This is Hamamoto from TIMEWELL.
Inward FDI screening is the FEFTA-based system under which a foreign investor's investment in a Japanese company is reviewed in advance from the standpoint of national security and related public interests. The Ministry of Finance and the ministry with jurisdiction over the relevant industry review cases jointly, and if a problem surfaces they can recommend or order that the investment be changed or called off.[^1]
If your first thought was "we don't take investment, so this doesn't apply to us," you are exactly the reader I wrote this for. The notification threshold for a listed company is a mere 1%. The net stretches surprisingly wide: startups taking money from overseas funds, mid-sized firms with a foreign company on their cap table, and any business operating in economic-security-sensitive fields such as semiconductors or storage batteries. In FY2023 alone, more than a thousand cases of "failure to notify" came to light.[^2] We have reached the point where "I didn't know the rules" is no longer an excuse.
Working from primary Ministry of Finance sources (chiefly the FY2024 annual report), this article lays out how the system works and where the latest amendments have taken it.
The basic structure: who triggers a notification, and by doing what
FEFTA is built on the principle that cross-border transactions are free, with the minimum necessary controls kept as the exception. Prior notification is one of those exceptions: it is required when a foreign investor invests in a company operating in a designated sector. The interests the review is meant to protect are four: national security, the maintenance of public order, the protection of public safety, and the smooth operation of the Japanese economy.[^1]
| Action | Rough trigger for prior notification |
|---|---|
| Acquiring shares or voting rights in a listed company | 1% or more (aggregated with holdings of closely related parties) |
| Acquiring shares or an equity interest in an unlisted company | Covered from a single share |
| Consenting to a director appointment, business transfer, etc. | When holding 1% or more and proposing it yourself |
| Money loans exceeding one year | Balance over 100 million yen, or over 50% of total liabilities |
| Establishing a branch or substantially changing the business purpose | Covered if in a designated sector |
The 1% figure is grounded in the fact that the right to propose an agenda item at a shareholders' meeting arises at 1% of voting rights. For comparison, the mandatory prior-notification thresholds are 25% in the United Kingdom and 10% in both France and Germany. Japan's 1% is the lowest in the G7, so the net is cast very wide indeed.[^2]
Another point that trips people up is the definition of "foreign investor." It turns on residency, not nationality. A Japanese national who lives abroad counts as a foreign investor, and conversely a Japanese company whose majority of voting rights is held by a foreign corporation is treated as a foreign investor too.[^2] "We're a Japanese company, so we're fine" does not hold.
Designated sectors and core sectors: the scope keeps widening on economic-security grounds
Prior notification is triggered by investment in a company that operates in a "designated sector." Within those, the ones judged to pose a particularly high risk to national security are the "core sectors," and they are handled more strictly. The exemption from notification discussed below is, as a rule, unavailable for them.[^2]
Core sectors go well beyond the traditional security fields of arms, aircraft, nuclear power, and space. Look at what has been added over the past few years and you can see the character of the system shifting.
| Timing | Main sectors added |
|---|---|
| 2019 | Cybersecurity-related (semiconductor manufacturing, software, etc.) |
| 2020 | Manufacturing of infectious-disease pharmaceuticals and highly controlled medical devices |
| 2021 | Critical mineral resources; port construction on certain remote islands |
| 2023 | Specified critical materials under the Economic Security Promotion Act (storage batteries, permanent magnets, machine tools, etc.), metal 3D printers, drones |
| 2024 | Semiconductor manufacturing equipment, advanced electronic components, machine tool parts, marine engines, optical fiber cable, multifunction printers |
From semiconductor manufacturing equipment to multifunction printers: this is no longer a story about the defense industry. A broad swath of Japanese manufacturing now falls within the "sectors subject to investment screening."[^2] The starting point for checking whether your own company falls into a designated or core sector is the eligibility list for listed companies published by the Ministry of Finance, which was revised for the sixth time in September 2024.[^3]
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The exemption scheme and how review works in practice: the numbers
Even in a designated sector, there is a scheme that exempts a foreign investor from prior notification, provided the investor observes certain conditions (not taking a board seat itself, not proposing the transfer or discontinuation of the designated-sector business, not accessing non-public technical information, and so on). If the exemption is used, a post-investment report is required within 45 days of completing the investment.[^2]
The practical review is faster than you might expect. In principle there is a 30-day prohibition period after the prior notification is accepted (extendable up to four months), but low-risk cases are shortened, and the average review in FY2024 was 8.2 business days. Roughly 79% of cases were done within two weeks.[^2]
It helps to anchor the overall picture in numbers (FY2024).[^2]
- Prior notifications numbered 2,903, about a sixfold increase from 493 in FY2015, with cybersecurity-related cases accounting for 56% of the total by sector.
- There has been not a single measure order (such as an order to divest shares) since the system was created. That said, in the past there was a recommendation and order to suspend a share acquisition involving an electric-power-related company.
- Meanwhile, discoveries of "non-notification" surged to 1,184 cases in FY2023. Most stemmed from investors simply not knowing that an action such as consenting to a director appointment required a notification at the time of the act.
That last figure is the practical lesson. Almost no investment has ever been stopped by an order, yet failures to notify are happening in large numbers. In other words, the risk of this system lies less in "having your investment killed" than in "committing a procedural violation without realizing it."
The latest 2025 amendment: tighter rules for "Specified Foreign Investors"
The most significant recent change is the amendment to the cabinet and ministerial orders on Specified Foreign Investors, which took effect on May 19, 2025.[^2]
A Specified Foreign Investor is an investor who, under a contract with a foreign government or the like or under foreign law, bears an obligation to disclose acquired information to a foreign government, together with any organization in which such an obligated party holds 50% or more of the voting rights or one-third or more of the officers. Under this amendment, Specified Foreign Investors can no longer use the prior-notification exemption in any designated sector.
Behind this lies concern about the outflow of technology and sensitive information through the investment channel. A party that bears a disclosure obligation under a foreign legal system can become an exit point for information regardless of its own intentions. This concern is continuous with the debate over China's National Intelligence Law. In the world of investment screening, too, we have entered an era where the question is not only "who is investing" but "under whose influence does that investor sit."
It is worth noting that, even as it tightens controls, the government has raised its target for the stock of inward direct investment to 120 trillion yen (and 150 trillion yen in the early 2030s), a two-track stance that welcomes sound investment.[^2] The screening system is more accurately understood not as a mechanism to exclude investment but as one to sort it.
Practical steps: what matters for the side making the investment and the side receiving it
For the Japanese company receiving investment, there are three key points. First, know whether your own business falls into a designated or core sector. Second, when accepting funding or a director from an overseas investor, confirm whether the counterparty qualifies as a foreign investor (residency and capital structure). Third, make sure everyone involved in your capital policy is aware of notifications required at the time of an act, such as consenting to a director appointment. This is where the great majority of those 1,184 non-notification cases arose.
For the side making or brokering the investment, the hard part is determining the investor's attributes: the ownership structure of a fund organized as a partnership, the presence of foreign-government-linked capital, and whether the investor qualifies as a Specified Foreign Investor. In short, it is the work of tracing the capital chain back to answer "who substantively controls this investor," and it has the same structure as the counterparty due diligence we support with our export-control AI agent, TRAFEED. TRAFEED is built on a knowledge base covering roughly 100 million corporate entities and can trace capital ties and affiliates. Its corporate knowledge is still expanding, and we plan to cover an ever-wider range of investigations going forward. If you find background checks on investors or counterparties challenging, please get in touch.
Summary
- Inward FDI screening is a FEFTA-based prior-review system. The 1% threshold for listed shares is the lowest in the G7, and the scope is broad.
- Core sectors have kept expanding on the economic-security current, now reaching semiconductor manufacturing equipment, storage batteries, machine tools, and multifunction printers.
- Review is fast, averaging 8.2 business days, with zero measure orders on record. The real practical risk is the "failure to notify" (1,184 cases discovered in FY2023).
- The amendment that took effect in May 2025 bars "Specified Foreign Investors," who bear an obligation to disclose information to a foreign government, from using the exemption scheme.
- The key is verifying the substantive control behind an investor. Due diligence that traces the capital chain becomes the standard move in the age of investment screening.
References
[^1]: Ministry of Finance, "About the Inward Direct Investment Review System" [^2]: Ministry of Finance, "FEFTA / Investment Review System Annual Report (FY2024)" [^3]: Ministry of Finance, revision of the "Eligibility List of Japanese Listed Companies for Prior Notification of Inward Direct Investment under FEFTA" (September 13, 2024)
We also referred to the Ministry of Finance's "Factors Considered by the Ministry of Finance and the Competent Ministries When Reviewing Prior Notifications under FEFTA" (May 8, 2020).