Will the MBK–Makino Deal Become a Nightmare for Foreign PE Funds? Take aways from Japan’s First FDI Block in 18 Years

II. Take aways from the MBK–Makino Case: What Foreign PE Funds Need to Know About Japan’s FEFTA Review

The strong reaction in the market to this recommendation reflects multiple factors. Understanding this background should help clients form a more accurate view of Japan’s foreign investment review regime.

(1) Why the Recommendation Was So Unexpected

Japan’s foreign investment review framework has historically been organized around three dimensions:

1. Investor attributes — nationality, shareholder structure, and the degree of any affiliation with foreign governments.
2. Sensitivity of the target’s business — whether it involves the core production or technological base of a national-security-related industry, whether there is a risk of leakage of sensitive technology or information, and whether it concerns the stable supply of strategic goods or services.
3. The purpose and nature of the investment — the percentage of shares to be acquired, the substantive degree of influence over management decisions, and whether the investor is likely to propose post-investment management initiatives that would be detrimental to national security (such as scaling back or divesting sensitive businesses, or accessing sensitive technology and information).

Within this framework, several factors made the recommendation surprising to the market.

First, in terms of historical precedent, Japan has had only one prior cease-and-desist order against a foreign acquisition: in May 2008, when the U.K. hedge fund The Children’s Investment Fund sought to increase its stake in Electric Power Development Co., Ltd. (J-Power), a Japanese utility, from 9.9% to 20%, the regulators issued a cease-and-desist order on national security grounds. That case, however, predated the 2017 FEFTA amendments that introduced the corrective order regime. Following those amendments, it had become widely accepted that if a foreign investor and the regulators agreed on a mitigation plan, and the foreign investor committed in its filing to comply with the mitigation, the government could ensure compliance by issuing a corrective order—including an order to dispose of the acquired shares—in the event of non-compliance. As a result, it was widely believed that formal cease-and-desist recommendations or orders would unlikely to be issued.

Second, in terms of investor attributes, MBK Partners is a PE fund headquartered in Seoul, South Korea. Korea is treated as a preferred-jurisdiction country under Japan’s export control regime, and risk under review dimension (i) had generally been viewed as relatively low. In addition, the PE business model typically aims at exit within a few years of acquisition; unlike strategic corporate investors with a long-term holding horizon, PE funds are generally regarded as interested in investment returns rather than the target’s technology, and were therefore considered to pose a comparatively low national security risk in theory.

Despite these factors, the regulators nevertheless issued a cease-and-desist recommendation against MBK, defying both expectations. The clear signal is that, where the target’s business is sufficiently sensitive, the relative advantages associated with the investor’s attributes and structure are not enough to offset the review risk.

This signal warrants particular caution from foreign PE funds. The previous expectation regarding FEFTA review was that, absent a country with national security tensions with Japan—such as PRC—the risk of being blocked was essentially remote. (PRC organizations and individuals, following the 2024 introduction of the special foreign investor regime, are now uniformly treated as government-affiliated entities and face a higher level of scrutiny under review dimension (i).) The MBK case has displaced even that expectation, prompting speculation as to whether the block was related to MBK’s business or investors in PRC. As discussed below, however, a risk assessment that uses “China or not” as the sole criterion is misguided when it comes to FEFTA review.

(2) Risk Assessment of the Target’s Business — Low, Medium, and Highly Sensitive

A point often overlooked by foreign investors is that the line between “designated industries” (which require pre-investment clearance under the FEFTA) and “non-designated industries” (which do not) frequently does not match investor expectations. The scope of designated industries under the FEFTA is very broad and has continued to expand in recent years, but a substantial number of industries remain non-designated and require no prior filing. For example, automotive manufacturing (although prior filing may be required where information-processing functions are involved), real estate, and consumer-facing manufacturing or services do not appear on the designated industry list. Investments in such non-designated industries do not require pre-clearance and only require an ex post report under certain circumstances.

Second, even where the target operates in a designated industry, not all designated industries receive the same level of attention in practice. Within the designated industries, the FEFTA further identifies “core industries”, which are sectors considered particularly likely to affect national security and are subject to stricter regulation. These include: weapons and aircraft manufacturing, natural resources (crude oil, natural gas), rare-earth resources, and pharmaceuticals and high-grade medical devices.

Even within the core industries, however, the actual intensity of review is not uniform across sectors, and certain sectors are recognized as receiving particularly intense scrutiny (i.e., “highly sensitive” sectors). These include: manufacturing directly related to defense equipment (such as the high-end machine tools at issue in this case); the semiconductor industry, which is a focus of geopolitical risk; precision machinery and key energy components in which Japan occupies a chokepoint position in global supply chains and holds irreplaceable core technology; and businesses holding technology subject to export controls.

It is worth emphasizing that even where a particular technology has no overt military use, the possibility of dual-use diversion, or difficulty in cleanly separating sensitive and non-sensitive business information, may also trigger heightened review. Conversely, designated industries with relatively weak national security implications (such as much of consulting and IT services, agriculture, forestry and fisheries, and consumer-related manufacturing and retail) typically experience shorter review cycles and are cleared without difficulty in the majority of cases.

From this perspective, Makino is a “highly sensitive” target: as the official press release on this case stated, Makino manufactures “some of the world’s leading machine tools, which are also widely used by manufacturers of Japan’s defense equipment.” Makino’s high-precision machine tools are classified as “particularly sensitive products with high potential for military diversion” requiring METI minister permission for export, and the company possesses related technology and information. On the facts, Makino faced very intense scrutiny under review dimension (ii). At the same time, because MBK contemplated a 100% acquisition, dimension (iii) was also subject to strict review.

Against this backdrop, it can be inferred that MBK Partners’ relative advantages as a Korean-based organization and as a PE fund were insufficient to offset the regulators’ risk assessment. In such a situation, the focus of review would normally shift to negotiation of mitigation measures—namely, whether binding investment conditions can be designed that protect national security while still leaving room for the deal to proceed. It is reasonable to infer that the investor and the regulators ultimately failed to reach agreement on mitigation measures, that the case therefore proceeded to the Foreign Exchange Council, and that it ended with the issuance of a cease-and-desist recommendation.

The implication for investors is that, at the earliest stages of a transaction, investors should conduct a careful sensitivity assessment of the target’s business through due diligence and, on that basis, consider whether informal pre-consultation with the regulators is advisable. Note, however, that pre-consultation has no fixed timetable and is not appropriate for every case—initiating pre-consultation in cases that are in fact lower-sensitivity may slow the project down.

In addition, where the target is known to hold sensitive technology or information (for example, large volumes of personal data), it is important to understand how the target manages such technology or information and whether it is segregated from non-sensitive technology or information. When mitigation measures are subsequently negotiated with the regulators, the foreign investor is likely to be required to restrict its access to such sensitive technology or information. If the target has not segregated, or cannot segregate, sensitive from non-sensitive technology or information, there is a risk that—as in this case—the parties will be unable to agree on mitigation measures.

(3) Risk Assessment of Investor Attributes — It’s Not Just About PRC Nexus

It must be acknowledged at the outset that investors with PRC characteristics face heightened scrutiny in Japan’s foreign investment review and frequently experience longer review cycles. Even investors that are not themselves PRC entities—such as those based in Hong Kong, Taiwan, or Singapore, or funds with considerable China-related investment activity—may face relatively stringent review if the regulators perceive them as having close ties to, or being susceptible to influence from, the PRC, with scrutiny calibrated to the depth of that nexus. That said, the PRC nexus is not the regulators’ sole consideration. Indeed, the only prior FEFTA block—the 2008 J-Power case—was directed at a U.K. hedge fund, not a Chinese investor. This is also consistent with FDI practice outside Japan: in industries closely tied to national security or traditional values, governments may, for political reasons, take a blocking posture toward all foreign investors, including those from allied countries. The U.S. blocking of Nippon Steel’s acquisition of U.S. Steel in 2025, and France’s blocking of the proposed acquisition of Carrefour by a Canadian company in 2021, are typical examples.

It can further be reasonably anticipated that, in certain critical industries with few players, investments from “competitor” jurisdictions will be subject to heightened scrutiny. For example, in semiconductors, manufacturing is concentrated in a small number of East Asian jurisdictions such as Taiwan and Korea; and given that Japan is currently pursuing the restoration of its position as a “semiconductor power” as a matter of national policy, investors from competitor jurisdictions can be expected to face stricter review.

An often-overlooked but significant factor is that the regulators pay close attention to an investor’s track record. PE funds with limited prior investment experience in Japan may, for that reason alone, attract more cautious scrutiny. Similarly, investors with a history of FDI-related regulatory issues in other jurisdictions, or PE funds with a track record of shutting down or scaling back business lines that—while less profitable—are critical to national security (such as defense-related operations, businesses where domestic players are few, or operations involving proprietary Japanese technology), can expect to face a more demanding review.

Based on the author’s extensive experience advising on FEFTA reviews (including the so-called “high-difficulty” cases involving PRC investors), the regulators’ review of the investor is not a simplistic, nationality-driven, one-size-fits-all assessment. Rather, it considers in an integrated way (i) the equity structure and substantive control relationships behind the investor; (ii) the degree of any affiliation with governments or state-owned capital; (iii) the investor’s prior investment record and compliance track record overseas and in Japan; and (iv) the substantive degree of post-closing influence over the target’s management.

For example, even if a PE fund has a small number of PRC-based LPs among its investors, this does not typically pose a significant issue for the fund’s investor-attribute assessment, provided it is clear from the fund’s structure that such LPs do not hold control rights.

Typically, in the first round of questions following submission of a filing, the regulators will pose questions of this type concerning the nature of the investing entity and the purpose of the investment. We therefore recommend that foreign investor clients begin preparing responses to these “must-be-asked questions” at the earliest stages of a transaction.

In addition, because Japan does not require execution of definitive transaction documents as a precondition to filing, investors anticipating a lengthy review may consider filing prior to signing. A common practical question is whether a filing can be submitted while items such as the transaction price or the identity of the investing entity remain undetermined. Japan’s authorities are relatively flexible on such practical points: provided that key information such as the actual investor, the target, and the percentage stake to be acquired is fixed, the regulators will accept a filing and commence review even if certain other information remains “to be determined” (with such information to be supplemented once finalized).

Providing the regulators with substantive, persuasive background materials demonstrating that the foreign investor will not have an adverse impact on Japan’s national security is at the heart of obtaining smooth clearance. Thorough advance preparation and dialogue with the regulators are often more determinative of the outcome than the investor’s nationality itself.

(4) The “Foreign Exchange Council” Procedure — Particular Caution Required

One procedural point warrants particular attention. FEFTA Reviews are normally conducted with the International Investment Management Office of METI as the point of contact and are, in principle, to be completed within 30 days, although the period may be extended if review cannot be concluded within that time. Once the extension exceeds three months, however, the case proceeds to deliberation by the Foreign Exchange Council.

In practice, investors frequently withdraw and resubmit their filings before the period expires in order to stop the clock, maintaining substantive dialogue with the regulators while keeping the case from triggering the formal extension mechanism. Given the timeline, this case appears to have gone through a similar process in its earlier stages.

Once a case proceeds to the Foreign Exchange Council, if the government determines that the investment would have a negative impact on Japan’s national security, it may, after hearing the Council’s opinion, recommend that the investment be suspended or modified. The actual deliberations of the Council remain largely opaque, as there are virtually no publicly disclosed precedents. Investors are afforded an opportunity to present their case, and the Council members are composed of external experts such as university professors. As a result, some investors expect the Council to function as a neutral, specialized tribunal that will give due consideration to their arguments. Under the Foreign Exchange Act, however, the authority to order suspension or modification of an investment rests solely with the government; the government is only required to hear the Council’s opinion, and nothing more. Judging from this case, it appears that the scope for investors to steer the outcome in their favor once a matter reaches the Foreign Exchange Council is limited.

Rather, once a case enters the Foreign Exchange Council process, however, the parties’ ability to control the pace of review and the flexibility with which the case can be handled both decline significantly, and the deliberation result is, in principle, to be made public. In this case, the cease-and-desist recommendation was indeed publicly disclosed. Given that public disclosure of a cease-and-desist recommendation can pose significant reputational risk to the parties, the case underscores that investors should make every effort to avoid the matter reaching the Foreign Exchange Council stage. How to address the regulators’ concerns through negotiation before Foreign Exchange Council involvement is thus a critical strategic judgment in foreign investment review practice.

(5) Mitigation Negotiations — From “Behavioral” Conditions Toward Higher-Intensity Constraints

Mitigation measures—undertakings to the regulators to comply with specified conduct in exchange for clearance—are a commonly used tool for handling sensitive review cases under the current FEFTA framework. To date, the commitments agreed between investors and the regulators under the FEFTA have generally taken the form of behavioral conditions, such as: prohibiting foreign government influence over the company’s management; prohibiting the foreign investor from accessing or disclosing sensitive technical information; and prohibiting the investor from proposing reductions or transfers of sensitive businesses.

Behavioral conditions, however, depend largely on the investor’s “self-discipline” and require long-term monitoring; they are generally regarded as a relatively weak form of constraint that places a meaningful burden on the government. Where, as in the present case, the target’s business is highly sensitive and the regulators have significant concerns about the investment, purely behavioral conditions may be regarded as insufficient to eliminate the security concerns.

In such situations, avoiding a cease-and-desist recommendation or order may require the introduction of higher-intensity constraints, including structural conditions. Given that Japan often draws lessons from CFIUS in the United States, higher-intensity constraints potentially imported into the Japanese practice may include ring-fencing specified business units, divestiture of certain sensitive businesses, the establishment of an independent security committee, and the introduction of third-party monitoring mechanisms.

It remains unclear what form of mitigation would have enabled the regulators to grant clearance in this case. However, with respect to the defense-related business implicating the “leakage of sensitive information pertaining to national security”—an area of particular concern for the regulators—one wonders whether it might have been possible to carve out that business from Makino’s overall operations and subject it to structural constraints, such as spinning off the defense business into a separate entity in which MBK would hold only a minority stake.

The design of high-intensity constraints, however, requires balancing the need to “persuade the regulators” against the need to “preserve investment value.” This means that negotiations with the regulators over mitigation terms will require substantially more time and effort than in the past, and that systematic strategic planning—with the assistance of external advisors—should begin early in the transaction.

Furthermore, the introduction of structural constraints raises new questions that have not arisen with behavioral conditions. The FEFTA is designed primarily to regulate the foreign investor; it does not presuppose any obligation on the part of the target to cooperate. In theory, a foreign investor can submit a FEFTA filing without obtaining the target’s consent or even informing the target. The historical predominance of behavioral conditions reflects this design, since such conditions bind only the foreign investor itself. Once structural constraints are introduced, however, active cooperation from the seller and the target becomes indispensable.

This gives rise to a practical difficulty: in transactions where the target’s cooperation is uncertain (such as hostile acquisitions) or where the transaction itself remains uncertain (such as tender offers requiring participation by minority shareholders), pre-implementation of structural constraints prior to obtaining FEFTA clearance is operationally challenging. Whether it will be possible to obtain FEFTA clearance in advance on the condition that structural constraints will be implemented post-closing will be an important practical issue going forward.

That said, moving beyond behavioral commitments to a broader range of mitigation tools, including structural measures, is not necessarily unfavorable for foreign investors. In some cases, regulators may be unable to clear a deal based on weak behavioral commitments alone, but may be prepared to do so if stronger measures are available.

Although this is only the second FEFTA case to be officially blocked, market participants understand that some deals have effectively been withdrawn after regulators signaled clearance concerns or the review became prolonged. These cases are not public, so any estimate is necessarily impressionistic, but they appear to occur at least several times a year. A wider range of mitigation options may therefore help some transactions obtain clearance where they previously could not.

(6) FEFTA Amendment Developments

In March 2026, the Japanese government submitted to the Diet a bill to amend the FEFTA. The proposed amendments are reported to further strengthen the foreign investment review regime. We will continue to monitor the legislative process and provide updates to clients as appropriate.

III. Conclusion

The cease-and-desist recommendation in the Makino acquisition marks the entry of Japan’s foreign investment review regime into a new phase of enforcement. Investors planning to acquire Japanese companies in security-related industries should conduct a comprehensive FEFTA compliance assessment at the earliest stages of any transaction, including: analysis of the target’s security-related business attributes; a realistic estimation of the review timeline; assessment of the feasibility of mitigation measures; and corresponding arrangements at the transaction document level.

Overall, however, the recommendation does not signal the end of inbound investment in Japan; rather, it is an important regulatory signal. For foreign enterprises and PE funds, the appropriate response is not to retreat from investment, but to engage with the increasingly stringent review environment through fuller advance preparation, more refined strategic planning, and deeper, more substantive engagement with the regulators. We welcome any specific inquiries.