The impact of Japan’s new Prime Minister Sanae Takaichi’s proposed tightening of foreign investment regulations on Japan’s M&A market is expected to be limited, at least in the near term, dealmakers polled by this news service said.

On 21 October, Takaichi was appointed as Japan’s 104th prime minister, marking the launch of a new administration. Takaichi has expressed that she would introduce a foreign investment screening committee – the Japanese version of the Committee on Foreign Investment in the US (CFIUS) – and restrictions on land acquisitions by foreign capital.

According to Shinichiro Kobayashi, principal economist, Mitsubishi UFJ Research and Consulting, foreign investment regulations are expected to tighten gradually rather than shift toward outright bans. Restrictions may be introduced in terms of transaction size or sector scope, but as Japan still needs foreign capital, drastic tightening appears unlikely, he added.

From an M&A perspective, the key question is whether – and how– her policy push will influence dealmaking. M&A professionals polled by this news service said they do not expect a significant shift in the overall deal environment in the near term.

Taku Matsumoto, partner at local law firm Anderson Mori & Tomotsune and a legal expert on economic security issues, said he does not expect major drastic changes in the Japanese government regulation policies at least for now.

Takaichi herself served as the minister in charge of economic security before becoming the prime minister, and her ideas appear to have already been reflected significantly in various existing policies regarding national security including foreign investment in Japan, he said.

The Takaichi administration, just as its predecessors, will be friendly to strategic corporate partners from ally and neutral countries to Japan, while being cautious on M&A linked to countries over which Tokyo has some economic security concerns, Matsumoto said.

Meanwhile, Mikiharu Mori, managing partner and attorney at law at Tokyo International Law Office, said the creation of a foreign investment screening committee may turn off overseas buyers keen on investment in Japan, because of possible concerns over prolonged deal duration and increased transaction costs. That said, Mori is not too worried about possible adverse effects of Takaichi’s initiatives impacting the market significantly, given Japan already has a solid legal system to review foreign investment in Japan under the current foreign exchange and control law.

Separately, the new administration is expected to be supportive of outbound M&A by Japanese companies to strengthen Japan’s strategic areas, such as semiconductor, artificial intelligence (AI), energy, space, and medical industries because Takaichi has advocated pro-business policies, Anderson Mori & Tomotsune’s Matsumoto said. It will also be willing to help promote domestic realignment of strategically important industries, he added.

Restricting foreign ownership of land

According to Akihiro Kido, joint head of Mizuho Securities’ investment banking business division, head of global advisory, the proposed restrictions on land acquisitions by foreign buyers would not impact deal activities significantly, since Takaichi’s proposal centres on introducing a prior-approval system for land around strategically important infrastructure.

That said, it would still be one area to watch, given that there has been a noticeable increase in acquisitions by private equity funds that target companies with valuable real estate holdings in Japan, he noted.

It is still unclear whether such deals would fall under the new regulations, and if so, whether the rules would apply uniformly regardless of the nationality of the general partners of private equity funds, Kido pointed out.

Matsumoto also noted that the current land investigation law in question only allows the central government to investigate transactions of land related to Japan’s national security. The scope of the law is very limited in general, he said.

“If you block or restrict purchases of real estate in Japan by overseas investors comprehensively, it will negatively impact economic growth,” Tokyo International Law Office’s Mori said. “Then almost everyone, even from within Japan, would be against the move from the standpoint that discrimination against or exclusion of foreigners must not occur.”

Japan continues to attract foreign capital

Takaichi has pledged to implement proactive fiscal policies aimed at solving social issues through public-private investment, as well as strategic government spending to strengthen advanced technologies.

From a valuation standpoint, Japan remains an attractive destination for foreign investors, Mitsubishi UFJ Research and Consulting’s Kobayashi said.

“Assets in Japan are relatively cheap,” Kobayashi noted. “Property prices have started to rise gradually, but the pace is far slower than in overseas markets, making Japanese real estate look inexpensive by comparison.”

On closer examination, the Takaichi administration is dominated by lawmakers advocating expansionary fiscal policy, many of whom have long argued that boosting household disposable income should take precedence, financed through government bond issuance. Kobayashi added that Japan’s persistent fiscal concerns have driven up long-term bond yields.

“Even if the policy rate rises slightly, sovereign risk premiums tend to increase more, steepening the yield curve and making the yen prone to selling,” he said, adding that the weak-yen trend, and the resulting foreign investment interest in Japanese companies, is unlikely to change anytime soon.

Meanwhile, Mizuho Securities’ Kido said he is closely watching whether Takaichi’s push to encourage more effective use of corporate internal reserves will lead to an increase in M&A activity, as retained earnings are typically used for one of the following purposes: boosting R&D and capex under an organic growth strategy, pursuing M&A, or enhancing shareholder returns through buybacks and dividends.

“While I don’t think the launch of the Takaichi administration would immediately shift the overall trend, we could see more Japanese companies allocating capital toward acquisitions,” he said.