Japan Finalizes Implementing Regulations for Revised FEFTA Foreign Investment Screening Regime (Part 1 of 2)

On September 16, 2026, Japan’s Ministry of Finance (MOF) announced the promulgation of the Cabinet Order, ministerial order and public notices implementing amendments to the Foreign Exchange and Foreign Trade Act (FEFTA) promulgated in June 2026.

About Part 1: Indirect Investments, Mitigation Measures and Post-Investment Intervention

This Part 1 alert follows our previous client alert that covered the amendments when the implementing Cabinet Order, ministerial order and public notices were still draft proposals open for public comment. Those instruments have now been finalized and promulgated on September 16, 2026.

This alert covers the finalized rules governing indirect investments in Japanese companies through acquisitions of foreign entities, investments made under the control or influence of foreign governments, mitigation measures, post-investment intervention in investments in non-designated sectors and interagency review. The finalized regulations also substantially revise the activities subject to prior notification in the information and communications technology (ICT) sectors, which will be addressed in Part 2.

About Part 2: Stay Tuned for ICT Implementing Regulations

Part 2 will address the ICT implementing regulations. Software and information processing designations are narrowed to an enumerated list. Coverage remains for critical infrastructure, software and services designed to handle personal information of one million or more individuals, technical information protected as trade secrets and AI technologies. The rules also streamline procedures for officer reappointment, and intragroup reorganizations and share buybacks. They expand the information required at the initial filing stage and introduce a new technology-based prior notification trigger for export-controlled and other important controlled technologies.

The amended FEFTA and its implementing regulations generally take effect on January 4, 2027. Many provisions, including the new indirect investment rules and prior notification requirements based on the revised designated sectors and specified technologies, are subject to a 30-day transitional period. The period will apply to investments made on or after February 3, 2027.¹

Part 1 Key Takeaways

• Foreign-to-foreign M&A may become subject to Japanese foreign investment screening. An acquisition by a foreign investor of a foreign entity holding shares or voting rights in a Japanese company may require prior notification in Japan if the relevant conditions are met.
• Mitigation measures are now expressly recognized by statute. Prior notifications must describe proposed measures, which may be revised during review and updated after completion of the investment. Buyers considering acquiring a business in a sensitive sector should strategize the filing, including proposed mitigation measures through informal discussions with relevant authorities prior to the formal filing of prior notification.
• Certain investments formally made by Japanese entities or residents may be treated as investments by foreign investors where foreign control, influence or specified relationships are present.
• High-risk investors in non-designated sectors may face post-investment reporting, recommendations or orders, including divestment or other measures, for up to five years after the investment.
• Certain national security reviews may involve consultation among multiple agencies and consideration by the Japan Foreign Investment Committee. This is based on the target’s sectors and technologies, the investor’s characteristics and the nature of the investment.

Overview of the 2026 FEFTA Amendments

The National Diet passed legislation substantially reforming Japan’s inward foreign direct investment screening regime on May 29, 2026 and promulgated on June 5, 2026. The implementing regulations promulgated on September 16 and specified key matters delegated to subordinate legislation under the amended FEFTA.

References to the “Amended Act,” “Amended Cabinet Order” and “Amended Ministerial Order” mean, respectively, FEFTA as amended, the Cabinet Order on Inward Direct Investment, etc. as amended, and the Order on Inward Direct Investment, etc. as amended.

Capturing Indirect Investments Including Foreign-to-Foreign Transactions

Before the amendments, FEFTA generally covered direct acquisitions by foreign investors of shares, voting rights and other interests in Japanese companies. An acquisition of a foreign entity that held a Japanese company as a subsidiary or other investment would’ve fallen outside the definition of inward direct investment.

The Amended Act expands that definition to cover certain acts through which a foreign investor acquires control of a foreign entity or other vehicle directly holding shares, voting rights or other interests in a Japanese company (Direct Holding Entity). These include acquisitions of 50% or more of the voting rights in a Direct Holding Entity; certain exercises of voting rights resulting in persons affiliated with the foreign investor constituting a majority of its officers or equivalent persons; and comparable acts.²

In particular, prior notification is required where the investor falls within the category of investors classified as presenting high risks.³ The investor is subject to the applicable conditions if the underlying Japanese company is listed, and the relevant holding is 1% or more. It also applies in principle if it is unlisted, irrespective of the ownership percentage.⁴

For cross-border M&A, a FEFTA assessment should therefore be undertaken early in the transaction process whenever the target group directly or indirectly holds interests in Japanese companies, even if the acquisition target itself is incorporated outside Japan.

Establishing a Statutory Framework for Mitigation Measures

The Amended Act expressly establishes a statutory framework for mitigation measures previously used in practice during regulatory review and discussions with authorities.

Where a foreign investor proposes measures to eliminate concerns relating to national security and other protected interests, the prior notification must include the content of those measures.⁵ New notification procedures allow investors to voluntarily revise those measures during the review period⁶ and to notify them of changes after completion of the investment.⁷

The overview materials on the amendments published by MOF on September 16, 2026 (the “MOF Material”) identifies examples of mitigation measures, including:

• Measures to prevent foreign government influence over the investor’s exercise of voting rights;
• Commitments not to propose the discontinuation or downsizing of specified businesses considered important to the stable supply of essential goods and services for national security and other protected interests; and
• Restrictions on access to sensitive technologies or information and their disclosure to third parties.⁸

These changes make it increasingly important for buyers and sellers to address the extent to which the buyer must accept mitigation measures required by the authorities, in addition to making FEFTA clearance a condition to close in their transaction agreements.

Further, buyers and sellers may want to consider conducting informal consultation with the relevant government authorities prior to the formal filing of the prior notification. This is particularly if acquiring the target business could raise concerns relating to national security and other protected interests, to ensure the review will be complete during the initial 30-day period after the filing.

Expanding Treatment of Domestic Investors Under Foreign Government Control or Influence

The Amended Act expands the circumstances in which a domestic investor who is a resident or Japanese entity may be treated as a foreign investor.

In addition to investments made “for the account of” non-residents or other specified persons, the Amended Act covers certain investments made pursuant to contracts or foreign laws and regulations, and investments made on the basis of specified special relationships with non-residents or other specified persons.⁹ These include enduring economic relationships based on share ownership and similar arrangements, family relationships, employment relationships and other prescribed relationships.

The Amended Cabinet Order specifies the relevant relationships, including family, employment and financial support relationships; obligations to cooperate with intelligence-gathering activities of foreign governments; and certain capital and officer relationships.¹⁰

New Post-Investment Intervention Powers for Non-Designated Sectors

Under the existing regime, investments in Japanese companies operating in non-designated sectors are subject to post-investment reporting where the relevant shareholding or voting rights percentage is 10% or more. It does not permit the authorities to issue recommendations or orders of the kind available under the screening regime.

The Amended Act introduces post-investment intervention powers for certain investments by high-risk investors in non-designated sectors that do not require prior notification. If changes in international circumstances or other developments after the investment make it necessary to determine whether the investment poses a substantial risk to national security, the authorities may require reports for five years after the investment and could recommend or order divestment or other measures.¹¹

The Amended Cabinet Order limits this regime to acquisitions of 10% or more of shares or voting rights and other specified investments by foreign investors classified as high risk.¹²

Unlike many other new rules, these powers are not subject to the 30-day transitional period. They apply to transactions undertaken on or after January 4, 2027.¹³

Strengthening Interagency Review

The Amended Act requires the Minister of Finance and the minister responsible for the relevant business sector to seek opinions from the Prime Minister, the Minister for Foreign Affairs and the heads of other relevant administrative agencies where necessary for certain national security reviews.¹⁴ This provision took effect on June 5, 2026, ahead of the other amendments.

The Japan Foreign Investment Committee (JFIC) has been established in connection with this enhanced review framework. It is co-chaired by MOF and the National Security Secretariat (NSS), with the Ministry of Foreign Affairs, the Ministry of Economy, Trade and Industry (METI) and the Ministry of Defense as its principal members.

According to MOF, cases are selected for JFIC consideration based on an overall assessment of the target’s business sectors and technologies, the foreign investor’s characteristics and the nature of the investment, including the percentage of voting rights acquired.¹⁵

Practical Implications for Overseas M&A

Overseas M&A that does not directly involve the acquisition of a Japanese company may be subject to the new indirect investment rules. Identifying Japanese entities and investments within the target group at an early stage and incorporating the FEFTA assessment into the transaction timetable and closing conditions, will therefore become increasingly important.