Japanese investment in Africa: opportunities and risks in a dynamic political landscape

Japanese foreign investment in Africa is growing 

Japanese interest in investing in Africa is on the rise. In particular, there appears to be a focus on the mining and energy sectors. This is perhaps unsurprising – Africa is a continent rich in mineral resources, and Japanese investors are keen to capitalise on its potential.

In April and May 2023, then Prime Minister Kishida Fumio embarked on a visit to Egypt, Ghana, Kenya, and Mozambique, marking Japan’s first high-profile African tour since 2014. These visits aimed to strengthen cooperation between Japan and African States, and signalled a renewed commitment to partnership that is set to continue. Building on this momentum, then Foreign Minister Kamikawa Yoko visited Madagascar, Côte d’Ivoire, and Nigeria in August 2024, further reinforcing Japan’s diplomatic outreach.

These visits align with Prime Minister Kishida’s 2022 message which emphasised Africa’s growing influence on the international stage. He underscored Japan’s aspiration to be a collaborative partner with Africa, fostering mutual growth that benefits both sides. This enthusiasm is by no means one-sided. During his visit to Tokyo in April 2023, African Development Bank President Akinwumi Adesina actively encouraged Japanese investors to increase their participation in Africa’s mining sector. 

These diplomatic initiatives are already translating into investor action. For example, Memorandums of Understanding have been signed by Japanese investors for mining exploration and exploitation projects in resource-rich countries such as the Democratic Republic of Congo, Namibia, and Zambia. 

While these developments present significant opportunities for growth and profit for Japanese companies in Africa, they also bring inherent political and regulatory risks. Japanese investors venturing into Africa must navigate these challenges carefully and ensure their investments are adequately protected under investment treaties.

What are investment treaties?  

Investment treaties are agreements entered into between States in order to promote the flow of foreign direct investment and protect the investments of investors of one State party to the treaty in the State of the other party. There are more than 2,500 investment treaties currently in force worldwide. The majority of these are bilateral investment treaties (BITs) entered into between two States. There are also multilateral investment treaties entered into between multiple States.

Investment treaties contain substantive investment protection standards which protect the “investments” of “investors” from internationally wrongful State interference. If a State interferes with an investor’s investment, and if there is an investment treaty in force between the home State of the investor and the host State of its investment, that investor may be able to bring a claim against the State under the treaty before an international tribunal.  If successful, an investor may be able to recover substantial damages, placing it in the position it would have been in but-for the internationally wrongful conduct of the State.

Protecting Japanese investments in Africa under investment treaties

Currently, Japan has BITs in force with only five of Africa’s 54 States: Angola, Côte d'Ivoire, Mozambique, Egypt, and Kenya. 

As such, it is crucial that Japanese investors think carefully about how they structure their investments to ensure they are not left without recourse if State conduct disrupts their plans.  It may be the case that an existing investment by a Japanese investor is not structured through a State that has an investment treaty in force with the host State of that investment.  If so, it is permissible to restructure investments with the specific aim of bringing an investment treaty into play provided that: (i) such an exercise is not specifically disallowed by the relevant investment treaty; and (ii) a dispute has not already begun or is reasonably foreseeable.  This is achieved by inserting a company that is incorporated in a State that has an investment treaty with the host State in the ownership structure of the investment.   It often is permissible for investments indirectly held by such investors to be entitled to protection.   Accordingly, it frequently is possible for structuring and restructuring exercises to be carried out in a way that entitles the investment to treaty protection but also is efficient for corporate and tax purposes.

While Japan’s network of investment treaties with African States is limited, Japanese companies are not left without options. Many opt to structure their investments through States such as the United Arab Emirates (UAE) or Mauritius, both of which have broader treaty networks with African countries. These jurisdictions also offer the benefit of being tax-efficient, making them attractive hubs for mitigating investment risks.

BITs at a glance 

Here is a list of BITs between Mauritius and the UAE, and African States: 

Investors should remain vigilant even where an in-force investment treaty is in place. At least two questions should be considered:

1. How are “investment” and “investor” defined? 

Not all investments of foreign investors will be protected under an investment treaty.  Companies investing abroad should carefully check whether, under the specific definitions set out in the relevant treaty, they are an “investor” who has made an “investment.” 

2. What are the standards of protection offered? 

An investment treaty is only as useful as the comprehensiveness of the protection it provides.  Investment protection standards can vary significantly between treaties, but common protections include: 

1. Fair and equitable treatment: While there is no single definition of the standard, some examples of State conduct which has been found to violate this standard include: a failure to protect an investor’s legitimate expectations; lack of good faith; lack of procedural fairness, due process or transparency; lack of a stable and predictable framework for investments; and discriminatory or unreasonable conduct. 
2. Prohibition on uncompensated expropriation: Expropriation is the taking of an investment by the State.  This can be direct (e.g., asset seizures) or indirect (e.g., regulatory changes that diminish an investment’s value).  Investment treaties typically guarantee that a State cannot expropriate an investment without prompt, adequate, and effective compensation.  In addition, in order to be lawful, expropriations must be for a public purpose, undertaken non-discriminatorily, and carried out under due process of law.
3. Umbrella clauses: An umbrella clause requires the host State to honour obligations it has undertaken with respect to an investor and/or investment, such as contractual commitments.

Knowing the answers to these questions is an essential step for any Japanese investors wishing to sufficiently protect their investments abroad from State interference. However, when investing in high-risk political jurisdictions, such as many States in Africa, the significance of doing so becomes even more critical. 

Navigating political risk in Africa 

2023 and 2024 have been pivotal years for the evolving relationship between Japan and Africa. Such change has also coincided with significant political changes across the African continent.

At the time of writing, 16 national elections have already taken place in Africa this year, with two more scheduled before the close of 2024. Looking ahead, 2025 is set to bring even more political change, with ten additional elections on the horizon in the continent.  For more information on political change in Africa, see our Article here.

With political change comes political risk

Take Senegal as just one example. Shortly after the Presidential elections in March 2024, the new President Bassirou Diomaye Faye announced plans to renegotiate key contracts in the mining sector (in addition to the oil and gas sectors). To this end, his Government established a Special Commission to audit and review these contracts, with a particular focus on the exploitation of natural resources. While President Faye assured that foreign investors remain welcome in the country, it remains unclear which contracts will be targeted for renegotiation or what practical measures these reviews will entail. What is clear, however, is that such actions could potentially impact the economic viability of projects in the affected sectors.

Senegal is far from an isolated case

As Africa moves through another cycle of elections heading into 2025, political risks in other African States are also likely to increase. Resource nationalism, stricter environmental regulations aimed at mitigating the environmental impact of mining, and the politicisation of mining projects are all potential flashpoints. Promising reforms in the extractive industries often prove a compelling way to garner electoral support, particularly from local communities who consider their country’s resources are being disproportionately exploited by foreign entities. 

This trend underscores the importance for foreign investors to remain vigilant and adaptive as Africa’s political landscape continues to shift.

The power of investment treaties 

Investors may at times be hesitant to bring a claim against a State in which they have operations, in order to avoid “souring” the relations. However, while relations between Japan and at least some African States are looking up, Japanese investors should be careful not to rule out investment protection and investor-State arbitration as a potential option not only for dispute resolution but also for dispute avoidance.

Most investment treaties have a “cooling-off” period before arbitration can be commenced.  This requires the aggrieved investor to file a notice of dispute with the relevant State and commence negotiations in good faith.  The availability of investment protection can often be an effective tool in negotiations with Governments, many of whom actively want to be seen as complying with their international legal obligations.  

Investors would also be well-advised to go in to any investment with eyes wide open. While in some cases negotiations will be enough, in others a State’s conduct may permanently prevent an investor from continuing operations or render ongoing operations unsafe. Where this is the case, initiating a claim may become the only viable option for recovering value on behalf of shareholders.

Authored by Markus Burgstaller, Scott Macpherson, and Sarah Tayara.