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 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, NJ 07302-3051.
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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May 26, 2003
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, 2003.
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.
MARKET REVIEW (NOVEMBER 2002 - APRIL 2003)
During the six months ended April 30, 2003 the TOPIX declined by -7.62%. The
main points in reviewing the market during this period were as follows:
- November 02: The Nikkei 225 Index ("Nikkei 225") rebounded by 6.7%,
recovering to the 9,000 level on November 28, 2002, while the TOPIX closed
3.5% higher. Early in the month, the market fell, dragged by some major
banks and debt overhanging companies. However, toward the month end, the
market regained lost ground because: (1) fears for an immediate
nationalization of major banks retreated; (2) the U.S. stock market
remained steady; and (3) foreign investors, who had sold Japanese stocks
since June 2002, turned into net buyers later in the month.
- December 02: The Nikkei 225 declined 6.9% to 8,578.95, while the TOPIX
closed 5.5% lower at 843.29. The Nikkei 225 fell for nine straight days,
the longest such losing streak in eleven years, while the TOPIX hit an
18-year low on December 16, 2002. Though there was no specific negative
news on the fundamentals, profit-taking after a sharp rise in late
November as well as selling pressure from individual investors dampened
the market.
- January 03: The Nikkei 225 declined 2.8% to 8339.94, while the TOPIX
closed 2.6% lower at 821.18. Early in the month, massive foreign investor
buying sent the market upward. However, the direction reversed thereafter
due to: (1) the increase in selling pressure from financial institutions
and corporate pension funds; and (2) the growing tension regarding a
military conflict with Iraq, together with the weakness in the U.S. stock
market.
- February 03: Geopolitical risks (Iraq and North Korea) and the share
liquidation by financial institutions forced the market to stay in a
bottom area after testing the strong resistance of the Nikkei 225, at a
level of 8800. February and the early part of March is a seasonal weak
period even in the 1980's bull market years, due to institutional
liquidation toward the fiscal year end. Geopolitical risks and plummeting
bank shares made this seasonal weakness even more painful for this period.
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THE JAPAN EQUITY FUND, INC.
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- March 03: The fall in share prices accelerated in March, on the back of
sales to unwind cross shareholdings in the run-up to the closing of
full-year accounts. Further, sales related to the return of the government
portion of employee pension funds, and also the increasing lack of buyers
due to the uncertainty over the Iraq situation, contributed with the
market falling to new post-bubble lows. Although there was a rebound in
share prices across the globe once the war in Iraq began, the upturn in
Japan was muted due to the financial instability that had been triggered
by the fall in share prices, as well as concerns over North Korea. During
March, the average trading volume on the First Section of the TSE was
830 million shares, with an average trading value of Y570 billion.
- April 03: April saw investors increasingly focus on low to mid-priced
stocks as they avoided international blue chips, which were particularly
affected by the return of the subrogated portion of employee pension funds
to the government and also the U.S. economy, where the war in Iraq led to
increasing uncertainty. Buyers continued to shy away, not only because of
the lacking sense of urgency in government policy, nor the deterioration
in supply/demand conditions caused by the return of the subrogated portion
of pension funds, but also because investors took a wait-and-see attitude
to corporate earnings announcements. As a result, the market remained on a
downward trend, hitting new post-bubble lows toward the end of the month.
During April, the average daily trading volume on the First Section of the
TSE was 950 million shares, with an average trading value of
Y590 billion.
Toward the end of the month of April, expectations of government
intervention to support stock prices declined, after Prime Minister
Junichiro Koizumi stated his adherence to the path of structural reform,
leading prices down to a new post-bubble low at one point. However, not
only did factors that had deteriorated the supply/demand situation, such
as the return of the government portion of pension funds, come to an end,
and companies such as Canon and Nissan posted favorable earnings results,
but there were also rises in U.S. markets. As a result, there were
buy-backs of international blue chips and high-priced issues. There was
also the buying of Softbank and other IT-related stocks, and the
short-term trading in small and mid-cap issues also continued, where there
were little concerns over supply/ demand. Nevertheless, Sony's
announcement on April 24, that it projected falling sales and profits for
fiscal year 2003, shook investor confidence in corporate earnings,
bringing leading issues down. The market hit new post-bubble lows on
April 25, 26, and 28. Bank stocks continued to be weak on the back of the
severe earnings environment.
3
THE JAPAN EQUITY FUND, INC.
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PERFORMANCE/ATTRIBUTION ANALYSIS
Table 1. Performance in comparison with the benchmark (TOPIX), U.S. DOLLAR
("USD") BASE
--------------------------------------------------------------------------------
AS OF APRIL 30, 2003
%
-------
Japan Equity Fund...................... -7.49
Benchmark (TOPIX)...................... -5.15
-------
Difference............................. -2.34
Table 2. Attribution Analysis Summary, JAPANESE YEN ("JPY") BASE
--------------------------------------------------------------------------------
AS OF APRIL 30, 2003
%
-------
Japan Equity Fund...................... -9.85
Benchmark (TOPIX)...................... -7.62
-------
Difference............................. -2.23
ATTRIBUTION BREAKDOWN
---------------------------------------
Sector Selection....................... 0.29
Stock Selection........................ -2.58
Others................................. 0.06
-------
Total.................................. -2.23
Table 3. Attribution Analysis Breakdown, JPY base (November 2002 - April
2003)
--------------------------------------------------------------------------------
PORTFOLIO MARKET SECTOR STOCK
WEIGHT WEIGHT SELECTION SELECTION
AVERAGE AVERAGE DERIVE EFFECT EFFECT
(%) (%) WEIGHTING (%) (%)
------ ------ -------- -------- --------
Technology............................. 18.07 15.67 Over -0.09 -0.61
Automobile............................. 10.54 11.65 Under -0.02 -0.19
Machinery.............................. 6.06 3.31 Over 0.16 0.34
Pharmaceutical......................... 5.00 5.23 Under 0.03 -0.03
Personal Consumption................... 10.03 10.20 Under -0.01 -0.70
Service/Media.......................... 4.08 4.04 Over 0.04 0.02
Construction/Property.................. 3.93 3.03 Over -0.06 -0.26
Metal/Glass............................ 4.96 4.54 Over 0.08 -0.60
Chemical/Textile....................... 8.83 7.61 Over -0.01 0.27
Wholesale/Transportation............... 9.10 8.48 Over -0.02 0.33
Finance................................ 7.91 12.44 Under 0.60 -1.00
Telecom................................ 8.03 8.15 Under -0.05 -0.18
Public Utility......................... 3.45 5.66 Under -0.36 -0.01
Total.................................. 100.00 100.00 -- 0.29 -2.58
4
THE JAPAN EQUITY FUND, INC.
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PERFORMANCE SUMMARY
As shown in Table 1, the net asset value ("NAV") of the Fund decreased by
-7.49% in USD terms during the six months from November 1, 2002 to April 30,
2003. Over the same period, the benchmark TOPIX lost -5.15 in USD terms.
Our attribution analysis in JPY base (Table 2) indicates that the
underperformance as much as -2.23% (-9.85% vs. -7.62%) during the period can be
attributed to the negative effects from stock selection (-2.58%). On the other
hand, sector selection showed a positive contribution (0.29%).
STOCK SELECTION
The attribution analysis indicates that stocks held in Finance (-1.00%) and
Personal Consumption (-0.70%) highly contributed to the negative performance.
SECTOR SELECTION
The attribution analysis also shows that our underweight stance in Finance
(7.91% vs. 12.44%)(0.60%) and overweight in Machinery (6.06% vs. 3.31%)(0.16%)
had a positive effect on the performance.
BACKGROUND OF NEGATIVE STOCK SELECTION EFFECT
We would contend that the negative contribution result from stock selection
was brought about by a strong outperformance of small-sized and lower
quality/illiquid stocks, with higher credit-risks that are basically excluded
from our investment universe. Stock prices have recently moved due to
supply/demand reasons, ignoring fundamentals and valuations.
We believe that the extension of TOPIX passive management by public pensions
and the partial return of the pension management to the government (DAIKO HENJO)
are having a relatively negative impact on large caps and a positive one on
under-held small caps--especially illiquid ones.
We sense that not just the "daiko henjo" effect but also speculation has
returned to a low quality small-cap universe. The main reason for this in our
view is that at the end of last year the second-tier types of stocks were
trading at low valuations, which is why they are currently rebounding so
strongly.
We suspect that the outperformance of the "weakest" would stop once they are
again valued in terms of price-earnings-ratio (PER), in line with the broader
market. They have lower liquidity, return-on-equity (RoE), margins, and balance
sheet quality than the average of the market and thus should rationally trade at
a PER discount, in our perspective. While it is hard to predict the exact timing
of the reversing of the current trend, we believe that fundamentals and
valuations should reassert themselves sooner or later.
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THE JAPAN EQUITY FUND, INC.
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OUTLOOK & STRATEGY
The Japanese equity market failed to participate in the global equity market
rally driven by the quick resolution to the war in Iraq and hope for a U.S.
economic recovery. Together with SARS-affected markets such as Hong Kong and
Taiwan, the Japanese market competed for the bottom in April performance.
Underperformance of the Japanese stock market is essentially attributed to the
following two factors:
(1) Extra selling pressure associated with 'DAIKO HENJO'. Corporate
liquidation of Japanese shares for daiko henjo is estimated to have
reached Y1-2 trillion so far this year, which created selling pressure
on institutional favorites including international blue chips such as
Toyota and Takeda Chemical. Speculators took advantage of this situation
by shorting these stocks in the last couple of months.
(2) Continued weakness of bank shares. Bank financing of Y2 trillion
including Y1 convertible preferred shares issued by Mizuho in March
continued to pull down common share prices, as buyers of these Mizuho
preferred shares, corporations, might have been selling their holdings
of common shares. The conversion ratio of Mizuho preferred shares should
be decided by late June. The lower Mizuho share price declines, the more
shares convertible preferred buyers can get. The outcome of the
Financial Service Agency ("FSA") special inspection was announced in
late April, which required additional credit costs of Y1.3 trillion.
Bank shares continued to plummet in April, reflecting more technical
factors rather than fundamentals such as a banking crisis.
Mid and small-cap stocks performed well, while large-cap stocks sank to new
lows due to the fear of DAIKO HENJO liquidation. A reverse two-tier market
persisted so far this year. General market sentiment has not been so bad as the
Nikkei 225 indicated. In April, the TSE Second Section and OTC indices recorded
new highs this year, while the Nikkei 225 sank to a new low. We are seeing the
market of stocks rather than the actual stock market.
We think the market represented by the Nikkei 225, TOPIX and Morgan Stanley
Capital International (MSCI) Japan Index with strong large-cap influence will
hit a bottom in the current quarter, although we do not have strong conviction
that the market hit the historic bottom (not a bottom) in April, due to lack of
capitulation with huge volume. There are a few reasons to be optimistic:
(1) Geopolitical risks have been reduced by the relatively quick resolution
of the war in Iraq. Although the North Korean problem remains
unresolved, the issue has less significance in the global economic
outlook with no fear of energy supply. SARS is having an impact on
regional economies. Although reaction and countermeasures taken by the
governments, businesses and people might have further negative impact on
regional economies in the short term, the epidemic will eventually be
contained.
(2) DAIKO HENJO liquidation with further potential selling of Y2-3 trillion
will peak in the current quarter. Stock market support measures such as
deregulation on corporate share buy-backs and easy use of the share
purchase organization are now under discussion. Corporations are now
announcing share buy-back plans, which will be implemented after
shareholders' meetings in June. Corporations have abundant cash flow.
(3) With exception of Sony, corporate earnings announcements and guidance by
major companies were in line or slightly better than expected, although
bottom line earnings were affected by huge losses from
6
THE JAPAN EQUITY FUND, INC.
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mark-to-market evaluation of share holdings. Unless we see a double
dip in the global economy led by the U.S., positive earnings growth
for the year ending March 2004 will be achieved. However, the driver of
profit growth will continue to be cost cutting and restructuring rather
than top line growth.
Due to fear of pension fund liquidation, large-cap stocks seem to be
oversold and we have started to see more values in large-cap stocks rather than
mid and small-cap stocks. Thus, we intend to maintain our overweight in
large-cap value stocks with high beta. By sectors, we maintain a rather neutral
stance at this point with modest underweight in defensive sectors such as
pharmaceuticals and utilities and substantial underweight in bank stocks.
FUND PERFORMANCE
As of April 30, 2003, the Fund's net assets were approximately
$45.5 million, which represents a NAV of $4.20 per share. The return on the
Fund's net assets was -7.49% since the Fund's fiscal year ended on October 31,
2002. Over the same period, the benchmark TOPIX return was -5.15%, as measured
in U.S. Dollars.
The change in NAV 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 place 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 fully invested. Specifically, the goal is to hold no
more than 5% in cash. On April 30, 2003, the proportion of the Fund's net assets
invested in Japanese equities listed on the First Section of the TSE was 98.46%,
while short-term investments and other net assets represented 1.54%.
The invested position of the Fund's assets consisted of common stocks of
companies operating in 27 different industries. The Fund had relatively large
weightings in Electric Appliances (17.81% of net assets), Transportation
Equipment (10.39%) and Communication (7.93%).
During the six months ended April 30, 2003, the Fund's market price on the
New York Stock Exchange ("NYSE") ranged from a low of $4.02 per share on
March 11, 2003 to a high of $4.98 on December 2, 2002. The Fund's NYSE market
price closed at $4.45 per share on April 30, 2003.
The NYSE trading price in relation to the Fund's NAV per share, as measured
by the weekly closing prices during the six months ended April 30, 2003 ranged
from a discount of 6.71% on December 19, 2002 to a premium of 4.81% on
April 17, 2003, and ended the period at a premium of 5.95%.
The Fund has not invested in derivative securities. Although foreign
currency hedging is permitted by the Fund's prospectus, the Fund has not engaged
in any foreign currency hedging.
7
THE JAPAN EQUITY FUND, INC.
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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) of DSBI, Mr. Ogawa possesses 28
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 14
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.
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
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THE JAPAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS
APRIL 30, 2003 (UNAUDITED)
--------------------------------------------------------------------------------
JAPANESE COMMON STOCKS--98.46%
--------------------------------------------------------------------------------
SHARES VALUE
--------- -----------
BANKS--2.78%
252 Mitsubishi Tokyo Financial Group
Inc. .................................. $ 852,021
145,000 The Sumitomo Trust & Banking Co.,
Ltd. .................................. 410,160
-----------
1,262,181
-----------
CHEMICALS--5.87%
190,000 Asahi Kasei Corp. ...................... 516,780
28,000 Kao Corp. .............................. 509,666
120,000 Mitsui Chemicals Inc. .................. 487,070
20,000 Nifco Inc. ............................. 215,583
31,500 Shin-Etsu Chemical Co., Ltd. ........... 941,125
-----------
2,670,224
-----------
COMMERCE--0.99%
60,000 Canon Sales Co., Inc. .................. 448,406
-----------
COMMUNICATION--7.93%
130 KDDI Corp. ............................. 393,841
400 NTT Corp. .............................. 1,399,280
880 NTT DoCoMo, Inc. ....................... 1,811,700
-----------
3,604,821
-----------
CONSTRUCTION--1.65%
65,000 Daiwa House Industry Co., Ltd. ......... 391,665
100,000 Kajima Corp. ........................... 212,570
40,000 Nippon Comsys Corp. .................... 144,280
-----------
748,515
-----------
ELECTRIC APPLIANCES--17.81%
19,000 Canon Inc. ............................. 766,424
125,000 Casio Computer Co., Ltd. ............... 758,432
22,500 Fanuc Ltd. ............................. 918,905
SHARES VALUE
--------- -----------
20,700 Kyocera Corp. .......................... $ 1,008,235
136,000 Matsushita Electric Industrial Co.,
Ltd. .................................. 1,081,262
180,000 Matsushita Electric Works, Ltd. ........ 941,501
3,700 Rohm Co., Ltd. ......................... 380,559
90,000 Sharp Corp. ............................ 941,501
22,100 Sony Corp. ............................. 536,363
247,000 Toshiba Corp. .......................... 657,344
15,000 Yokogawa Electric Corp. ................ 106,704
-----------
8,097,230
-----------
ELECTRIC POWER & GAS--3.39%
30,000 Kansai Electric Power Co., Inc. ........ 500,879
320,000 Tokyo Gas Co., Inc. .................... 1,039,083
-----------
1,539,962
-----------
FOODS--1.11%
16,000 Ajinomoto Co., Inc. .................... 162,022
23,300 Katokichi Co., Ltd. .................... 341,632
-----------
503,654
-----------
GLASS & CERAMIC PRODUCTS--1.54%
132,000 Asahi Glass Co., Ltd. .................. 701,481
-----------
INSURANCE--0.43%
30 Millea Holdings Inc. ................... 194,326
-----------
IRON & STEEL--2.09%
520,000 Nippon Steel Corp. ..................... 578,793
108,700 Tokyo Steel Manufacturing Co., Ltd. .... 371,157
-----------
949,950
-----------
LAND TRANSPORTATION--3.49%
200 East Japan Railway Co. ................. 903,841
9
THE JAPAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2003 (UNAUDITED)
--------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONTINUED)
--------------------------------------------------------------------------------
SHARES VALUE
--------- -----------
LAND TRANSPORTATION (CONCLUDED)
61,000 Yamato Transport Co., Ltd. ............. $ 681,011
-----------
1,584,852
-----------
MACHINERY--5.96%
215,000 Komatsu Ltd. ........................... 818,688
270,000 Mitsubishi Heavy Industries, Ltd. ...... 598,795
310,000 NSK Ltd. ............................... 825,006
50,700 THK Co., Ltd. .......................... 466,734
-----------
2,709,223
-----------
MARINE TRANSPORTATION--0.87%
152,000 Mitsui O.S.K. Lines, Ltd. .............. 396,887
-----------
METAL PRODUCTS--1.24%
53,000 Tostem Inax Holding Corp. .............. 564,198
-----------
OTHER FINANCING BUSINESS--1.98%
71,400 Hitachi Capital Corp. .................. 717,645
4,000 Orix Corp. ............................. 182,442
-----------
900,087
-----------
OTHER PRODUCTS--2.87%
206,000 Toppan Printing Co., Ltd. .............. 1,303,339
-----------
PHARMACEUTICAL--4.92%
34,400 Sankyo Co., Ltd. ....................... 497,474
35,000 Takeda Chemical Industries, Ltd. ....... 1,280,023
70,000 Tanabe Seiyaku Co., Ltd. ............... 459,285
-----------
2,236,782
-----------
PULP & PAPER--0.41%
50,000 Oji Paper Co., Ltd. .................... 188,719
-----------
REAL ESTATE--2.23%
189,000 Mitsui Fudosan Co., Ltd. ............... 1,015,466
-----------
SHARES VALUE
--------- -----------
RETAIL TRADE--5.90%
42,000 Ito-Yokado Co. Ltd. .................... $ 985,940
108,000 Marui Co., Ltd. ........................ 897,515
5,000 Nitori Co., Ltd. ....................... 217,173
69,000 Uny Co., Ltd. .......................... 582,651
-----------
2,683,279
-----------
SECURITIES--2.56%
118,000 Nomura Holdings Inc. ................... 1,166,273
-----------
SERVICES--4.04%
2,760 Nippon Television Network Corp. ........ 282,260
1,600 OBIC Co., Ltd. ......................... 243,702
9,000 Secom Co., Ltd. ........................ 209,390
158 The Goodwill Group, Inc. ............... 572,550
45,000 Tokyo Broadcasting System, Inc. ........ 526,864
-----------
1,834,766
-----------
TEXTILE & APPAREL--2.40%
95,000 Kuraray Co., Ltd. ...................... 539,041
77,000 Onward Kashiyma Co., Ltd. .............. 552,255
-----------
1,091,296
-----------
TRANSPORTATION EQUIPMENT--10.39%
55,000 Denso Corp. ............................ 782,492
20,000 Honda Motor Co., Ltd. .................. 661,143
25,600 Shimano Inc. ........................... 405,564
73,800 Toyota Industries Corp. ................ 1,090,108
79,000 Toyota Motor Corp. ..................... 1,785,087
-----------
4,724,394
-----------
WAREHOUSING--1.25%
100,000 Mitsubishi Logistics Corp. ............. 568,248
-----------
10
THE JAPAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONCLUDED)
APRIL 30, 2003 (UNAUDITED)
--------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONCLUDED)
--------------------------------------------------------------------------------
SHARES VALUE
--------- -----------
WHOLESALE TRADE--2.36%
15,000 Autobacs Seven Co., Ltd. ............... $ 298,142
98,000 Mitsubishi Corp. ....................... 581,488
28,600 Ryoyo Electro Corp. .................... 194,831
-----------
1,074,461
-----------
Total Common Stocks
(Cost--$58,589,589) ............................. 44,763,020
-----------
----------------------------------------------------------------
SHORT-TERM INVESTMENTS--0.32%
----------------------------------------------------------------
PRINCIPAL
AMOUNT
(000)
---------
U.S. DOLLAR TIME DEPOSIT--0.32%
$148 Bank of New York Time
Deposit, 0.10%,
due 5/1/03
(Cost--$148,017) ...................... 148,017
-----------
Total Investments--98.78%
(Cost--$58,737,606) ............................. 44,911,037
-----------
Other assets less liabilities--1.22% .............. 553,870
-----------
NET ASSETS (Applicable to 10,815,688 shares of
capital stock outstanding; equivalent to $4.20
per share) 100.00% .............................. $45,464,907
===========
-------------------------------------------
TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
APRIL 30, 2003
-------------------------------------------
PERCENT OF
INDUSTRY NET ASSETS
-------- ----------
Electric Appliances ............... 17.81%
Transportation Equipment .......... 10.39
Communication ..................... 7.93
Machinery ......................... 5.96
Retail Trade ...................... 5.90
Chemicals ......................... 5.87
Pharmaceutical .................... 4.92
Services .......................... 4.04
Land Transportation ............... 3.49
Electric Power & Gas .............. 3.39
-------------------------------------------
TEN LARGEST COMMON STOCK
POSITIONS HELD
APRIL 30, 2003
-------------------------------------------
PERCENT OF
ISSUE NET ASSETS
----- ----------
NTT DoCoMo, Inc. .................. 3.98%
Toyota Motor Corp. ................ 3.93
NTT Corp. ......................... 3.08
Toppan Printing Co., Ltd. ......... 2.87
Takeda Chemical Industries,
Ltd. ............................. 2.82
Nomura Holdings Inc. .............. 2.56
Toyota Industries Corp. ........... 2.40
Matsushita Electric Industrial Co.,
Ltd. ............................. 2.38
Tokyo Gas Co., Inc. ............... 2.29
Mitsui Fudosan Co., Ltd. .......... 2.23
See accompanying notes to financial statements.
11
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2003 (UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
Investment in securities, at value (cost--$58,737,606).... $ 44,911,037
Cash denominated in foreign currency (cost--$542,024)..... 545,606
Receivable for securities sold............................ 151,579
Interest and dividends receivable......................... 267,061
Prepaid expenses.......................................... 18,639
------------
Total assets............................................ 45,893,922
------------
LIABILITIES
Payable for securities purchased.......................... 314,143
Accrued expenses and other liabilities.................... 114,872
------------
Total liabilities....................................... 429,015
------------
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.................... 107,282,946
Accumulated net investment loss........................... (103,052)
Accumulated net realized loss on investments.............. (48,002,267)
Net unrealized depreciation on investments and other
assets and liabilities denominated in foreign currency... (13,820,877)
------------
Net assets applicable to shares outstanding............. $ 45,464,907
============
NET ASSET VALUE PER SHARE........................... $ 4.20
============
See accompanying notes to financial statements.
12
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2003 (UNAUDITED)
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (net of withholding taxes of $33,480)........... $ 293,504
Interest.................................................. 60
------------
Total investment income................................. 293,564
------------
EXPENSES:
Investment management fee................................. 116,150
Administration fee........................................ 60,000
Legal fees and expenses................................... 44,753
Custodian fees and expenses............................... 39,209
Audit and tax services.................................... 35,208
Reports and notices to shareholders....................... 26,281
Insurance expense......................................... 18,495
Directors' fees and expenses.............................. 14,876
Transfer agency fee and expenses.......................... 7,935
Other..................................................... 33,709
------------
Total expenses.......................................... 396,616
------------
NET INVESTMENT LOSS......................................... (103,052)
------------
REALIZED AND UNREALIZED GAINS FROM INVESTMENT ACTIVITIES AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized losses on investments........................ (5,114,179)
Net realized foreign currency transaction gains........... 25,120
Net change in unrealized appreciation (depreciation) on
investments in equity securities......................... 1,547,539
Net change in unrealized appreciation (depreciation) on
assets and liabilities denominated in foreign currency... 3,208
------------
Net realized and unrealized losses from investment
activities and foreign currency
transactions............................................... (3,538,312)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (3,641,364)
============
See accompanying notes to financial statements.
13
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
FOR THE SIX
MONTHS
ENDED FOR THE YEAR
APRIL 30, 2003 ENDED
(UNAUDITED) OCTOBER 31, 2002
-------------- ----------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment loss....................................... $ (103,052) $ (421,926)
Net realized gain (loss) on:
Investments............................................. (5,114,179) (13,433,292)
Foreign currency transactions........................... 25,120 (81,954)
Net change in unrealized appreciation on:
Investments in equity securities........................ 1,547,539 2,524,336
Translation of short-term investments and other assets
and liabilities denominated in foreign currency........ 3,208 7,749
------------- ---------------
Net decrease in net assets resulting from operations...... (3,641,364) (11,405,087)
------------- ---------------
NET ASSETS:
Beginning of period....................................... 49,106,271 60,511,358
------------- ---------------
End of period............................................. $ 45,464,907 $ 49,106,271
============= ===============
See accompanying notes to financial statements.
14
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 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
15
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 tax purposes 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 $9,422 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, 2003. 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 six months ended April 30,
2003, there were no out-of-pocket expenses incurred by the Manager or the
Adviser.
At April 30, 2003, the Fund owed $18,243 to the Manager and the Manager
informed the Fund that it owed the Adviser $10,946.
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. In addition, as
permitted by the Administration Agreement, the Fund reimburses the Administrator
for its out-of-pocket expenses related to the Fund. For the six months ended
April 30, 2003, there were no out-of-pocket expenses incurred by the
Administrator.
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
16
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
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, 2003, DSTC and the
Sub-Custodian earned $13,584 and $25,625, respectively, as compensation for
custodial service to the Fund.
At April 30, 2003, the Fund owed $10,000 and $2,016 to DSTC for
administration and custodian fees, respectively, excluding fees and expenses of
$2,747 payable to the Sub-Custodian.
During the six months ended April 30, 2003, the Fund paid or accrued $26,281
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,
2003 was substantially the same as the cost of securities for financial
statement purposes. At April 30, 2003, the net unrealized depreciation of
investments for federal income tax purposes, excluding short-term securities, of
$13,826,569 was composed of gross appreciation of $739,523 for those investments
having an excess of value over cost, and gross depreciation of $14,566,092 for
those investments having an excess of cost over value. For the six months ended
April 30, 2003, total aggregate purchases and sales of portfolio securities,
excluding short-term securities, were $17,627,374 and $17,305,156, respectively.
At October 31, 2002, the Fund had a remaining capital loss carryover of
$42,874,512, of which $6,264,639 expires in the year 2005, $16,909,841 expires
in the year 2006, $6,225,150 expires in the year 2009 and $13,474,882 expires in
the year 2010 available to offset future net capital gains.
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, 2003, Daiwa
Securities America Inc. an affiliate of the Manager, Adviser and DSTC owned
14,532 shares.
17
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,
2003 ----------------------------------------------------
(UNAUDITED) 2002 2001 2000 1999 1998
------------ -------- -------- -------- -------- --------
Net asset value, beginning of period........ $ 4.54 $ 5.59 $ 8.35 $ 9.39 $ 6.08 $ 6.99
------- ------- ------- ------- ------- -------
Net investment loss......................... (0.01) (0.04) (0.04) (0.04) (0.01) (0.01)
Net realized and unrealized gains (losses)
on investments and foreign
currency transactions...................... (0.33) (1.01) (2.72) (1.00) 3.32 (0.90)
------- ------- ------- ------- ------- -------
Net increase (decrease) in net asset value
resulting from operations.................. (0.34) (1.05) (2.76) (1.04) 3.31 (0.91)
------- ------- ------- ------- ------- -------
Net asset value, end of period.............. $ 4.20 $ 4.54 $ 5.59 $ 8.35 $ 9.39 $ 6.08
======= ======= ======= ======= ======= =======
Per share market value, end of period....... $ 4.450 $ 4.150 $ 4.990 $ 7.063 $ 9.813 $ 6.875
======= ======= ======= ======= ======= =======
Total investment return:
Based on market price at beginning and end
of period................................ 7.23 % (16.83)% (29.35)% (28.02)% 42.73 % (6.78)%
Based on net asset value at beginning and
end of period............................ (7.49)% (18.78)% (33.05)% (11.08)% 54.44 % (13.02)%
Ratios and supplemental data:
Net assets, end of period
(in millions)............................ $ 45.5 $ 49.1 $ 60.5 $ 90.3 $101.6 $ 65.8
Ratios to average net assets of:
Expenses................................ 1.64 %* 1.44 % 1.12 % 0.96 % 1.08 % 1.19 %
Net investment loss..................... (0.42)%* (0.74)% (0.51)% (0.48)% (0.11)% (0.13)%
Portfolio turnover........................ 36.26 % 76.19 % 63.39 % 61.91 % 58.70 % 52.07 %
---------------------------------------------------------------------------
* Annualized.
18
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
RESULTS OF ANNUAL MEETING OF STOCKHOLDERS (UNAUDITED)
--------------------------------------------------------------------------------
On June 2, 2003, 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 I 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 2006.
NUMBER OF SHARES/VOTES
----------------------
PROXY AUTHORITY
CLASS I VOTED FOR WITHHELD
--------------------- --------- ---------------
Hiroshi Kimura 7,969,863 340,074
Martin J. Gruber 8,036,647 273,291
In addition to the two Directors re-elected at the Meeting, Austin C.
Dowling, David G. Harmer and Oren G. Shaffer were the other members of the Board
who continued to serve as Directors of the Fund.
----------------------------------------------------------------------
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.
19
----------------------------------------
BOARD OF DIRECTORS
Hiroshi Kimura, CHAIRMAN
Austin C. Dowling
Martin J. Gruber
David G. Harmer
Oren G. Shaffer
--------------------------------------------
OFFICERS
Shunsuke Ichijo
PRESIDENT
John J. O'Keefe
VICE PRESIDENT AND TREASURER
Judy Runrun T. Kushner
SECRETARY
Laurence E. Cranch
ASSISTANT SECRETARY
--------------------------------------------
ADDRESS OF THE FUND
c/o Daiwa Securities Trust Company
One Evertrust Plaza, 9th Floor
Jersey City, NJ 07302-3051
--------------------------------------------
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 US 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 represen-tation 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, 2003
-------------------------
[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.