National attitudes to corporate takeovers must change or there could be a mass exodus of foreign investment, the Japanese Government will be told today.

A panel of MPs from the ruling Liberal Democratic Party is expected to highlight the modest - and still falling - level of foreign investment, a trend that has gathered pace dramatically as company managements have entrenched themselves more deeply.

The panel is likely to call for clearer rules on mergers and acquisitions, a stricter code on anti-takeover measures and demands on the Government to be more transparent in its criteria for blocking foreign takeovers.

Depending on the level of official concern, observers say, policies for economic and fiscal management proposed by the panel could prompt sweeping legal changes.

Decades of tacit governmental support for the siege mentality of Japan Inc may dissolve because of the ultra-low levels of foreign direct investment: only 2.5 per cent of GDP in 2006, compared with 44.6 per cent in the UK and 13 per cent in the United States.

Yet the problem, according to many overseas investors in Japan, is that companies have never progressed from the idea of having their shares listed on the stock exchange to the concept of being owned by outsiders.

Chris Rigg, a veteran Japan fund manager, said: “Some companies [clearly] are not interested in corporate governance, outside shareholders or dividends. There have recently been signs that corporations are becoming more responsive, but that's because they know foreign investors are beginning to just write Japan off.”

As Japan has been exposed - through activist funds and a string of takeover attempts - to more Western views on shareholder capitalism, the reaction of Japanese-listed companies has been uncompromising. Hundreds have adopted poison-pill strategies to ward off hostile bids that have never even been tabled.

The latest call for change comes amid a long-running feud between the British Children's Investment Fund and J-Power, an electricity wholesaler in which it holds a near-10 per cent stake. Attempts by the fund to double its holding were blocked by the authorities, with little explanation.

That incident and several failed takeover attempts by foreign investors have led to a barrage of recent attacks on the behaviour of corporate Japan and its apparent dismissal of shareholder interests from its list of priorities. The heaviest public criticism has come from both the European Trade Commissioner and from the Asian Corporate Governance Association, which last week published a coruscating review of the state of listed Japanese companies.

A range of reported shareholder-unfriendly practices include inexplicable cross-shareholdings in other firms, huge piles of cash unreturned to shareholders and an almost total lack of outside directors.

Brokers say that such practices are the tip of the iceberg and that fund managers have shown their distress by simply moving investment elsewhere.

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