First-Ever FDI Suspension Recommendation Under Japan’s Post-2017 FEFTA Regime

2. Practical Operation of FDI Screening

The FEFTA generally requires prior notification for FDIs by foreign investors in certain covered business sectors.※1 It prohibits the implementation of such FDIs for a certain period※2 following notification, during which the Minister of Finance and the minister(s) responsible for the relevant covered sector(s) review the FDIs from the perspectives of national security and other relevant considerations. If the review identifies any matters of concern, the Minister of Finance and the relevant minister(s) may recommend that the foreign investor suspend or modify the FDI (Article 27 (5) of the FEFTA). If the recommendation is not followed, the suspension or modification of the FDI may be ordered (Article 27 (10)).

Even where concerns arise during the review process, however, it is standard practice to conclude the review without issuing a formal suspension recommendation if those concerns are addressed by the foreign investor’s undertaking to comply with certain conditions set out in the notification.※3 A breach of such undertaking may expose the investor to criminal liability for filing a false notification (Article 70 (1) (xxii) of the FEFTA), and may also be subject to ex post facto corrective orders (Article 29 (2) of the FEFTA), which were introduced by the 2017 amendment. Accordingly, a suspension recommendation under the FEFTA is generally considered to be issued only where no effective undertaking is available to dispel the concerns.

3. Reasons for the Suspension Recommendation

According to the “Notice of Update on Progress Toward Implementation of Tender Offer for Shares of Makino Milling Machine Co., Ltd. (Securities Code: 6135)” dated April 23, 2026, issued by the Offeror, the reasons for the decision to issue the Suspension Recommendation were as follows. Finance Minister Satsuki Katayama provided a similar explanation in remarks made the same day, explicitly referring to the Offeror’s plan to make Makino Milling a wholly-owned subsidiary.

In analyzing the rationale behind this decision, it appears that the authorities first assessed Makino Milling as possessing technology and information relating to high-performance machine tools, including information that could, at least when combined with other data, constitute sensitive information relevant to national security. Taking into account the regulations on technology transfer transactions under the FEFTA (Article 25), the authorities then evaluated the risk of such information being leaked and the extent to which this risk could be mitigated through the Offeror’s undertaking. In such cases, covenants restricting foreign investors’ access to sensitive information or its ability to appoint personnel to positions with such access are typically considered. However, because Makino Milling’s sensitive information includes procurement and sales information necessary for planning and implementing measures to enhance corporate value, such covenants were likely deemed incompatible with the Offeror’s objectives of the Acquisition and therefore ineffective.

This assessment appears to have been strongly influenced by the fact that this Acquisition would result in Makino Milling becoming a wholly-owned subsidiary of the Offeror. Setting aside the commercial feasibility of such an arrangement, had the Offeror structured the transaction as a take-private in partnership with an appropriate domestic Japanese partner – where the partner would assume responsibility for management and any operations requiring access to sensitive information – the effectiveness of the aforementioned covenants might have been recognized.

Furthermore, FDIs in companies forming part of the defense supply chain are typically subject to careful scrutiny from the perspectives of ensuring a stable supply of defense equipment and preventing military diversion. That these considerations were taken into account in the Share Acquisition is evident from the reasoning underlying the Suspension Recommendation. In particular, the Suspension Recommendation refers to the fact that Makino Milling manufactures “high-performance machine tools that are classified as sensitive goods with a particularly high possibility of being diverted for military use and thus require the permission of the Minister of Economy, Trade and Industry for export” (i.e., machine tools subject to list control under Japan’s national security trade controls pursuant to the FEFTA), as well as to the fact that such tools are widely used by defense equipment manufacturers in Japan. Unlike the concerns regarding potential leakage of sensitive information discussed above, however, the Suspension Recommendation does not address the effectiveness of measures to mitigate these risks. Accordingly, with respect to concerns over the stable supply of defense equipment and the risk of military diversion – particularly given that the latter can be addressed, at least in part, through national security trade controls – it is possible that the authorities considered such risks to be capable of mitigation through covenants (for example, covenants restricting proposals to transfer, discontinue, or scale down key operations within the defense equipment supply chain).

As described above, the rationale behind the Suspension Recommendation – at least as communicated to the Offeror – can be understood in light of the FDI review process described in Section 2, and it appears that the authorities have not departed from their prior practice.

4. Practical Insights Given the Suspension Recommendation※4

The issuance of this Suspension Recommendation clearly demonstrates that FDI reviews under the FEFTA are not merely a box-ticking exercise, but have become a strategic critical factor that can determine the success or failure of transactions. While the authorities continue to apply established FDI screening procedures, their approach has become increasingly stringent. Accordingly, not only foreign investors, but also target companies and sellers acting as counterparties, must combine legal analysis of the FEFTA and expertise in national and economic security. In particular, they should identify and assess the sensitivity of the target and potential concerns of the authorities, and carefully consider in advance both the need to address such concerns and the feasibility of appropriate mitigation measures.※5 It is also important to analyze this Acquisition in light of its differences from other transactions that underwent extended review but did not result in a formal suspension recommendation, such as YAGEO Electronics Japan LLC’s tender offer for shares in Shibaura Electronics Co., Ltd.

Furthermore, in assessing the sensitivity of a target company, foreign investors rely not only on their own or their advisors’ expertise in national and economic security, but also seek to validate the target’s self-assessment through due diligence. A target company may fail to recognize its own significance in the defense equipment supply chain, however, with the result that due diligence may not adequately reflect its sensitivity in this regard. In situations where this risk may arise, early consultation with the authorities – taking into account the need to preserve confidentiality – is advisable. In addition, if concerns not previously identified by the parties are raised by the authorities during the review process, it is essential to respond promptly by developing and presenting constructive and flexible solutions.