METI TO REVIEW SECURITY CRITERIA FOR FDI

UNCLAS SECTION 01 OF 03 TOKYO 000454 SIPDIS SENSITIVE SIPDIS FOR EAP, EAP/J AND EB/IFD/OIA USDOC FOR 4410/ITA/MAC/OJ/NMELCHER STATE PASS USTR FOR WCUTLER, MBEEMAN, RMEYERS JUSTICE FOR ANITTRUST DIVISION -CHEMTOB GENEVA ALSO FOR USTR PARIS FOR OECD E.O. 12958: N/A TAGS: EINV ECON PARM JA SUBJECT: METI TO REVIEW SECURITY CRITERIA FOR FDI SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY ¶1. (SBU) SUMMARY: The Ministry of Economy, Trade and Industry (METI) has established an outside study group to recommend possible revisions to the law that governs those sectors in which foreign direct investment (FDI) requires prior government notification and approval. The study group's ideas will feed into METI recommendations to the Ministry of Finance (MOF) regarding possible future amendments to the law. The announcement of the study group coincided with the issuance of a report by the Japan Business Federation (Keidanren) calling for changes to Japan's existing M&A legislation, including, inter alia, stricter review of proposed M&A transactions on national security grounds. METI officials insist the timing of the two announcements is coincidental. The composition of the study group is sufficiently broad that we do not believe it will recommend significant tightening of Japan's current FDI rules. End Summary. Study Group to Examine Rules Governing M&A Deals -------------- --- ¶2. (U) On December 19, 2006, METI announced the formation of a "Study Group on the International Investment Climate in a Globalized Economy." The ministry's instructions to the 20-member panel were to review the Foreign Exchange and Foreign Trade Control Law, (FEL) from the viewpoint both of protecting technologies important to national security as well as "clarifying problems with measures to improve corporate value (i.e. M&A),while maintaining an equitable international investment climate." ¶3. (U) Under Articles 26 and 27 of the FEL, foreign direct investment - defined as acquisition of more than 10 percent of a firm's listed stock by a foreign investor - in certain sectors requires prior notification to the Minister of Finance and the minister in charge of the specific industry. The ministers have thirty days (extendable) to review the proposed transaction after which they may approve, reject, or recommend changes to the deal. The sectors in which FDI is subject to prior notification are: aircraft manufacturing, nuclear power, lethal weaponry and gunpowder, spacecraft and rocketry, electricity generation, distribution of gas, heat or water, communications, broadcasting, railroads, passenger transport, biological chemicals, guard services, oil, leather, and air/maritime transport. ¶4. (SBU) The government has not updated the criteria governing the notification process or the list of covered sectors since 1991, although in that time there has been significant liberalization of Japan's FDI regime. METI officials in the Trade Finance and Economic Cooperation Bureau, which is overseeing the study group's work, told us that Ministry officials want to be sure that the coverage of Article 27 keeps pace with changes to Japan's FDI regime and changes in the global security environment (e.g. development of new technologies and materials and increasing concerns about proliferation.) A January 4 Sankei newspaper article on the formation of the study group described it as part of an effort to prevent proliferation of technology that could be used in production of WMD and linked the group's mandate to Japan's efforts to improve its counter-terrorism laws. No Weakening of Japan's Welcome to Inward FDI -------------- ¶5. (SBU) The minutes of the study group's first meeting in December reflect some of these concerns, especially the worry that new commercial technologies, especially those with dual-use applications, could be outpacing Japan's regulatory regime. Some members expressed concern about potential diversion of such commercial technologies to military use and thought the government needed to develop a regulatory system that reflected both the high TOKYO 00000454 002 OF 003 level of Japanese technology and the increasing amount of inward FDI. Other participants noted the growing use of "holding companies" for investment purposes which made it difficult to identify the party that has effective control over the investment. METI officials also noted the concerns were not about investment from Japan's close partners such as the United States but that some business sectors worried that increased inward M&A by Chinese companies could, over time, result in a drain of sensitive technology. ¶6. (SBU) At the same time, according to the minutes, members of the study group in their discussion emphasized the importance of maintaining an open investment climate and the growing contribution of FDI to Japan's economic growth. Others noted that FDI growth last year had been below expectations so it was important that the study group and the government avoid giving the impression that Japan is turning its back on international investment flows. Other members called for clarity in the regulations noting that uncertainty about whether a particular sector was covered would by itself have a discouraging effect on investment. ¶7. (SBU) METI officials as well as the chairman of the study group, Waseda University Graduate School Professor Dr Shujiro Urata, emphasized to us that the group's mandate did not signal a reversal of the government's pro-FDI policies. A look at the composition of the study group does not indicate any obvious protectionist bias in the membership. Of the 20 members, eight are professors from prominent economic or business faculties. Two others are lawyers who are active in M&A deals. The remaining ten are business executives from "blue-chip" firms as Mitsubishi Heavy Industries, Canon, Toyota and JFE Steel Corporation including executives from Sumitomo and Mitsubishi trading companies. METI officials involved in selecting the study group's members told us they included companies that both "like and dislike METI's regulatory regime." ¶8. (SBU) The Committee has already met twice and Urata expected it would meet twice more before submitting an interim report to METI Directors General of Trade and Economic Cooperation and Economic and Industrial Policy in April this year. The group's report will provide input into METI's formal recommendations to MOF on whether and how to amend the FEL. If the cabinet agrees amendments are needed, the earliest it could submit draft legislation to the Diet would be during the 2008 regular session (January-July 2008). No Connection to Keidanren's Recommendations -------------- ¶9. (U) The announcement of the study group coincided almost exactly with the release by Keidanren of a report calling for further amendments to Japan's M&A legislation. Among its recommendations, Keidanren expressed concern over the "threat to Japan's economic foundation or damage to national security from the outflow of technology." It called for a review of the FEL to consider possible changes to prior notification requirements and the expansion of the scope of production and technologies subject to regulation, and establishment of a process similar to that in the United States' CFIUS process. Keidanren used similar arguments about the threat to Japanese high technology firms in its recent public campaign for strict rules to govern the triangular merger mechanism ostensibly designed to facilitate M&A through cross-border stock swaps. ¶10. (SBU) Despite the coincidence of timing, METI officials insisted that the study group was not a response to the Keidanren report. In fact, they said, the establishment of the study group had been planned since early 2006 in expectation of the liberalization of M&A rules and full implementation of Japan's new Company Law in May 2007. The officials opined that Article 27 and its implementing regulations do not reflect changing geopolitical circumstances in the region including changes in technology and the TOKYO 00000454 003 OF 003 rapid emergence of the East Asia region not only as a destination but also as a source of FDI. SCHIEFFER