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Goldman against Japan’s Strict Foreign Investment Rules in Stocks

Japanese government: Japanese government plans to impose stricter rules on foreign investment in local equities. But Goldman Sachs has opposed the plan saying it’ll be detrimental to the market and hinder the ability to raise funds. It will also undermine the seven-year market reforms.

Last week the finance ministry proposed a new measure on foreign investment threshold in companies related to national security. Foreign investors are to report in advance when they plan to buy more than 1% – from the current limit is 10%.

The ruling Liberal Democratic Party approved the bill. But before it becomes law, it must get a green light from the cabinet and both houses of parliament. Goldman Sachs says implementation in the fiscal year starting in April.

However, Goldman strategists say the implementation will have a substantial negative impact on Japanese stock markets. The new regulation will deter foreign investor participation, causing a decline in market liquidity.

According to Goldman strategists, foreign investors account for about 70% of the local stock trading volumes. Under the new rule, they will face an additional burden of expenses, time, and legal risks. This would increase the risk premium of investing in Japans. The strategists added.

The draft bill aims to strengthen the monitoring of investment in national security-related industries. It also aims to promote foreign direct investment. The new rules will apply to sectors such as power generation and communications, and weapons manufacturing. However, exceptions will apply for purchases of assets for investment portfolios.

Definition of investment portfolios remains unclear

Portfolio investment will not be subject to stricter rules; however, the exact meaning of what falls under the category remains unclear.

Nikkei Asian Review says the government plans to exclude hedge funds and asset management companies from the rule. But the newspaper did not cite any source.

Goldman is also asking whether block trades larger than 1% of the company’s shares could fall under portfolio investing.

Japanese government move could undermine efforts to promote foreign investment and shareholder engagement. Shinzo Abe- Japan’s Prime Minister, introduced the stewardship code in 2014, followed by the corporate governance code in 2015.

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