Japan Foreign Direct Investment 2026: New FEFTA Rules

For anyone tracking Japan foreign direct investment in 2026, the year has delivered two headlines that seem to pull in opposite directions. The government has raised its ambition to nearly triple the stock of inbound investment, and at the same time the Diet has passed the most significant tightening of national-security screening under the Foreign Exchange and Foreign Trade Act in years. Both are real, and a foreign investor has to read them together. Whether your plan is a greenfield subsidiary or the acquisition of a Japanese target, this guide explains what changed, what the new FEFTA rules mean in practice, and how to tell whether your specific deal now needs a prior notification.

If you are still scoping the entry itself rather than the deal, our Japan market entry guide covers the ground-level process; this article is about the investment-screening layer that sits on top of it.

Japan’s Two-Track Message to Foreign Investors

The simplest way to understand 2026 is as a two-track policy. On the growth track, Japan wants more foreign capital, more foreign R&D, and more foreign factories, and it has set targets and incentives to get them. On the security track, it wants tighter control over who acquires sensitive Japanese businesses and how, and it has rebuilt its screening regime to close the gaps. A standard, non-sensitive market entry benefits from the first track and is barely touched by the second. A deal in a strategic sector, or one structured through an offshore holding company, now runs straight into the second. Knowing which track your transaction sits on is the whole game.

The Growth Push: a 150 Trillion Yen Inward FDI Target

Japan has set a headline goal of lifting the balance of inward direct investment to 120 trillion yen by 2030 and 150 trillion yen in the early 2030s, an increase from its earlier target of 100 trillion yen by 2030, as Nippon.com reported on the raised 150 trillion yen ambition. To see how large that is, inward FDI stock stood at roughly 53 trillion yen at the end of 2024, so the target is close to a tripling of foreign investment held in Japan.

The Program for Promotion of Foreign Direct Investment

The policy vehicle is the Program for Promotion of Foreign Direct Investment in Japan, updated in 2025 into a structure reported as five pillars and 32 measures. Its aim, set out in METI’s background material on FDI into Japan, is to remove practical barriers for foreign entrants, from administrative procedures and English-language support to talent and regional investment, and to actively court foreign facilities and headquarters functions.

The barriers the programme targets are the ones foreign entrants complain about most: slow and Japanese-only administrative procedures, difficulty recruiting bilingual and specialist staff, limited English-language public services, and the concentration of activity in a handful of cities. Alongside the national programme, regional governments and JETRO offer their own incentives to attract investment outside the largest metropolitan areas, so the effective support package for a given project can be larger than the headline national measures suggest. For an investor in a strategic sector, the practical move is to ask what combination of national and regional support a specific site and project can access, rather than reading the target purely as a top-line political number.

Where the incentives point: GX, AI and DX, semiconductors, life sciences

The support is not spread evenly. Government backing is concentrated in strategic fields: decarbonization and the green transformation (GX), artificial intelligence and digital transformation (DX), semiconductors, and life sciences. For a foreign company whose business sits in one of these areas, 2026 offers an unusually welcoming policy environment. The catch is that several of these same strategic fields overlap with the sectors the security track most wants to screen, which is where the FEFTA reform comes in.

The weak yen and the timing question

Currency has sharpened the opportunity and added a variable. The yen reached a roughly 40-year low near 163 to the US dollar in late July 2026 before Japan’s Finance Ministry and the US Treasury conducted coordinated yen-buying intervention, which pulled it back toward the mid-150s within days, according to market data on the Japanese yen. A cheaper yen lowers the dollar or euro cost of acquiring Japanese assets, which is part of why inbound interest has been strong. But the intervention is a reminder that the currency picture is unstable, and that the authorities are willing to act. Investors sizing a Japanese deal should model the exchange rate as a moving input, and should not assume the late-July lows will persist through a deal timeline that FEFTA review may lengthen.

How FEFTA Screening Works Today (the Foreign Exchange and Foreign Trade Act)

The Foreign Exchange and Foreign Trade Act, known as FEFTA, is Japan’s framework for reviewing inbound investment on national-security grounds. It is administered by the Ministry of Finance together with the minister responsible for the relevant industry. Understanding the existing regime is necessary before the 2026 changes make sense.

Prior notification, the 1% threshold, and designated sectors

Under FEFTA, a foreign investor must file a prior notification and clear a review before completing an investment in a Japanese company that operates in a designated or core business sector. For listed companies, the threshold that triggers this obligation is an acquisition of 1% or more of shares or voting rights, lowered from the previous 10% in the 2019 to 2020 reform. The designated sectors are those judged sensitive to national security: defence and weapons, aircraft and aerospace, nuclear, dual-use technologies, cybersecurity, telecommunications, and critical infrastructure such as electricity, gas, water, and rail. Reforms in 2023 and 2024 widened the list further to cover items tied to supply-chain security, including semiconductor manufacturing equipment, advanced electronic components, batteries and their critical materials, and certain machine-tool and marine-engine components. The Ministry of Finance’s guidance on the classification of listed companies is where investors check how a specific target is categorised.

Post-investment reporting and the exemption scheme

Not every investment requires advance clearance. Investments in non-sensitive sectors are generally subject only to a post-investment report, filed after the fact. FEFTA also runs an exemption scheme that allows certain passive foreign financial investors to avoid prior notification if they comply with defined conditions, such as not taking board seats or intervening in the management of the target. The practical result today is a tiered system: heavy scrutiny for sensitive-sector control deals, a lighter touch for passive or non-sensitive investment.

What the 2026 FEFTA Amendment Changes

On 29 May 2026 the Diet passed the Act for Partial Amendment of the Foreign Exchange and Foreign Trade Act, and the government promulgated it on 5 June 2026, following Cabinet approval of the bill on 17 March 2026. Commentators have nicknamed the reform “Japan CFIUS” or “J-CFIUS” for its resemblance to the US inbound-review process. As Baker McKenzie’s analysis of the promulgated FEFTA amendments sets out, the changes broaden what is screened and how. Four shifts matter most.

Indirect acquisitions and offshore holding companies

The most consequential change closes the offshore gap. The definition of inward direct investment is expanded to capture certain indirect acquisitions, including the acquisition of 50% or more of the voting rights of a foreign company that itself holds an interest in a Japanese business. Until now, a buyer could sometimes acquire a Japanese operation by purchasing its non-Japanese parent and fall outside the prior-notification net. As Paul Hastings’ review of the indirect-acquisition and risk-mitigation reforms explains, that structure can now bring the transaction within Japanese screening. Cross-border acquirers who assumed an offshore holding structure sidesteps FEFTA need to revisit that assumption.

Risk-mitigation commitments and post-closing powers

The amendment codifies risk-mitigation measures. Where an investor proposes commitments to address national-security concerns, those commitments must be included in the prior notification, and the relevant ministry gains clearer authority to recommend or order that mitigation measures be adopted or revised, or to order the disposal of an investment where agreed measures are not properly implemented. The regime also gains post-closing intervention powers over certain investments that were not subject to prior notification. In short, clearing the initial review is no longer necessarily the end of the state’s involvement in a sensitive deal.

A “Japan CFIUS” interagency review

The reform formalises an interagency process. In national-security reviews, the Minister of Finance and the relevant sector minister must seek the opinions of the Prime Minister, the Minister for Foreign Affairs, and the heads of other relevant authorities, as described in Clifford Chance’s briefing on the J-CFIUS reforms. The amendment also widens anti-circumvention rules so that domestic entities investing on behalf of non-residents, including nominee-style arrangements, are captured rather than used as a workaround.

When the new rules take effect

The amendment is not yet in force. It is scheduled to commence on a date to be specified by Cabinet Order within one year of the 5 June 2026 promulgation, and the exact effective date has not been fixed. Much of the operational detail, including secondary thresholds and any changes to the designated-sector list, will be set in implementing Cabinet Orders that have not yet been issued. Investors should treat the coming months as a window to prepare rather than a period in which nothing applies.

Japan is not moving in isolation

The reform reads less like a Japanese outlier and more like Japan catching up to a global norm. The “Japan CFIUS” nickname is apt: over the past decade the United States, the European Union, the United Kingdom, Australia, and others have all strengthened inbound-investment screening on national-security grounds, extending review to indirect acquisitions, adding call-in and post-closing powers, and formalising interagency decision-making. Japan’s 2026 amendment adopts the same building blocks. For a multinational that already navigates CFIUS in the United States or the National Security and Investment Act regime in the United Kingdom, the concepts will be familiar, and the internal playbook, early sector classification, structural review, and prepared mitigation, transfers directly. The strategic point for the boardroom is that a Japanese acquisition should now be scoped for security review as a matter of course, exactly as a deal in those markets would be, rather than treated as a jurisdiction where screening can be assumed away.

Enforcement: Why Skipping a Filing Is Not an Option

FEFTA is not a box-ticking regime. A foreign investor who should have filed a prior notification and did not, or who closes before clearing the review, exposes the transaction to serious consequences. The regime carries the power to order corrective action, and the 2026 amendment sharpens it: the relevant ministry can order the disposal of an investment where mitigation commitments are not implemented, and the new post-closing intervention powers mean a completed deal in a sensitive sector is not beyond reach. Failure to file, or filing false information, can also attract administrative and criminal penalties under the Act. For an acquirer, the practical risk is not just a fine; it is the prospect of having to unwind a closed transaction, which is far more expensive than the filing it replaced. This is why sensitive-sector deals should treat FEFTA analysis as a condition of the deal, on the same footing as antitrust clearance.

The reform’s interagency structure and codified mitigation powers are also likely to make outcomes more predictable over time, because the process and the state’s expectations are written down rather than exercised case by case. That predictability cuts both ways: it narrows the room for informal workarounds while giving well-prepared investors a clearer path to approval.

Japan’s Foreign Investment Restrictions in Practice: Does Your Deal Need a Prior Notification?

Stripped to the practical question, Japan’s foreign investment restrictions turn on three things: what the target does, how much you are acquiring, and how the deal is structured. Work through them in order.

• What does the target do? Map its activities against the designated and core sector list. If it touches defence, nuclear, aerospace, cybersecurity, telecommunications, critical infrastructure, or the newer supply-chain categories such as semiconductors and batteries, assume prior notification is likely.
• How much are you acquiring? For a listed company in a sensitive sector, 1% or more of shares or voting rights triggers the prior-notification duty. Below the threshold, and in non-sensitive sectors, a post-investment report is generally the extent of it.
• How is the deal structured? If you are acquiring a Japanese business indirectly by buying a foreign holding company, or investing through a domestic intermediary, the 2026 amendment may pull the transaction into scope once it takes effect, even if the same economics sat outside FEFTA before.

A routine, wholly greenfield entry into a non-sensitive sector, setting up a subsidiary to sell or operate, generally does not require a FEFTA prior notification at all. The regime is aimed at control and influence over sensitive Japanese businesses, not at ordinary market entry. Most companies reading this need the second thing rather than the first, which is what our Japan market entry consulting is built around, a distinction our guide to doing business in Japan keeps in view.

What Foreign Investors Should Do Now

• Classify the target early. Determine sensitive-sector exposure at the start of diligence, not the end. The MOF classification guidance and the target’s own registered activities are the starting point.
• Re-examine offshore structures. If your deal reaches a Japanese business through a non-Japanese holding company, assume the indirect-acquisition rule may apply once the amendment commences, and plan the filing accordingly.
• Build FEFTA timing into the deal calendar. A prior notification carries a review and waiting period before you can close. Treat it as a gating item, not a formality.
• Prepare mitigation, not just paperwork. For sensitive-sector deals, anticipate the commitments the ministry may seek and factor the possibility of post-closing conditions into your valuation and integration plan.
• Use the growth-side support. If your business sits in GX, AI and DX, semiconductors, or life sciences, engage with the promotion programme’s incentives in parallel with the screening analysis. The two tracks are managed by different parts of government and can be worked at the same time. Our international expansion strategy guidance frames how to weigh the opportunity against the compliance load.

Key Takeaways

• Two tracks at once: Japan is courting far more foreign investment (a 150 trillion yen stock target for the early 2030s, up from 100 trillion yen) while tightening national-security screening under FEFTA.
• The reform is law: the Diet passed the FEFTA amendment on 29 May 2026 and the government promulgated it on 5 June 2026, nicknamed “Japan CFIUS.”
• Not yet in force: it commences on a date set by Cabinet Order within one year of promulgation, with key details left to implementing orders not yet issued.
• Indirect deals now count: acquiring 50% or more of a foreign company that holds a Japanese business can trigger screening, closing the offshore-holding-company gap.
• Stronger state hand: risk-mitigation commitments are codified, post-closing intervention is possible, and an interagency review involving the Prime Minister and Foreign Minister is formalised.
• The 1% rule still anchors it: for a listed target in a designated sector, 1% or more of shares or voting rights triggers prior notification; ordinary greenfield entry into non-sensitive sectors generally does not.

What to Read Next

• Japan Market Entry: The Complete Guide for 2026
• International Expansion Strategy: How to Choose Your Next Market
• Doing Business in Japan: A Practical Guide for Foreign Companies