Foreign banks warn Japan's tighter reporting rules to cause 'chilling effect'

TOKYO, Oct 10 (Reuters) - Japan’s plan to tighten ownership reporting requirements for foreign investors will have a “chilling effect” on inbound investment, a group of foreign banks and brokerages has warned the government, according to a document seen by Reuters.

The caution from foreign financial services firms comes as Japan this week announced a sweeping plan that will compel foreigners investing in defence, nuclear power, utilities, telecoms and elsewhere to report when they intend to amass a 1% stake in a company, as opposed to 10% now.

The change, expected to become a law next year, reflects broad concern that China could gain access to key technologies.

But the proposal has also sparked concerns that an increase in regulatory procedures could sap investor appetite toward the world’s third-largest economy and roll back the goodwill from reforms under Prime Minister Shinzo Abe.

“Lowering the 10% ownership threshold means regulating a tremendous number of trades that were previously not targeted,” the banks said in the document, which was dated October 7. It has not been publicly released. “That would bring about a massive chilling effect on inward investment by foreigners.”

No one was immediately available at the Ministry of Finance, which is in charge of the changes, for comment.

Government officials have previously told Reuters that the change is aimed at better monitoring Chinese investment, following in the steps of similar moves by the United States and Europe.

However, the banks characterised the move as “extremely unusual on an international level”. The law change would also have a negative impact on the liquidity of domestic stock market, which relies on foreign investors for some 70% of its trades, they said.

It would also hurt fundraising by domestic companies, they said.

The move was first reported by Reuters in August and was officially announced earlier this week. (Reporting by David Dolan, Takashi Umekawa and Takaya Yamaguchi; Editing by Miyoung Kim)