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The regime has changed materially, and recently

Japan was for many years a relatively permissive jurisdiction for inbound investment. That is no longer an accurate description, and foreign advisors working from pre-2023 assumptions will get the analysis wrong.

Over the past several years Japan has repeatedly expanded the sectors subject to prior notification, lowered the thresholds that trigger it, added new investor categories, and — with amendments promulgated on 5 June 2026 — extended the regime toward indirect acquisitions and created new authority over transactions that previously fell outside screening entirely.

Semiconductors sit at the centre of this. If your target manufactures integrated circuits, memory media, or semiconductor manufacturing equipment, you are almost certainly inside the strictest tier of the regime.

This page is an orientation, not legal advice. Japanese counsel should be engaged at the earliest stage of any transaction in this sector.

FEFTA: the core inbound investment regime

The Foreign Exchange and Foreign Trade Act is Japan’s primary FDI screening framework, administered by the Ministry of Finance together with the relevant sectoral ministry — METI for semiconductors.

The three-tier sector structure

Business activities are classified as:

1. Non-designated sectors — generally post-transaction reporting only
2. Designated sectors — prior notification required, subject to exemptions
3. Core sectors — prior notification required, with restricted access to exemptions

A further subcategory, specified core sectors, was introduced in 2025 for businesses classified as specified essential infrastructure service providers under the Economic Security Promotion Act that also operate in core sectors.

Where semiconductors sit

The core-sector list has expanded repeatedly and deliberately toward this industry. Manufacture of integrated circuits and semiconductor memory media are core-sector activities. In 2023, following designation of “specified critical materials” under the Economic Security Promotion Act, semiconductors, machine tools and industrial robots were added to core sectors. In August 2024, six further sectors were added, including manufacture of equipment related to semiconductor manufacturing and manufacture of machine tool components.

The cumulative effect is substantial. The number of listed companies classified in core sectors rose from 518 in May 2020 to 996 by 2025 — roughly a quarter of all listed Japanese companies — with a further large group in non-core designated sectors.

The thresholds

For listed companies, the prior notification threshold for share acquisition by a foreign investor is 1% — reduced from 10% in the 2020 amendments. This is a low bar by international standards and catches transactions that would be unremarkable elsewhere.

Prior notification is also triggered by acquisitions of unlisted company shares, certain board appointments, proposals of material business transfers at shareholder meetings, and by “specified acquisitions” — transfers of shares between foreign investors.

Exemptions and their limits

An exemption regime exists for investors who commit to conditions including not appointing directors, not proposing business transfers, and not accessing non-public technical information. Financial investors can often use it.

For core-sector businesses, however, the exemption is significantly restricted — and a foreign investor acquiring shares in an unlisted company conducting a core business cannot rely on it at all. Since most attractive semiconductor supply-chain targets are unlisted mid-sized specialists conducting core-sector activities, strategic acquirers in this sector should generally assume full prior notification applies.

Timing

The statutory review period runs 30 days from notification, in practice frequently shortened for straightforward cases, and extendable where the authorities require further review. For sensitive transactions, the extension is the realistic planning assumption. Volume is significant — prior notifications reached approximately 2,900 in FY2024 — so administrative capacity is a genuine timing factor.

The 2026 reform: a “Japanese CFIUS”

Prime Minister Takaichi advocated a Japanese analogue to CFIUS before taking office, and the reform process moved quickly. Following a mandatory five-year statutory review begun in October 2025, the Cabinet approved an amendment bill on 17 March 2026, and the amendments were promulgated on 5 June 2026.

Key directions:

Indirect acquisitions. The regime reaches structures where control is acquired through intermediate entities rather than directly. Practical implication: FEFTA analysis must be conducted at the level of the entire transaction group and ownership chain, not just the immediate acquiring entity.

Post-closing authority over non-designated sectors. Authorities gain powers over certain investments not subject to prior notification — including investments in companies outside designated sectors — where subsequent developments create serious national-security concerns. They may request information and, where statutory requirements are met, recommend or order remedial measures, potentially including share disposal. MOF has characterised this as targeting particularly high-risk investors rather than establishing general retrospective review, but the tool exists.

Codified mitigation measures. Conditions agreed during the review process are given explicit statutory footing — closer to the CFIUS mitigation-agreement model.

Enhanced scrutiny of state-linked investors. Monitoring of “specified foreign investors” connected to foreign governments is strengthened. A May 2025 cabinet order had already made prior notification mandatory for entities or individuals subject to obligations to cooperate with foreign government intelligence activities.

Inter-agency consultation. The Minister of Finance and competent business minister must seek views from other relevant authorities when necessary for review — a provision that entered force on promulgation.

Status. Most provisions enter force on a date to be set by Cabinet Order within one year of promulgation. Draft implementing regulations were published for consultation in July 2026. Thresholds, exemptions and procedural details remained subject to change as of August 2026 — anyone structuring a transaction should confirm the current position with Japanese counsel rather than relying on secondary summaries.

Export controls

Japan operates a licensing regime under FEFTA covering listed items and catch-all controls, administered by METI. Since 2023, advanced semiconductor manufacturing equipment across multiple categories has been subject to export licensing, broadly aligned with US and Dutch measures though implemented under Japanese law with Japanese procedures.

Two points foreign companies frequently miss:

Deemed export. Providing controlled technology to foreign nationals inside Japan can constitute a controlled transfer. This has direct consequences for foreign-owned Japanese subsidiaries with international engineering teams and for post-acquisition integration involving technical exchange.

Alignment is not identity. Japanese controls are similar to but not the same as US or Dutch controls in scope, item definitions and licensing practice. Compliance programmes built for one regime require separate Japanese analysis.

The regulatory environment here is actively evolving in response to international developments. Positions should be verified currently rather than assumed from prior guidance.

The Economic Security Promotion Act

Enacted in 2022 and phased in subsequently, this legislation creates four pillars: supply-chain resilience for specified critical materials (semiconductors included), security of core infrastructure, public-private technology development, and a patent non-disclosure system for sensitive inventions.

For foreign companies, the practical touchpoints are: designation as a critical sector feeds directly into FEFTA classification; companies receiving government support under the framework accept conditions and disclosure obligations; and the specified essential infrastructure provider designation triggers equipment procurement pre-screening for covered entities.

Merger control

Notification to the Japan Fair Trade Commission is required where turnover thresholds are met. The substantive standard is comparable to other developed jurisdictions.

Two practical notes. First, JFTC review and FEFTA review run separately, on separate timetables, with separate agencies — plan both. Second, the JFTC’s Phase I is generally 30 days, with Phase II adding substantially more; semiconductor transactions have attracted increasing scrutiny globally, and Japan is not an exception.

Employment law: the constraint most acquirers underestimate

Japanese employment law makes dismissal of regular employees genuinely difficult. Termination requires objectively reasonable grounds and social acceptability, and economic redundancy is assessed against a demanding four-factor framework: business necessity, efforts to avoid dismissal, reasonable selection criteria, and adequate procedure.

The practical consequence is that a foreign acquirer cannot plan post-acquisition cost reduction the way they would in the US. Headcount reduction in Japan is normally achieved through voluntary retirement programmes with enhanced severance, natural attrition, or redeployment — all slower and more expensive than the model in an American deal book.

Under a share acquisition, employment relationships transfer intact. Under a business transfer, individual employee consent is generally required. Under a corporate split, the Labour Contract Succession Act imposes specific consultation and notification procedures.

Model this in the acquisition case at the start. Deals in this sector have failed because the synergy assumptions embedded restructuring that Japanese law does not permit on the assumed timeline.

A practical sequence

1. Before an approach: classify the target’s activities under FEFTA. Determine whether core-sector, whether listed, and whether any exemption could apply.
2. At structuring: map the full ownership chain — the 2026 amendments make intermediate structures relevant.
3. Early in diligence: identify export-controlled technology and any conditions attached to government support received by the target.
4. In parallel: prepare FEFTA notification and JFTC filing on separate tracks.
5. Throughout: model employment constraints into the base case rather than the downside case.

Regulatory position stated as of August 2026. The 2026 FEFTA amendments were not fully in force at the time of writing and implementing regulations remained subject to finalisation. Verify current status with Japanese counsel.

Related: Acquiring a Japanese Semiconductor Company · [Japan’s National Semiconductor Strategy]

Important: This article provides general information and is not legal, tax, employment or investment advice. Regulations and transaction requirements change. Obtain advice from qualified Japanese counsel for a specific matter.

Written and edited by Masanori Takano, Chief Executive Officer of TechMedix Institute, Inc.