Friends will note that the kind of considerations behind the legislation proposed in Japan to safeguard national industry have been analysed by us previously in terms of the theory of political economy. Those readers who wish to pursue this line of policy may benefit by searching for our essays on Friedrich List, accessible by entering the name in the apposite search facility. Cheers.
Japan models a new look for national security
Restrictions on foreign investment could be a template for governments around the world
Japan’s newly defined restrictions on foreign investment, which were laid out last week and designate companies according to their importance to national security, seem wilfully concocted to confuse. Value Golf, a website for booking tee-off times, can be found in the same non-critical category as MUFG, the country’s largest bank. Golf-Do, a purveyor of second-hand clubs, sits a rung of sensitivity higher along with Fanuc, Japan’s most important manufacturer of industrial robots. Resort Trust, which operates a chain of luxury golf courses, ranks in the most protected group alongside Mitsubishi Heavy Industries, which builds military submarines. Quirkily triaged, perhaps. But also revealing of Japan’s attitude towards business and, possibly, a template for governments around the world as coronavirus violently redefines the scope and meaning of national security. For all the oddities of the Japanese list, the broader message is unambiguous.
Even before the pandemic, Tokyo had taken a more holistic view of corporations’ collective role in the national interest and in maintaining the desired contours of the world’s third-biggest economy. That has evolved into a more explicit view on the criticality of each and every listed company. For all the purring from the Ministry of Finance about how the clarification encourages foreign investment, it amounts to a protectionist framework that, depending on the administration wielding it and the pressures of the day, could turn out to be more powerful than it looks. In its sustained assault on globalisation, say chief executives in Japan and elsewhere in Asia, the Covid-19 pandemic has rubbed raw the vulnerabilities of supply chains that once felt reliable, easily re-routable and protected by the fundamental instincts of commerce. The crisis has bludgeoned the comforting assumption that the market will always find a way to deliver whatever is needed. It has distended the list of which businesses — from makers of paper masks and rubber gloves, to biotech start-ups and producers of specialist chemicals — might, from now on, need to be ringfenced as a matter of policy.
In a recent forum on the theme hosted by the London School of Economics, Peter Watkins, a visiting fellow, warned of a “loss of innocence” around globalisation. “What were previously seen as almost purely economic or technical decisions about the sourcing of components will become more political,” he said. The definition of national security is likely to be broadened to include the concept of “societal resilience”. Aimen Mir, a former chair of the Committee on Foreign Investment in the US in both the Obama and Trump administrations, now a lawyer at Freshfields, predicts investment regimes will now be tightened everywhere. “There is a realisation that what needs to be protected is broader than the traditional ideas,” he said, adding that in some countries there will be a particular resistance to foreign buyers targeting companies while they are struggling. Perceptions of what is required to protect the public and the risks of ceding ownership of technology have shifted. Germany, Canada, Australia and France among others have expressed (in different terms) the need to increase the scrutiny of acquisitions by foreign entities. Mergers and acquisitions lawyers say a number of “in flight” deals that straddled the pandemic’s first months are undergoing stricter reviews. In some cases, the virus is accelerating existing concerns. A UK Ministry of Defence policy document in 2017 noted the need for “further steps to increase the robustness and resilience of our supply chains”. In late 2019, according to Japanese and US officials in Tokyo, the US government began discussing a plan to rebuild key supply chains that currently depended on China and others into a “global trusted network” that circumvented them. Tokyo, despite years of mostly warmer relations with Beijing, has devoted a $2.2bn chunk of its coronavirus stimulus package to help companies move production out of China. But the move was part of a pre-existing pattern. Japan has been building up to tightening the investment screening regime around a dozen vital sectors (power generation, military equipment, software) since last autumn.
The newly revealed group of “core” national interest companies, for which certain activist or state-backed investors will have to pre-notify the finance ministry if they want to build stakes larger than 1 per cent, comprises 518 names, representing about 40 per cent of the market capitalisation of the Tokyo Stock Exchange. That is more extensive, by some measures, than the markets had expected, but in line with what experts guessed. Japan has always consciously viewed its economy as the sum of its companies, their tangible assets and intellectual property, says a retired official from the Ministry of Economy, Trade and Industry. But it has tended, to the intense frustration of investors, to take a much broader view than other countries of which ones needed to be protected to keep that economy intact. Japan, says the senior executive of one of the country’s largest companies, has long built its policy around the anxieties of an island: coronavirus is now requiring everyone else to do the same.