone in this approach, as the U.S. and European countries have also adopted similar measures. By aligning with these standards, Japan aims to maintain a balance between national security and continued economic openness.

The impact on Chinese investors is expected to be more pronounced, as they would likely fall under the high-risk category and face potential post-closing interventions. However, for most other foreign investors, the changes are unlikely to deter M&A activity targeting Japanese firms.

Despite the proposed changes, Japan has historically rejected only one foreign investment under its screening law—the 2008 attempt by the Children's Investment Fund to buy Electric Power Development. Analysts believe there may be unconfirmed rejections behind the scenes, indicating the government's cautious approach to sensitive transactions.