THE JAPAN EQUITY FUND, INC.
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GENERAL INFORMATION
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THE FUND
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 Tokyo Stock Exchange ("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. The Fund implements 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 43027, Providence, RI 02940-3027.
THE JAPAN EQUITY FUND, INC.
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A brief summary of the material aspects of the Plan follows:
WHO CAN PARTICIPATE IN THE PLAN? If you wish to participate and your shares
are held in your name, you may elect to become a direct participant in the Plan
by completing and mailing the Enrollment Authorization form on the back cover of
the Dividend Reinvestment and Cash Purchase Plan Brochure available from the
Plan Agent. However, if your shares are held in the name of a brokerage firm,
bank or nominee, you should instruct your nominee to participate in the Plan on
your behalf. If your nominee is unable to participate in the Plan for you, you
should request that your shares be registered in your name, so that you may
elect to participate directly in the Plan.
MAY I WITHDRAW FROM THE PLAN? If your shares are held in your name and you
wish to receive all dividends and capital gain distributions in cash rather than
in shares, you may withdraw from the Plan without penalty at any time by
contacting the Plan Agent. If your shares are held in nominee name, you should
be able to withdraw from the Plan without a penalty at any time by sending
written notice to your nominee. If you withdraw, you or your nominee will
receive a share certificate for all full shares or, if you wish, the Plan Agent
will sell your shares and send you the proceeds, after the deduction of
brokerage commissions. The Plan Agent will convert any fractional shares to cash
at the then-current market price and send to you a check for the proceeds.
HOW ARE THE DIVIDENDS AND DISTRIBUTIONS REINVESTED? If the market price of
the Fund's shares on the payment date should equal or exceed their net asset
value per share, the Fund will issue new shares to you at the higher of net
asset value or 95% of the then-current market price. If the market price is
lower than net asset value per share, the Fund will issue new shares to you at
the market price. If the dividends or distributions are declared and payable as
cash only, you will receive shares purchased for you by the Plan Agent on the
NYSE or otherwise on the open market to the extent available.
WHAT IS THE CASH PURCHASE FEATURE? The Plan participants have the option of
making annual investments in Fund shares through the Plan Agent. You may invest
any amount from $100 to $3,000 annually. The Plan Agent will purchase shares for
you on the NYSE or otherwise on the open market on or about February 15th of
each year. Plan participants should send voluntary cash payments to be received
by the Plan Agent approximately ten days before the annual purchase date. The
Plan Agent will return any cash payments received more than thirty days prior to
the purchase date. You may withdraw a voluntary cash payment by written notice,
if the notice is received by the Plan Agent not less that two business days
before the purchase date.
IS THERE A COST TO PARTICIPATE? There are no Plan charges or brokerage
charges for shares issued directly by the Fund. However, each participant will
pay a pro rata portion of brokerage commissions for shares purchased on the NYSE
or on the open market by the Plan Agent.
WHAT ARE THE TAX IMPLICATIONS? The automatic reinvestment of dividends and
distributions does not relieve you of any income tax which may be payable (or
required to be withheld) on such dividends and distributions. In addition, the
Plan Agent will reinvest dividends for foreign participants and for any
participant subject to federal backup withholding after the deduction of the
amounts required to be withheld.
PLEASE NOTE THAT, IF YOU PARTICIPATE IN THE PLAN THROUGH A BROKERAGE
ACCOUNT, YOU MAY NOT BE ABLE TO CONTINUE AS A PARTICIPANT IF YOU TRANSFER THOSE
SHARES TO ANOTHER BROKER. CONTACT YOUR BROKER OR NOMINEE OR THE PLAN AGENT TO
ASCERTAIN WHAT IS THE BEST ARRANGEMENT FOR YOU TO PARTICIPATE IN THE PLAN.
2
THE JAPAN EQUITY FUND, INC.
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December 7, 2001
DEAR SHAREHOLDERS:
It is our pleasure on behalf of the Board of Directors to present the Annual
Report for The Japan Equity Fund, Inc. (the "Fund") for the fiscal year ended
October 31, 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
In the twelve months ended October 2001, the Tokyo stock market declined by
23.23% and 28.70%, in terms of TOPIX and Nikkei 225 Indexes, respectively.
Except for a rebound phase shown during the March-May 2001 period, market
sentiment had been consistently bearish.
The main factors behind the continuing drop in the stock market include:
(1) a valuation correction in the information technology ("IT") related stocks
consistent with the burst of the IT bubble in the United States, (2) continued
downward revisions in aggregate corporate earnings, and (3) lack of more
meaningful progress in structural reform by the Koizumi government.
The main market points to review during the past twelve months are as
follows.
On March 2nd, the Nikkei 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 (based on the Index composition before the review effective from
April 2000, the figure listed above would have been Y15,747). Thereafter,
however, the decline in stock prices came to a halt thanks to the Bank of
Japan's ("BoJ") monetary easing and expectations of concrete economic stimulus
and direct stock-boosting measures. On March 19th, 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 by Y913 on March 21st, the
seventh highest one day increase on record.
In late April, the Tokyo stock market surged amid increasing investor
expectations for changes, including pro-market structural reform, pledged by the
new Prime Minister Junichiro Koizumi. The U.S. stock market's 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.
3
THE JAPAN EQUITY FUND, INC.
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With a 4.8% drop in the Nikkei in May, stock prices resumed their decline.
In both Japan and the U.S., the economic outlook clearly deteriorated, with the
Tokyo market showing price declines almost across the board. However, the
release of fiscal year third quarter earnings results triggered brisk buying of
small and mid-cap stocks in the trading company, materials, machinery and other
sectors, centering on companies with favorable earnings results. On May 15th,
the U.S. cut interest rates for the fifth time this year (lowering the Fed Funds
rate from 4.5% to 4.0%). The Tokyo market staged a rally, which, however, was
unsustainable.
On June 21st, the Council on Economic and Fiscal Policy decided on a basic
reform course to help the Japanese economy back on its feet, including the
disposal of bad loans within two - three years, but there was almost no market
reaction. Moreover, the BoJ Tankan Survey and the Industrial Production Index,
which were released on July 3rd and 30th, respectively, indicated that the
economic situation had deteriorated further, especially for the manufacturing
industry. This hurt investor sentiment.
On August 29th, Hakuo Yanagisawa, head of the Financial Service Agency
("FSA"), said that the major banks should be able to reduce their bad loans to
approximately 7,000 to 10,000 billion Yen by between 2004 and 2007, according to
FSA simulations. This means that it could take seven years at most to resolve
banks' bad loan problems against the earlier promise of Prime Minister Koizumi's
three year plan. Although some bank analysts saw the FSA calculations as a more
realistic assessment, this overshadowed investor sentiment.
The Tokyo stock market fell for five consecutive months leading up to and
including September, as investor concerns about a worldwide economic recession
mounted, especially since the Sept 11th terrorist attacks on New York and
Washington D.C. Domestically, the second quarter Gross Domestic Product ("GDP")
figures and the collapse of Mycal, a major retailer, highlighted the
accelerating pace of Japan's economic downturn.
On September 19th, the BoJ cut its official discount rate by 0.10% to 0.15%,
and raised its upper limit for liquidity injections into the market. The move
demonstrated solidarity with the international initiative to ease monetary
policy. On September 14th, Mycal, the fourth-largest retailer, filed for court
protection from its creditors with more than 1,390 billion Yen in debt. Mycal
had been kept on life support with short-term loans from its main bank, Dai-ichi
Kangyo, which decided that it could no longer continue to support it on that
day. The collapse of the struggling retailer is one of the top five corporate
failures in Japanese history. Following the news, investors sold shares of
companies holding huge debt.
In October, the stock market rebounded after five consecutive monthly
declines, as investors welcomed the following factors: (1) the U.S. and other
foreign stock markets recovered to their pre-terrorist attacks levels in the
middle of the month, and (2) the Yen's exchange rate declined against major
foreign currencies. Moreover, the supply-demand balance improved dramatically as
pension and public funds allocated more money to the stock market, partly as a
re-balancing exercise. This move lifted share prices during the month.
FUND PERFORMANCE
As of October 31, 2001, the Fund's net assets were approximately
$60.5 million, which represents a net asset value of $5.59 per share. The return
on the Fund's net assets was -33.05% since the Fund's fiscal year-end on
October 31, 2000. Over the same period, the Benchmark (TOPIX) return was
-31.21%, as measured in U.S. Dollars.
4
THE JAPAN EQUITY FUND, INC.
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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 October 31, 2001, the proportion of the Fund's
net assets invested in Japanese equities listed on the First Section of the TSE
was 98.52%, while short-term investments and other net assets represented 1.48%.
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 (14.95% of net assets), Transportation
Equipment (7.94%), Services (7.34%), Pharmaceutical (7.15%) and Chemicals
(6.81%).
During the fiscal year ended October 31, 2001, the Fund's market price on
the New York Stock Exchange ("NYSE") ranged from a low of $4.63 per share on
September 21, 2001 to a high of $7.375 on November 7, 2000. The Fund's NYSE
market price closed at $4.99 per share on October 31, 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 fiscal year ended
October 31, 2001 ranged from a discount of 29.59% on December 21, 2000 to a
discount of 3.86% on July 19, 2001, and ended the period at a discount of
10.73%.
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. ("DSBI") 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 of DSBI, 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.
5
THE JAPAN EQUITY FUND, INC.
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We thank you for your support of The Japan Equity Fund, Inc. and your
continued interest in the Japanese economy and marketplace.
Sincerely,
/s/ Hiroshi Kimura /s/ Shunsuke Ichijo
HIROSHI KIMURA SHUNSUKE ICHIJO
CHAIRMAN OF THE BOARD PRESIDENT
6
THE JAPAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2001
--------------------------------------------------------------------------------
-------------------------------------------
JAPANESE COMMON STOCKS--98.53%
--------------------------------------------------------------------------------
SHARES VALUE
---------- -------------
BANKS--4.80%
192 Mitsubishi Tokyo Financial Group
Inc. .................................. $ 1,434,130
60 Mizuho Holdings, Inc. .................. 182,221
230,000 The Sumitomo Trust & Banking Co.,
Ltd. .................................. 1,287,532
-------------
2,903,883
-------------
CHEMICALS--6.81%
210,000 Asahi Kasei Corp. ...................... 694,657
50,000 Denki Kagaku Kogyo Kabushiki Kaisha..... 103,833
28,000 Fuji Photo Film Co., Ltd. .............. 928,507
52,000 Kao Corp. .............................. 1,237,790
35,000 Shin-Etsu Chemical Co., Ltd. ........... 1,157,761
-------------
4,122,548
-------------
COMMUNICATION--5.92%
300 NTT Corp. .............................. 1,241,074
172 NTT DoCoMo, Inc. ....................... 2,343,594
-------------
3,584,668
-------------
CONSTRUCTION--0.95%
71,000 Sekisui House, Ltd. .................... 574,620
-------------
ELECTRIC APPLIANCES--14.95%
47,000 Canon Inc. ............................. 1,373,389
16,200 Fanuc Ltd. ............................. 678,158
152,000 Fujitsu Ltd. ........................... 1,130,362
50,000 Matsushita Electric Industrial Co.,
Ltd. .................................. 595,092
9,000 Murata Manufacturing Co., Ltd. ......... 567,348
28,000 NEC Corp. .............................. 255,110
51,000 Omron Corp. ............................ 653,041
39,000 Pioneer Corp. .......................... 752,278
5,100 Rohm Co., Ltd. ......................... 545,457
SHARES VALUE
---------- -------------
72,000 Sharp Corp. ............................ $ 748,190
25,000 Sony Corp. ............................. 950,094
215,000 Toshiba Corp. .......................... 799,434
-------------
9,047,953
-------------
ELECTRIC POWER & GAS--4.18%
85,000 Kansai Electric Power Co., Inc. ........ 1,412,829
44,800 Tokyo Electric Power Co., Inc. ......... 1,117,886
-------------
2,530,715
-------------
FISHERY, AGRICULTURE & FORESTRY--0.21%
70,000 Nippon Suisan Kaisha, Ltd. ............. 125,257
-------------
FOODS--3.13%
78,000 Ajinomoto Co., Inc. .................... 848,313
11,000 Coca-Cola West Japan Co., Ltd. ......... 232,045
70,000 House Foods Corp. ...................... 646,393
25 Japan Tobacco Inc. ..................... 164,163
-------------
1,890,914
-------------
INSURANCE--1.35%
99,000 Tokio Marine & Fire Insurance Co.,
Ltd. .................................. 813,420
-------------
LAND TRANSPORTATION--2.76%
189 East Japan Railway Co. ................. 1,106,107
30,000 Yamato Transport Co., Ltd. ............. 565,132
-------------
1,671,239
-------------
MACHINERY--3.13%
75,000 Amano Corp. ............................ 437,700
20,000 Daikin Industries Ltd. ................. 290,569
30,000 NSK Ltd. ............................... 100,468
12,300 SMC Corp. .............................. 1,065,132
-------------
1,893,869
-------------
See accompanying notes to financial statements.
7
THE JAPAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2001
--------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONTINUED)
--------------------------------------------------------------------------------
SHARES VALUE
---------- -------------
METAL PRODUCTS--0.58%
25,000 Tostem Inax Holding Corp. .............. $ 348,847
-------------
NON-FERROUS METALS--1.83%
130,000 Sumitomo Electric Industries, Ltd. ..... 1,107,609
-------------
OIL & COAL PRODUCTS--0.36%
110,000 Cosmo Oil Co., Ltd. .................... 219,404
-------------
OTHER FINANCING BUSINESS--3.40%
6,000 Acom Co., Ltd. ......................... 503,324
36,400 Hitachi Capital Corp. .................. 711,089
9,600 Orix Corp. ............................. 843,930
-------------
2,058,343
-------------
OTHER PRODUCTS--2.53%
123,000 Dai Nippon Printing Co., Ltd. .......... 1,316,523
1,400 Nintendo Co., Ltd. ..................... 216,958
-------------
1,533,481
-------------
PHARMACEUTICAL--7.15%
50,000 Chugai Pharmaceutical Co., Ltd. ........ 734,220
24,000 Eisai Co., Ltd. ........................ 616,597
25,000 Ono Pharmaceuticals Co., Ltd. .......... 800,295
29,000 Sankyo Co., Ltd. ....................... 566,527
10,000 Taisho Pharmaceutical Co. Ltd. ......... 199,048
29,000 Takeda Chemical Industries, Ltd. ....... 1,411,557
-------------
4,328,244
-------------
PULP & PAPER--0.65%
80,000 Oji Paper Co., Ltd. .................... 392,678
-------------
REAL ESTATE--1.37%
81,000 Mitsui Fudosan Co., Ltd. ............... 826,422
-------------
SHARES VALUE
---------- -------------
RETAIL TRADE--6.57%
900 Cawachi Ltd. ........................... $ 52,081
21,000 Ito-Yokado Co. Ltd. .................... 930,805
9,000 Lawson, Inc. ........................... 318,394
60,000 Marui Co., Ltd. ........................ 816,055
11,000 Seven - Eleven Japan Co., Ltd. ......... 481,244
13,000 Skylark Co., Ltd. ...................... 329,722
31,000 Uny Co., Ltd. .......................... 299,746
50,000 Xebio Co., Ltd. ........................ 746,942
-------------
3,974,989
-------------
SECURITIES--3.97%
255,000 Nikko Cordial Corp. .................... 1,383,526
77,000 Nomura Holdings Inc. ................... 1,017,565
-------------
2,401,091
-------------
SERVICES--7.34%
5,260 Nippon Television Network Corp. ........ 1,191,628
19,000 Secom Co., Ltd. ........................ 993,433
39,000 TIS Inc. ............................... 1,053,189
7,000 Toho Co., Ltd. ......................... 815,891
23,000 Tokyo Broadcasting System, Inc. ........ 387,015
-------------
4,441,156
-------------
TEXTILE & APPAREL--1.69%
163,000 Kuraray Co., Ltd. ...................... 1,022,178
-------------
TRANSPORTATION EQUIPMENT--7.94%
45,000 Denso Corp. ............................ 650,086
55,000 Fuji Heavy Industries Ltd. ............. 270,418
39,000 Honda Motor Co., Ltd. .................. 1,405,319
16,800 Toyota Industries Corp. ................ 284,068
See accompanying notes to financial statements.
8
THE JAPAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONCLUDED)
OCTOBER 31, 2001
--------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONCLUDED)
-------------------------------------------
SHARES VALUE
---------- -------------
90,000 Toyota Motor Corp. ..................... $ 2,194,041
-------------
4,803,932
-------------
WAREHOUSING--1.64%
110,000 Mitsubishi Logistics Corp. ............. 993,187
-------------
WHOLESALE TRADE--3.32%
63,000 Mitsubishi Corp. ....................... 485,053
180,000 Mitsui & Co., Ltd. ..................... 1,066,732
50,000 Ryoyo Electro Corp. .................... 459,657
-------------
2,011,442
-------------
Total Common Stocks
(Cost--$77,520,533)............................... 59,622,089
-------------
-------------------------------------------
SHORT-TERM INVESTMENTS--0.15%
-------------------------------------------
PRINCIPAL
AMOUNT
(000)
----------
U.S. DOLLAR TIME DEPOSIT--0.15%
$91 Bank of New York Time Deposit, 0.10%,
due 11/1/01
(Cost--$91,006)........................ 91,006
-------------
Total Investments--98.68%
(Cost--$77,611,539)............................... 59,713,095
Other assets less liabilities--1.32%................ 798,263
-------------
NET ASSETS (Applicable to 10,815,688 shares of
capital stock outstanding; equivalent to $5.59 per
share) 100.00%.................................... $ 60,511,358
=============
-------------------------------------------
TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
OCTOBER 31, 2001
-------------------------------------------
PERCENT OF
INDUSTRY NET ASSETS
-------- ----------
Electric Appliances................ 14.95%
Transportation Equipment........... 7.94
Services........................... 7.34
Pharmaceutical..................... 7.15
Chemicals.......................... 6.81
Retail Trade....................... 6.57
Communication...................... 5.92
Banks.............................. 4.80
Electric Power & Gas............... 4.18
Securities......................... 3.97
-------------------------------------------
TEN LARGEST COMMON STOCK
POSITIONS HELD
OCTOBER 31, 2001
-------------------------------------------
PERCENT OF
ISSUE NET ASSETS
----- ----------
NTT DoCoMo, Inc.................... 3.87%
Toyota Motor Corp.................. 3.63
Mitsubishi Tokyo Financial
Group Inc......................... 2.37
Kansai Electric Power Co., Inc..... 2.33
Takeda Chemical Industries, Ltd.... 2.33
Honda Motor Co., Ltd............... 2.32
Nikko Cordial Corp................. 2.29
Canon Inc.......................... 2.27
Dai Nippon Printing Co., Ltd....... 2.18
The Sumitomo Trust & Banking
Co., Ltd.......................... 2.13
See accompanying notes to financial statements.
9
THE JAPAN EQUITY FUND, INC.
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STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2001
--------------------------------------------------------------------------------
ASSETS
Investment in securities, at value
(cost--$77,611,539)....................... $ 59,713,095
Cash denominated in foreign currency
(cost--$723,836).......................... 724,295
Receivable for securities sold............. 1,167,309
Interest and dividends receivable.......... 171,610
Prepaid expenses........................... 27,931
------------
Total assets............................. 61,804,240
------------
LIABILITIES
Payable for securities purchased........... 1,192,787
Accrued expenses and other liabilities..... 100,095
------------
Total liabilities........................ 1,292,882
------------
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..... 107,786,826
Accumulated net realized loss on
investments............................... (29,479,916)
Net unrealized depreciation on investments
and other assets and liabilities
denominated in foreign currency........... (17,903,709)
------------
Net assets applicable to shares
outstanding............................. $ 60,511,358
============
NET ASSET VALUE PER SHARE............ $ 5.59
============
See accompanying notes to financial statements.
10
THE JAPAN EQUITY FUND, INC.
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STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2001
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (net of withholding taxes of
$78,220).................................. $ 443,248
Interest................................... 3,908
------------
Total investment income.................. 447,156
------------
EXPENSES:
Investment management fee.................. 292,860
Administration fee......................... 140,282
Custodian fees and expenses................ 75,046
Audit and tax services..................... 66,450
Legal fees and expenses.................... 57,592
Reports and notices to shareholders........ 56,863
Directors' fees and expenses............... 49,266
Insurance expense.......................... 23,552
Transfer agency fee and expenses........... 15,847
Other...................................... 45,781
------------
Total expenses........................... 823,539
------------
NET INVESTMENT LOSS.......................... (376,383)
------------
REALIZED AND UNREALIZED GAINS FROM INVESTMENT
ACTIVITIES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized losses on investments......... (6,305,436)
Net realized foreign currency transaction
losses.................................... (323,537)
Net change in unrealized appreciation
(depreciation) on investments in equity
securities................................ (22,792,438)
Net change in unrealized appreciation
(depreciation) on other assets and
liabilities denominated in foreign
currency.................................. 22,836
------------
Net realized and unrealized losses from
investment activities and foreign currency
transactions................................ (29,398,575)
------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $(29,774,958)
============
See accompanying notes to financial statements.
11
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED
OCTOBER 31,
----------------------------
2001 2000
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss........................ $ (376,383) $ (499,416)
Net realized gain (loss) on:
Investments.............................. (6,305,436) 5,683,608
Foreign currency transactions............ (323,537) (33,032)
Net change in unrealized appreciation
(depreciation) on:
Investments in equity securities......... (22,792,438) (16,403,238)
Translation of short-term investments and
other assets and liabilities denominated
in foreign currency..................... 22,836 (30,733)
------------ ------------
Net decrease in net assets resulting from
operations................................ (29,774,958) (11,282,811)
------------ ------------
NET ASSETS:
Beginning of year.......................... 90,286,316 101,569,127
------------ ------------
End of year................................ $ 60,511,358 $ 90,286,316
============ ============
See accompanying notes to financial statements.
12
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 in the United States of America 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 (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"), 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 $23,010 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 year ended October 31, 2001.
In addition, the Fund has agreed to reimburse the Manager and the Adviser for
all out-of-pocket expenses related to the Fund. For the year ended October 31,
2001, there were no out-of-pocket expenses incurred by the Manager and expenses
of $5,919 were paid to the Adviser, representing reimbursement to the Adviser of
cost relating to the attendance by its employees at meetings of the Fund's
Board.
At October 31, 2001, the Fund owed $22,458 to the Manager and the Manager
informed the Fund that it owed the Adviser $13,474.
At October 31, 2001, included in "Receivable for securities sold" and
"Payable for securities purchased" in the Statement of Assets and Liabilities
the Fund had amounts of $183,153 and $70,080, respectively, for unsettled
portfolio transactions with Daiwa Securities America Inc.
14
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
--------------------------------------------------------------------------------
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, formerly The Sumitomo Bank, Limited (the
"Sub-Custodian"), an affiliate of the Manager, to act as the sub-custodian for
all of the cash and securities of 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 year ended October 31, 2001, DSTC and the
Sub-Custodian earned $39,039 and $36,007, respectively, as compensation for
custodial service to the Fund.
At October 31, 2001, the Fund owed $10,473 and $2,786 to DSTC for
administration and custodian fees, respectively, excluding fees and expenses of
$1,979 payable to the Sub-Custodian.
During the year ended October 31, 2001, the Fund paid or accrued $51,592 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
October 31, 2001 was $77,600,819, excluding $91,006 of short-term investments.
At October 31, 2001, the net unrealized depreciation of investments for federal
income tax purposes, excluding short-term securities, of $17,978,730 was
composed of gross appreciation of $998,795 for those investments having an
excess of value over cost, and gross depreciation of $18,977,525 for those
investments having an excess of cost over value. For the year ended October 31,
2001, total aggregate purchases and sales of portfolio securities, excluding
short-term securities, were $46,269,777 and $45,387,095, respectively.
At October 31, 2001, the Fund had a remaining capital loss carryover of
$29,399,630, of which $6,264,639 expires in the year 2005, $16,909,841 expires
in the year 2006 and $6,225,150 expires in the year 2009.
At October 31, 2001, the Fund made capital account reclassifications due to
permanent book/tax differences. The Fund reclassified $323,537 from accumulated
net realized loss on investments to accumulated net investment loss as result of
permanent book/tax differences, primarily relating to net realized foreign
currency losses. The Fund also reclassified $699,920 from paid-in-capital in
excess of par value to accumulated net investment loss, primarily relating to a
net operating loss for the year ended October 31, 2001.
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 October 31, 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 year is
presented below:
FOR THE YEARS ENDED OCTOBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Net asset value, beginning of year................. $ 8.35 $ 9.39 $ 6.08 $ 6.99 $ 10.52
------- ------- ------- ------- -------
Net investment loss................................ (0.04) (0.04) (0.01) (0.01) (0.01)
Net realized and unrealized gains (losses) on
investments and foreign currency transactions..... (2.72) (1.00) 3.32 (0.90) (2.86)
------- ------- ------- ------- -------
Net increase (decrease) in net asset value
resulting from operations......................... (2.76) (1.04) 3.31 (0.91) (2.87)
------- ------- ------- ------- -------
Less: dividends and distributions to shareholders
Net realized gains on investments and foreign
currency transactions........................... -- -- -- -- (0.66)
------- ------- ------- ------- -------
Net asset value, end of year....................... $ 5.59 $ 8.35 $ 9.39 $ 6.08 $ 6.99
======= ======= ======= ======= =======
Per share market value, end of year................ $ 4.990 $ 7.063 $ 9.813 $ 6.875 $ 7.375
======= ======= ======= ======= =======
Total investment return:
Based on market price at beginning and end of
year, assuming reinvestment of dividends........ (29.35)% (28.02)% 42.73 % (6.78)% (23.76)%
Based on net asset value at beginning and end of
year, assuming reinvestment of dividends........ (33.05)% (11.08)% 54.44 % (13.02)% (28.73)%
Ratios and supplemental data:
Net assets, end of year (in millions)............ $ 60.5 $ 90.3 $101.6 $ 65.8 $ 75.6
Ratios to average net assets of:
Expenses....................................... 1.12 % 0.96 % 1.08 % 1.19 % 1.03 %
Net investment loss............................ (0.51)% (0.48)% (0.11)% (0.13)% (0.13)%
Portfolio turnover............................... 63.39 % 61.91 % 58.70 % 52.07 % 61.75 %
See accompanying notes to financial statements.
16
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To The Shareholders and
Board of Directors of
The Japan Equity Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Japan Equity Fund, Inc. (the
"Fund") at October 31, 2001, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 2001 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 7, 2001
17
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------
The Fund is required by Subchapter M of the Internal Revenue Code of 1986,
as amended, to advise you within 60 days of the Fund's fiscal year end
(October 31, 2001) as to the federal tax status of distributions received by you
during such fiscal year. There were no dividend payments or foreign tax credits
with respect to the fiscal year 2001.
SHAREHOLDERS ARE STRONGLY ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH
RESPECT TO THE TAX CONSEQUENCES OF THEIR INVESTMENT IN THE FUND.
18
----------------------------------------
BOARD OF DIRECTORS
Hiroshi Kimura, 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.
ANNUAL REPORT
OCTOBER 31, 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.