October 10, 2019 / 10:58 AM / 12 days ago

UPDATE 1-Foreign banks warn Japan's tighter reporting rules to cause 'chilling effect' -document

* Proposed changes could sap inbound investment, banks say

* Changes come despite Abe’s push for pro-market reforms

* Would hid market liquidity, domestic fundraising, banks say (Adds analyst comment, background)

By David Dolan and Takashi Umekawa

TOKYO, Oct 10 (Reuters) - Japan’s plan to tighten reporting requirements for foreigners wishing to buy shares in key industries, will have a “chilling effect” on inbound investment, a group of foreign banks and brokerages warned the government in a document seen by Reuters.

Japan announced the plan this week 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 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 to comment.

“The proposed law change, if implemented in its current form, would almost certainly kill any ambitions Tokyo may have to re-establish itself as a leading global financial centre,” longtime Japan strategist Jesper Koll said.

“This bill, if passed in its current form, would probably force an even greater Japan discount to global markets.”

EYE ON CHINA

Government officials have previously told Reuters that the change is aimed at better monitoring Chinese investment, following 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 the 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 added.

Tokyo has been courting foreign direct investment since Abe took office in 2012. He has also championed pro-market reforms, including strengthening of corporate governance.

But despite the push, Japan still trades at a discount to the United States. The broad TOPIX index trades at an average of 13 times earnings, compared with 20 times for the S&P 500 according to Refinitiv data.

The planned legal change was first reported by Reuters in August and was officially announced earlier this week. (Reporting by David Dolan, Takashi Umekawa; Additional reporting by Takaya Yamaguchi and Linda Sieg; Editing by Miyoung Kim and Elaine Hardcastle)

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