Tokyo Stock Exchange head hits out at foreign investment rule

The head of the Tokyo Stock Exchange has condemned a Japanese government proposal to sharply tighten rules on foreign investment as “idiotic” and a threat to Japan’s standing in global financial markets. 

The unusually blunt comments by Akira Kiyota, chief executive of Japan Exchange Group (JPX), which owns the Tokyo and Osaka exchanges, echo a chorus of panic among the world’s biggest investment banks. They have warned of an “existential risk” to their businesses in Japan if the new rules are not significantly watered down. 

The Ministry of Finance plans to lower the threshold at which foreign investors must submit a pre-purchase report when investing in companies regarded as sensitive to national security from 10 per cent to just 1 per cent. The change would affect a wide range of transactions. 

“The current level of 10 per cent is totally fine,” said Mr Kiyota in an interview with the Financial Times. “Nothing would be gained by reducing it to 1 per cent. It’s absolutely idiotic, and I doubt it will ever happen. Japan would lose trust of the rest of the world.”

A delegation from the International Bankers Association of Japan met finance ministry officials on Wednesday to plead their case, arguing that their daily business requires frequent purchases of share blocs greater than 1 per cent, according to people familiar with the matter. 

While both the finance ministry and the ministry of economy, trade and industry have stressed that exemptions will be made for “portfolio investors”, they have yet to clarify precisely how those will be defined. Foreign banks fear it will be impossible to determine the nature of investments in real time, putting their block trading and market-making operations at a huge disadvantage to their Japanese rivals which are not covered by the rules. 

The planned changes have triggered grave warnings from large foreign investors in Japan, who have been advised that the restrictions could be used to curtail their ability as shareholders to propose changes in companies’ senior management.

The heads of two top foreign investment managers said the proposed rules could derail progress on governance, kill the current shareholder activism boom and make a mockery of Prime Minister Shinzo Abe’s famous inducement to overseas institutions to “buy my Abenomics”. 

Foreign investors at present own about a third of the Tokyo stock market by value, and are responsible for about 65 per cent of daily trading volume. 

A wide range of sectors are deemed strategically significant under the new law.

“The fact that the regulation will apply to industries such as agriculture, forestry, fisheries, leather and marine transport gives the impression that the Abe administration, which carries the banner of global free trade, has started to slant protectionist,” said Masatoshi Kikuchi, a strategist at Mizuho who suggested that the government should set the pre-notification level at 5 per cent. 

One official close to the process said the planned exemption for portfolio investment reflected the government’s desire to reduce barriers to foreign investment while mirroring the US and European methods of scrutinising transactions that might affect national security.

“As a whole, this is deregulation,” the official said, adding that foreign investors’ concerns would be addressed through the regulatory process once the law had passed. “It purely depends on how we will define ‘portfolio investment’.” 

Analysis by the finance ministry suggested that a crude application of the new rules would increase pre-notifications eightfold, but 90 per cent of that would relate to portfolio investment, which it intends to exempt from the rules. 

Even if transactions do trigger the notification process, the government will only block them if they affect national security, the official said.

“Our message is please trust us because we have a big objective of increasing foreign investment in Japan.” 

Jesper Koll, head of fund management group WisdomTree Japan, said: “Just when we thought Japan was on an irreversible right track towards global best-in-class capital stewardship and pro-free markets rulemaking, we get a rude wake-up call suggesting Japan’s national interest and free capital flows may be on a collision course.” 

He added, however, that the process of introducing the new law would give banks and investors the opportunity to lobby the government to soften its position. 

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