Chinese Spies, Smuggled Drugs Fuel Takaichi’s Security Push

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Summary

**Japan is launching its most ambitious economic-security push in years under Prime Minister Sanae Takaichi, driven by a surge in Chinese espionage, chip smuggling, and drug trafficking.** The new Japan Foreign Investment Committee, modeled after the US CFIUS, will coordinate cross-government reviews of foreign investments for national security risks, replacing the current fragmented system. Recent incidents include Japanese defense forces using USB drives with China-linked viruses, ties to Chinese organizations illegally exporting fentanyl, and the smuggling of Nvidia AI chips to China via Japan. Takaichi, who previously oversaw economic security legislation, has expanded the Economic Security Promotion Act and lowered the foreign investment screening threshold from 10% to 1%.

**The screening mechanism is expected to focus heavily on China, which Takaichi has identified as Japan's largest import source and a major supply-chain risk.** In her 2024 book, she cited China's national intelligence law as a tool that can compel Chinese nationals to assist state information collection. China retaliated by adding 20 Japanese organizations to its export control list, including defense institutes and Mitsubishi affiliates. Relations have further deteriorated since Takaichi speculated about military action over Taiwan, with Japan scrambling jets against Chinese and Russian bombers and protesting Chinese coast guard incursions.

**Beyond China, Japan faces cyber threats from the US and Russia, though spoofed IP addresses make attribution difficult.** The government has already used national security laws to block foreign bids, such as opposing MBK Partners' takeover of Makino Milling Machine and complicating Seven & i Holdings' sale to Alimentation Couche-Tard. However, risks remain acute for Japan's small and medium enterprises, which form the backbone of manufacturing supply chains but lack resources to protect sensitive technologies. The Takaichi administration is promoting dual-use technologies as a growth industry, raising awareness among business owners through government and police efforts.

**What to watch next:** Whether Japan's CFIUS will deter Chinese investment as effectively as its US counterpart, and how smaller firms adapt to new security requirements without stifling innovation.

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Chinese spies stealing Japanese industrial secrets in boardrooms. Chip smugglers ferrying Nvidia’s prized artificial intelligence semiconductors via Japan. Drug gangs quietly slipping fentanyl across Japan’s borders to a US opioid crisis.

Across a range of industries, Japan’s economic-security vulnerabilities have been on display in a slew of recent incidents. The cases show how foreign actors increasingly see Japan as an attractive target — and, in some instances, a convenient gateway — for espionage and other illicit activities.

That’s helping drive Japan’s most ambitious economic-security push in years under Prime Minister Sanae Takaichi, a longtime advocate of stronger safeguards against such threats. Her administration has just launched what’s been billed as the Japanese equivalent to the Committee on Foreign Investment in the US, or CFIUS, in an effort to broaden and intensify reviews of overseas funds eyeing local targets.

“Takaichi is pushing forward through the menu of economic security policies that policymakers, bureaucrats, even academia have been advocating over the last few years and actually implementing it,” said Akira Igata, who leads the Economic Security Intelligence Lab at the University of Tokyo.

Like its US counterpart, Japan’s CFIUS will coordinate across government ministries to vet foreign investments for national security risks. That differs from the current approach, in which reviews are largely just handled by the Finance Ministry and the ministry overseeing the relevant industry.

“I believe that having a consistent, cross-government review process will make the system more predictable for foreign investors,” Takaichi said after the first meeting of the Japan Foreign Investment Committee on Monday. “Ultimately, that should help strike a balance between encouraging legitimate investment and safeguarding economic security.”

The panel is being established as part of a recent revision to the Foreign Exchange and Foreign Trade Act. The new legislation also expands pre-screening requirements to cover certain cases of indirect ownership and gives authorities broader powers to examine transactions by high-risk investors — such as foreign governments or state-controlled entities — even outside traditionally sensitive sectors.

Japan’s foreign investment pre-screening filings have climbed in recent years since a previous overhaul of FEFTA in 2019. Before then, foreign activist funds could acquire up to 10% of a company’s shares without government scrutiny. But after, the threshold was lowered to 1%, capturing far more attempts by activist investors to influence target companies.

After meeting with Japanese officials last month, Treasury Secretary Scott Bessent touted the US’s support for Japan’s efforts to build an investment screening mechanism.

Before she ascended to the premiership, Takaichi served as chief of her party’s cybersecurity headquarters and then as the minister in charge of economic security from 2022-2024. In the more recent role, she worked extensively on legislation to protect the nation’s supply chains, infrastructure and technology from global risks. Japan’s leader has since driven the expansion and revision of that law, known as the Economic Security Promotion Act.

The US CFIUS heavily focuses on threats from China, and Japan’s will probably be no different.

“When seeking to strengthen supply-chain resilience and information security, we must not forget the existence of China,” Takaichi wrote in a 2024 book titled Japan’s Economic Security: Protecting the Nation and Its People.

She noted that China is Japan’s largest source of imports, exerts significant influence over global supply chains and sends large numbers of researchers and students abroad. She also pointed to a Chinese national intelligence law, which she argued can compel Chinese nationals to assist the state in collecting information.

Many of the recent episodes highlight her concern. In just the past few weeks, Nikkei has reported that Japan’s defense forces used USB drives with a virus linked to China as well as Japanese ties to Chinese organizations illegally exporting fentanyl. And last month, Bloomberg reported that prosecutors in Taiwan suspected that three individuals successfully smuggled at least one shipment of Nvidia Corp. AI chips to China after first exporting them to Japan.

China, meantime, is increasing its export-control offensive against Japan.

The Ministry of Commerce on Monday added 20 Japanese organizations to its control list, imposing a general ban on Chinese exports that can be used for both commercial and military purposes. Targets include the state-run National Institute for Defense Studies, military systems research centers and affiliates of Mitsubishi Electric Corp. and Mitsubishi Heavy Industries Ltd.

Relations between the two Asian powers have deteriorated since November, when Takaichi speculated over the potential for military action in relation to Taiwan. In the latest strain on ties, Japan on Monday protested activity by Chinese coast guard vessels asserting Beijing’s claims to maritime borders close to a southern Japanese island, just days after Tokyo scrambled fighter jets in response to flights by Chinese and Russian bombers around Japan’s south.

“Previously, we weren’t in a situation where a major trading partner was engaging in what could be described as unilateral, non-market practices,” Finance Minister Satsuki Katayama told reporters after the launch on Monday, responding to a question about rising threats from abroad and referring to China’s export controls.

Cyber Security

For Japan, the issue goes beyond China as threats increasingly come through digital channels, as National Police Agency data show. Japan has detected suspicious cyber activity from all around the world, namely from the US and Russia. But it can be difficult to identify where the attacks are actually coming from due in part to spoofed IP addresses, a report from the agency suggested.

As security concerns ramp up officials are using new tools. In April, the Japanese government opposed Seoul-based MBK Partners Ltd.’s bid for machine tool maker Makino Milling Machine Co., invoking a national security law for only the second time in history. The review of Taiwanese Yageo Corp.’s acquisition of Japan’s Shibaura Electronics Co. stretched seven months last year, while the government’s security labeling of Seven & i Holdings in 2024 contributed to regulatory hurdles that eventually derailed a takeover bid from Canada’s Alimentation Couche-Tard Inc.

Strengthening investment screening addresses only part of the challenge. Risks remain particularly acute for smaller firms, which account for nearly all of Japanese businesses. Despite forming the backbone of the country’s manufacturing supply chain, many lack the resources and expertise needed to protect sensitive technologies.

Aichi-based mold manufacturer Make Start Co., which employs about 100 people and supplies components to major auto part makers, is one of the exceptions. Partly in response to client demand for stronger security, the firm is trying to protect its data and technology by keeping more than 90% of production in-house and providing company-issued smartphones to staff.

It’s a combination of these small steps that prevents leakages, said chief executive officer Kunihiro Sakoda. Breaches can happen when employees change jobs and take their experience and intangible know-how elsewhere, or posts on social media that inadvertently show confidential information, he said.

“I do think these measures would have been put on the back burner if I had to sort this all out myself,” Sakoda said, crediting a partnership with a cybersecurity specialist.

Yuzo Murayama, professor emeritus at Doshisha University, credits the government and police for devoting “considerable resources” to the issue and in turn garnering attention from business owners. The administration is heavily promoting the development of dual-use technologies — items with civilian and military applications — highlighting how the products can both fuel the economy and protect domestic supply chains.

“The Takaichi administration came into office and began talking about turning the defense industry into a growth industry,” Murayama said. “I think that has significantly raised awareness.”

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