<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND TWO WORLD TRADE CENTER,
LETTER TO THE SHAREHOLDERS NOVEMBER 30, 1998 NEW YORK, NEW YORK 10048
DEAR SHAREHOLDER:
For the period under review, Japan experienced some positive political and
fiscal developments that the Fund's new sub-advisor, Morgan Stanley Dean Witter
Investment Management Inc., believes could ultimately put the Japanese economy
back on the road to recovery. The portfolio manager continues to maintain an
investment strategy that favors the highest quality Japanese companies for your
Fund's portfolio.
PERFORMANCE REVIEW
During the six-month period ended November 30, 1998, Morgan Stanley Dean Witter
Japan Fund's Class B shares produced a total return of 7.20 percent. During the
same period, the Morgan Stanley Capital International (MSCI) Japan Index and the
Lipper Japanese Funds Average returned 4.90 percent and 3.75 percent,
respectively. The Fund's Class A, C and D shares returned 7.59 percent, 7.04
percent and 8.04 percent, respectively. The performance of the Fund's four share
classes varies because of differing expenses.
ECONOMIC OVERVIEW
In the political arena, the Liberal Democratic Party (LDP) formed a coalition
with the Japan Liberal Party in November. The leader of the Liberal Party, Mr.
Ozawa, is a champion of radical reform, including smaller government and tax
cuts. The Fund's sub-advisor believes that if allowed to implement the dramatic
changes in Japan he has been actively promoting, Mr. Ozawa could prove a
meaningful catalyst for major reform.
Investors must be mindful, however, that it is yet a long way to the finish line
for a major overhaul of Japan's highly bureaucratic and established system. In
addition, while Mr. Ozawa is acknowledged to be extremely capable, he has
numerous enemies among the LDP who may stall his efforts. What's more, the 24
trillion yen stimulus package announced on November 16 did not contain any
unexpected new programs such as large fundamental reductions in personal and
corporate taxes, tax-deductible mortgage payments or termination of the
consumption tax.
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
LETTER TO THE SHAREHOLDERS NOVEMBER 30, 1998, CONTINUED
Prudent caution aside, the Japanese bank rescue package announced in September,
coupled with the optimism for a stronger, more powerful leadership surrounding
the LDP-Liberal Party alliance, lead us to expect some reasonable upside
potential for the Japanese equity market going into 1999. Volume has been thin,
domestic institutional cross-holding selling appears to have peaked in September
(until the March 1999 fiscal year end) and foreign investors are increasing
weightings for Japan from a very underweighted position.
PORTFOLIO REVIEW
As a result of lingering uncertainties, the Fund's portfolio continues to be
concentrated on companies that have high-quality balance sheets and are
potential beneficiaries of both a domestic economic upturn and the international
economic exposure they have. Sectors such as electronics, machinery and
pharmaceuticals meet the need for domestic and international economic
sensitivity criteria, while the Fund's holdings in select housing, chemical,
retail and nonbank financials meet the criteria for quality domestic
economically sensitive issues. The Fund has avoided construction, brokerage and
utilities issues because of their lack of exposure and unattractive relative
valuations. Key holdings as of November 30, 1998, included such household names
as Nintendo, Sony, Canon and Fuji Film.
LOOKING AHEAD
In conclusion, the Fund's sub-advisor believes that the Japanese stock market
may likely trend higher. This said, it is important to note that it does not
believe that a dramatic structural change has yet occurred in Japan, nor that
its policy makers have found the right prescription for meaningfully reviving
the economy. Thus, the Fund's portfolio manager maintains that only the highest
quality companies currently merit investment until more supply-side measures,
including better efficiency of public spending, has firmly been adopted by the
Japanese government.
In this current market environment, we believe that the Fund's portfolio is well
positioned to participate in any rallies over the next several months as the
Japanese authorities continue to seriously address the problems of the nation's
stalled economy.
NEW SUB-ADVISOR APPROVED
During the period under review, the Fund's Board of Directors approved the
selection of Morgan Stanley Dean Witter Investment Management Inc. (at that time
Morgan Stanley Asset Management
2
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
LETTER TO THE SHAREHOLDERS NOVEMBER 30, 1998, CONTINUED
Inc.), an affiliate of Morgan Stanley Dean Witter Advisors Inc., to act as
sub-advisor to the Fund. The new sub-advisory agreement was approved by
shareholders at a special meeting held on August 18, 1998, and took effect on
October 1, 1998. The results of the vote were as follows:
<TABLE>
<S> <C>
For............................................... 8,541,334
Against........................................... 337,496
Abstain........................................... 1,147,359
</TABLE>
Morgan Stanley Dean Witter Investment Management, like Morgan Stanley Dean
Witter Advisors, is a wholly owned subsidiary of Morgan Stanley Dean Witter &
Co., a preeminent global financial services firm that maintains leading market
positions in each of three primary businesses -- securities, asset management
and credit services. The firm serves in various portfolio management and similar
capacities to investment companies and pension plans as well as other
institutional and individual investors. Morgan Stanley Dean Witter Investment
Management replaces Morgan Grenfell Investment Services Limited as the Fund's
sub-advisor and will provide the Fund with investment advice and portfolio
management relating to the Fund's investments, subject to the overall
supervision of Morgan Stanley Dean Witter Advisors, the Fund's Investment
Manager.
We appreciate your continued support of Morgan Stanley Dean Witter Japan Fund
and look forward to serving your investment needs.
Very truly yours,
[SIGNATURE]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
3
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF
SHARES VALUE
- ----------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (95.7%)
BUILDING PRODUCTS (0.7%)
200,000 Sanwa Shutter Corp...................... $ 911,084
------------
CONSUMER ELECTRONICS/APPLIANCES (4.8%)
49,000 Aiwa Co., Ltd........................... 1,424,442
69,500 Sony Corp............................... 5,084,815
------------
6,509,257
------------
CONSUMER SPECIALTIES (1.4%)
250,000 Casio Computers Co., Ltd................ 1,932,603
------------
DIVERSIFIED ELECTRONIC PRODUCTS (7.9%)
53,000 Kyocera Corp............................ 2,500,447
272,000 Matsushita Electric Industrial Co.,
Ltd................................... 4,373,203
700,000 Toshiba Corp............................ 3,922,046
------------
10,795,696
------------
E.D.P. PERIPHERALS (2.6%)
180,000 Mitsumi Electric Co., Ltd............... 3,580,999
------------
ELECTRICAL PRODUCTS (2.5%)
497,000 Furukawa Electric Co.................... 1,674,827
167,000 Sumitomo Electric Industries............ 1,817,134
------------
3,491,961
------------
ELECTRONIC COMPONENTS (5.0%)
78,000 Murata Manufacturing Co., Ltd........... 3,052,862
45,000 TDK Corp................................ 3,730,816
------------
6,783,678
------------
ELECTRONIC DATA PROCESSING (5.8%)
350,000 Fujitsu, Ltd............................ 4,041,413
650,000 Hitachi Ltd............................. 3,911,084
------------
7,952,497
------------
ELECTRONIC DISTRIBUTORS (0.5%)
40,000 Ryosan Co., Ltd......................... 664,231
------------
ELECTRONIC PRODUCTION EQUIPMENT (3.6%)
500,000 NEC Corp................................ 4,254,974
19,000 Tokyo Electron Ltd...................... 709,704
------------
4,964,678
------------
ENGINEERING & CONSTRUCTION (0.7%)
73,000 Kinden Corp............................. 969,184
------------
FINANCIAL SERVICES (1.4%)
100,000 Hitachi Credit Corp..................... 1,863,581
------------
FOOD CHAINS (1.5%)
41,900 Family Mart Co., Ltd.................... 2,031,206
------------
<CAPTION>
NUMBER
OF
SHARES VALUE
- ----------------------------------------------------------------
<C> <S> <C>
HOME BUILDING (1.8%)
250,000 Sekisui Chemical Co..................... $ 1,522,533
100,000 Sekisui House Ltd....................... 972,797
------------
2,495,330
------------
INDUSTRIAL MACHINERY/
COMPONENTS (7.4%)
130,000 Amada Co., Ltd.......................... 649,208
89,000 Asahi Diamond Industries Co., Ltd....... 399,651
300,000 Daifuku Co., Ltd........................ 1,534,714
200,000 Daikin Industries, Ltd.................. 1,753,959
110,000 Fuji Machine Manufacturing Co., Ltd..... 3,465,692
210,000 Minebea Co., Ltd........................ 2,256,029
50,000 Tsubakimoto Chain Co.................... 113,276
------------
10,172,529
------------
INDUSTRIAL SPECIALTIES (1.0%)
200,000 Fujitec Co., Ltd........................ 1,429,151
------------
MACHINERY - DIVERSIFIED (1.6%)
600,000 Mitsubishi Heavy Industries Ltd......... 2,246,041
------------
MOTOR VEHICLES (4.6%)
39,000 Honda Motor Co.......................... 1,399,756
850,000 Nissan Motor Co., Ltd................... 2,622,818
90,000 Toyota Motor Corp....................... 2,280,146
------------
6,302,720
------------
OFFICE EQUIPMENT/SUPPLIES (7.3%)
244,000 Canon, Inc.............................. 5,389,200
60,000 Lintec Corp............................. 472,594
427,000 Ricoh Co., Ltd.......................... 4,108,770
------------
9,970,564
------------
OTHER PHARMACEUTICALS (6.8%)
50,000 Ono Pharmaceutical Co................... 1,388,551
180,000 Sankyo Co., Ltd......................... 4,092,570
130,000 Yamanouchi Pharmaceutical Co., Ltd...... 3,800,244
------------
9,281,365
------------
OTHER TELECOMMUNICATIONS (5.4%)
645 Nippon Telegraph & Telephone Corp....... 4,818,514
580 NTT Data Corp........................... 2,533,821
------------
7,352,335
------------
PHOTOGRAPHIC PRODUCTS (3.1%)
114,000 Fuji Photo Film Co...................... 4,258,222
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1998 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
NUMBER
OF
SHARES VALUE
- ----------------------------------------------------------------
<C> <S> <C>
POLLUTION CONTROL EQUIPMENT (0.8%)
80,000 Kurita Water Industries Ltd............. $ 1,104,344
------------
PRECISION INSTRUMENTS (1.2%)
15,000 Keyence Corp............................ 1,693,057
------------
PRINTING FORMS (0.8%)
80,000 Dai Nippon Printing Co., Ltd............ 1,159,562
------------
PROPERTY - CASUALTY INSURANCE (0.8%)
188,000 Sumitomo Marine & Fire Insurance Co.,
Ltd................................... 1,122,046
------------
REAL ESTATE (1.4%)
202,000 Mitsubishi Estate Co., Ltd.............. 1,928,965
------------
RECREATIONAL PRODUCTS/TOYS (5.2%)
59,000 Nintendo Co., Ltd....................... 5,466,423
150,000 Yamaha Corp............................. 1,657,734
------------
7,124,157
------------
SEMICONDUCTORS (3.6%)
58,000 Rohm Co., Ltd........................... 4,898,092
------------
SPECIALTY CHEMICALS (4.5%)
560,000 Daicel Chemical Industries, Ltd......... 1,386,927
300,000 Kaneka Corp............................. 2,148,599
700,000 Mitsubishi Chemical Corp................ 1,307,349
120,000 NIFCO Inc............................... 959,805
60,000 Shin-Etsu Polymer Co., Ltd.............. 302,071
------------
6,104,751
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
- ----------------------------------------------------------------
<C> <S> <C>
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $124,781,217) (A)........................................................ 95.7 % $ 131,093,886
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................ 4.3 5,873,699
------ -------------
NET ASSETS................................................................................ 100.0 % $ 136,967,585
------ -------------
------ -------------
</TABLE>
- ---------------------
(a) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $12,108,724 and the
aggregate gross unrealized depreciation is $5,796,055, resulting in net
unrealized appreciation of $6,312,669.
FORWARD FOREIGN CURRENCY CONTRACTS OPEN AT NOVEMBER 30, 1998:
<TABLE>
<CAPTION>
IN
CONTRACTS TO EXCHANGE DELIVERY UNREALIZED
DELIVER FOR DATE APPRECIATION
- --------------------------------------------------
<S> <C> <C> <C>
JPY 485,126,712 $3,943,158 12/01/98 $ 3,842
JPY
6,250,000,000 $53,755,117 01/21/99 2,594,858
-----------
Total unrealized appreciation........ $2,598,700
-----------
-----------
</TABLE>
CURRENCY ABBREVIATION:
JPY Japanese Yen.
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $124,781,217).............................................................. $131,093,886
Unrealized appreciation on open forward foreign currency contracts............................ 2,598,700
Foreign currency.............................................................................. 3,939,316
Receivable for:
Investments sold.......................................................................... 1,309,134
Shares of beneficial interest sold........................................................ 466,007
Dividends................................................................................. 260,500
Deferred organizational expenses.............................................................. 96,299
Prepaid expenses and other assets............................................................. 100,088
------------
TOTAL ASSETS............................................................................. 139,863,930
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased................................................. 789,892
Plan of distribution fee.................................................................. 110,190
Investment management fee................................................................. 107,234
Payable to bank............................................................................... 1,840,953
Accrued expenses and other payables........................................................... 48,076
------------
TOTAL LIABILITIES........................................................................ 2,896,345
------------
NET ASSETS............................................................................... $136,967,585
------------
------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $212,494,904
Net unrealized appreciation................................................................... 8,918,842
Net investment loss........................................................................... (680,452)
Accumulated net realized loss................................................................. (83,765,709)
------------
NET ASSETS............................................................................... $136,967,585
------------
------------
CLASS A SHARES:
Net Assets.................................................................................... $889,973
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 123,145
NET ASSET VALUE PER SHARE................................................................ $7.23
------------
------------
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE)........................................ $7.63
------------
------------
CLASS B SHARES:
Net Assets.................................................................................... $130,890,949
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 18,315,304
NET ASSET VALUE PER SHARE................................................................ $7.15
------------
------------
CLASS C SHARES:
Net Assets.................................................................................... $3,676,134
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 514,040
NET ASSET VALUE PER SHARE................................................................ $7.15
------------
------------
CLASS D SHARES:
Net Assets.................................................................................... $1,510,529
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 208,142
NET ASSET VALUE PER SHARE................................................................ $7.26
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<S> <C>
NET INVESTMENT LOSS:
INCOME
Dividends (net of $26,749 foreign withholding tax)............................................. $ 151,577
Interest....................................................................................... 117,667
-----------
TOTAL INCOME.............................................................................. 269,244
-----------
EXPENSES
Investment management fee...................................................................... 591,925
Plan of distribution fee (Class A shares)...................................................... 911
Plan of distribution fee (Class B shares)...................................................... 581,812
Plan of distribution fee (Class C shares)...................................................... 10,747
Transfer agent fees and expenses............................................................... 220,242
Registration fees.............................................................................. 44,728
Custodian fees................................................................................. 42,470
Professional fees.............................................................................. 24,127
Organizational expenses........................................................................ 20,074
Shareholder reports and notices................................................................ 8,885
Trustees' fees and expenses.................................................................... 5,990
Other.......................................................................................... 9,573
-----------
TOTAL EXPENSES............................................................................ 1,561,484
-----------
NET INVESTMENT LOSS....................................................................... (1,292,240)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/loss on:
Investments................................................................................ (39,423,202)
Foreign exchange transactions.............................................................. 5,551,321
-----------
NET LOSS.................................................................................. (33,871,881)
-----------
Net change in unrealized appreciation/depreciation on:
Investments................................................................................ 42,739,083
Translation of forward foreign currency contracts, other assets and liabilities denominated
in foreign currencies.................................................................... 2,648,239
-----------
NET APPRECIATION.......................................................................... 45,387,322
-----------
NET GAIN.................................................................................. 11,515,441
-----------
NET INCREASE................................................................................... $10,223,201
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR
FOR THE SIX ENDED
MONTHS ENDED MAY 31,
NOVEMBER 30, 1998 1998*
- ------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment loss........................................................ $ (1,292,240 ) $ (2,943,073)
Net realized loss.......................................................... (33,871,881 ) (28,408,746)
Net change in unrealized depreciation...................................... 45,387,322 (21,344,171)
----------------- ------------
NET INCREASE (DECREASE)............................................... 10,223,201 (52,695,990)
Net decrease from transactions in shares of beneficial interest............ (755,126 ) (59,523,451)
----------------- ------------
NET INCREASE (DECREASE)............................................... 9,468,075 (112,219,441)
NET ASSETS:
Beginning of period........................................................ 127,499,510 239,718,951
----------------- ------------
END OF PERIOD
(INCLUDING A NET INVESTMENT LOSS OF $680,452 AND UNDISTRIBUTED NET
INVESTMENT INCOME OF $611,788, RESPECTIVELY)........................... $ 136,967,585 $127,499,510
----------------- ------------
----------------- ------------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1998 (UNAUDITED)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Japan Fund (the "Fund"), is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a non-diversified,
open-end management investment company. The Fund's investment objective is to
seek long-term capital appreciation. The Fund seeks to meet its investment
objective by investing primarily in securities of issuers located in Japan. The
Fund was organized as a Massachusetts business trust on January 22, 1996 and
commenced operations on April 26, 1996. On July 28, 1997, the Fund commenced
offering three additional classes of shares, with the then current shares
designated as Class B shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange; the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), or Morgan Stanley Dean Witter Investment Management Inc. (the
"Sub-Advisor") that sale or bid prices are not reflective of a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Trustees (valuation of debt securities for which market quotations are not
readily available may be based upon current market prices of securities which
are comparable in coupon, rating and maturity or an appropriate matrix utilizing
9
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1998 (UNAUDITED) CONTINUED
similar factors); (4) certain portfolio securities may be valued by an outside
pricing service approved by the Trustees. The pricing service may utilize a
matrix system incorporating security quality, maturity and coupon as the
evaluation model parameters, and/or research and evaluations by its staff,
including review of broker-dealer market price quotations, if available, in
determining what it believes is the fair valuation of the securities valued by
such pricing service; and (5) short-term debt securities having a maturity date
of more than sixty days at time of purchase are valued on a mark-to-market basis
until sixty days prior to maturity and thereafter at amortized cost based on
their value on the 61st day. Short-term debt securities having a maturity date
of sixty days or less at the time of purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date
except for certain dividends on foreign securities which are recorded as soon as
the Fund is informed after the ex-dividend date. Discounts are accreted over the
life of the respective securities. Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. OPTION ACCOUNTING PRINCIPLES -- When the Fund purchases a call or put option,
the premium paid is recorded as an investment which is subsequently
market-to-market to reflect the current market value. If a purchased option
expires, the Fund will realize a loss to the extent of the premium paid. If the
Fund enters into a closing sale transaction, a gain or loss is realized for the
difference between the proceeds from the sale and the cost of the option. If a
put option is exercised, the cost of the security or currency sold upon exercise
will be increased by the premium originally paid. If a call option is exercised,
the cost for the security purchased upon exercise will be increased by the
premium originally paid.
E. 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, other assets and liabilities and forward foreign currency
contracts are translated at the exchange rates prevailing at the end of the
period; and (2) purchases, sales, income and expenses are translated at the
exchange rates prevailing on the respective dates of such transactions. The
resultant exchange gains and losses are
10
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1998 (UNAUDITED) CONTINUED
included in the Statement of Operations as realized and unrealized gain/loss on
foreign exchange transactions. Pursuant to U.S. Federal income tax regulations,
certain foreign exchange gains/losses included in realized and unrealized
gain/loss are included in or are a reduction of ordinary income for federal
income tax purposes. The Fund does not isolate that portion of the results of
operations arising as a result of changes in the foreign exchange rates from the
changes in the market prices of the securities.
F. FORWARD FOREIGN CURRENCY CONTRACTS -- The Fund may enter into forward foreign
currency contracts which are valued daily at the appropriate exchange rates. The
resultant unrealized exchange gains and losses are included in the Statement of
Operations as unrealized foreign currency gain or loss and in the Statement of
Assets and Liabilities as part of the related foreign currency denominated asset
or liability. The Fund records realized gains or losses on delivery of the
currency or at the time the forward contract is extinguished (compensated) by
entering into a closing transaction prior to delivery.
G. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions 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/tax"
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 reclassification. 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.
I. ORGANIZATIONAL EXPENSES -- The Investment Manager paid the organizational
expenses of the Fund in the amount of approximately $200,000 and was reimbursed
for the full amount thereof. Such expenses have been deferred and are being
amortized on the straight-line method over a period not to exceed five years
from the commencement of operations.
11
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1998 (UNAUDITED) CONTINUED
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, calculated daily and payable monthly, by applying the
annual rate of 0.95% to the net assets of the Fund determined as of the close of
each business day. Prior to October 1, 1998, the annual rate was equal to 1.0%.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
Under a Sub-Advisory Agreement between the Sub-Advisor and the Investment
Manager, the Sub-Advisor provides the Fund with investment advice and portfolio
management relating to the Fund's investments in securities, subject to the
overall supervision of the Investment Manager. As compensation for the services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Advisor monthly compensation equal to 40% of its monthly compensation.
Prior to October 1, 1998, Morgan Grenfell Investment Services Limited served as
the Fund's sub-advisor, providing identical services and receiving compensation
at the same rate as the current Sub-Advisor.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 1.0% of the
lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C -- up to 1.0% of the average daily net
assets of Class C. In the case of Class A shares, amounts paid under the Plan
are paid to the Distributor for services provided. In the case of
12
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1998 (UNAUDITED) CONTINUED
Class B and Class C shares, amounts paid under the Plan are paid to the
Distributor for (1) services provided and the expenses borne by it and others in
the distribution of the shares of these Classes, including the payment of
commissions for sales of these Classes and incentive compensation to, and
expenses of, Morgan Stanley Dean Witter Financial Advisors and others who engage
in or support distribution of the shares or who service shareholder accounts,
including overhead and telephone expenses; (2) printing and distribution of
prospectuses and reports used in connection with the offering of these shares to
other than current shareholders; and (3) preparation, printing and distribution
of sales literature and advertising materials. In addition, the Distributor may
utilize fees paid pursuant to the Plan, in the case of Class B shares, to
compensate Dean Witter Reynolds Inc. ("DWR"), an affiliate of the Investment
Manager and Distributor, and other selected broker-dealers for their opportunity
costs in advancing such amounts, which compensation would be in the form of a
carrying charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts, including
carrying charges, totaled $16,525,722 at November 30, 1998.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the six months ended November 30, 1998, the distribution fee
was accrued for Class A shares and Class C shares at the annual rate of 0.25%
and 1.0%, respectively.
The Distributor has informed the Fund that for the six months ended November 30,
1998, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $241,890 and $2,312,
respectively and received $5,267 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which are
not an expense of the Fund.
13
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1998 (UNAUDITED) CONTINUED
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended November 30, 1998 aggregated
$79,430,780 and $73,564,983, respectively.
For the six months ended November 30, 1998, the Fund incurred $31,207 in
brokerage commissions with Morgan Stanley & Co., an affiliate of the Investment
Manager and Distributor, for portfolio transactions executed on behalf of the
Fund.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At November 30, 1998, the Fund had
transfer agent fees and expenses payable of approximately $200.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
NOVEMBER 30, 1998 FOR THE YEAR
---------------------------- ENDED
MAY 31, 1998*
(UNAUDITED) --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 2,742,567 $ 17,921,322 1,653,350 $ 11,512,949
Redeemed......................................................... (2,638,197) (17,799,048) (1,634,575) (11,582,196)
----------- -------------- ----------- ------------
Net increase (decrease) - Class A................................ 104,370 122,274 18,775 (69,247)
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 10,599,918 71,366,355 8,327,661 65,197,758
Redeemed......................................................... (11,028,028) (74,345,512) (16,855,398) (127,207,599)
----------- -------------- ----------- ------------
Net decrease - Class B........................................... (428,110) (2,979,157) (8,527,737) (62,009,841)
----------- -------------- ----------- ------------
CLASS C SHARES
Sold............................................................. 426,692 2,870,427 272,435 1,993,277
Redeemed......................................................... (172,956) (1,145,635) (12,131) (85,899)
----------- -------------- ----------- ------------
Net increase - Class C........................................... 253,736 1,724,792 260,304 1,907,378
----------- -------------- ----------- ------------
CLASS D SHARES
Sold............................................................. 2,114,244 14,410,749 143,074 983,689
Redeemed......................................................... (1,999,522) (14,033,784) (49,654) (335,430)
----------- -------------- ----------- ------------
Net increase - Class D........................................... 114,722 376,965 93,420 648,259
----------- -------------- ----------- ------------
Net increase (decrease) in Fund.................................. 44,718 $ (755,126) (8,155,238) $(59,523,451)
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
- ---------------------
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through May 31, 1998.
14
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1998 (UNAUDITED) CONTINUED
6. FEDERAL INCOME TAX STATUS
At May 31, 1998, the Fund had a net capital loss carryover of approximately
$29,365,000 of which $448,000 which will be available through May 31, 2005 and
$28,917,000 will be available through May 31, 2006 to offset future capital
gains to the extent provided by regulations.
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $19,268,000 during fiscal 1998.
As of May 31, 1998, the Fund had temporary book/tax differences primarily
attributable to post-October losses and capital loss deferrals on wash sales.
7. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Fund may enter into forward foreign currency contracts ("forward contracts")
to facilitate settlement of foreign currency denominated portfolio transactions
or to manage foreign currency exposure associated with foreign currency
denominated securities.
Forward contracts involve elements of market risk in excess of the amounts
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the foreign exchange rates underlying the forward
contracts. Risks may also arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
At November 30, 1998, there were outstanding forward contracts used to
facilitate settlement of foreign currency denominated portfolio transactions and
manage foreign currency exposure.
At November 30, 1998, the Fund's cash balance consisted principally of interest
bearing deposits with Chase Manhattan Bank N.A., the Fund's custodian.
15
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX PERIOD
MONTHS FOR THE FOR THE APRIL 26,
ENDED YEAR YEAR 1996*
NOVEMBER ENDED ENDED THROUGH
30, 1998++ MAY 31, MAY 31, MAY 31,
(UNAUDITED) 1998**++ 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER
SHARE DATA:
Net asset value,
beginning of
period.......... $ 6.67 $ 8.79 $ 9.61 $ 10.00
---------- --------- --------- ----------
Income (loss)
from investment
operations:
Net investment
loss.......... (0.07) (0.13) (0.16) --
Net realized
and unrealized
gain (loss)... 0.55 (1.99) (0.66) (0.39)
---------- --------- --------- ----------
Total income
(loss) from
investment
operations...... 0.48 (2.12) (0.82) (0.39)
---------- --------- --------- ----------
Net asset value,
end of period... $ 7.15 $ 6.67 $ 8.79 $ 9.61
---------- --------- --------- ----------
---------- --------- --------- ----------
TOTAL RETURN+.... 7.20%(1) (24.12)% (8.53)% (3.90)%(1)
RATIOS TO AVERAGE
NET ASSETS:
Expenses......... 2.61%(2)(3) 2.48% 2.43% 2.84%(2)
Net investment
loss............ (2.16) (3) (1.62)% (1.77)% (0.52)%(2)
SUPPLEMENTAL DATA:
Net assets, end
of period, in
thousands....... $130,891 $125,008 $239,719 $273,544
Portfolio
turnover rate... 65%(1) 7% 25% --
</TABLE>
- ---------------------
* Commencement of operations.
** Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX PERIOD
MONTHS JULY 28,
ENDED 1997*
NOVEMBER THROUGH
30, 1998 MAY 31,
(UNAUDITED) 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 6.72 $ 9.16
---------- ----------
Income (loss) from investment operations:
Net investment income (loss)....................................... (0.03) 0.05
Net realized and unrealized gain (loss)............................ 0.54 (2.49)
---------- ----------
Total income (loss) from investment operations........................ 0.51 (2.44)
---------- ----------
Net asset value, end of period........................................ $ 7.23 $ 6.72
---------- ----------
---------- ----------
TOTAL RETURN+......................................................... 7.59%(1) (26.64)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.86%(2)(3) 1.83%(2)
Net investment income (loss).......................................... (1.41) (3) 0.75%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $890 $ 126
Portfolio turnover rate............................................... 65%(1) 7%
</TABLE>
<TABLE>
<S> <C> <C>
CLASS C SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 6.68 $ 9.16
---------- ----------
Income (loss) from investment operations:
Net investment loss................................................ (0.07) (0.07)
Net realized and unrealized gain (loss)............................ 0.54 (2.41)
---------- ----------
Total income (loss) from investment operations........................ 0.47 (2.48)
---------- ----------
Net asset value, end of period........................................ $ 7.15 $ 6.68
---------- ----------
---------- ----------
TOTAL RETURN+......................................................... 7.04%(1) (27.07)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 2.61%(2)(3) 2.52%(2)
Net investment loss................................................... (2.16) (3) (1.21)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $3,676 $1,738
Portfolio turnover rate............................................... 65%(1) 7%
</TABLE>
- ---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
MORGAN STANLEY DEAN WITTER JAPAN FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX PERIOD
MONTHS JULY 28,
ENDED 1997*
NOVEMBER THROUGH
30, 1998 MAY 31,
(UNAUDITED) 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS D SHARES++
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 6.72 $ 9.16
---------- ----------
Income (loss) from investment operations:
Net investment loss................................................ (0.03) (0.01)
Net realized and unrealized gain (loss)............................ 0.57 (2.43)
---------- ----------
Total income (loss) from investment operations........................ 0.54 (2.44)
---------- ----------
Net asset value, end of period........................................ $ 7.26 $ 6.72
---------- ----------
---------- ----------
TOTAL RETURN+......................................................... 8.04%(1) (26.64)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.61%(2)(3) 1.60%(2)
Net investment loss................................................... (1.16) (3) (0.23)%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $1,511 $628
Portfolio turnover rate............................................... 65%(1) 7%
</TABLE>
- ---------------------
* The date shares were first issued.
++ The per share amounts were computed using an average number of shares
outstanding during the period.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
SUB-ADVISOR
Morgan Stanley Dean Witter Investment Management Inc.
The financial statements included herein have been taken from the records of
the Fund without examination by the independent accountants and accordingly they
do not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of the
Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY
DEAN WITTER
JAPAN FUND
SEMIANNUAL REPORT
NOVEMBER 30, 1998
