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.
Annual Report
December 31, 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 9
Itemized list of your Fund's portfolio holdings
Financial Statements 13
Financial Highlights 16
Notes to Financial Statements 17
Report of Independent Accountants 23
Tax Information 24
Officers and Directors 27
How to Contact The Japan Fund Back cover
2
<PAGE>
Dear Shareholders,
In 1996, investors in Japanese stocks were hurt by a lackluster market
and a weakening currency. While The Japan Fund's total return for the year of
- -10.92% was disappointing in absolute terms, the Fund significantly outperformed
the dollar-based TOPIX benchmark, which declined 16.51%. The unmanaged TOPIX
declined 6.8% in yen terms, while a depreciation of the yen versus the dollar
reduced returns to U.S. investors. The Fund's currency hedging activity earlier
in 1996 added 0.83% to performance. However, most of the Fund's outperformance
relative to TOPIX came from stock selection.
Japan's Deflationary Spiral Unwinds in 1996
Several major improvements in Japan's investment environment became
visible in the first half of 1996. After suffering a three year period between
1993 and 1995 in which nominal GDP growth was below 1%, both real and nominal
GDP growth began accelerating to the 3% level, spurred by recoveries in housing,
consumption, private investment, and public investment. Moreover, one of the
major economic problems in Japan, price deflation, abated as indicated by the
GDP deflator, which for the second quarter of 1996 turned positive versus a year
earlier for the first time in two years. The major wholesale and consumer price
indices also turned positive by mid-year. Helped by the yen's reversal since
mid-1995, Japan's deflationary spiral appears to be easing.
Moreover, the risks to the financial system of the massive real
estate-related bad debt carried by Japanese banks -- another key concern
regarding the economy and financial markets -- appear to have abated. The major
banks began large scale write-offs of bad debts, the Bank of Japan instituted
various measures such as strengthening depositor insurance, to contain the
systemic risks from bank failures, and legislation was passed by mid year to
rescue a major source of bad debts, the Jusen (housing loan corporations). Some
improvements were also visible in the Japanese real estate market: vacancy rates
clearly came down, prime office rents stabilized, the rental yield began to
improve, and the number of land transactions began to increase.
3
<PAGE>
THE JAPAN FUND, INC.
PERFORMANCE UPDATE as of December 31, 1996
- ------------------------------------------
THE JAPAN FUND, INC.
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $ 8,908 -10.92% -10.92%
5 Year $ 9,175 -8.25% -1.71%
10 Year $14,027 40.27% 3.44%
- --------------------------------------
TOPIX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $ 8,349 -16.51% -16.51%
5 Year $ 9,615 -3.85% -0.78%
10 Year $13,956 39.56% 3.39%
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
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 DECEMBER 31
THE JAPAN FUND, INC.
Year Amount
- ----------------------
'86 $10,000
'87 $13,301
'88 $15,881
'89 $17,728
'90 $14,827
'91 $15,289
'92 $12,729
'93 $15,738
'94 $17,317
'95 $15,747
'96 $14,027
TOPIX
Year Amount
- ----------------------
'86 $10,000
'87 $16,217
'88 $20,259
'89 $22,304
'90 $17,012
'91 $17,214
'92 $12,532
'93 $18,352
'94 $20,055
'95 $17,079
'96 $16,997
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 withholding 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 DECEMBER 31
<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... $16.97 $16.24 $14.27 $10.76 $10.69 $ 8.90 $10.33 $ 10.50 $ 9.44 $ 8.33
INCOME DIVIDENDS.. $ .20 $ .02 $ .08 $ .09 $ -- $ -- $ .28 $ -- $ -- $ .08
CAPITAL GAINS
DISTRIBUTIONS..... $ 9.08 $ 3.88 $ 3.59 $ 1.10 $ .41 $ -- $ .39 $ .85 $ .11 $ --
FUND TOTAL
RETURN (%)........ 33.01 19.40 11.63 -16.36 3.11 -16.74 23.64 10.03 -9.07 -10.92
INDEX TOTAL
RETURN (%)........ 46.82 33.19 6.79 -35.88 8.39 -22.92 24.07 21.96 -1.29 -16.51
</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 December 31, 1996
- ---------------------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------------------
Equity Holdings 96%
Cash Equivalents 4% The Fund's equity holdings
---- include a position in
100% Convertible Bonds of
==== approximately 5%.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
SECTOR DIVERSIFICATION (Excludes 4% Cash Equivalents)
- --------------------------------------------------------------------------
Manufacturing 29%
Financial 19% The Fund has trimmed
Consumer Staples 16% exposure to sectors that may
Consumer Discretionary 9% be sensitive to the domestic
Service Industries 6% economy, such as consumer
Durables 6% discretionary and durable
Construction 5% goods.
Metals & Minerals 5%
Technology 2%
Other 3%
----
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 (42% 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. RICOH CO., LTD.
Leading maker of copiers and
information equipment
4. DAITO TRUST CONSTRUCTION CO., LTD.
Construction and building
management services
5. SUMITOMO ELECTRIC INDUSTRIES, LTD.
Leading manufacturer of electric Top holdings include global
wires and cables corporations as well as
domestically-oriented
6. MATSUSHITA ELECTRIC WORKS, INC. companies with strong
Leading maker of building materials competitive positions.
and lighting equipment
7. PIONEER ELECTRONICS CORP.
Leading manufacturer of
audio equipment
8. MITSUBISHI HEAVY INDUSTRIES, LTD.
Diversified heavy machinery
manufacturer and leading
shipbuilder
9. JAPAN ASSOCIATED FINANCE CO.
Venture capital company
10. CANON INC.
Leading producer of visual image
and information equipment
- -----------------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio,
see page 9. A monthly Investment Portfolio Summary and quarterly Portfolio
Holdings are available upon request.
5
<PAGE>
Given this seemingly positive backdrop, favorable earnings growth and
continued low interest rates spurred the Tokyo market higher by 8.5% in yen
terms over the first half of 1996, led by smaller capitalization, auto, and real
estate stocks. In the second half, however, as the market looked to 1997,
several developments dampened investor sentiment. In the fall, the government
announced plans to implement a more restrictive fiscal policy for 1997, with
hikes in the consumption tax, elimination of income tax breaks, and reduced
public works spending. The impending elimination of the public sector's
contribution to growth led to a scaling back of the market's expectation for
1997 real GDP growth. In addition, the announcement in November of a Japanese
version of the "Big Bang" spurred selling in major financial industry stocks as
investors became concerned about increased competition and margin pressures in
the face of deregulation.
As a result, performance of the majority of the more
domestically-oriented sectors began to diverge as the year progressed in a
pronounced fashion from that of the handful of more globally competitive
companies who were benefiting from yen depreciation. The best performing
industries in 1996 were autos, pharmaceuticals, tires, precision, non-bank
financials, and electronics, while the worst performing industries were
securities, paper, banks, shipping, insurance, and construction. Smaller cap
stocks declined more than large caps as market liquidity dried up in the second
half of 1996. For the most part, the decline in smaller cap stock prices was not
due to earnings disappointments or to adverse or unexpected corporate
developments.
In keeping with this shift, The Japan Fund reduced positions in
companies more sensitive to domestic economic growth, including Sekisui
Chemical, Itochu, Sumitomo Corp., Komori, THK, Kajima, Maeda Road, Takasago
Thermal Engineering, and the steel companies. In turn, the Fund has increased
exposure to select global companies, such as Sony, Pioneer, MHI, and Sumitomo
Electric, as well as to attractively valued, economically-defensive companies
such as Shiseido, Gunze, Nippon Meat Packers, and Daito Trust. Holdings of
smaller growth stocks which have the potential of becoming the future "blue
chips," including Shokoh Fund, H.I.S., and Ryohin Keikaku, have been increased
as well.
6
<PAGE>
Improved Outlook for Japanese Equities
The returns on the Japanese market in recent years have been
disappointing, especially in comparison to the major bull markets in the United
States and, to a lesser extent, Europe. However, we believe that the investment
fundamentals in Japan are gradually improving. There are indications that Japan
is emerging from its long deflationary spiral. Nominal GDP growth for 1996 is
expected to be over 3%, and while volatility in growth from quarter to quarter
can be expected in 1997 due to the expected consumption tax hike, we believe
that per annum nominal GDP growth of 2-3% is possible for Japan over the coming
two or three years. The financial system risks are now better contained than
before, and deregulation is proceeding in areas such as telecommunications,
finance, and transportation.
Moreover, Japanese institutional investors and Japanese households,
whose financial assets amount to over $10 trillion, are still sitting on very
large cash and bond holdings. Rates currently offered on bank deposits with
maturities of less than two years are below the 0.8% average dividend yield on
stocks, and the current earnings yield on equity (inverse of the price earnings
ratio) for the Japanese market is now approximately equal to the 2.4% yield on
the ten-year Japanese government bond -- the first time since the 1970s that the
earnings of Japanese stocks are so inexpensive relative to the prevailing
long-bond yield. While Japanese investors are still highly risk averse, a
gradual shift of financial assets from cash and bonds to the equity market may
be expected over the next two to three years as Japan continues to emerge from
deflation, and financial deregulation allows new players and products into the
equity market.
To be sure, the structural changes that Japan is undergoing are likely
to entail some continued risks. Currency risk from Japan's continued capital
outflow remains, although recent trade statistics indicate that the collapse of
the Japanese trade surplus is slowing. Also, changes with respect to stock
cross-holdings and the shift of equity buyers from shareholders with collateral
business interests to pure investors such as pension funds and foreigners may
continue to move the valuation levels of the market outside of historical
ranges. The opening up of Japanese industries to import competition and
deregulation is likely to result in greater competition and increased divergence
between strong and weak companies. With these major changes, the Japanese equity
market may continue to feature high volatility going forward.
7
<PAGE>
In such a context, competitive strength, industry leadership, and
valuation levels are all central to our stock selection process as we begin
1997. The Fund will maintain core holdings in global companies with strong
technology, valuable franchises, and adaptability to changing yen levels.
Investment in domestically-oriented companies is focusing on industry leaders
with strong competitive positions, aggressive restructuring plans or
adaptability to change, and issues offering attractive valuation relative to
market and industry averages, with less emphasis on historical valuation ranges.
With respect to smaller-capitalization growth investments, we are seeking
companies with clear and defensible competitive advantages, demonstrated
excellence in performance, and a long growth horizon.
We continue to position the Fund to take advantage of the ongoing
transformation and growth of Japan, and remain convinced that the long-term
outlook for Japan's economy and equity market remains constructive. Thank you
for your continued investment, and please do not hesitate to call a Japan Fund
specialist at 1-800-53-JAPAN (1-800-535-2726) with any questions.
Sincerely,
/S/Lynn Birdsong /s/Henry Rosovsky
Lynn Birdsong, Henry Rosovsky,
President Chairman
The Japan Fund:
A Team Approach to Investing
The Japan Fund is managed by a team of Scudder investment professionals
who each play an important role in the Fund's management process. Team members
work together to develop investment strategies and select securities for the
Fund. They are supported by Scudder's large staff of economists, research
analysts, traders, and other investment specialists who work in our offices
across the United States and abroad. We believe our team approach benefits Fund
investors by bringing together many disciplines and leveraging Scudder's
extensive resources.
Lead Portfolio Manager Seung Kwak assumed responsibility for the Fund's
investment strategy and daily operation in 1994 and has been a member of the
portfolio management team since 1989. Mr. Kwak has directed our Tokyo-based
research effort since he joined Scudder in 1988. Elizabeth J. Allan, Portfolio
Manager, helps set the Fund's general investment strategy. Ms. Allan has
contributed her expertise to the management of the Fund since she joined Scudder
in 1987 and has numerous years of Pacific Basin research and investing
experience.
8
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO as of December 31, 1996
% of Principal Market
Portfolio Amount (c) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1.8% REPURCHASE AGREEMENTS
7,023,000 Repurchase Agreement with Donaldson,
Lufkin & Jenrette dated 12/31/96 at 6.7% to
be repurchased on 1/2/97 at $7,025,614
collateralized by a $6,794,000 U.S. Treasury
Note, 7.25%, 2/15/98 (Cost $7,023,000).......... 7,023,000
-------------
2.0% COMMERCIAL PAPER
7,500,000 Household Finance Corp., 4.97%, 1/15/97
(Cost $7,484,483)............................... 7,484,483
-------------
4.8% CONVERTIBLE BONDS
Durables 0.5%
Automobiles JPY 233,000,000 ShinMaywa Industries, Ltd., 0.7%, 3/31/03......... 2,077,303
Manufacturing 2.3% -------------
Industrial Specialty 0.9% JPY 388,000,000 Nippon Electric Glass Co., Ltd., 2%, 3/29/02...... 3,551,326
-------------
Office Equipment/Supplies 1.4% JPY 445,000,000 Ricoh Co., Ltd., 1.5%, 3/29/02.................... 5,110,526
Technology 2.0% -------------
Computer Software 0.5% JPY 225,000,000 Softbank Corp., 0.5%, 3/29/02..................... 1,806,839
Diverse Electronic Products 1.5% JPY 575,000,000 Matsushita Electric Industrial Co., Ltd., 1.4%, -------------
3/31/2004....................................... 5,908,384
-------------
Total Convertible Bonds (Cost $20,058,963)........ 18,454,378
91.4% COMMON STOCKS -------------
Shares
---------------------------------------------------------------- -------------
Consumer Discretionary 8.6%
Department & Chain Stores 5.8% 155,000 FamilyMart Co., Ltd............................... 6,196,788
235,000 Jusco Co., Ltd.................................... 7,974,700
107,000 Ryohin Keikaku Co., Ltd........................... 7,945,773
-------------
22,117,261
-------------
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<CAPTION>
THE JAPAN FUND, INC.
% of Market
Portfolio Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Home Furnishings 0.2% 45,200 Nitori Co., Ltd................................... 784,492
-------------
Recreational Products 1.7% 127,100 Square Co., Ltd................................... 6,420,301
-------------
Restaurants 0.4% 99,306 Genki Sushi Co., Ltd.............................. 1,714,981
-------------
Specialty Retail 0.5% 54,400 Shimamura Co., Ltd................................ 1,869,545
Consumer Staples 15.2% -------------
Consumer Electronic &
Photographic Products 5.4% 659,000 Pioneer Electronics Corp.......................... 12,575,684
122,000 Sony Corp......................................... 7,995,683
-------------
20,571,367
-------------
Food & Beverage 5.3% 224,400 Ariake Japan Co., Ltd. (b)........................ 7,208,082
256,000 Fujicco Co., Ltd.................................. 2,851,567
583,000 Nippon Meat Packers, Inc.......................... 7,551,161
231,600 Rock Field Co., Ltd............................... 2,959,744
-------------
20,570,554
-------------
Package Goods/Cosmetics 2.5% 843,000 Shiseido Co., Ltd................................. 9,754,080
-------------
Textiles 2.0% 1,451,000 Gunze, Ltd........................................ 7,530,015
Health 1.2% -------------
Pharmaceuticals 316,000 Banyu Pharmaceutical Co., Ltd..................... 4,420,344
Communications 0.6% -------------
Telephone/
Communications 353 DDI Corp.......................................... 2,334,842
Financial 18.1% -------------
Other Financial
Companies 17.3% 156,000 Japan Associated Finance Co....................... 12,325,361
423,876 Nichiei Co., Ltd.................................. 31,293,842
104,500 Shohkoh Fund & Co., Ltd........................... 22,738,969
-------------
66,358,172
-------------
Real Estate 0.8% 300,000 Mitsubishi Estate Co., Ltd........................ 3,082,635
-------------
Media 0.4%
Broadcasting &
Entertainment 52,000 Horipro Inc....................................... 498,403
28,777 Sony Music Entertainment (Japan) Inc.............. 1,138,059
-------------
1,636,462
-------------
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
INVESTMENT PORTFOLIO
% of Market
Portfolio Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------
Service Industries 5.5%
Miscellaneous
Commercial Services 3.6% 384,000 Itochu Corp....................................... 2,062,413
123,000 Secom Co., Ltd.................................... 7,445,212
21,000 Softbank Corp..................................... 1,485,105
369,000 Sumitomo Corp..................................... 2,909,049
-------------
13,901,779
Miscellaneous -------------
Consumer Services 1.9% 150,800 H.I.S. Co., Ltd................................... 7,291,944
Durables 4.8% -------------
Automobiles 434,000 Bridgestone Corp.................................. 8,244,538
358,100 Kyokuto Kaihatsu Kogyo Co., Ltd................... 4,792,807
751,000 ShinMaywa Industries, Ltd......................... 5,531,500
-------------
18,568,845
-------------
Manufacturing 26.1%
Diversified Manufacturing 7.7% 839,000 Ishikawajima-Harima Heavy Industries Co., Ltd..... 3,730,982
1,582,000 Mitsubishi Heavy Industries, Ltd.................. 12,567,481
939,000 Sumitomo Electric Industries, Ltd................. 13,135,135
-------------
29,433,598
-------------
Electrical Products 6.5% 789,000 Hitachi Ltd....................................... 7,357,914
365,000 Kinden Corp....................................... 4,633,020
1,498,000 Matsushita Electric Works, Inc.................... 12,896,175
-------------
24,887,109
-------------
Machinery/Components/
Controls 0.8% 10,500 Keyence Corp...................................... 1,296,520
29,800 SMC Corp.......................................... 2,004,507
-------------
3,301,027
-------------
Office Equipment/Supplies 9.4% 499,000 Canon Inc......................................... 11,030,481
264,000 Kokuyo............................................ 6,519,644
945,000 Ricoh Co., Ltd.................................... 10,852,690
119,100 Riso Kagaku Corp.................................. 7,651,360
-------------
36,054,175
-------------
Miscellaneous 1.7% 384,000 Shimano Inc....................................... 6,465,763
Metals & Minerals 4.4% -------------
Precious Metals 1.8% 1,052,000 Sumitomo Metal Mining Co., Ltd.................... 7,094,482
-------------
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
THE JAPAN FUND, INC.
% of Market
Portfolio Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------
Steel & Metals 2.6% 1,243,000 Kawasaki Steel Corp............................... 3,574,121
2,607,000 Sumitomo Metal Industries, Ltd.................... 6,415,638
-------------
9,989,759
-------------
Construction 5.2%
Homebuilding 0.3% 106,000 Hosoda Corp....................................... 1,061,739
-------------
Miscellaneous 4.9% 1,385,000 Daito Trust Construction Co., Ltd................. 15,427,424
480,000 Toshiba Plant Kensetsu Co......................... 3,502,288
-------------
18,929,712
-------------
Transportation 1.3%
Railroads 848,000 Tokyu Corp........................................ 4,818,099
-------------
Total Common Stocks (Cost $379,581,032)........... 350,963,082
-------------
- -------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $414,147,478) (a)......................... 383,924,943
=============
(a) The cost for federal income tax purposes was $429,654,003. At December 31, 1996, net unrealized depreciation for all
securities based on tax cost was $45,729,060. This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of $5,398,860 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost over market value of $51,127,920.
(b) Security valued in good faith by the Valuation Committee of the Board of Directors at fair value amounted to
$7,208,082 (1.87% of net assets). The value has been estimated by the Board of Directors in the absence of readily
ascertainable market values. However, because of the inherent uncertainty of valuation, those estimated values
may differ significantly from the values that would have been used had a ready market for the security existed,
and the difference could be material. The cost of this security at December 31, 1996 amounted $6,710,618. This
security may also have certain restrictions as to resale.
(c) 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $414,147,478)
(Note A).............................................. $ 383,924,943
Cash.................................................... 790
Foreign currency holdings, at market (identified
cost $1,526,805) (Note A)............................. 1,527,852
Receivable on investments sold.......................... 487,519
Receivable on fund shares sold.......................... 4,276,432
Dividends and interest receivable....................... 192,662
Other assets............................................ 5,433
--------------
Total assets.......................................... 390,415,631
Liabilities
Payable for investments purchased....................... $1,582,918
Payable for fund shares redeemed........................ 1,961,392
Accrued management fee (Note C)......................... 254,647
Other accrued expenses (Note C)......................... 652,712
-------------
Total liabilities..................................... 4,451,669
--------------
Net assets, at market value............................. $ 385,963,962
==============
Net Assets
Net assets consist of:
Accumulated distributions in excess of net
investment income................................... $(9,942,905)
Net unrealized appreciation (depreciation) on:
Investments......................................... (30,222,535)
Foreign currency related transactions............... 13,574
Accumulated net realized loss........................... (37,203,728)
Paid-in capital......................................... 463,319,556
--------------
Net assets, at market value............................. $ 385,963,962
==============
Net asset value, offering and redemption price per
share ($385,963,96 / 246,358,011 outstanding
shares of capital stock, $.333 par value,
600,000,000 shares authorized)........................ $8.33
======
The accompanying notes are an integral part of the financial statements.
13
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE JAPAN FUND, INC.
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income
Income:
Dividends (net of withholding taxes of $422,476)............... $ 2,394,032
Interest (net of withholding taxes of $27,529)................. 1,546,708
---------------
Expenses: 3,940,740
Management fee (Note C)........................................ $3,621,876
Shareholder and Transfer Agent services (Note C)............... 861,923
Officers and directors fees and expenses (Notes C & D)......... 222,069
Custodian fees................................................. 366,978
Printing....................................................... 172,032
Legal.......................................................... 98,174
Auditing and accounting services............................... 107,250
Federal and state registration ................................ 51,490
Other.......................................................... 69,157 5,570,949
------------------------------
Net investment loss............................................ (1,630,209)
---------------
Net realized and unrealized gain (loss) on
investment transactions
Net realized gain (loss) from:
Investments.................................................. (7,161,298)
Options...................................................... 7,481,083
Foreign currency related transactions.......................... (275,588) 44,197
---------------
Net unrealized appreciation (depreciation) during
the period on:
Investments.................................................. (48,668,588)
Foreign currency related transactions........................ 13,771 (48,654,817)
------------------------------
Net loss on investment transactions............................ (48,610,620)
---------------
Net decrease in net assets resulting from operations $(50,240,829)
===============
The accompanying notes are an integral part of the financial statements.
14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
Years Ended December 31,
-------------------------------------------
Increase (Decrease) in Net Assets 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment loss............................................... $ (1,630,209) $ (1,225,455)
Net realized gain (loss) from investment
transactions.................................................... 44,197 (31,866,410)
Net unrealized depreciation on investment
transactions during the period.................................. (48,654,817) (13,959,444)
------------------------------------
Net decrease in net assets resulting from
operations...................................................... (50,240,829) (47,051,309)
------------------------------------
Distributions to shareholders:
In excess of net investment income................................ (3,998,120) --
------------------------------------
In excess of net realized gains................................... -- (5,803,249)
------------------------------------
Fund share transactions:
Proceeds from shares sold......................................... 187,023,459 330,312,663
Net asset value of shares issued to
shareholders in reinvestment of
distributions................................................... 3,312,548 4,957,881
Cost of shares redeemed........................................... (298,937,269) (319,319,066)
------------------------------------
Net increase (decrease) in net assets from
Fund share transactions......................................... (108,601,262) 15,951,478
------------------------------------
Increase (decrease) in net assets................................. (162,840,211) (36,903,080)
Net assets at beginning of period................................. 548,804,173 585,707,253
------------------------------------
Net assets at end of period (including
accumulated distributions in excess of
net investment income of $9,942,905
and undistributed net investment income
of $10,531,476, respectively)................................... $ 385,963,962 $548,804,173
====================================
Other Information
Increase (decrease) in Fund shares
Shares outstanding at beginning of period......................... 58,139,460 55,779,456
------------------------------------
Shares sold....................................................... 20,114,876 37,050,849
Shares issued to shareholders in reinvestment
of distributions................................................ 380,640 559,580
Shares redeemed................................................... (32,276,965) (35,250,425)
------------------------------------
Net increase (decrease) in Fund shares............................ (11,781,449) 2,360,004
------------------------------------
Shares outstanding at end of period............................... 46,358,011 58,139,460
====================================
The accompanying notes are an integral part of the financial statements.
15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE JAPAN FUND, INC.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout each period and other
performance information derived from the financial statements.
Years Ended December 31,
------------------------------------------------------------------------------
1996(a) 1995 1994(a) 1993(a) 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------
<S> <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
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (loss).......... (.03) (.01) (.05) (.05) (.05) (.03) .09 .04 .04 .16
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net realized and
unrealized gain (loss)
on investments......... (1.00) (.94) 1.07 2.15 (1.74) .37 (2.41) 1.66 3.13 5.81
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.............. . (1.03) (.95) 1.02 2.10 (1.79) .34 (2.32) 1.70 3.17 5.97
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income................. -- -- -- -- -- -- (.09) (.08) (.02) (.20)
In excess of net
investment income...... (.08) -- -- (.28) -- -- -- -- -- --
From net realized
gains on investment
transactions........... -- -- (.80) (.39) -- (.41) (1.10) (3.59) (3.88) (9.08)
In excess of net
realized gains......... -- (.11) (.05) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions...... (.08) (.11) (.85) (.67) -- (.41) (1.19) (3.67) (3.90) (9.28)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period.......... $8.33 $9.44 $10.50 $10.33 $8.90 $10.69 $10.76 $14.27 $16.24 $16.97
====== ====== ====== ====== ===== ====== ====== ====== ====== ======
Total Return.............. .(10.92) (9.07) 10.03 23.64 (16.74) 3.11 (16.36) 11.63 19.40 33.01
Ratios and
Supplemental Data
Net assets, end of
period ($ millions)...... 386 549 586 471 409 335 313 401 404 394
Ratio of operating
expenses to average
daily net assets (%)..... 1.16 1.21 1.08 1.25 1.42 1.26 1.05 1.02 1.01 .90
Ratio of net investment
income (loss) to average
daily net assets (%)..... (.34) (.24) (.40) (.47) (.31) (.15) .72 .34 .28 .41
Portlio turnover rate (%).. 72.6 69.9 74.3 81.7 47.0 46.4 52.7 60.4 38.8 34.0
Average commission
rate paid (b)........ ....$.0444 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is calculated for fiscal years
ending on or after December 31, 1996.
16
</TABLE>
<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.
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
17
<PAGE>
THE JAPAN FUND, INC.
- -----------------------------------------------------------------------
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, 1996, the Fund had a net tax basis capital loss
carryforward of approximately $30,683,000 which may be applied against
any realized net taxable capital gains of each succeeding year until
fully utilized or until, December 31, 2003 ($23,266,000), and December
31, 2004 ($7,417,000), the respective expiration dates, whichever occurs
first. In addition, from November 1, 1996 through December 31, 1996, the
Fund incurred approximately $5,813,000 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, 1997.
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 year ended December 31, 1996, purchases and sales of investment
securities (excluding short-term investments) aggregated $331,621,568
and $461,718,305, 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 year ended December 31,
1996, the fee pursuant to the Management Agreement amounted to
$3,621,876, 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 year ended December 31, 1996, the amount charged to the Fund by
SSC aggregated $685,999, of which $50,828 is unpaid at December 31,
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 year ended December 31, 1996, the Officers
and Directors fees and expenses aggregated $169,112.
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 year ended December 31, 1996,
Directors' retirement benefits amounted to $52,957. At December 31,
1996, the Fund has accrued $191,768 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 December 31, 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 December 31,
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
January 31, 1997
23
<PAGE>
THE JAPAN FUND, INC.
- -----------------------------------------------------------------------
TAX INFORMATION
For its fiscal year ended December 31, 1996, the total amount of income
received by the Fund from sources within foreign countries and
possessions of the United States was $.0407 per share (representing a
total of $1,865,540). The total amount of taxes paid by the Fund to such
countries was $.01 per share (representing a total of $449,707).
24
<PAGE>
This page intentionally left blank.
25
<PAGE>
This page intentionally left blank.
26
<PAGE>
Officers and Directors
Henry Rosovsky
Chairman of the Board and Director
Professor, Harvard University; Director, Corning Inc., Paine Webber Group
Lynn Birdsong*
President
William L. Givens
Director
President, Twain Associates
William H. Gleysteen, Jr.
Director
Consultant
John F. Loughran
Director
Senior Adviser for Asia Pacific to J.P. Morgan & Co., Inc.
Yoshihiko Miyauchi
Director
William V. Rapp
Director
Senior Research Fellow Columbia University; Professor, University of
Victoria; Managing Director, Rue Associates
O. Robert Theurkauf*
Director
Shoji Umemura
Director
Board Counselor, The Nikko Securities Co., Ltd.; Counselor, Tokyo Stock
Exchange; Advisor, Japan Securities Dealers Association, Association of Tokyo
Stock Exchange Regular Members; Director, The Securities Analysts Association
of Japan; Advisor, Japan Association of Corporate Executives; Associate
Advisor, Tokyo Chamber of Commerce and Industry; Vice President, Japan-Korea
Economic Association; Member, Executive Board, Waseda University; Chairman,
Congregation, Waseda University
Hiroshi Yamanaka
Director
Advisor to the Board, The Meiji Mutual Life Insurance Company; Lifetime
Executive Director, Japan Association of Corporate Executives; Vice Chairman,
The Security Analysts Association of Japan; Governor, Board of Governors,
Tokyo Stock Exchange; Auditor, The Bank of Tokyo-Mitsubishi, Ltd., The
Mitsubishi Foundation, Mitsubishi Research Institute; Director, Kirin Brewery
Co., Ltd., Seijo Gakuen; Doctor of Commerce, Chuo University
Elizabeth J. Allan*
Vice President
William E. Holzer*
Vice President
Thomas W. Joseph*
Vice President
Seung Kwak*
Vice President
Edward J. O'Connell*
Vice President
Miyuki Wakatsuki
Vice President
Manager, Nikko International Capital Management Co., Ltd.
Gina Provenzano*
Vice President and Treasurer
Kathryn L. Quirk*
Vice President and Secretary
Thomas F. McDonough*
Assistant Secretary
Pamela A. McGrath*
Assistant Treasurer
HONORARY DIRECTORS
Tristan E. Beplat
Director, Daiwa Bank Trust Co., Yasuda Fire & Marine Insurance Co. of
America, Pacific Forum, Farfield Maxwell, Ltd; Member, Advisory Council, East
Asian Studies, Princeton University; Honorary Director, Japan Society,
U.S.-Asia Institute, Radix Ventures, Inc.
Allan Comrie
Former Director, The Japan Fund, Inc.
Jonathan Mason
Former Chairman of the Board and Director, The Japan Fund, Inc.
James W. Morley
Professor of Political Science Emeritus, Columbia University
Robert G. Stone, Jr.
Former Chairman of the Board and Director, The Japan Fund, Inc.
Chairman of the Board, Kirby Corporation
* Scudder Stevens & Clark, Inc.
27
<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.
W e 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
