TOKYO, Japan - The Japanese Finance Ministry's proposal to restrict international investors in their equity investments in Japan, has come under fire.

Goldman Sachs says the plan will undermine 7 years of market reforms and limit the capacity of Japanese companies to entice foreign investors when raising capital.

The Finance Ministry in a statement last week said it wanted international investors to give prior notice about their intentions to pick up more than 1% of shares in a listed entity that is perceived to be connected to national security. There is a similar limitation in place currently however the threshold is 10%.

A bill has been approved by the ruling Liberal Democratic Party however it has to be approved by cabinet before being put forward to both houses of the Diet to legislate the proposed law.

If the bill becomes law Goldman says the measures will be implemented in the fiscal year commencing in April 2020.

"The implementation of the new regulation as currently proposed could have a substantial negative impact on the Japanese stock market," Goldman strategists including Kathy Matsui, Vice Chair of Goldman Sachs Japan said a note circulated earlier this week. "There is a risk that the new regulations could deter foreign investor participation, causing a decline in market liquidity."

"The most critical issue in our view will be what exemptions are ultimately made," according to Goldman. While portfolio investments will not be subject to the stricter rules, the exact definition of what would fall into that category "remains unclear," the Goldman Sachs analysts said.

"There is a significant risk that Japan's inward FDI could decline. Not only would this impede firms' ability to raise capital, but this could also undermine seven years of positive momentum in market reforms."

(Pictured: Finance Ministry in Japan. Credit: Wikipedia).