Regulatory Updates

National Security Meets Business: Navigating Japan's Evolving Regulatory Landscape

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read
Slide summarising Japan’s economic-security framework: four-pillar 2022 Act, 1 % FEFTA FDI trigger, export-control vigilance and compliance checklist for US firms.

TL;DR

  • Japan’s 2022 Economic Security Promotion Act adds supply-chain resilience, infrastructure review, R&D funding and sensitive-patent secrecy to keep strategic tech safe.
  • FEFTA investment screening now triggers at 1 % stakes in “core” sectors; export-control vigilance is tightening.
  • US businesses must map supply chains, plan for pre-screening of infrastructure gear, and integrate FEFTA/US-EAR compliance.

Table of Contents

  • The Global Trend: Security as a Driver of Economic Regulation
  • Japan's Response: The Economic Security Promotion Act
  • Bolstered Investment Screening: The Foreign Exchange and Foreign Trade Act (FEFTA)
  • Export Controls: An Enduring Instrument
  • Navigating the New Reality: Implications and Strategies for US Businesses
  • Conclusion

The relationship between national security, economic policy, and international business is undergoing a profound transformation globally. Driven by escalating geopolitical tensions, technological competition, and a broadening definition of security itself – now encompassing economic resilience, technological leadership, human rights, and cybersecurity – governments worldwide are increasingly implementing regulations that directly impact corporate operations, supply chains, and investments. While the dynamic between the United States and China often dominates headlines in this sphere, Japan, a key US ally and major global economy, has also significantly reshaped its legal framework to address these modern challenges.

Understanding this evolving landscape in Japan is crucial for American and other multinational corporations operating in, investing in, or trading with the country. What was once primarily driven by economic logic now requires careful navigation through a growing thicket of security-related rules impacting everything from supply chains and critical infrastructure to technology development and foreign investment.

The Global Trend: Security as a Driver of Economic Regulation

The past decade has witnessed a marked increase in governments using trade and investment tools to achieve national security objectives. The United States, for instance, has significantly expanded its use of export controls, particularly concerning advanced technologies deemed critical for national security. Measures targeting specific companies and utilizing tools like the Entity List (EL), the Unverified List (UVL), and the stringent Foreign Direct Product Rule (FDPR) under the Export Administration Regulations (EAR) have aimed to restrict access to US technology for certain foreign entities, primarily in China. These controls often have extraterritorial reach, impacting non-US companies involved in supply chains utilizing US-origin technology or software.

Beyond export controls, import restrictions tied to human rights concerns, such as the US Uyghur Forced Labor Prevention Act (UFLPA), demonstrate the broadening scope of "security." Similarly, restrictions in the telecommunications sector, driven by concerns over data security, espionage, and the integrity of critical infrastructure, have led to bans on government procurement and market access limitations for specific foreign equipment vendors in the US and other allied nations.

This trend inevitably creates friction with established international trade rules under the World Trade Organization (WTO), which prioritize principles like non-discrimination (Most-Favored Nation, National Treatment) and the general prohibition of quantitative restrictions. While the WTO agreements contain exceptions for national security (e.g., GATT Article XXI), the scope and legitimacy of invoking these exceptions, particularly for measures driven by economic competition or broader definitions of security, remain contentious. WTO panels have begun scrutinizing such claims more closely, although major players like the US maintain that national security determinations are fundamentally sovereign and not subject to WTO adjudication.

Furthermore, the assertion of extraterritorial jurisdiction through mechanisms like secondary sanctions or expansive export control rules often draws legal challenges and countermeasures from other nations. China, for example, has enacted its own suite of laws, including an Unreliable Entity List, an Export Control Law, and an Anti-Foreign Sanctions Law, creating potential "sandwich situations" where companies face conflicting legal obligations.

Japan's Response: The Economic Security Promotion Act

Against this global backdrop, Japan determined that its existing legal framework was insufficient to address the multifaceted risks emerging at the nexus of security and the economy. Recognizing the need for a more comprehensive and proactive approach, the Japanese Diet enacted the Economic Security Promotion Act (経済安全保障推進法 - Keizai Anzen Hoshō Suishin Hō) in May 2022. This landmark legislation, being implemented in phases, establishes a multi-pillar framework aimed at bolstering Japan's economic resilience and technological autonomy while ensuring national security.

The Act is built upon four core pillars:

1. Strengthening Supply Chain Resilience:

  • Objective: To reduce reliance on specific countries for critical goods and materials essential for Japanese citizens' lives and economic activities, thereby minimizing vulnerability to supply disruptions.
  • Mechanism: The government designates "Specified Critical Goods" (e.g., semiconductors, pharmaceuticals, critical minerals, fertilizers). Businesses handling these goods can submit plans for diversifying suppliers, increasing domestic production, or building stockpiles. Approved plans may receive financial assistance and subsidies from the government.
  • Implications: Foreign companies involved in the supply chains of these critical goods in Japan may face increased scrutiny regarding their own supply chain security and origins. Conversely, opportunities may arise for companies contributing to diversification and resilience efforts within Japan. Compliance will require enhanced supply chain visibility and potentially costly adjustments.

2. Ensuring the Security and Reliability of Key Infrastructure:

  • Objective: To prevent cyberattacks and other disruptions to essential services by ensuring the security of systems and equipment used in critical infrastructure sectors.
  • Mechanism: The Act designates 14 specific sectors as "Specified Essential Infrastructure," including electricity, gas, water, telecommunications, finance, transportation (railways, aviation, ports), and healthcare. Operators within these sectors planning to introduce certain important systems or equipment must submit their plans to the relevant ministry for advance screening. The government can issue recommendations or orders to modify or halt plans if security risks are identified (e.g., risks of external interference, supply disruptions affecting stable provision).
  • Implications: This pillar directly impacts foreign suppliers of equipment and IT systems to Japan's critical infrastructure sectors. Companies will need to demonstrate the security and reliability of their products and supply chains during the pre-screening process. This could create market access hurdles, necessitate specific security certifications, and require transparency regarding software components and development processes. US tech and industrial firms supplying these sectors must anticipate and prepare for this review process.

3. Supporting Public-Private Research and Development for Critical Technologies:

  • Objective: To foster Japan's technological advantage in cutting-edge fields vital for future economic competitiveness and national security.
  • Mechanism: The government identifies "Specified Critical Technologies" (e.g., AI, quantum computing, advanced materials, biotechnology, space technologies). Public-private councils ("Shin-Gidai" Councils) are established for designated technology areas to formulate R&D visions and strategies. The government provides funding and support for collaborative research projects involving industry, academia, and government institutions, facilitated through agencies like the Japan Science and Technology Agency (JST) and the New Energy and Industrial Technology Development Organization (NEDO).
  • Implications: This pillar presents opportunities for US companies and research institutions to participate in publicly funded, cutting-edge R&D initiatives in Japan. However, participation may come with conditions related to intellectual property rights sharing, data handling, and potentially security clearances or restrictions on foreign personnel involvement, depending on the sensitivity of the technology.

4. Establishing a Non-Disclosure System for Sensitive Patents:

  • Objective: To prevent the public disclosure of patent applications containing technologies that could potentially be diverted for military use or pose a risk to national security if made public, aligning Japan with practices in the US and other countries.
  • Mechanism: Patent applications filed in Japan related to potentially sensitive dual-use technologies (identified through specific International Patent Classification codes and screening by the Japan Patent Office and Cabinet Office) may be subject to a secrecy designation ("hozen shitei"). If designated, the application will not be published, the invention cannot be worked (including filing abroad) without permission, and compensation may be paid to the applicant for losses incurred due to the secrecy order. The system is expected to fully launch around May 2024.
  • Implications: Foreign companies filing patents in Japan in sensitive technology areas (e.g., advanced computing, nuclear technology, aerospace) need to be aware of this system. A secrecy designation could delay or prevent international patent filings (potentially conflicting with PCT timelines or US filing requirements) and restrict the commercialization of the invention. Understanding the scope of designated technologies and the procedural aspects will be crucial.

Bolstered Investment Screening: The Foreign Exchange and Foreign Trade Act (FEFTA)

Complementing the Economic Security Promotion Act, Japan has also significantly tightened its foreign direct investment (FDI) screening regime under the amended Foreign Exchange and Foreign Trade Act (FEFTA), effective May 2020.

  • Lowered Threshold: The threshold triggering mandatory prior notification for foreign investors acquiring shares in listed Japanese companies operating in designated sensitive sectors was lowered from 10% to 1%.
  • Expanded Scope of "Core Sectors": The list of business sectors subject to heightened scrutiny due to national security relevance was expanded. It now broadly covers areas like critical infrastructure (energy, water, telecom, transportation), cybersecurity, advanced technologies (semiconductors, AI, quantum, aerospace, robotics), defense industries, nuclear power, and even infectious disease-related pharmaceuticals and medical devices.
  • Review Process: Foreign investors exceeding the threshold in these core sectors must notify the Ministry of Finance and relevant sector-specific ministries before the acquisition. The government reviews the proposed investment for potential national security risks, considering factors like the nature of the target company's business, the investor's background (including state influence), potential leakage of sensitive technology, and impact on critical supply chains or infrastructure. The government can recommend or order changes to the investment plan or, in rare cases, block the transaction.
  • Implications: US companies planning acquisitions, joint ventures, or even significant minority investments in Japanese companies operating in these broadly defined core sectors face a more rigorous and potentially lengthy review process. Thorough due diligence, careful structuring of transactions, and proactive engagement with Japanese authorities are essential. This regime bears comparison to the Committee on Foreign Investment in the United States (CFIUS) process, although specific procedures and focal points differ.

Export Controls: An Enduring Instrument

Japan maintains a robust export control system based on international non-proliferation regimes (Wassenaar Arrangement, Nuclear Suppliers Group, etc.) implemented through its FEFTA and related cabinet orders and ministerial ordinances (e.g., the Export Trade Control Order). This system controls the export of listed dual-use goods and technologies, as well as exports destined for specific countries or end-users of concern (catch-all controls).

While the Economic Security Promotion Act doesn't directly overhaul export controls, the overall emphasis on economic security suggests potential for:

  • Heightened Scrutiny: Increased diligence in licensing decisions for sensitive technologies, particularly those identified as critical under the new Act.
  • Potential New Controls: Future adjustments or additions to control lists to cover emerging technologies not yet captured by international regimes, potentially influenced by Japan's own R&D priorities or controls implemented by allies like the US.
  • End-Use/End-User Focus: Continued or enhanced focus on verifying the ultimate end-use and end-user of exported items, especially in sectors related to military modernization or human rights concerns in specific regions.

US companies exporting technology or goods from Japan, or incorporating Japanese components subject to control into their products, must remain vigilant about these evolving controls.

The cumulative effect of Japan's economic security legislation and enhanced investment screening creates a more complex operating environment for foreign businesses. Key implications include:

  • Increased Compliance Burden: Companies need to invest in understanding and complying with new requirements related to supply chain reporting (potentially), infrastructure equipment screening, patent application processes, and FDI notifications.
  • Due Diligence Demands: Enhanced due diligence is required not only for M&A targets (FEFTA screening) but also for suppliers (supply chain resilience, infrastructure security) and R&D partners (technology support pillar).
  • Potential Operational Impacts: Regulations could restrict choices for suppliers of critical goods or infrastructure components, potentially increasing costs or delaying projects. Patent secrecy could impact R&D timelines and global IP strategies.
  • Need for Integrated Compliance: Companies must manage compliance requirements stemming from multiple jurisdictions (e.g., US EAR and Japanese FEFTA/Export Controls), especially when dealing with sensitive technologies or complex global supply chains involving countries like China.

To navigate this landscape effectively, US companies should consider the following strategies:

  1. Stay Abreast of Developments: Continuously monitor the phased implementation of the Economic Security Promotion Act, issuance of specific guidelines and designated lists by Japanese ministries, and any amendments to FEFTA or export control regulations.
  2. Conduct Risk Assessments: Evaluate how the four pillars of the Economic Security Act, FEFTA screening, and export controls impact current and planned operations, investments, supply chains, and R&D activities in Japan.
  3. Enhance Internal Compliance: Develop or update internal compliance programs (ICPs) to address Japanese economic security requirements alongside existing US and international trade compliance protocols. This includes training relevant personnel.
  4. Strengthen Supply Chain Management: Increase visibility into supply chains for critical components, identify potential vulnerabilities, and explore diversification options where necessary.
  5. Strategic Engagement: Engage proactively with relevant Japanese government agencies during investment screening processes or when participating in government-supported R&D programs.
  6. Contractual Protections: Review and update contracts with Japanese partners, suppliers, and customers to include clauses addressing compliance with applicable laws, handling of sensitive information, and potential impacts of regulatory changes (e.g., force majeure, termination rights).

Conclusion

Japan has embarked on a significant legislative journey to integrate economic security considerations deeply into its regulatory framework. The Economic Security Promotion Act, coupled with strengthened investment screening and enduring export controls, signals a paradigm shift. While aiming to protect Japan's national interests and technological base in an era of heightened geopolitical risk, these measures inevitably create new complexities and compliance challenges for international businesses. For US companies accustomed to navigating similar regulations at home (like CFIUS and EAR), the key lies in understanding the specific nuances of the Japanese system, conducting thorough risk assessments, and implementing robust, integrated compliance strategies. Vigilance, adaptation, and strategic planning are paramount for successfully operating at the evolving intersection of business and security in Japan.