A vast majority of Japanese companies back the government’s recent decision to tighten reporting requirements for foreign investment in industries related to national security, a Reuters poll found, despite criticism from overseas investors.

The Corporate Survey found that 62% of firms see Japan’s latest step as appropriate from the standpoint of national security and 31% think it is necessary although conditions are severe. Only 7% saw no need to strengthen regulations.

Under the change, approved by parliament last month and set to become a law next year, foreign investors in industries such as defence, nuclear power, utilities and telecoms will have to report holdings once they amass a 1% stake in a company, as against 10% now.

The move, reflecting concern that China could gain access to key technology and confidential information, followed similar steps taken by the United States and Europe in recent years to allow greater scrutiny of ownership in industries deemed as critical to national security.

“It is necessary to restrict domestic corporate buyouts by Chinese capital. Without limiting ownership of Japanese stocks and real estate, Chinese capital would dominate Japan,” wrote a manager of a paper/pulp maker.

A manager at an electrical machinery maker, however, wrote: “It’s difficult to clarify a definition as it’s associated with national security. It would hamper corporate efforts to boost its corporate value, which could run counter to government policy to lure foreign investment.”

The new regulation quickly drew criticism from foreign investors, who have a large weight in the Japanese stock market. They said the 1% threshold is too low and argue that the new regulation runs counter to the ongoing corporate trend of strengthening governance.

Goldman Sachs Group strategists warned in October the new regulation could have substantial negative effects on the Japanese stock market. It could have unintended consequences like deterring foreign investors and harming market liquidity.

“The survey results reflect sluggish foreign direct investment in Japan, as many Japanese firms are cautious about M&A and tie-ups involving foreign businesses,” said Koichi Fujishiro, senior economist at Dai-ichi Life Research Institute.

“The revision this time is largely symbolic and political, keeping up with steps taken by US President Donald Trump,” he said.

Some 40% of Japanese firms expected the revised law would prevent outflow of technology and management know-how overseas, the Corporate Survey found.

Some 39% said the revised law could dent the attractiveness of Japanese stocks, hamper tie-ups with foreign business and cause difficulty in access to necessary capital. Two-fifth of firms saw no particular impact.

The survey, conducted from Nov.20 to Dec.2 for Reuters by Nikkei Research, canvassed 502 big and midsize non-financial companies. Roughly half responded to the questions on the new regulation, on condition of anonymity so that they can express their opinions more freely.

Japanese firms are overwhelmingly expecting the economy to contract after the 2020 Tokyo Olympics following growth in the run-up to the event, prompting a call for fresh fiscal stimulus to support a fragile economy, a Reuters poll showed.

Growth in the world’s third-largest economy has slowed to a crawl in the last quarter as the US-China trade war and global slowdown undermined the export-led economy. Many market players bet the economy will contract in the current quarter, as consumption takes a hit from the sales tax hike to 10% from 8% starting on Oct. 1.

Analysts polled by Reuters last month expected the economy to shrink 2.5% in October-December, rebound 0.6% in the first quarter, then accelerate towards 1.2% annualised growth in the July-September quarter, during which Tokyo hosts the Olympics.

The growth rate is expected to halve in the final quarter of 2020. The Reuters Corporate Survey found Japanese firms have a gloomier outlook of the economy, with 65% of respondents expecting the economy to contract after the Olympics. That could signal weaker business spending and investment than markets see.

Some 65% also urged the government to compile fresh economic stimulus to underpin a fragile economy after the 2020 Olympics.

“The economy is already in recession. There’s a risk of private consumption falling sharply after the Olympics,” a manager at a transport equipment maker wrote in the survey.

“An economic boom triggered by the Olympics may help avoid a slump temporarily. Without some kind of stimulus, things could cool across all sectors,” a manager at a ceramics manufacturer wrote.

Reuters