This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
THE JAPAN FUND, INC.
Semiannual Report
June 30, 1996
A pure no-load(TM) mutual fund
Scudder, Stevens & Clark, Inc.
Investment Manager
<PAGE>
THE JAPAN FUND, INC.
CONTENTS
Portfolio Management Discussion 3
Reviews the period's investing strategies, financial markets,
and economic conditions
Performance Update 4
Portfolio Summary 5
Investment Portfolio 8
Itemized list of your Fund's portfolio holdings
Financial Statements 13
Financial Highlights 16
Notes to Financial Statements 17
Report of Independent Accountants 23
How to Contact The Japan Fund Back cover
2
<PAGE>
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
In the first six months of 1996, the Japanese equity market, as
measured by the unmanaged Tokyo Stock Price Index (TOPIX), returned 2.45% for
dollar-based investors. The Japan Fund's 3.85% return outperformed the unmanaged
index, with holdings in smaller- and medium-sized companies, economically
sensitive companies, and multinationals boosting performance.
The modest dollar-based return on the Japanese market masks a much
stronger performance in local terms. The TOPIX, in yen terms, appreciated 8.5%
during the first six months of 1996, as a weaker yen supported Japan's economic
recovery. The yen, however, depreciated against the U.S. dollar, eroding much of
the gain for dollar-based investors. The Fund's currency hedging strategy helped
boost returns by 0.6% in the first six months of 1996.
Japan's Economy: Present and Future
The recovery in the Japanese economy was stronger than expected. First
quarter real GDP growth, at 12.7% on an annualized basis, was surprisingly high.
Growth in housing, public capital expenditures, private consumption, and private
capital expenditures more than offset Japan's decline in net exports. The GDP
deflator declined only slightly in early 1996, compared with a larger decline
through late 1995, indicating that deflation in Japan may be abating.
Many signs lead us to believe that Japanese growth will be firm through
the remainder of the year. Recently, the Japanese government agreed to use
public funds to bail out housing loan corporations affected by the collapse of
Japan's real estate market. In addition, many large Japanese banks wrote off
much of their bad debt during the 1996 fiscal year, substantially reducing the
financial risks in the economy. Finally, the government's announcement of its
intention to raise the consumption tax from 3% to 5% next April may cause some
heavy buying activity in advance of the impending tax hike.
3
<PAGE>
THE JAPAN FUND, INC.
PERFORMANCE UPDATE as of June 30, 1996
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
THE JAPAN FUND, INC.
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
6/30/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,616 16.16% 16.16%
5 Year $10,135 1.35% 0.27%
10 Year $19,351 93.51% 6.82%
TOPIX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
6/30/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,160 11.60% 11.60%
5 Year $12,305 23.05% 4.23%
10 Year $20,188 101.88% 7.27%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED JUNE 30
THE JAPAN FUND
Year Amount
- ----------------------
'86 $10,000
'87 $14,696
'88 $16,713
'89 $17,245
'90 $20,462
'91 $19,093
'92 $15,248
'93 $19,599
'94 $22,913
'95 $16,659
'96 $19,351
TOPIX
Year Amount
- ----------------------
'86 $10,000
'87 $16,859
'88 $19,951
'89 $20,918
'90 $19,049
'91 $16,406
'92 $12,285
'93 $18,910
'94 $21,605
'95 $18,090
'96 $20,188
The Tokyo Stock Exchange Stock Price Index (TOPIX) is an unmanaged
capitalization weighted measure (adjusted in U.S. dollars) of all shares listed
on the first section of the Tokyo Stock Exchange. Index returns assume dividends
reinvested net of witholding tax and, unlike Fund returns, do not reflect any
fees or expenses.
- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
YEARLY PERIODS ENDED JUNE 30
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------------------------------------------------------------------------------
NET ASSET VALUE... $22.83 $17.55 $14.76 $13.01 $11.51 $9.01 $11.57 $12.71 $8.44 $9.77
INCOME DIVIDENDS.. $ .06 $ .14 $ .04 $ .06 $ .09 $ - $ .01 $ .27 $ - $ .03
CAPITAL GAINS
DISTRIBUTIONS..... $ 4.74 $ 7.80 $ 3.55 $ 4.24 $ .52 $ .21 $ - $ .39 $ .96 $ -
FUND TOTAL
RETURN (%)........ 46.96 13.73 3.18 18.66 -6.69 -20.14 28.54 16.91 -27.29 16.16
INDEX TOTAL
RETURN (%)........ 68.59 18.33 4.84 -8.94 -13.88 -25.13 53.93 14.25 -16.27 11.60
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
4
<PAGE>
PORTFOLIO SUMMARY as of June 30, 1996
- ---------------------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------------------
Equity Holdings 93%
Cash Equivalents 5%
Other 2% The Fund's emphasis on
---- globally-competitive stocks
100% served it well over the period.
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
SECTOR DIVERSIFICATION (Excludes 5% Cash Equivalents)
- --------------------------------------------------------------------------
Manufacturing 31%
Financial 16% Because we expect private
Durables 9% construction to pick up in 1997,
Consumer Staples 9% we added construction-related
Construction 8% companies to the portfolio.
Metals & Minerals 6%
Technology 6%
Consumer Discretionary 5%
Service Industries 5%
Other 5%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (38% of Portfolio)
- --------------------------------------------------------------------------
1. NICHIEI CO., LTD.
Finance company for small- and
medium-sized firms
2. SHOHKOH FUND & CO., LTD.
Finance company for small- and
medium-sized firms
3. JAPAN ASSOCIATED FINANCE CO.
Venture capital company
4. BRIDGESTONE CORP.
Leading automobile tire manufacturer
5. SMC CORP.
Leading maker of pneumatic equipment Pioneer Electronics Corp. was
one of the largest contributors
6. ITOCHU CORP. to Fund performance.
Leading general trading company
7. DAITO TRUST CONSTRUCTION CO., LTD.
Construction and building
management services
8. MATSUSHITA ELECTRICAL WORKS, INC.
Leading maker of building materials
and lighting equipment
9. PIONEER ELECTRONICS CORP.
Leading manufacturer of
audio equipment
10. CANON INC.
Leading producer of visual image
and information equipment
- -----------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio,
see page 8.
A monthly Investment Portfolio Summary and quarterly Portfolio Holdings
are available upon request.
5
<PAGE>
The prospects for growth in 1997 and beyond are less clear. On one
hand, the recent recovery in the indicators for private capital expenditures and
private consumption hint at continued economic expansion from private domestic
demand in 1997. But major structural changes, such as greater penetration of
manufactured imports into Japan, historically high unemployment figures, and the
large excess capacity in domestic manufacturing sectors, continue to raise
questions about the speed and strength of the current recovery. In addition, the
recent collapse in the Japanese trade surplus increases the risk of yen
depreciation, which could lead to higher interest rates.
Maintaining Our Focus on Fundamentals
The Fund's emphasis on global companies based in Japan, companies
benefiting from Japan's economic recovery, and small growth businesses served it
well during the period. One of the largest contributors to performance was
Pioneer Electronics Corporation, which represents a major turnaround opportunity
in consumer electronics. Pioneer boasts large growth potential in car
electronics, CATV equipment, flat panel displays, and Digital Video Disks -- the
next generation storage device set to replace CD-ROMs and VCR cassettes. Other
contributors included Square, a leading computer game manufacturer with high
secular growth prospects; Bridgestone, Japan's largest tire manufacturer
benefiting from a global recovery in demand; Ariake Japan, Japan's leading
manufacturer of natural seasonings with substantial growth prospects in China
and the United States; and Keyence, a high-growth manufacturer of sensors used
in production automation.
Some of the detractors from Fund performance included Sumitomo Corp., a
major trading company which recently announced a large trading loss; Nichiei, a
leading non-bank lender to small- and medium-sized corporations; and THK, the
world's leading manufacturer of linear motion modules used as machinery parts.
Others were Sanyo Shinpan, a consumer finance company; and Hitachi, a major
industrial conglomerate.
New additions to The Japan Fund include construction- related companies
such as Kajima, Daito Trust, Toshiba Engineering and Construction Co., Ltd., and
Kokuyo. If Japanese domestic demand shows continued strength into 1997, we would
expect private construction to pick up. We also increased our investment focus
on companies with strong brand recognition and franchises, strong recurring
6
<PAGE>
sales, and companies with attractive relative valuations. Recently purchased
stocks fitting these characteristics included Gunze, a leading underwear
manufacturer; Fujicco, the leading brand food manufacturer in seaweed preserves
and Japanese-style cooked beans; and Santen, the leading ophthalmic drug
manufacturer.
During the period, we sold holdings in semiconductor-related companies
such as Toshiba, Fujitsu, and NGK Spark Plug, based on unfavorable supply and
demand for semiconductors globally. We also sold holdings of companies such as
Takeda Chemical, Maeda Road, Royal, Hitachi Metal, Fast Retailing, Kato Denki,
and Sanyo Shinpan.
Outlook
While the anticipated economic recovery is underway, the visibility of
growth in 1997 still remains somewhat low. Moreover, as long as the Japanese
trade surplus continues to decline, we believe that the risk of further yen
depreciation remains. In such a context, The Japan Fund will continue to focus
on stocks that are globally competitive, offer potential to become the future
"blue chips" of Japan, are undergoing a major turnaround, or offer attractive
valuation and cash generation.
In closing, we would like to inform you of a change in the reporting
schedule for The Japan Fund. In this era of electronic information we have taken
a look at our short-form quarterly reports, which you generally receive two or
more weeks after the end of your Fund's first and third fiscal quarters. Going
forward, these printed reports will be discontinued, and portfolio information
will be made available on a more timely basis -- each month, in most cases --
through Scudder's Web site, Scudder's automated information line (SAIL), and by
calling a Japan Fund Service Specialist. Please call us should you have any
questions. Thank you for your continued interest in The Japan Fund.
Sincerely,
/s/Lynn Birdsong, /s/Henry Rosovsky,
Lynn Birdsong, Henry Rosovsky,
President Chairman
7
<PAGE>
THE JAPAN FUND, INC.
INVESTMENT PORTFOLIO as of June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount($)(b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
2.5% REPURCHASE AGREEMENTS
-------------------------------------------------------------------------------------
12,503,000 Repurchase Agreement with Donaldson,
Lufkin & Jenrette dated 6/28/96 at 5.45%
to be repurchased on 7/1/96 at $12,508,678
collateralized by a $12,455,000 U.S. Treasury
Note, 5.25%, 12/31/97 (Cost $12,503,000) ........... 12,503,000
----------
-------------------------------------------------------------------------------------
2.5% COMMERCIAL PAPER
-------------------------------------------------------------------------------------
13,000,000 Ford Motor Credit Co., 5.36% 7/23/96
(Cost $12,957,360) ................................. 12,957,360
----------
-------------------------------------------------------------------------------------
5.7% CONVERTIBLE BONDS
-------------------------------------------------------------------------------------
DURABLES 0.5%
Automobiles JPY 233,000,000 ShinMaywa Industries, Ltd., 0.7%, 3/31/03 ............ 2,772,111
----------
MANUFACTURING 3.0%
Industrial Specialty 1.6% JPY 803,000,000 Nippon Electric Glass Co., Ltd., 2%, 3/29/02 ......... 8,199,868
----------
Office Equipment/Supplies 1.4% JPY 445,000,000 Ricoh Co., Ltd., 1.5%, 3/29/02 ....................... 4,838,946
JPY 230,000,000 Riso Kagaku Corp., 1.875%, 3/31/02 ................... 2,138,484
----------
6,977,430
----------
TECHNOLOGY 2.2%
Computer Software 0.9% JPY 405,000,000 Softbank Corp., 0.5%, 3/29/02 ........................ 4,774,067
----------
Diverse Electronic Products 1.3% JPY 575,000,000 Matsushita Electric Industrial Co., Ltd., 1.4%,
3/31/04 ............................................ 6,646,640
----------
TOTAL CONVERTIBLE BONDS (Cost $28,656,169) ........... 29,370,116
----------
-------------------------------------------------------------------------------------
87.2% COMMON STOCKS
-------------------------------------------------------------------------------------
Shares
-------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 5.0%
Department & Chain Stores 1.5% 25,000 Ito-Yokado Co., Ltd. ................................. 1,510,029
180,000 Jusco Co., Ltd. ...................................... 5,904,875
----------
7,414,904
----------
Home Furnishings 0.4% 97,200 Nitori Co., Ltd. ..................................... 2,176,086
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
-
8
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Recreational Products 1.6% 7,000 Bandai Co., Ltd. ......................... 243,706
132,000 Square Co., Ltd. ......................... 7,755,837
----------
7,999,543
----------
Restaurants 0.4% 99,306 Genki Sushi Co., Ltd. .................... 2,196,012
----------
Specialty Retail 1.1% 129,400 Shimamura Co., Ltd. ...................... 5,699,472
----------
CONSUMER STAPLES 8.1%
Consumer Electronic &
Photographic Products 3.1% 661,000 Pioneer Electronics Corp. ................ 15,764,701
----------
Food & Beverage 3.5% 265,400 Ariake Japan Co., Ltd. ................... 10,040,261
256,000 Fujicco Co., Ltd. ........................ 4,070,361
252,600 Rock Field Co., Ltd. ..................... 4,108,631
----------
18,219,253
----------
Textiles 1.5% 1,198,000 Gunze, Ltd. .............................. 7,520,684
----------
HEALTH 1.2%
Pharmaceuticals 354,000 Banyu Pharmaceutical Co., Ltd. ........... 5,013,935
45,000 Santen Pharmaceutical Co. ................ 1,048,568
----------
6,062,503
----------
COMMUNICATIONS 1.0%
Telephone/
Communications 615 DDI Corp. ................................ 5,372,504
----------
FINANCIAL 15.2%
Other Financial
Companies 14.8% 178,000 Japan Associated Finance Co. ............. 20,819,665
481,876 Nichiei Co., Ltd. ........................ 32,144,148
109,500 Shohkoh Fund & Co., Ltd. ................. 23,013,661
----------
75,977,474
----------
Real Estate 0.4% 102,300 Kansai Sekiwa Real Estate, Ltd. .......... 1,963,083
----------
MEDIA 1.6%
Broadcasting &
Entertainment 227,000 Horipro Inc. ............................. 3,256,636
103,377 Sony Music Entertainment (Japan) Inc. .... 4,817,679
----------
8,074,315
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
-
9
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SERVICE INDUSTRIES 4.7%
Miscellaneous
Commercial Services 4.5% 30,600 Aucnet Inc. .............................. 1,370,128
2,475,000 Itochu Corp. ............................. 17,323,982
14,000 Secom Co., Ltd. .......................... 926,212
369,000 Sumitomo Corp. ........................... 3,284,196
----------
22,904,518
----------
Miscellaneous
Consumer Services 0.2% 20,000 H.I.S. Co., Ltd. ......................... 1,218,988
----------
DURABLES 7.6%
Automobiles 1,089,000 Bridgestone Corp. ........................ 20,797,825
83,600 FCC Co., Ltd. ............................ 3,109,170
358,100 Kyokuto Kaihatsu Kogyo Co., Ltd. ......... 7,558,925
751,000 ShinMaywa Industries, Ltd. ............... 7,686,024
----------
39,151,944
----------
MANUFACTURING 26.0%
Chemicals 1.4% 598,000 Nippon Shokubai Corp., Ltd. .............. 5,792,297
124,000 Sekisui Chemical Co., Ltd. ............... 1,518,344
----------
7,310,641
----------
Diversified Manufacturing 5.5% 1,501,000 Ishikawajima-Harima Heavy
Industries Co., Ltd. ................... 7,338,009
1,331,000 Mitsubishi Heavy Industries, Ltd. ........ 11,590,835
645,000 Sumitomo Electric Industries, Ltd. ....... 9,253,438
----------
28,182,282
----------
Electrical Products 3.5% 34,000 Hitachi Ltd. ............................. 316,900
16,000 Mabuchi Motor Co., Ltd. .................. 1,020,514
1,498,000 Matsushita Electric Works, Inc. .......... 16,289,304
----------
17,626,718
----------
Industrial Specialty 0.6% 106,400 Mirai Industry Co., Ltd. ................. 3,133,992
----------
Machinery/Components/
Controls 7.9% 112,500 Keyence Corp. ............................ 15,317,312
89,000 Komori Corp. ............................. 2,277,151
234,800 SMC Corp. ................................ 18,194,399
194,400 THK Co., Ltd. ............................ 4,707,452
----------
40,496,314
----------
Office Equipment/Supplies 7.1% 742,000 Canon Inc. ............................... 15,459,040
225,000 Kokuyo ................................... 6,229,725
</TABLE>
The accompanying notes are an integral part of the financial statements.
--
10
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
484,000 Ricoh Co., Ltd. ............................... 5,130,351
119,100 Riso Kagaku Corp. ............................. 9,577,192
-----------
36,396,308
-----------
TECHNOLOGY 3.4%
Diverse Electronic Products 2.1% 569,000 Matsushita Electrical Industrial Co., Ltd. .... 10,606,844
-----------
Electronic Components/
Distributors 1.3% 100,000 Kyocera Corp. ................................. 7,081,829
-----------
METALS & MINERALS 5.8%
Precious Metals 1.6% 930,000 Sumitomo Metal Mining Co., Ltd. ............... 8,064,787
-----------
Steel & Metals 4.2% 1,873,000 Kawasaki Steel Corp. .......................... 6,760,497
619,000 Nisshin Steel Co., Ltd. ....................... 2,403,938
4,089,000 Sumitomo Metal Industries, Ltd. ............... 12,554,521
-----------
21,718,956
-----------
CONSTRUCTION 7.1%
Homebuilding 0.6% 215,000 Hosoda Corp. .................................. 2,897,839
-----------
Miscellaneous 6.5% 1,114,000 Daito Trust Construction Co., Ltd. ............ 16,694,476
455,000 Kajima Corp. .................................. 4,698,223
426,000 Takasago Thermal Engineering Co., Inc. ........ 6,890,117
539,000 Toshiba Engineering & Construction Co., Ltd. .. 5,270,069
-----------
33,552,885
-----------
TRANSPORTATION 0.5%
Railroads 483 East Japan Railway Co. ........................ 2,537,808
-----------
TOTAL COMMON STOCKS (Cost $412,279,518)........ 447,323,187
-----------
---------------------------------------------------------------------------------------
2.1% PURCHASED OPTIONS
---------------------------------------------------------------------------------------
Principal
Amount (b)
---------------------------------------------------------------------------------------
JPY 11,000,000,000 Put on Japanese Yen, strike price JPY 102.59,
expiration date 12/18/96..................... 5,401,000
JPY 11,000,000,000 Put on Japanese Yen, strike price JPY 102.68,
expiration date 1/16/97...................... 5,247,000
-----------
TOTAL PURCHASED OPTIONS (Cost $4,287,037)...... 10,648,000
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $470,683,084) (a) ..................... 512,801,663
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
--
11
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) The cost for federal income tax purposes was $488,508,725. At June 30,
1996, net unrealized appreciation for all securities based on tax cost was
$24,292,938. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $42,093,268 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$17,800,330.
(b) Principal amount stated in U.S. dollars unless otherwise noted.
CURRENCY ABBREVIATIONS
JPY Japanese Yen
The accompanying notes are an integral part of the financial statements.
--
12
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
JUNE 30, 1996
- --------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
ASSETS
Investments, at market (identified cost $470,683,084)
(Note A) .............................................. $512,801,663
Cash .......................................................... 156
Foreign currency holdings, at market (identified
cost $123,978)(Note A) ................................ 121,635
Receivable on investments sold ................................ 6,730,652
Receivable on fund shares sold ................................ 309,531
Dividends and interest receivable ............................. 1,482,966
Other assets .................................................. 5,551
------------
Total assets .......................................... 521,452,154
LIABILITIES
Payable for investments purchased ............................. $4,613,680
Payable for fund shares redeemed .............................. 1,347,077
Accrued management fee (Note C) ............................... 319,637
Other accrued expenses (Note C) ............................... 537,239
Payable on closed forward currency
exchange contracts (Note A) .......................... 2,873,252
----------
Total liabilities ............................. 9,690,885
------------
Net assets, at market value ................................... $511,761,269
============
NET ASSETS
Net assets consist of:
Undistributed net investment income ................... $ 8,217,393
Net unrealized appreciation (depreciation) on:
Investments ................................... 42,118,579
Foreign currency related transactions ......... (45,313)
Accumulated net realized loss ......................... (56,021,663)
Capital stock ......................................... 17,457,725
Additional paid-in capital ............................ 500,034,548
------------
Net assets, at market value ................................... $511,761,269
============
NET ASSET VALUE, offering and redemption price per
share ($511,761,269 [Divided by sign] 52,373,175
outstanding shares of capital stock, $.333 par
value, 600,000,000 shares authorized) ................. $9.77
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
--
13
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of withholding taxes of $270,632) .............. $ 1,534,623
Interest (net of withholding taxes of $12,285) ................ 821,773
-----------
2,356,396
Expenses:
Management fee (Note C) ....................................... $ 1,955,836
Shareholder and Transfer Agent services (Note C) .............. 435,191
Officers and directors fees and expenses (Notes C & D) ........ 97,580
Custodian fees ................................................ 182,462
Printing ...................................................... 108,189
Legal ......................................................... 52,625
Auditing and accounting services .............................. 47,975
Federal and state registration ................................ 48,385
Other ......................................................... 36,391 2,964,634
--------------------------
Net investment loss ........................................... (608,238)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments ........................................... (5,887,122)
Options ............................................... 1,938,521
Foreign currency related transactions ................. (59,481) (4,008,082)
-----------
Net unrealized appreciation (depreciation) during
the period on:
Investments ........................................... 23,672,526
Foreign currency related transactions ................. (45,116) 23,627,410
--------------------------
Net gain on investment transactions ........................... 19,619,328
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......... $19,011,090
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
--
14
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, December 31,
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment loss ......................................... $ (608,238) $ (1,225,455)
Net realized loss from investment transactions .............. (4,008,082) (31,866,410)
Net unrealized appreciation (depreciation) on
investment transactions during the period ........... 23,627,410 (13,959,444)
------------- -------------
Net increase (decrease) in net assets resulting
from operations ..................................... 19,011,090 (47,051,309)
------------- -------------
Distributions to shareholders:
From net investment income ($.03 per share
for June 30, 1996) .................................. (1,705,845) --
------------- -------------
In excess of net realized gains ($.11 per share
for December 31, 1995) .................................... -- (5,803,249)
------------- -------------
Fund share transactions:
Proceeds from shares sold ................................... 125,153,703 330,312,663
Net asset value of shares issued to
shareholders in reinvestment of
distributions ....................................... 1,433,385 4,957,881
Cost of shares redeemed ..................................... (180,935,237) (319,319,066)
------------- -------------
Net increase (decrease) in net assets from
Fund share transactions ............................. (54,348,149) 15,951,478
------------- -------------
INCREASE (DECREASE) IN NET ASSETS ........................... (37,042,904) (36,903,080)
Net assets at beginning of period ........................... 548,804,173 585,707,253
------------- -------------
NET ASSETS AT END OF PERIOD (including
undistributed net investment income of
$8,217,393 and $10,531,476, respectively) ........... $ 511,761,269 $ 548,804,173
============= =============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period ................... 58,139,460 55,779,456
------------- -------------
Shares sold ................................................. 13,130,848 37,050,849
Shares issued to shareholders in reinvestment
of distributions .................................... 153,962 559,580
Shares redeemed ............................................. (19,051,095) (35,250,425)
------------- -------------
Net increase (decrease) in Fund shares ...................... (5,766,285) 2,360,004
------------- -------------
Shares outstanding at end of period ......................... 52,373,175 58,139,460
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
--
15
<PAGE>
THE JAPAN FUND, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION
DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER 31,
ENDED JUNE 30, --------------------------------------------------------------------------------
1996(a) 1995 1994(a) 1993(a) 1992 1991 1990 1989 1988 1987 1986(a)
-------------- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........... $ 9.44 $10.50 $10.33 $ 8.90 $ 10.69 $10.76 $ 14.27 $16.24 $16.97 $20.28 $15.53
------ ------ ------ ------ ------- ------ ------- ------ ------ ------ ------
Income from investment
operations:
Net investment
income (loss) ............... (.01) (.01) (.05) (.05) (.05) (.03) .09 .04 .04 .16 .10
Net realized and
unrealized gain (loss)
on investments .............. .37 (.94) 1.07 2.15 (1.74) .37 (2.41) 1.66 3.13 5.81 9.34
------ ------ ------ ------ ------- ------ ------- ------ ------ ------ ------
Total from investment
operations .................... .36 (.95) 1.02 2.10 (1.79) .34 (2.32) 1.70 3.17 5.97 9.44
------ ------ ------ ------ ------- ------ ------- ------ ------ ------ ------
Less distributions:
From net investment
income ...................... (.03) -- -- -- -- -- (.09) (.08) (.02) (.20) (.02)
In excess of net
investment income ........... -- -- -- (.28) -- -- -- -- -- -- --
From net realized
gains on investment
transactions ................ -- -- (.80) (.39) -- (.41) (1.10) (3.59) (3.88) (9.08) (4.67)
In excess of net
realized gains .............. -- (.11) (.05) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------- ------ ------- ------ ------ ------ ------
Total distributions ........... (.03) (.11) (.85) (.67) -- (.41) (1.19) (3.67) (3.90) (9.28) (4.69)
------ ------ ------ ------ ------- ------ ------- ------ ------ ------ ------
Net asset value,
end of period ............... $ 9.77 $ 9.44 $10.50 $10.33 $ 8.90 $10.69 $ 10.76 $14.27 $16.24 $16.97 $20.28
====== ====== ====== ====== ======= ====== ======= ====== ====== ====== ======
TOTAL RETURN (%) ................ 3.85** (9.07) 10.03 23.64 (16.74) 3.11 (16.36) 11.63 19.40 33.01 77.54
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ........... 512 549 586 471 409 335 313 401 404 394 584
Ratio of operating
expenses to average
daily net assets (%) .......... 1.14* 1.21 1.08 1.25 1.42 1.26 1.05 1.02 1.01 .90 .70
Ratio of net investment
income (loss) to average
daily net assets (%) .......... (.23)* (.24) (.40) (.47) (.31) (.15) .72 .34 .28 .41 .51
Portfolio turnover rate (%) ..... 80.2* 69.9 74.3 81.7 47.0 46.4 52.7 60.4 38.8 34.0 38.2
Average commission
rate paid (b) ................. $.0424 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
<FN>
(a) Per share amounts have been calculated using weighted average shares outstanding.
(b) Average commission rate paid per share of common and preferred stocks is calculated for fiscal years beginning on or after
September 1, 1995.
* Annualized ** Not annualized
</FN>
</TABLE>
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The Japan Fund, Inc. (the "Fund") is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment company.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Portfolio securities which are traded on an exchange are
valued at the most recent sale price reported on the exchange on which the
security is traded most extensively. If no sale occurred, the security is then
valued at the calculated mean between the most recent bid and asked quotations.
If there are no such bid and asked quotations, the most recent bid quotation is
used. Securities traded in the over-the-counter market are valued at the most
recent sale price on such market. If no sale occurred in the over-the-counter
market, the security is then valued at the calculated mean between the most
recent bid and asked quotations. If there are no such bid and asked quotations,
the most recent bid quotation shall be used.
Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Fund, which quotations
reflect broker/dealer-supplied valuations and electronic data processing
techniques. If the pricing agents are unable to provide such quotations, the
most recent bid quotation supplied by a bona fide market maker shall be used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Directors.
OPTIONS. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised.
--
17
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
If the Fund writes an option and the option expires unexercised, the Fund will
realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written call or
purchased put option is adjusted for the amount of option premium. If a written
put or purchased call option is exercised, the Fund's cost basis of the acquired
security or currency would be the exercise price adjusted for the amount of the
option premium.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When the Fund writes a put option it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-Counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum exposure
to purchased options is limited to the premium initially paid. In addition,
certain risks may arise upon entering into option contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out an
option contract prior to the expiration date and that a change in the value of
the option contract may not correlate exactly with changes in the value of the
securities or currencies hedged.
--
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATIONS. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis:
(i) market value of investment securities, other assets and liabilities at
the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the daily rates of exchange prevailing
on the respective dates of such transactions.
The Fund does not isolate that portion of gains and losses on investments which
is due to changes in foreign exchange rates from that which is due to changes in
market prices of the investments. Such fluctuations are included with the net
realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract (forward contract) is a commitment to purchase or sell a foreign
currency at the settlement date at a negotiated rate. During the period, the
Fund utilized forward contracts as a hedge in connection with portfolio
purchases and sales of securities denominated in foreign currencies.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
--
19
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, the Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
FEDERAL INCOME TAXES. No provision for United States income taxes has been made
since it is the Fund's policy to comply with provisions of the Internal Revenue
Code applicable to regulated investment companies. Under the United States-Japan
tax treaty, Japan imposes a withholding tax of 15% on dividends and 10% on
interest. There is currently no Japanese tax on capital gains.
At December 31, 1995, the Fund had a net tax basis capital loss carryforward of
approximately $23,266,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December 31,
2003, the expiration date. In addition, from November 1, 1995 through December
31, 1995, the Fund incurred approximately $1,685,000 of net realized capital
losses. As permitted by tax regulations, the Fund intends to elect to defer
these losses and treat them as arising in the fiscal year ended December 31,
1996.
DISTRIBUTION OF INCOME AND GAINS. Distributions of net investment income are
made annually. During any particular year net realized gains from investment
transactions, in excess of available capital loss carryforwards, would be
taxable to the Fund if not distributed and, therefore, will be distributed to
shareholders annually. An additional distribution may be made to the extent
necessary to avoid the payment of a four percent federal excise tax. Earnings
and profits distributed to shareholders on redemption of Fund shares ("tax
equalization") may be utilized by the Fund, to the extent permissible, as part
of the Fund's dividends paid deduction on its federal income tax return.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences primarily relate to investments in forward contracts, foreign
denominated investments, passive foreign investment companies, and certain
securities sold at a loss. As a result, net investment income (loss) and net
realized gain (loss) on
--
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
investment transactions for a reporting period may differ significantly from
distributions during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund. The Fund uses the identified cost method for
determining realized gain or loss on investments for both financial and federal
income tax reporting purposes.
OTHER. Investment security transactions are accounted for on a trade-date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Acquisition
discount and original issue discount are accreted for both tax and financial
reporting purposes.
B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------
For the six months ended June 30, 1996, purchases and sales of investment
securities (excluding short-term investments) aggregated $199,619,552 and
$281,655,389, respectively.
C. RELATED PARTIES
- --------------------------------------------------------------------------------
Under the Investment Management Agreement (the "Management Agreement") with
Scudder, Stevens & Clark, Inc. (the "Adviser"), the Adviser directs the
investments of the Fund in accordance with its investment objective, policies,
and restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides certain
administrative services in accordance with the Management Agreement. The Fund
agrees to pay the Adviser a fee equal to an annual rate of 0.85% of the first
$100,000,000 of the Fund's average daily net assets, 0.75% of the next
$200,000,000 of such assets, 0.70% of the next $300,000,000 of such assets and
0.65% of such net assets in excess of $600,000,000 computed and accrued daily
and paid monthly. For the six months ended June 30, 1996, the fee pursuant to
the Management Agreement amounted to $1,955,836, which was equivalent to an
annual effective rate of 0.75% of the Fund's average daily net assets. The
Management Agreement also provides that if the Fund's expenses, exclusive of
taxes, interest and extraordinary expenses, exceed specified limits, such
excess, up to the amount of the management fee, will be paid by the Adviser.
--
21
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
six months ended June 30, 1996, the amount charged to the Fund by SSC aggregated
$363,092, of which $58,246 is unpaid at June 30, 1996.
The Fund pays each of its Officers and Directors not affiliated with the Adviser
an annual fee plus specified amounts for attended board and committee meetings.
For the six months ended June 30, 1996, the Officers and Directors fees and
expenses aggregated $71,247.
D. DIRECTORS' RETIREMENT BENEFITS
- --------------------------------------------------------------------------------
Under a retirement program, which became effective January 1, 1992, independent
members of the Board of Directors who meet certain criteria become eligible to
participate in a defined benefit retirement program. Under this program monthly
payments will be made for a period of 120 months by the Fund based on the
individual's final year basic Directors fees and length of service. For the six
months ended June 30, 1996, Directors' retirement benefits amounted to $26,333.
At June 30, 1996, the Fund has accrued $178,676 for such benefits.
E. LINES OF CREDIT
- --------------------------------------------------------------------------------
The Fund and several affiliated Funds ("The Participants") share in a $500
million revolving credit facility for temporary or emergency purposes, including
the meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated among each of the Participants. Interest is calculated based
on the market rates at the time of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the agreement. In addition, the
Fund also maintains an uncommitted line of credit.
--
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF THE JAPAN FUND, INC.:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Japan Fund, Inc. (the "Fund")
at June 30, 1996, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at June 30, 1996 by
correspondence with the custodian and brokers and the application of alternative
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
Boston, Massachusetts PRICE WATERHOUSE LLP
August 22, 1996
--
23
<PAGE>
You can call toll free (1-800-343-2890) anytime day or night and get access to
automated information regarding transactions in your account as well as The
Japan Fund's share price. By using your touch-tone telephone and providing the
necessary information (including your account number), you can receive daily
updates from this computerized system.
We remind all shareholders that the Fund offers a free dividend reinvestment
program. You can obtain additional information about this feature and arrange to
have all dividends and capital gain distributions reinvested in additional Fund
shares by calling The Japan Fund Service Center at 1-800-53-JAPAN
(1-800-535-2726). The Fund typically distributes capital gains twice a year
(December and March).
HOW TO CONTACT US:
1-800-53-JAPAN
1-800-535-2726
(Outside the U.S. call 617-439-4640)
The Japan Fund
Shareholder Service Center
Two International Place
Boston, MA 02110
Scudder, Stevens & Clark, Inc.
Investment Manager
