Sony Corp. is among the companies in Japan subject to stricter foreign ownership rules. Photo by MIKI Yoshihito.
Japan has had a prickly relationship with foreigners for a long time – many would say since 1853, when Commodore Matthew Perry led four U.S. gunboats into Tokyo Bay to force Japan to establish diplomatic ties with Washington.
But the Japanese aversion to foreign influence dates back to at least 1639, when Japan sealed itself off from foreign contact almost completely. In the following two centuries, only Dutch and Chinese traders could to come to Japan. Even they were limited to Dejima, an artificial island the Dutch had built at Nagasaki as a trading post. Few Americans have heard of Dejima, though everyone knows about Nagasaki (if for tragic, unrelated reasons).
While today’s Japan is a thoroughly modern and advanced nation, its ancient history is seldom far beneath the surface. Case in point: New regulations, which will be fully phased in by June 7, require foreigners to obtain government preapproval before taking stakes of 1% or more in 518 Japanese firms, covering a dozen strategic sectors of the economy. These businesses represent 14% of Japan’s publicly traded companies. Looser rules that apply to nearly 1,600 other companies require foreign investors to notify the government, but not to secure advance approval. Some passive investors and financial institutions are exempt from these restrictions, but hedge funds seeking a management voice and other activist investors are not. The previous threshold for preapproval was 10%.
Many commentators have mentioned China as the primary target of these regulations. Beijing’s aggressive siphoning of technology and other intellectual property by any available means has become an issue of global attention. Japan and other Pacific nations also share American concerns about China’s increasingly aggressive military posture.
In fact, the Japanese rule changes are in the same vein as recent moves in the U.S. to expand the powers of our Committee on Foreign Investment in the United States, or CFIUS. Under rules that were in effect through 2018, only transactions in which foreign entities took a controlling stake in enterprises with national security implications were subject to CFIUS review. Like Japan, we have broadened our government’s powers to block foreign acquisition of noncontrolling stakes in companies involved in sensitive technology, infrastructure or the personal data of U.S. citizens. Also like Japan, we implemented our rules largely with China in mind, but we did not limit them to that country or any other specified group of nations. European countries have taken similar measures.
But just because the stated aims and structures of the laws are similar does not mean countries will apply them the same way in practice. For example, Japan stands out among advanced democracies for the way its prosecutors appeared to wield criminal law on behalf of local Nissan executives in a 2018 boardroom coup against CEO Carlos Ghosn.
Ghosn had forged a successful multinational alliance between Nissan and Renault. That agreement left the French automaker with a 43% stake in Nissan while Nissan held only a 15% reciprocal interest in its French partner. Before his arrest on corruption charges – after being lured to Japan by his underlings on a false business pretext – Ghosn had been pushing toward a formal merger or other arrangement that could have moved control of Nissan out of Japan. Ghosn’s extended pretrial confinement, aggressive interrogation, repeated rearrests after being released on bail and eventual midnight escape from Japan are now the stuff of legend.
Japan’s sensitivity to foreign encroachment goes back a very long time, and the country has an extended historical memory. Only 88 years separated Commodore Perry’s first incursion at Tokyo Bay and the Japanese attack on Pearl Harbor. That’s the same amount of time that today separates us from the election of Franklin D. Roosevelt. It is not within most people’s personal memory, but neither is it something that seems particularly remote, especially not to the silent generation and baby boomers who are today’s senior decision makers.
It takes at least a century for historic events to truly fade into history. Sometimes it takes longer. While the current rise of nationalistic trade policy is a global phenomenon, in Japan it ties into a longer tradition of seeking to keep outsiders out, or at least to limit them to their predetermined islands of influence.