THE JAPAN EQUITY FUND, INC.
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GENERAL INFORMATION
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THE FUND
The Japan Equity Fund, Inc. (the "Fund") is a diversified, closed-end
management investment company. Prior to May 1, 2000, the Fund invested
substantially all of its assets in equity securities of non-financial Japanese
companies whose securities are traded on the First Section of the Tokyo Stock
Exchange ("TSE"). Upon the shareholders' approval at the 2000 Annual Meeting of
Stockholders, effective April 28, 2000, the Fund's investment objective has been
changed.
The investment objective of the Fund is to outperform over the long term, on
a total return basis (including appreciation and dividends), the Tokyo Stock
Price Index (TOPIX), a composite market-capitalization weighted index of all
common stocks listed on the First Section of the TSE. The Fund seeks to achieve
its investment objective by investing substantially all of its assets in equity
securities of companies listed on the First or Second Section of the TSE or
listed on the over-the-counter market in Japan or listed on other stock
exchanges in Japan. Daiwa SB Investments (U.S.A.) Ltd. is the Fund's Investment
Manager. Daiwa SB Investments Ltd. is the Fund's Investment Adviser. Effective
January 1, 2000, the Fund implemented an "active" portfolio management policy,
which is an approach that involves quantitative valuation of securities to
identify an appropriate universe of securities from which to select investments,
with judgmental analysis then applied to this universe to determine the actual
investments to be made by the Fund.
SHAREHOLDER INFORMATION
The Fund's shares are listed on the New York Stock Exchange ("NYSE"). The
Fund understands that its shares may trade periodically on certain exchanges
other than the NYSE, but the Fund has not listed its shares on those other
exchanges and does not encourage trading on those exchanges.
The Fund's NYSE trading symbol is "JEQ". Weekly comparative net asset value
(NAV) and market price information about the Fund is published each Monday in
THE WALL STREET JOURNAL, each Sunday in THE NEW YORK TIMES, and each Saturday in
BARRON'S, and also appears in many other newspapers. The Fund's weekly NAV is
also available by visiting www.daiwast.com or calling (800) 933-3440 or
(201) 915-3020. Also, the Fund's website includes a monthly market review and a
list of the Fund's top ten industries and holdings.
INQUIRIES
Inquiries concerning your share account should be directed to PFPC Inc. (the
"Plan Agent") at the number noted below. All written inquiries should be
directed to the Fund, c/o Daiwa Securities Trust Company, One Evertrust Plaza,
9th Floor, Jersey City, New Jersey 07302.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
A Dividend Reinvestment and Cash Purchase Plan (the "Plan") is available to
provide Shareholders with automatic reinvestment of dividends and capital gain
distributions in additional Fund shares. The Plan also allows you to make
optional annual cash investments in Fund shares through the Plan Agent. A
brochure fully describing the Plan's terms and conditions is available from the
Plan Agent by calling (800) 331-1710 or by writing The Japan Equity Fund, Inc.,
c/o PFPC Inc. P.O. Box 8030, Boston, MA 02266-8030.
THE JAPAN EQUITY FUND, INC.
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June 6, 2001
DEAR SHAREHOLDERS:
It is our pleasure on behalf of the Board of Directors to present the
Semi-Annual Report for The Japan Equity Fund, Inc. (the "Fund") for the six
months ended April 30, 2001.
BACKGROUND
The objective of the Fund is to outperform over the long term, on a total
return basis (including appreciation and dividends), the Tokyo Stock Price Index
("TOPIX"). Stock selection in Japan is facilitated by the use of a value screen
applied to all stocks listed on the First and Second Sections of the Tokyo Stock
Exchange ("TSE"), the over-the-counter market in Japan and listed on other stock
exchanges in Japan. The way in which the Fund seeks to meet its objective is to
identify under-valued stocks by examining certain fundamental characteristics of
stocks which are listed on the exchanges listed above. These fundamental
characteristics include, among others, the earnings-to-price ratio and the
book-to-price ratio. This method of stock selection results in a master list of
300 stocks (from a universe of 3,300 stocks) from which stocks are selected for
the Fund in accordance with predetermined sector and size parameters.
PERFORMANCE OF THE JAPANESE STOCK MARKET
MARKET REVIEW -- NOVEMBER 2000 - APRIL 2001
SUMMARY
- During the period from November 1, 2000 to April 30, 2001, the TOPIX
declined by 5.06% from 1379.96 to 1310.09 in Yen terms. The stock market
bottomed out at 1161.97 on March 14th but it appears to have peaked at
1440.97 on May 7th for the time being.
NOVEMBER 2000
- Entering November, the external environment continued to hold many
concerns: oil prices remained at their highest level since the Gulf War
and stock prices in New York displayed volatility as the outcome of the
U.S. presidential election remained in doubt. In Japan, the political
scene was thrown into disarray when Koichi Kato, former chief secretary
of the Liberal Democratic Party ("LDP"), signalled his intention to back
a no-confidence motion against the Mori cabinet.
DECEMBER 2000
- The prices of Nippon Steel (5401), MHI (7011), Teijin (3401) and other
domestic demand--oriented mid-cap stocks steadied in December, but
information technology ("IT") and semiconductor stocks deteriorated
through the end of the month. Business sentiment was battered when two
ethnic South Korean credit cooperatives, Kansai Kogin (Japan's largest,
with deposits of approximately Y1trn) and Tokyo Shogin (Japan's seventh
largest), technically became insolvent on December 16th. The Nikkei Index
fell below Y14,000 for the first time since January 1999 and TOPIX below
Y1,300, its lowest level since March 1999. The announcement in early
December of Gross Domestic Product ("GDP") growth of 0.2% in the
July--September quarter, the third consecutive quarter of positive
growth, failed to lift spirits in the investment and corporate
communities.
JANUARY 2001
- In early January the Tokyo stock market fell to the lowest level in
almost 20 months. Thereafter, the key indices were pushed upwards by the
following factors: (1) talks of official support for the stock market
(2) stable movements in the U.S. stock markets, especially the NASDAQ and
(3) a number of corporate
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THE JAPAN EQUITY FUND, INC.
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plans to buy back their own shares. However the degree of rebound was
limited while the selling pressure from bank and corporate unwinding
their cross-share holdings put a cap on the market. On January 18, the
LDP's panel, chaired by Hideyuki Aizawa, the former chairman of the
Financial Reconstruction Commission, started to discuss how to halt the
slide in the stock market. They have considered several measures,
including one giving companies more freedom to buy back and hold their
own shares. This supported the stock market from the middle of the month
on.
FEBRUARY 2001
- At the beginning of the month, deterioration in business sentiment became
clear in both Japan and the U.S., and the Tokyo markets declined in line
with drops in the U.S. Stock Markets. On February 8th, the July --
September GDP was revised down substantially, from 1.0% growth to a 2.4%
decline, for the first negative growth in three quarters. On the
following day, February 9, the Bank of Japan ("BoJ") lowered the discount
rate by 0.15 percentage points, to 0.35%, but this did not stop the
markets from falling further. In the middle of the month, NTT DoCoMo
carried out a capital increase of close to Y1trn through a public
offering, which had an adverse effect on the demand/supply picture for
stocks.
MARCH 2001
- On March 2, the Nikkei Index, which peaked on December 29, 1989 at
Y38,915.87 hit a new post-bubble low of Y12,879.97, breaking through the
previous low set on October 9, 1998. Thereafter, however, the decline in
stock prices came to a halt thanks to the BoJ's monetary easing and
expectations of concrete economic stimulus and direct stock-boosting
measures. On March 19, the BoJ decided to add quantitative easing to its
array of measures, thus re-applying real zero interest rates. This,
coupled with reports of agreement on the need to encourage the disposal
of bad debt at the Japan-U.S. summit on March 20th, was welcomed by the
markets and led to a strong Nikkei rebound of Y913 on March 21, the
seventh highest on record.
APRIL 2001
- In late April, the Tokyo stock market surged amid increasing investor
expectations for changes, including pro-market structural reform, pledged
by new Prime Minister Junichiro Koizumi. The U.S. stock markets' strong
movement on the back of the U.S. Federal Reserve Bank's interest rate cut
and foreign investors' return to the market also supported this rally,
which occurred after the market seesawed until the middle of the month as
investor expectations for the government's economic package fluctuated
and concerns over the domestic economy increased.
OUTLOOK AND STRATEGY
We remain very positive on the long-term developments in Japan. Prime
Minister Koizumi remains faithful to his reformist goals so far and he is
clearly different from his predecessors in the LDP over the last 40 years. New
ideas such as the reduction of the number of local authorities and privatization
of Narita Airport have never been discussed before in Japan but are now suddenly
thrown into mainstream discussions by inclusion on policy agendas. Koizumi's
exciting speaking style, unassuming life style, and political leadership skills
should continue to appeal to voters. We think it is highly possible that he will
take advantage of his popularity to brush aside the opposition leaders and
vested interests within LDP and carry out structural reform. The future could be
very bright.
On the other hand, with negative GDP growth for the first quarter of 2001,
concerns over the course of the macro economy for the rest of the year are
gradually increasing. The deteriorating business climate should increase the
likelihood of a decline in corporate profits, and foreign investor buying to
adjust their extreme underweight position appears to have peaked for the time
being.
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THE JAPAN EQUITY FUND, INC.
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Given the mixture of the long-term positives and short-term negatives, the
market is likely to be stuck in a trading range during the traditionally quiet
summer months. However, the downside risks should be limited given that interest
rate-related valuations are at a historically low level.
In our view, the catalysts for the resumption of upward movement in the
market will include concrete policy proposals for a final resolution to the
non-performing loan problem and an acceleration of corporate restructuring,
which we expect to be realized sometime in the second half of this year.
We continue to maintain a balanced portfolio strategy without favoring
particular areas. The portfolio consists of (1) internationally competitive
stocks (Fuji Film, Sony, and Honda), (2) cyclical value stocks (Oji Paper,
Kuraray and Kubota), and (3) defensive stocks (Nippon Meat Packers, JT, and
Kansai Electric Power).
If Prime Minister Koizumi is able to implement policies for structural
reform, we believe that the market will begin to distinguish winners and losers
more clearly across sectors. We believe the stocks held in the portfolio that
are associated with quality should benefit from the expected market conditions
in the second half of the year.
FUND PERFORMANCE
As of April 30, 2001, the Fund's net assets were approximately
$76.7 million, which represents a net asset value of $7.09 per share. The return
on the Fund's net assets was -15.09% since the Fund's fiscal year-end on
October 31, 2000. Over the same period, the Benchmark (TOPIX) return was
-12.50%, as measured in U.S. Dollars.
The change in net asset value in U.S. Dollars depends on several factors
such as: (1) the percentage change in the Benchmark during the period; (2) the
over- or under- performance of the Fund's portfolio, after expenses, relative to
the Benchmark; and (3) the change in the Japanese Yen/U.S. Dollar exchange rate.
Our investment strategy is to invest in undervalued securities based on
intensive bottom-up analysis supported by quantitative screening. In our
research efforts, we placed a priority on evaluation of the top management, and
its commitment to enhance shareholders' value through clear-cut strategies,
including restructuring, that will be eventually reflected in share prices. We
add value primarily through a bottom-up stock selection approach for the
fundamental Japan equity product.
It is important to emphasize again that it has not been an objective of the
Fund to predict changes in its Benchmark. Rather, its goal is to outperform the
Benchmark, while staying fairly fully invested. Specifically, the goal is to
hold no more than 5% in cash. On April 30, 2001, the proportion of the Fund's
net assets invested in Japanese equities listed on the First Section of the TSE
was 98.48%, while short-term investments and other net assets represented 1.52%.
The invested position of the Fund's assets consisted of common stocks of
companies operating in 26 different industries. The Fund had relatively large
weightings in Electric Appliances (17.35% of net assets), Communication (7.59%),
Banks (7.49%), Transportation Equipment (6.93%), Chemicals (6.37%), and Services
(5.90%).
During the six months ended April 30, 2001, the Fund's market price on the
New York Stock Exchange ("NYSE") ranged from a low of $5.51 per share on
March 14, 2001 to a high of $7.375 on November 7, 2000. The Fund's NYSE market
price closed at $6.72 per share on April 30, 2001.
The NYSE trading price in relation to the Fund's net asset value per share,
as measured by the weekly closing prices during the six months ended April 30,
2001 ranged from a discount of 29.59% on December 21, 2000 to a discount of
4.82% on April 19, 2001, and ended the period at a discount of 5.22%.
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THE JAPAN EQUITY FUND, INC.
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The Fund has not invested, and presently does not intend to invest, in
derivative securities. Although foreign currency hedging is permitted by the
Fund's prospectus, the Fund has not engaged in any foreign currency hedging.
PORTFOLIO MANAGEMENT
Mr. Koichi Ogawa, CFA, is the Executive Director and Chief Portfolio Manager
of Daiwa SB Investments Ltd. for all North American clients. A senior member of
the Investment Policy Committee (IPC), Mr. Ogawa possesses 27 years of
investment experience and has been responsible for Japan stock selection since
1984. He spent nine years with Daiwa Securities as an institutional research
analyst and three years in New York analyzing U.S. securities. He graduated from
Tohoku University with a B.A. in Law in 1972.
Mr. Kazuhiko Hosaka, CMA, is a Senior Portfolio Manager, with a total of
13 years of experience in the Japanese equity market. He joined Daiwa in 1990 as
a portfolio manager after spending two years as a securities analyst at Barclays
Securities Group. He has been directly responsible for managing Japanese equity
portfolios for several North American and European pension clients. He graduated
from Aoyama Gakuin University with a B.A. in Law in 1988.
SUBSEQUENT EVENT
Harry M. Markowitz retired as a Director of the Fund effective as of
June 6, 2001.
We thank you for your support of The Japan Equity Fund, Inc. and your
continued interest in the Japanese economy and marketplace.
Sincerely,
/s/ Hideaki Matsuura /s/ Shunsuke Ichijo
HIDEAKI MATSUURA SHUNSUKE ICHIJO
CHAIRMAN OF THE BOARD PRESIDENT
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THE JAPAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS
APRIL 30, 2001 (UNAUDITED)
--------------------------------------------------------------------------------
-------------------------------------------
JAPANESE COMMON STOCKS--98.48%
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SHARES VALUE
---------- ------------
BANKS--7.49%
192 Mitsubishi Tokyo Financial
Group Inc......................... $ 1,958,074
300 Mizuho Holdings, Inc............... 1,847,835
285,000 The Sumitomo Trust & Banking
Co., Ltd.......................... 1,935,370
------------
5,741,279
------------
CHEMICALS--6.37%
175,000 Asahi Kasei Corp................... 900,850
20,000 Denki Kagaku Kogyo Kabushiki
Kaisha............................ 73,978
32,000 Fuji Photo Film Co., Ltd........... 1,289,842
54,000 Kao Corp........................... 1,372,400
31,000 Shin-Etsu Chemical Co., Ltd........ 1,244,516
------------
4,881,586
------------
COMMUNICATION--7.59%
398 NTT Corp........................... 2,528,774
160 NTT DoCoMo, Inc.................... 3,289,357
------------
5,818,131
------------
CONSTRUCTION--0.97%
86,000 Sekisui House, Ltd................. 739,927
------------
ELECTRIC APPLIANCES--17.35%
24,000 Canon Inc.......................... 942,129
12,200 Fanuc Ltd.......................... 682,331
59,000 Fujitsu Ltd........................ 811,817
120,000 Hitachi Ltd........................ 1,163,577
4,500 Kyocera Corp....................... 430,150
88,000 Matsushita Electric Industrial
Co., Ltd.......................... 1,467,260
15,000 Minebea Co., Ltd................... 117,766
16,000 Murata Manufacturing Co., Ltd...... 1,345,528
55,000 NEC Corp........................... 1,003,845
SHARES VALUE
---------- ------------
9,200 Rohm Co., Ltd...................... $ 1,623,310
29,400 Sony Corp.......................... 2,198,754
230,000 Toshiba Corp....................... 1,509,753
------------
13,296,220
------------
ELECTRIC POWER & GAS--3.45%
100,000 Kansai Electric Power Co., Inc..... 1,577,499
44,800 Tokyo Electric Power Co., Inc...... 1,069,688
------------
2,647,187
------------
FISHERY, AGRICULTURE & FORESTRY--0.38%
150,000 Nippon Suisan Kaisha, Ltd.......... 292,594
------------
FOODS--3.47%
11,000 Coca-Cola West Japan Co., Ltd...... 237,272
70,000 House Foods Corp................... 805,099
150 Japan Tobacco Inc.................. 1,001,619
55,000 Nippon Meat Packers, Inc........... 616,107
------------
2,660,097
------------
GLASS & CERAMIC PRODUCTS--1.34%
120,000 Asahi Glass Co., Ltd............... 1,029,543
------------
INSURANCE--2.29%
74,000 Tokyo Marine & Fire Insurance
Co., Ltd.......................... 778,632
160,000 Yasuda Fire & Marine Insurance
Co., Ltd.......................... 979,037
------------
1,757,669
------------
LAND TRANSPORTATION--2.60%
119 East Japan Railway Co.............. 662,663
60,000 Nippon Express Co., Ltd............ 301,093
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THE JAPAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2001 (UNAUDITED)
--------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONTINUED)
--------------------------------------------------------------------------------
SHARES VALUE
---------- ------------
LAND TRANSPORTATION (CONCLUDED)
48,000 Yamato Transport Co., Ltd.......... $ 1,025,658
------------
1,989,414
------------
MACHINERY--4.30%
60,000 Amano Corp......................... 485,148
130,000 Komatsu Ltd........................ 736,544
212,000 Kubota Corp........................ 772,157
11,000 SMC Corp........................... 1,304,330
------------
3,298,179
------------
MARINE TRANSPORTATION--0.84%
238,000 Mitsui O.S.K. Lines, Ltd........... 643,399
------------
METAL PRODUCTS--0.52%
25,000 Tostem Corp........................ 396,398
------------
NON-FERROUS METALS--2.60%
150,000 Mitsui Mining & Smelting
Co., Ltd.......................... 880,210
90,000 Sumitomo Electric
Industries, Ltd................... 1,113,072
------------
1,993,282
------------
OTHER FINANCING BUSINESS--1.77%
21,000 Hitachi Capital Corp............... 482,720
10,000 Orix Corp.......................... 873,331
------------
1,356,051
------------
OTHER PRODUCTS--3.31%
118,000 Dai Nippon Printing Co., Ltd....... 1,603,577
5,800 Nintendo Co., Ltd.................. 934,197
------------
2,537,774
------------
PHARMACEUTICAL--3.75%
30,000 Chugai Pharmaceutical Co., Ltd..... 445,569
SHARES VALUE
---------- ------------
10,000 Taisho Pharmaceutical Co. Ltd...... $ 196,681
32,000 Takeda Chemical
Industries, Ltd................... 1,543,667
25,000 Yamanouchi Pharmaceutical
Co., Ltd.......................... 692,028
------------
2,877,945
------------
PULP & PAPER--1.72%
270,000 Oji Paper Co., Ltd................. 1,322,137
------------
REAL ESTATE--1.05%
81,000 Mitsui Fudosan Co., Ltd............ 803,116
------------
RETAIL TRADE--4.97%
26,000 Ito-Yokado Co., Ltd................ 1,449,939
30,000 Marui Co., Ltd..................... 405,261
8,800 Paris Miki Inc..................... 284,905
3,200 Saizeriya Co., Ltd................. 139,603
23,000 Seven-Eleven Japan Co., Ltd........ 1,118,818
5,000 Yamada Denki Co., Ltd.............. 410,360
------------
3,808,886
------------
SECURITIES--4.64%
170,000 Nikko Securities Co., Ltd.......... 1,444,759
100,000 Nomura Securities Co., Ltd......... 2,112,505
------------
3,557,264
------------
SERVICES--5.90%
4,560 Nippon Television Network Corp..... 1,468,944
19,000 Secom Co., Ltd..................... 1,153,379
39,000 TIS Inc............................ 1,385,755
23,000 Tokyo Broadcasting System, Inc..... 515,662
------------
4,523,740
------------
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THE JAPAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONCLUDED)
APRIL 30, 2001 (UNAUDITED)
--------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONCLUDED)
-------------------------------------------
TEXTILE & APPAREL--1.54%
SHARES VALUE
---------- ------------
163,000 Kuraray Co., Ltd................... $ 1,176,819
------------
TRANSPORTATION EQUIPMENT--6.93%
30,000 Denso Corp......................... 588,830
43,000 Honda Motor Co., Ltd............... 1,729,745
90,000 Toyota Motor Corp.................. 2,993,930
------------
5,312,505
------------
WHOLESALE TRADE--1.34%
180,000 Mitsui & Co., Ltd.................. 1,028,571
------------
Total Common Stocks
(Cost--$82,053,262).......................... 75,489,713
------------
-------------------------------------------
SHORT-TERM INVESTMENTS--0.23%
-------------------------------------------
PRINCIPAL
AMOUNT
(000) VALUE
---------- ------------
U.S. DOLLAR TIME DEPOSIT--0.23%
$177 Bank of New York Time Deposit,
2.10%, due 5/1/01
(Cost--$176,765).................. $ 176,765
------------
Total Investments--98.71%
(Cost--$82,230,027).......................... 75,666,478
Other assets less liabilities--1.29%........... 992,042
------------
NET ASSETS (Applicable to 10,815,688 shares of
capital stock outstanding; equivalent to
$7.09 per share)--100.00%.................... $ 76,658,520
============
See accompanying notes to financial statements.
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THE JAPAN EQUITY FUND, INC.
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TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
APRIL 30, 2001 (UNAUDITED)
-------------------------------------------
PERCENT OF
INDUSTRY NET ASSETS
-------- ----------
Electric Appliances................ 17.35%
Communication...................... 7.59
Banks.............................. 7.49
Transportation Equipment........... 6.93
Chemicals.......................... 6.37
Services........................... 5.90
Retail Trade....................... 4.97
Securities......................... 4.64
Machinery.......................... 4.30
Pharmaceutical..................... 3.75
TEN LARGEST COMMON STOCK
POSITIONS HELD
APRIL 30, 2001(UNAUDITED)
-------------------------------------------
PERCENT OF
ISSUE NET ASSETS
----- ----------
NTT DoCoMo, Inc.................... 4.29%
Toyota Motor Corp.................. 3.91
NTT Corp........................... 3.30
Sony Corp.......................... 2.87
Nomura Securities Co., Ltd......... 2.76
Mitsubishi Tokyo Financial
Group Inc........................ 2.55
The Sumitomo Trust & Banking
Co., Ltd......................... 2.52
Mizuho Holdings, Inc............... 2.41
Honda Motor Co., Ltd............... 2.26
Rohm Co., Ltd...................... 2.12
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THE JAPAN EQUITY FUND, INC.
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STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2001 (UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
Investment in securities, at value
(cost--$82,230,027)....................... $ 75,666,478
Cash denominated in foreign currency
(cost--$2,139,022)........................ 2,114,953
Receivable for securities sold............. 4,251,011
Interest and dividends receivable.......... 237,243
Prepaid expenses........................... 25,958
------------
Total assets............................. 82,295,643
------------
LIABILITIES
Payable for securities purchased........... 5,490,837
Accrued expenses and other liabilities..... 146,286
------------
Total liabilities........................ 5,637,123
------------
NET ASSETS
Capital stock, $0.01 par value per share;
total 30,000,000 shares authorized;
10,815,688 shares issued and
outstanding............................... 108,157
Paid-in capital in excess of par value..... 108,486,746
Accumulated net investment loss............ (154,963)
Accumulated net realized loss on
investments............................... (25,201,807)
Net unrealized depreciation on investments
and other assets and liabilities
denominated in foreign currency........... (6,579,613)
------------
Net assets applicable to shares
outstanding............................. $ 76,658,520
============
NET ASSET VALUE PER SHARE............ $ 7.09
============
See accompanying notes to financial statements.
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THE JAPAN EQUITY FUND, INC.
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STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2001 (UNAUDITED)
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (net of withholding taxes of
$45,145).................................. $ 255,822
Interest................................... 3,259
------------
Total investment income.................. 259,081
------------
EXPENSES:
Investment management fee.................. 147,462
Administration fee......................... 73,405
Custodian fees and expenses................ 38,452
Audit and tax services..................... 30,992
Reports and notices to shareholders........ 29,753
Directors' fees and expenses............... 25,254
Legal fees and expenses.................... 24,753
Insurance expense.......................... 8,577
Transfer agency fee and expenses........... 7,935
Other...................................... 27,461
------------
Total expenses........................... 414,044
------------
NET INVESTMENT LOSS.......................... (154,963)
------------
REALIZED AND UNREALIZED GAINS FROM INVESTMENT
ACTIVITIES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized losses on investments......... (1,721,586)
Net realized foreign currency transaction
losses.................................... (305,741)
Net change in unrealized appreciation
(depreciation) on investments in equity
securities................................ (11,457,544)
Net change in unrealized appreciation
(depreciation) on and other assets and
liabilities denominated in foreign
currency.................................. 12,038
------------
Net realized and unrealized losses from
investment activities and foreign currency
transactions................................ (13,472,833)
------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $(13,627,796)
============
See accompanying notes to financial statements.
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THE JAPAN EQUITY FUND, INC.
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STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED FOR THE YEAR
APRIL 30, ENDED
2001 OCTOBER 31,
(UNAUDITED) 2000
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss........................ $ (154,963) $ (499,416)
Net realized gain (loss) on:
Investments.............................. (1,721,586) 5,683,608
Foreign currency transactions............ (305,741) (33,032)
Net change in unrealized appreciation
(depreciation) on:
Investments in equity securities......... (11,457,544) (16,403,238)
Translation of short-term investments and
other assets and liabilities denominated
in foreign currency..................... 12,038 (30,733)
------------ ------------
Net decrease in net assets resulting from
operations................................ (13,627,796) (11,282,811)
------------ ------------
NET ASSETS:
Beginning of period........................ 90,286,316 101,569,127
------------ ------------
End of period.............................. $ 76,658,520 $ 90,286,316
============ ============
See accompanying notes to financial statements.
12
THE JAPAN EQUITY FUND, INC.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Japan Equity Fund, Inc. (the "Fund") was incorporated in Maryland on
July 12, 1990 under its former name "The Japan Emerging Equity Fund, Inc." and
commenced operations on July 24, 1992. It is registered with the Securities and
Exchange Commission as a closed-end, diversified management investment company.
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
and disclosures in the financial statements. Actual reporting results could
differ from those estimates.
VALUATION OF INVESTMENTS--Securities which are listed on the First or Second
Section of the Tokyo Stock Exchange or listed on the over-the-counter market in
Japan or listed on other exchanges in Japan and for which market quotations are
readily available are valued at the last reported sales price available to the
Fund at the close of business on the day the securities are being valued or,
lacking any such sales, at the last available bid price. In instances where
quotations are not readily available or where the price as determined by the
above procedures is deemed not to represent fair market value, fair value will
be determined in such manner as the Board of Directors (the "Board") may
prescribe. Short-term investments having a maturity of 60 days or less are
valued at amortized cost, except where the Board determines that such valuation
does not represent the fair value of the investment. All other securities and
assets are valued at fair value as determined in good faith by, or under the
direction of, the Board.
FOREIGN CURRENCY TRANSLATION--The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities and other assets and liabilities stated in Japanese yen
are translated at the exchange rates prevailing at the end of the period; and
(2) purchases, sales, income and expenses are translated at the rate of exchange
prevailing on the respective dates of such transactions. The resulting exchange
gains and losses are included in the Statement of Operations. The Fund does not
isolate the effect of fluctuations in foreign exchange rates from the effect of
fluctuations in the market price of securities.
TAX STATUS--The Fund intends to continue to distribute substantially all of
its taxable income and to comply with the minimum distribution and other
requirements of the Internal Revenue Code applicable to regulated investment
companies. Accordingly, no provision for federal income or excise taxes is
required.
The Fund is not subject to any Japanese income, capital gains or other taxes
except for withholding taxes on certain income, generally imposed at rates of
10% on interest and 15% on dividends, paid to the Fund by Japanese corporations.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date (the date upon which the order to buy or sell is
executed). Realized and unrealized gains and losses from security and foreign
currency transactions are calculated on the identified cost basis. Dividend
income and corporate
13
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
actions are recorded generally on the ex-date, except for certain dividends and
corporate actions from Japanese securities which may be recorded after the
ex-date, as soon as the Fund acquires information regarding such dividends or
corporate actions. Interest income is recorded on an accrual basis.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--The Fund records dividends and
distributions payable to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations, which
may differ from generally accepted accounting principles. These book basis/tax
basis differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax basis treatment;
temporary differences do not require reclassifications. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
INVESTMENT MANAGER AND INVESTMENT ADVISER
The Fund has an Investment Management Agreement with Daiwa SB Investments
(U.S.A.) Ltd. (the "Manager"). Daiwa SB Investments Ltd. ("DSBI" or the
"Adviser") also an affiliate of the Manager acts as the Fund's investment
adviser pursuant to an Investment Advisory Agreement between the Manager and
DSBI. For such investment services, the Fund is obligated to pay the Manager a
monthly fee at an annual rate of 0.60% of the first $20 million, 0.40% of the
next $30 million and 0.20% of the excess over $50 million of the Fund's average
weekly net assets, of which fee 60% is paid by the Manager to DSBI.
Brokerage commissions of approximately $12,356 were paid by the Fund to
Daiwa Securities America, Inc., an affiliate of both the Manager and DSBI, in
connection with portfolio transactions during the six months ended April 30,
2001. In addition, the Fund has agreed to reimburse the Manager and the Adviser
for all out-of-pocket expenses related to the Fund. However, for the six months
ended April 30, 2001, there were no out-of-pocket expenses incurred by the
Manager or the Adviser.
At April 30, 2001, the Fund owed $23,889 to the Manager and the Manager
informed the Fund that it owed the Adviser $14,334.
ADMINISTRATOR AND CUSTODIAN AND OTHER RELATED PARTIES
Daiwa Securities Trust Company ("DSTC") an affiliate of the Adviser,
provides certain administrative services to the Fund, for which the Fund pays to
DSTC a monthly fee at an annual rate of 0.20% of the first $60 million of the
Fund's average weekly net assets, 0.15% of the next $40 million and 0.10% of the
excess over $100 million, with a minimum annual fee of $120,000.
DSTC also acts as custodian for the Fund's assets and has appointed Sumitomo
Mitsui Banking Corporation (the "Sub-Custodian"), an affiliate of the Manager,
to act as the sub-custodian for all of the cash and securities of
14
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
the Fund held in Japan. As compensation for its services as custodian, DSTC
receives a monthly fee and reimbursement of out-of-pocket expenses. Such
expenses include fees and out-of-pocket expenses of the Sub-Custodian. During
the six months ended April 30, 2001, DSTC and the Sub-Custodian earned $20,596
and $17,856, respectively, as compensation for custodial service to the Fund.
At April 30, 2001, the Fund owed $11,753 and $3,175 to DSTC for
administration and custodian fees, respectively, excluding fees and expenses of
$4,711 payable to the Sub-Custodian.
During the six months ended April 30, 2001, the Fund paid or accrued $24,753
for legal services in connection with the Fund's on-going operations to a law
firm of which the Fund's Assistant Secretary is a partner.
INVESTMENTS IN SECURITIES AND FEDERAL INCOME TAX MATTERS
For federal income tax purposes, the cost of securities owned at April 30,
2001 was $82,312,521, excluding $176,765 of short-term investments. At
April 30, 2001, the net unrealized depreciation of investments for federal
income tax purposes, excluding short-term securities, of $6,822,808 was composed
of gross appreciation of $4,767,061 for those investments having an excess of
value over cost, and gross depreciation of $11,589,869 for those investments
having an excess of cost over value. For the six months ended April 30, 2001,
total aggregate purchases and sales of portfolio securities, excluding
short-term securities, were $26,351,763 and $25,520,202, respectively.
At October 31, 2000, the Fund had a remaining capital loss carryover of
$23,174,480, of which $6,264,639 expires in the year 2005 and $16,909,841
expires in the year 2006.
CAPITAL STOCK
There are 30,000,000 shares of $.01 par value common stock authorized. Of
the 10,815,688 shares of the Fund outstanding at April 30, 2001, Daiwa
Securities America Inc. an affiliate of the Manager, Adviser and DSTC owned
14,532 shares.
15
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding during each period is
presented below:
FOR THE SIX
MONTHS ENDED
APRIL 30, FOR THE YEARS ENDED OCTOBER 31,
2001 ----------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997 1996
------------ -------- -------- -------- -------- --------
Net asset value, beginning of period........ $ 8.35 $ 9.39 $ 6.08 $ 6.99 $ 10.52 $ 11.47
------- ------- ------- ------- ------- -------
Net investment loss......................... (0.01) (0.04) (0.01) (0.01) (0.01) (0.01)
Net realized and unrealized gains (losses)
on investments and foreign
currency transactions...................... (1.25) (1.00) 3.32 (0.90) (2.86) 0.19
------- ------- ------- ------- ------- -------
Net increase (decrease) in net asset value
resulting from operations.................. (1.26) (1.04) 3.31 (0.91) (2.87) 0.18
------- ------- ------- ------- ------- -------
Less: dividends and distributions to
shareholders
Net realized gains on investments and
foreign currency transactions............ -- -- -- -- (0.66) (0.67)
Dilutive effect of rights offering.......... -- -- -- -- -- (0.43)
------- ------- ------- ------- ------- -------
Offering costs charged to paid-in capital in
excess of par value........................ -- -- -- -- -- (0.03)
------- ------- ------- ------- ------- -------
Net asset value, end of period.............. $ 7.09 $ 8.35 $ 9.39 $ 6.08 $ 6.99 $ 10.52
======= ======= ======= ======= ======= =======
Per share market value, end of period....... $ 6.720 $ 7.063 $ 9.813 $ 6.875 $ 7.375 $ 10.375
======= ======= ======= ======= ======= =======
Total investment return:
Based on market price at beginning and end
of period, assuming reinvestment
of dividends............................. (4.86)% (28.02)% 42.73 % (6.78)% (23.76)% (13.55)%+
Based on net asset value at beginning and
end of period, assuming reinvestment
of dividends............................. (15.09)% (11.08)% 54.44 % (13.02)% (28.73)% (1.18)%+
Ratios and supplemental data:
Net assets, end of period
(in millions)............................ $ 76.7 $ 90.3 $101.6 $ 65.8 $ 75.6 $113.6
Ratios to average net assets of:
Expenses................................ 1.06 %* 0.96 % 1.08 % 1.19 % 1.03 % 0.90 %
Net investment loss..................... (0.40)%* (0.48)% (0.11)% (0.13)% (0.13)% (0.04)%
Portfolio turnover........................ 33.15 % 61.91 % 58.70 % 52.07 % 61.75 % 33.89 %
---------------------------------------------------------------------------
+ For the year ended October 31, 1996, the total investment return
includes the benefit of shares resulting from the exercise of rights.
* Annualized.
16
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
RESULTS OF ANNUAL MEETING OF STOCKHOLDERS (UNAUDITED)
--------------------------------------------------------------------------------
On June 6, 2001, the Annual Meeting of Stockholders of The Japan Equity
Fund, Inc. (the "Fund") was held and the following matter was voted upon and
passed.
Election of two Class II Directors to the Board of Directors of the Fund to
serve for a term expiring on the date on which the Annual Meeting of
Stockholders is held in the year 2004 and the election of one Class III Director
to serve for a term expiring on the date on which the Annual Meeting of
Stockholders is held in the year 2002.
NUMBER OF PROXY
SHARES/VOTES AUTHORITY
VOTED FOR WITHHELD
------------ ------------
CLASS II
------------------------------
David G. Harmer............... 8,677,604 271,070
Oren G. Shaffer............... 8,625,109 323,565
CLASS III
------------------------------
Alfred C. Morley.............. 8,661,223 287,451
In addition to the three Directors re-elected at the Meeting, Austin C.
Dowling, Martin J. Gruber, and Hideaki Matsuura were the other members of the
Board who continued to serve as Directors of the Fund.
17
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
AN IMPORTANT NOTICE CONCERNING OUR PRIVACY POLICY
--------------------------------------------------------------------------------
This Privacy Notice describes the types of non-public information we collect
about you, the ways we safeguard the confidentiality of this information and
when this information may be shared with others. In this Privacy Notice, the
terms "we," "our" and "us" refer to the Fund. The term "you" in this Privacy
Notice refers broadly to all of our individual stockholders (including
prospective and former individual stockholders).
In order to provide you with services, we collect certain non-public
information about you. We obtain this personal information from the following
sources:
- Applications and other forms you submit to us.
- Dealings and transactions with us or others.
We do not disclose any non-public personal information about you to anyone,
except as permitted by law. For instance, so that we may effect transactions
that you request or authorize, we may disclose the information we collect to
companies that perform services on our behalf, such as printers and mailers that
assist us in the distribution of investor materials. These companies will use
this information only for the services for which we hired them, and are not
permitted to use or share this information for any other purpose.
We maintain physical, electronic and procedural security measures that
comply with federal standards to safeguard your non-public personal information.
Access to such information is restricted to those agents of the Fund who are
trained in the proper handling of client information and who need to know that
information in order to provide services to stockholders.
18
----------------------------------------
BOARD OF DIRECTORS
Hideaki Matsuura, CHAIRMAN
Austin C. Dowling
Martin J. Gruber
David G. Harmer
Alfred C. Morley
Oren G. Shaffer
--------------------------------------------
OFFICERS
Shunsuke Ichijo
PRESIDENT
John J. O'Keefe
VICE PRESIDENT AND TREASURER
Judy Runrun Tu
SECRETARY
Laurence E. Cranch
ASSISTANT SECRETARY
--------------------------------------------
ADDRESS OF THE FUND
c/o Daiwa Securities Trust Company
One Evertrust Plaza, 9th Floor
Jersey City, New Jersey 07302
--------------------------------------------
INVESTMENT MANAGER
Daiwa SB Investments (U.S.A.) Ltd.
INVESTMENT ADVISER
Daiwa SB Investments Ltd.
ADMINISTRATOR AND CUSTODIAN
Daiwa Securities Trust Company
TRANSFER AGENT AND REGISTRAR
PFPC Inc.
LEGAL COUNSEL
Clifford Chance Rogers & Wells LLP
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
--------------------------------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that from time to time the Fund may purchase shares of its
common stock in the open market at prevailing market prices.
This report is sent to shareholders of the Fund for their information. It is not
a prospectus, circular or representation intended for use in the purchase or
sale of shares of the Fund or of any securities mentioned in the report.
The financial information included herein is taken from the records of the Fund
without examination by independent accountants who do not express an opinion
thereon.
SEMI-ANNUAL REPORT
APRIL 30, 2001
-------------------------
[JAPAN EQUITY FUND LOGO]
-------------------------
THE JAPAN EQUITY
FUND, INC.
c/o Daiwa Securities Trust Company
One Evertrust Plaza
Jersey City, New Jersey 07302
INVESTMENT MANAGER
Daiwa SB Investments (U.S.A.) Ltd.
INVESTMENT ADVISER
Daiwa SB Investments Ltd.