On Tuesday (April 20), several Japanese media reported that the U.S. and Japanese governments will jointly monitor Japan’s Rakuten Group (Rakuten) over concerns that customer information has been leaked to China (the Chinese Communist Party). This comes after a subsidiary of Tencent became a major shareholder of Rakuten.
IMAGE FRAME INVESTMENT, a subsidiary of Chinese tech giant Tencent Holdings Ltd, has become a major shareholder of Rakuten with a 3.65% stake, a transaction that Japanese authorities are wary of for national security reasons.
The Japanese government will conduct regular interviews with Rakuten under the Foreign Exchange and Foreign Trade Act and share information with U.S. authorities to coordinate a solution to the risk of information leaking to China (the Chinese Communist Party).
Tencent’s investment in Rakuten has also raised concerns in Washington, and shortly after the announcement, the U.S. Embassy in Tokyo asked Japan’s National Security Agency, as well as Japan’s Ministry of Finance, Ministry of Internal Affairs and Communications, and Ministry of Economy, Trade and Industry, how the deal would be handled under foreign investment rules.
Japanese government to monitor Tencent’s involvement in Rakuten management
Sources told Kyodo News that the Japanese government’s check on Tencent’s involvement in Rakuten’s management is due to concerns about the Chinese Communist government’s access to Americans’ personal information. In January, then-President Donald Trump (Trump) signed an executive order banning transactions with eight Chinese applications (APPs), including Ant Group’s Alipay and Tencent’s WeChat Pay.
For national security reasons, Japan’s Foreign Exchange and Foreign Trade Act restricts foreign companies and foreign investors from investing in Japanese companies in sensitive areas such as telecommunications.
Amendments to the law, which took effect last year in the face of growing Chinese Communist Party influence, require foreign investors to seek prior approval from the Japanese government if they plan to take a 1 percent or higher stake in companies in those areas, which was previously 10 percent or higher.
Prior approval is not required if the participation is only to seek a return on investment, rather than to influence management.
Rakuten told Kyodo News that Tencent Group Inc. acquired the shares purely for investment purposes, adding that Rakuten rejected the possibility of shareholders gaining access to customer data.
A Japanese government source told Nikkei Asian Review, “Tencent’s explanation for the purely financial investment is not entirely clear.”
Kyodo News reported that IMAGE FRAME INVESTMENT, a subsidiary of Tencent Holdings, needs to make clear to Japanese authorities by mid-May that it has no plans to send any company representatives to Rakuten’s board of directors, as well as the need to meet other demands made by the Japanese government.
Tighter U.S. regulations to monitor foreign investment
Rakuten was founded in 1997 as an online shopping mall operator and has grown into a major IT company with a portfolio of businesses including cell phones and financial services.
Image Frame Investment bought a stake in Rakuten for 65.7 billion yen ($604 million) without being scrutinized by the Japanese government.
Japanese government sources, Nikkei Asian Review, said, “It is shocking that Chinese capital was injected into a Japanese company of such importance without raising questions.”
By contrast, the Committee on Foreign Investment in the United States (CFIUS) operates an oversight approach that brings together experts from the U.S. Departments of Treasury, Defense and Energy and gives CFIUS the authority to order the sale of a foreign investor’s stock after the fact if it is deemed to pose a significant threat.
CFUIS also conducts informal consultations prior to an investment transaction to determine whether the transaction poses a national security threat.
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