Japan Blocks Foreign Takeover on Security Grounds

Japan has blocked South Korean private equity firm MBK Partners’ attempt to acquire Makino Milling, a manufacturer of high-precision machine tools, citing national security concerns. The decision, issued under Japan’s Foreign Exchange and Foreign Trade Act (FEFTA), marks the first time a foreign investment has been halted under the law since 2008, when the government blocked a British fund’s attempt to increase its stake in J-Power, a major energy company.

Dual-Use Technology Sparks Scrutiny

Makino Milling’s products, including CNC machine tools, are used in both civilian and military applications. The Japanese government argued that the acquisition could allow foreign entities to gain access to technologies with potential defense implications. Such dual-use capabilities have become a focal point for FEFTA reviews, as outlined in administrative guidance from the Ministry of Finance.

Under FEFTA, foreign investors must notify the government if a transaction involves companies in sectors deemed sensitive, such as defense, semiconductors, or dual-use technologies. The review process includes a 30-day evaluation period, during which the government assesses risks to national security. Failure to comply with FEFTA requirements can result in orders to halt transactions, as seen in the Makino case.

CFIUS Approval Not a Guarantee

Despite securing approval from the U.S. Committee on Foreign Investment in the United States (CFIUS)—a requirement due to Makino’s Ohio facility—the deal was blocked by Japan. This highlights a growing divergence in foreign investment screening standards between jurisdictions. The Japanese government’s decision shows its commitment to a stricter, more security-focused approach, akin to CFIUS but tailored to its own priorities.

The 2008 J-Power case, which also involved energy security concerns, set a precedent for Japan’s willingness to prioritize national interests over foreign investment. The Makino acquisition, however, represents a shift toward broader scrutiny of foreign ownership in sectors with indirect ties to sensitive technologies.

Legislative Changes Expand FEFTA’s Reach

Recent reforms have expanded FEFTA’s scope. In 2019, the threshold for triggering a review was lowered from 10% to 1% ownership, and new provisions now require notification if a foreign investor appoints a director or auditor of a Japanese company. Further amendments, approved by the Japanese Cabinet in March 2026, aim to strengthen FEFTA by broadening the definition of sensitive industries and introducing stricter compliance measures.

The proposed legislation, expected to be debated in the Diet until July 2026, will likely take effect by mid-2027. If passed, it will introduce more rigorous scrutiny of indirect acquisitions, layered holding structures, and beneficial ownership arrangements, increasing regulatory uncertainty for foreign investors.

Risks and Compliance Challenges Ahead

For foreign investors, the Makino case signals a need for heightened vigilance. Transactions involving Japanese companies in sensitive sectors may face prolonged reviews, stricter mitigation requirements, and greater transparency demands. Private equity firms, in particular, must handle complex governance restrictions and ongoing compliance obligations to avoid FEFTA-related hurdles.

As Japan aligns its foreign investment screening with broader economic security goals, foreign investors are advised to conduct thorough risk assessments before pursuing deals that could attract FEFTA attention. The evolving setting shows the importance of understanding local regulatory priorities and preparing for increasingly stringent oversight.