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, 1997
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 6
Portfolio Summary 7
Investment Portfolio 8
Itemized list of your Fund's portfolio
holdings
Financial Statements 13
Financial Highlights 16
Notes to Financial Statements 17
Officers and Directors 23
How to Contact The Japan Fund Back cover
2
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
The Japanese stock market rallied from depressed levels in the first six
months of 1997. While the yen continued to weaken through April, growing
evidence that the Japanese trade surplus is resurging led to a dramatic reversal
in May, and the yen strengthened to 1996-end levels by the end of June. As a
result, the Tokyo Stock Price Index (TOPIX) returned 7.60% for dollar-based
investors in the first six months of 1997, with 5.63% return from yen-based
appreciation of the TOPIX and 1.97% from yen appreciation versus the dollar. In
the same period, The Japan Fund outperformed the TOPIX, the Fund's benchmark
index, by a significant margin, returning 17.22% to our shareholders. The Fund's
outperformance was largely attributable to stock selection and the strong
performance of the Fund's core holdings, such as Nichiei, Shohkoh Fund, Sony,
Canon, Orix, Ricoh, Tokyo Electron and Pioneer. Over the twelve months ended
June 31, 1997, The Japan Fund returned 0.54%, in contrast to the TOPIX return of
- -12.32%.
An Improving Environment
The strength of the market over the last six months reflects a number of
improvements in Japanese fundamentals. First, there is growing evidence that the
Japanese economy is emerging from the deflationary spiral of 1990-1995. The rent
and land prices of prime real estate appear to be stablilizing, consumer and
wholesale price indicators are recovering, and the job offer/applicant ratio has
been improving, suggesting a better employment outlook. Second, the Japanese
financial system risk appears to be largely contained, with the largest banks
now making significant strides in the provisioning for, and write-offs of, bad
debts. Third, the management of many Japanese corporations appears to be
increasingly conscious of shareholder returns. The number of companies which
have announced large scale share buybacks is growing, with visible positive
effects on the stock prices of those companies. Moreover, a growing number of
corporate managers we interview are focusing on return on equity as a key
management goal, and some, such as Tokyo Electron, Sony, and Orix, have recently
introduced stock options as a part of management compensation schemes. Greater
focus by management on stock market performance could attract new investment
from pension and foreign money and help absorb some of the overhang as keiretsu
company cross holdings are unwound.
3
<PAGE>
The Japan Fund, Inc.
While the overall tone of the Japanese stock market continued to improve in
the first half of 1997, there were large disparities in performance within the
Japanese equity market. The leading sectors, such as real estate, insurance,
electronics, other financials, pharmaceuticals, and communications surged over
15%, while the worst-performing sectors, such as airlines, securities, shipping,
construction, and utilities declined over 7%. As deregulation continues to
proceed at an uneven pace among industries, we believe that the market is
distinguishing the "winners" from the "losers." Sectors which benefit from
deregulation, such as other financials, electronics, and communications
continued to outperform, while industries which face new risks from
deregulation, such as airlines, securities, shipping, construction, and
utilities all have been laggards.
Focus on Beneficiaries of Deregulation
The Japan Fund continues to position itself in the companies that we
believe will be the "winners" in Japan's more deregulated environment. These
include the leading technology companies which should benefit from the
forthcoming digital information revolution, as well as the leading domestic
companies with clear competitive strengths, adaptability to change, excess cash
generation or clear restructuring benefits. The Fund also continues to hold
smaller, entrepreneurial growth companies that are driving the growth of Japan's
new services and may emerge as the blue chips of tomorrow. Major positions which
have been added in the first six months of 1997 include Tokyo Electron, one of
the world's largest semiconductor production equipment makers, Orix, Japan's
leading and the most globalized non-bank financial company, and semiconductor
and telecommunications manufacturer NEC.
We have also sought to control the various risks in the portfolio. In fact,
we believe that the Fund's risk control methodology is one of the major benefits
of our investment style. Because the efficacy of the valuation indicators for
Japanese stocks has changed in the last year, we have undertaken a more
comprehensive valuation analysis of our investments, assessing indicators --
such as price-to-earnings, price-to-cash flow, and dividend yield -- both
relative to current market levels and to the company's historical levels. We
have also emphasized greater control of risks under a range of scenarios,
focusing on the sensitivity of the portfolio to changes in various economic
4
<PAGE>
Portfolio Management Discussion
variables, such as the currency, interest rates, and economic growth rates.
Because the prospects for the yen in particular appeared increasingly
uncertain over the last few months, we have attempted to reduce the Fund's
sensitivity to the performance of dollar earners, by taking profits on such
holdings as Bridgestone, Sumitomo Metal and Mining, and reducing the Fund's
consumer electronics positions. In turn, the Fund has added new positions in
Nippon Oil and Hokuetsu Paper, and specialty retail companies such as Fast
Retailing and Senshukai, all of which have strong competitive positions,
attractive valuations, and should benefit from yen appreciation. We have also
attempted to offset the currency risk of holding a major position in the global
technology companies by continuing to underweight other highly
currency-sensitive sectors, such as autos, shipbuilding, and shipping. In doing
so, we seek to position the Japan Fund to perform well on the basis of stock
selection, regardless of the currency level.
More Reasonable Valuations
Looking forward, while near term prospects appear to be clouded by the
direction of the yen and the temporary fall-off in growth from the imposition of
the consumption tax hike in April, we believe that the major point for
longer-term investors in Japan is that the country's longest post-war recession
- -- which was accompanied by severe price and asset deflation -- now appears to
be over. Valuations in the Japanese stock market in terms of price-to-book and
price-to-cash flow ratios are no longer expensive by global standards, and an
increasing number of Japanese corporate managers are focusing more heavily on
shareholder returns. In short, we believe that opportunities in Japan for
long-term investors are expanding, and we thank you for your continued
investment in The Japan Fund.
Sincerely,
/s/Lynn Birdsong /s/Henry Rosovsky
Lynn Birdsong, Henry Rosovsky,
President Chairman
5
<PAGE>
THE JAPAN FUND, INC.
PERFORMANCE UPDATE as of June 30, 1997
- -----------------------------------------------------------------
THE JAPAN FUND, INC.
- -----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
6/30/97 $10,000 Cumulative Annual
- ---------------------------------------
SCUDDER SHORT TERM BOND FUND
- ---------------------------------------
1 Year $ 10,054 0.54% 0.54%
5 Year $ 12,760 27.60% 4.99%
10 Year $ 13,239 32.39% 2.85%
- ---------------------------------------
TOPIX
- ---------------------------------------
1 Year $ 8,768 -12.32% -12.32%
5 Year $ 14,409 44.09% 7.57%
10 Year $ 10,500 5.00% 0.49%
- ---------------------------------------
- -----------------------------------------------------------------
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 June 30
THE JAPAN FUND, INC.
Year Amount
- ----------------------
'87 $10,000
'88 $11,373
'89 $11,735
'90 $13,924
'91 $12,992
'92 $10,376
'93 $13,337
'94 $15,592
'95 $11,336
'96 $13,168
'97 $13,239
TOPIX
Year Amount
- ----------------------
'87 $10,000
'88 $11,835
'89 $12,409
'90 $11,302
'91 $ 9,734
'92 $ 7,287
'93 $11,218
'94 $12,817
'95 $10,730
'96 $11,975
'97 $10,500
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 June 30
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------
NET ASSET VALUE... $ 17.55 $ 14.76 $ 13.01 $ 11.51 $ 9.01 $ 11.57 $ 12.71 $ 8.44 $ 9.77 $ 9.62
INCOME DIVIDENDS.. $ .14 $ .06 $ .06 $ .09 $ - $ .01 $ .27 $ - $ .03 $ .17
CAPITAL GAINS
DISTRIBUTIONS..... $ 7.80 $ 3.55 $ 4.24 $ .52 $ .21 $ - $ .39 $ .96 $ - $ -
FUND TOTAL
RETURN (%)........ 13.73 3.18 18.66 -6.69 -20.14 28.54 16.91 -27.29 16.16 0.54
INDEX TOTAL
RETURN (%)........ 18.33 4.84 -8.94 -13.88 -25.13 53.93 14.25 -16.27 11.60 -12.32
</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.
6
<PAGE>
PORTFOLIO SUMMARY as of June 30, 1997
- ---------------------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------------------
Equity Holdings 97%
Foreign Debt 2%
Cash Equivalents 1%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Given our favorable long-term
outlook, the Fund is
essentially fully invested in
Japanese equities
- ---------------------------------------------------------------------------
SECTOR DIVERSIFICATION (Excludes 1% Cash Equivalents)
- ---------------------------------------------------------------------------
Manufacturing 20%
Consumer Discretionary 16%
Financial 14%
Technology 13%
Consumer Staples 12%
Service Industries 7%
Metals & Minerals 5%
Construction 3%
Communications 3%
Other 7%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Many Japanese manufacturers
are potential beneficiaries of
restructuring efforts
- ---------------------------------------------------------------------------
TEN LARGEST HOLDINGS (34% of Portfolio)
- ---------------------------------------------------------------------------
1. TOKYO ELECTRON LTD.
Leading semiconductor production equipment manufacturer
2. ORIX CORP.
Major leasing company
3. SECOM CO., LTD.
Electronic security system operator
4. RICOH CO., LTD.
Leading maker of copiers and information equipment
5. NICHIEI CO., LTD.
Finance company for small- and medium-sized firms
6. CANON INC.
Leading producer of visual image and information equipment
7. H. I. S. CO., LTD.
Leading airline discount ticket seller
8. SHOHKOH FUND & CO., LTD.
Finance company for small- and medium-sized firms
9. PIONEER ELECTRONICS CORP.
Leading manufacturer of audio equipment
10. HITACHI LTD.
General electronics manufacturer
Top Holdings include recent
additions Tokyo Electron and
Orix Corp.
- ---------------------------------------------------------------------------
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.
7
<PAGE>
<TABLE>
<CAPTION>
THE JAPAN FUND, INC.
INVESTMENT PORTFOLIO as of June 30, 1997 (Unaudited)
- -------------------------------------------------------------------------------------------------------------
% of Principal Market
Portfolio Amount (b) Value ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------
0.2% REPURCHASE AGREEMENTS
-------------------------------------------------------------------------
944,000 Repurchase Agreement with Donaldson,
Lufkin & Jenrette dated 6/30/97 at 5.9% to
be repurchased on 7/1/97 at $944,158
collateralized by a $780,000 U.S. Treasury
Bond, 10.75%, 5/15/03 (Cost $944,000) .. 944,000
-----------
-------------------------------------------------------------------------
1.0% U.S. TREASURY OBLIGATIONS
-------------------------------------------------------------------------
5,000,000 U.S. Treasury Bill, 8/21/97
(Cost $ 4,964,964) (c) ................. 4,964,964
-----------
-------------------------------------------------------------------------
1.6% FOREIGN BONDS-NON U.S. $ DENOMINATED
-------------------------------------------------------------------------
JPY 577,000,000 Sony Corp., 0.15%, 3/30/01
(Cost $ 6,001,918) ..................... 7,690,145
-----------
-------------------------------------------------------------------------
8.1% CONVERTIBLE BONDS
-------------------------------------------------------------------------
Media 1.8%
Print Media JPY 225,000,000 Softbank Corp., 0.5%, 3/29/02 ........... 2,031,891
JPY 666,000,000 Softbank Corp., 3/31/00 ................. 6,868,615
-----------
8,900,506
-----------
Manufacturing 2.0%
Industrial Specialty 0.8% JPY 388,000,000 Nippon Electric Glass Co., Ltd.,
2%, 3/29/02 ........................................ 4,028,619
-----------
Office Equipment/
Supplies 1.2% JPY 445,000,000 Ricoh Co., Ltd., 1.5%, 3/29/02 .......... 5,882,340
-----------
Technology 4.3%
Electronic Components/
Distributors 0.7% JPY 263,000,000 NIDEC, 1%, 9/30/03 ...................... 3,437,519
-----------
Electronic Data Processing 1.8% JPY 314,000,000 Fujitsu Ltd., 1.9%, 3/29/02 ............. 4,309,589
JPY 316,000,000 Fujitsu Ltd., 1.95%, 3/31/03 ............ 4,337,039
-----------
8,646,628
-----------
Semiconductors 1.8% JPY 232,000,000 NEC Corp., 1%, 9/30/11 .................. 2,382,550
JPY 401,000,000 Tokyo Electron, Ltd., 0.9%, 9/30/03 ..... 6,056,461
-----------
8,439,011
-----------
Total Convertible Bonds
(Cost $32,838,915) ...................... 39,334,623
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------------------------------------
% of Market
Portfolio Shares Value ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-------------------------------------------------------------------------
89.1% COMMON STOCKS
-------------------------------------------------------------------------
Consumer Discretionary 13.7%
Department & Chain
Stores 1.0% 150,000 Jusco Co., Ltd. ......................... 5,065,003
-----------
Recreational Products 4.3% 532,000 Shimano Inc. ............................ 11,140,389
197,100 Square Co., Ltd. ........................ 9,716,560
-----------
20,856,949
-----------
Specialty Retail 3.5% 119,000 Fast Retailing Co., Ltd. ................ 3,841,724
107,000 Ryohin Keikaku Co., Ltd. ................ 8,439,752
455,000 Senshukai ............................... 4,644,883
-----------
16,926,359
-----------
Consumer Electronic &
Photographic Products 4.9% 570,000 Pioneer Electronics Corp. ............... 13,826,019
110,000 Sony Corp. .............................. 9,588,169
-----------
23,414,188
-----------
Consumer Staples 11.5%
Department & Chain
Stores 2.2% 216,500 FamilyMart Co., Ltd. .................... 10,616,264
-----------
Food & Beverage 5.7% 224,400 Ariake Japan Co., Ltd. .................. 8,575,796
350,000 Fujicco Co., Ltd. ....................... 4,702,905
104,271 Genki Sushi Co., Ltd. ................... 1,683,111
705,000 Nippon Meat Packers, Inc. ............... 9,103,918
231,600 Rock Field Co., Ltd. .................... 3,516,133
-----------
27,581,863
-----------
Package Goods/
Cosmetics 2.0% 578,000 Shiseido Co., Ltd. ...................... 9,531,629
-----------
Textiles 1.6% 1,678,000 Gunze, Ltd. ............................. 7,642,579
-----------
Communications 3.1%
Telephone/
Communications 873 DDI Corp. ............................... 6,444,097
892 Nippon Telegraph & Telephone Corp........ 8,561,208
-----------
15,005,305
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------------------------------------
% of Market
Portfolio Shares Value ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial 13.7%
Other Financial
Companies 12.8% 156,000 Japan Associated Finance Co. ............ 12,250,240
133,876 Nichiei Co., Ltd. ....................... 15,535,737
272,400 Orix Corp. .............................. 20,178,658
46,500 Shohkoh Fund & Co., Ltd. ................ 14,078,614
-----------
62,043,249
-----------
Real Estate 0.9% 300,000 Mitsubishi Estate Co., Ltd. ............. 4,345,171
-----------
Media 0.7%
Broadcasting &
Entertainment 0.3% 27,000 Sony Music Entertainment (Japan) Inc. ... 1,265,073
-----------
Print Media 0.4% 27,300 Softbank Corp. .......................... 1,745,999
-----------
Service Industries 6.9%
Miscellaneous
Commercial Services 3.9% 384,000 Itochu Corp. ............................ 2,067,254
229,000 Secom Co., Ltd. ......................... 16,803,856
-----------
18,871,110
-----------
Miscellaneous
Consumer Services 3.0% 275,800 H.I.S. Co., Ltd. ........................ 14,558,852
-----------
Durables 2.7%
Automobiles 358,100 Kyokuto Kaihatsu Kogyo Co., Ltd. ........ 4,436,803
1,195,000 ShinMaywa Industries, Ltd. .............. 8,414,318
-----------
12,851,121
-----------
Manufacturing 17.6%
Containers & Paper 1.6% 1,257,000 Hokuetsu Paper Mills, Ltd. .............. 7,644,438
Diversified -----------
Manufacturing 2.4% 439,000 Mitsubishi Heavy Industries, Ltd. ....... 3,366,905
497,000 Sumitomo Electric Industries, Ltd. ...... 8,325,975
-----------
11,692,880
-----------
Electrical Products 4.6% 1,198,000 Hitachi, Ltd. ........................... 13,379,635
795,000 Matsushita Electric Works, Inc. ......... 9,017,538
-----------
22,397,173
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------------------------------------
% of Market
Portfolio Shares Value ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Machinery/Components/
Controls 1.1% 11,550 Keyence Corp. .......................... 1,713,201
44,800 SMC Corp. .............................. 3,783,823
------------
5,497,024
------------
Office Equipment/
Supplies 7.9% 551,000 Canon Inc. ............................. 14,999,738
122,000 Kokuyo Corp. ........................... 3,299,887
756,000 Ricoh Co., Ltd. ........................ 9,894,425
119,100 Riso Kagaku Corp. ...................... 9,768,258
------------
37,962,308
------------
Technology 8.7%
Electronic Components/
Distributors 1.4% 137,100 Nidec Corp. ............................ 6,698,892
------------
Semiconductors 7.3% 113,000 Advantest Corp. ........................ 8,676,381
783,000 NEC Corp. .............................. 10,930,983
323,200 Tokyo Electron Ltd. .................... 15,453,590
------------
35,060,954
------------
Energy 1.7%
Oil & Gas Production 1,499,000 Nippon Oil Co., Ltd. ................... 8,200,619
------------
Metals & Minerals 4.6%
Steel & Metals 1,243,000 Kawasaki Steel Corp. ................... 4,045,362
2,999,000 Nisshin Steel Co., Ltd. ................ 7,850,100
3,606,000 Sumitomo Metal Industries, Ltd. ........ 10,257,011
------------
22,152,473
------------
Construction 3.1%
Homebuilding 0.1% 43,000 Hosoda Corp. ........................... 292,645
------------
Miscellaneous 3.0% 1,069,000 Daito Trust Construction Co., Ltd. ..... 12,591,833
480,000 Toshiba Engineering &
Construction Co., Ltd. ................ 2,261,583
------------
14,853,416
------------
Transportation 1.1%
Railroads 848,000 Tokyu Corp. ............................ 5,260,693
------------
Total Common Stocks (Cost
$398,982,550) ......................... 430,034,229
------------
Total Investment Portfolio --
100.0% (Cost $443,732,347) (a) ........ $482,967,961
============
</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 $459,104,122. At June 30,
1997, net unrealized appreciation for all securities based on tax cost was
$23,863,839. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $56,175,590 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$32,311,751.
(b) Principal amount stated in U.S. dollars unless otherwise noted.
(c) At June 30, 1997, these securities, in whole or in part, were pledged to
cover initial margin requirements on open futures contracts.
At June 30, 1997, open futures contracts purchased were as follows:
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
------- ---------- --------- -------------- ---------
Nikkei 225 Sept. 1997 60 10,622,890 10,502,482
Total net unrealized depreciation on open futures
contracts purchased ..................................... (120,408)
=========
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
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Assets
Investments, at market (identified cost $443,732,347) . $482,967,961
Foreign currency holdings, at market (identified
cost $37,150,656) .................................. 36,996,918
Receivable on investments sold ........................ 381,805
Receivable on fund shares sold ........................ 1,675,121
Daily variation margin on open futures contracts ...... 104,261
Dividends and interest receivable ..................... 1,140,639
Other assets .......................................... 12,927
------------
Total assets ....................................... 523,279,632
Liabilities
Payable for investments purchased ..................... $3,255,267
Payable for bank overdrafts ........................... 13,685
Payable for fund shares redeemed ...................... 2,558,114
Accrued management fee ................................ 318,496
Other payables and accrued expenses ................... 441,781
----------
Total liabilities .................................. 6,587,343
------------
Net assets, at market value ........................... $516,692,289
============
Net Assets Net assets consist of:
Accumulated distributions in excess of net
investment income ............................... $(15,275,093)
Net unrealized appreciation (depreciation) on:
Investments ..................................... 39,235,614
Futures ......................................... (120,408)
Foreign currency related transactions ........... (47,246)
Accumulated net realized loss ...................... (34,593,930)
Paid-in capital .................................... 527,493,352
------------
Net assets, at market value ........................... $516,692,289
============
Net asset value, offering and redemption price per
share ($516,692,289/53,726,564 outstanding
shares of capital stock, $.333 par value,
600,000,000 shares authorized) ..................... $9.62
======
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income
Income:
Dividends (net of withholding taxes of $236,844) ...... $1,342,117
Interest (net of withholding taxes of $12,913) ........ 788,188
-----------
2,130,305
Expenses:
Management fee ........................................ $ 1,507,916
Shareholder and Transfer Agent services ............... 281,619
Officers and directors fees and expenses .............. 91,694
Custodian and accounting fees ......................... 143,325
Reports to shareholders ............................... 39,545
Legal ................................................. 107,668
Auditing .............................................. 27,524
Registration fees ..................................... 42,846
Other ................................................. 32,052 2,274,189
----------------------
Net investment loss ................................... (143,884)
-----------
Net realized and unrealized gain (loss) on
investment transactions
Net realized gain (loss) from:
Investments ........................................ 1,595,376
Futures ............................................ 1,023,788
Foreign currency related transactions .............. (9,366) 2,609,798
-----------
Net unrealized appreciation (depreciation)
during the period on:
Investments ........................................ 69,458,149
Futures ............................................ (120,408)
Foreign currency related transactions .............. (60,820) 69,276,921
----------------------
Net gain on investment transactions ................... 71,886,719
-----------
Net increase in net assets resulting from operations .. $71,742,835
===========
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Six Months
Ended Year
June 30, Ended
1997 December 31,
Increase (Decrease) in Net Assets (Unaudited) 1996
- --------------------------------------------------------------------------------
Operations:
Net investment loss ............................ $ (143,884) $ (1,630,209)
Net realized gain (loss) from investment
transactions ................................ 2,609,798 44,197
Net unrealized appreciation (depreciation)
on investment transactions
during the period ........................... 69,276,921 (48,654,817)
----------- ------------
Net increase (decrease) in net assets
resulting from operations ................... 71,742,835 (50,240,829)
----------- ------------
Distributions to shareholders:
In excess of net investment income ............. (5,188,304) (3,998,120)
----------- ------------
Fund share transactions:
Proceeds from shares sold ...................... 223,737,092 187,023,459
Net asset value of shares issued to
shareholders in reinvestment of
distributions ............................... 4,229,743 3,312,548
Cost of shares redeemed ........................ (163,793,039) (298,937,269)
----------- ------------
Net increase (decrease) in net assets from .....
Fund share transactions ..................... 64,173,796 (108,601,262)
----------- ------------
Increase (decrease) in net assets .............. 130,728,327 (162,840,211)
Net assets at beginning of period .............. 385,963,962 548,804,173
----------- ------------
Net assets at end of period (including
accumulated distributions in excess of
net investment income of $15,275,093 and
of $9,942,905, respectively) ................ $516,692,289 $385,963,962
============ ============
Other Information
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ...... 46,358,011 58,139,460
----------- ------------
Shares sold .................................... 26,209,610 20,114,876
Shares issued to shareholders in
reinvestment of distributions ............... 550,748 380,640
Shares redeemed ................................ (19,391,805) (32,276,965)
----------- ------------
Net increase (decrease) in Fund shares ......... 7,368,553 (11,781,449)
----------- ------------
Shares outstanding at end of period ............ 53,726,564 46,358,011
============ ============
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
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.
<TABLE>
<CAPTION>
Six months
Ended June 30, Years Ended December 31,
1997 (a) -------------------------------------------------------------------------------------
(Unaudited) 1996(a) 1995 1994(a) 1993(a) 1992 1991 1990 1989 1988 1987
--------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ... $ 8.33 $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 ....... 1.41 (1.00) (.94) 1.07 2.15 (1.74) .37 (2.41) 1.66 3.13 5.81
------ ----- ------ ------ ----- ------ ------ ------ ------ ------ ------
Total from investment
operations ............ 1.41 (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 .... (.12) (.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 ... (.12) (.08) (.11) (.85) (.67) -- (.41) (1.19) (3.67) (3.90) (9.28)
------ ----- ------ ------ ----- ------ ------ ------ ------ ------ ------
Net asset value,
end of period ........ $ 9.62 $8.33 $ 9.44 $10.50 $10.33 $8.90 $10.69 $10.76 $14.27 $16.24 $16.97
====== ===== ====== ====== ====== ===== ====== ====== ====== ====== ======
Total Return (%) ........ 17.22** (10.92) (9.07) 10.03 23.64 (16.74) 3.11 (16.36) 11.63 19.40 33.01
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ... 517 386 549 586 471 409 335 313 401 404 394
Ratio of operating
expenses to average
daily net assets (%) .. 1.16* 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 (%) ............ (.07)* (.34) (.24) (.40) (.47) (.31) (.15) .72 .34 .28 .41
Portfolio turnover rate
(%) ................... 63.4* 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) ......... $.0425 $.0444 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
(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.
* Annualized
** Not Annualized
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
- --------------------------------------------------------------------------------
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.
Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the period, the
Fund purchased securities index futures as a temporary substitute for purchasing
selected investments.
17
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the value of the
securities or currencies hedged. When utilizing futures contracts to hedge the
Fund gives up the opportunity to profit from favorable price movements in the
hedged positions during the term of the contract.
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.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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.
19
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
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 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, 1997, purchases and sales of investment
securities (excluding short-term investments) aggregated $157,741,839 and
$121,153,827, respectively.
The aggregate face value of futures contracts opened and closed during the six
months ended June 30, 1997 was $44,911,924 and $34,289,034, respectively.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1997, the fee pursuant to
the Management Agreement amounted to $1,507,916, which was equivalent to an
annual effective rate of .77% of the Fund's average daily net assets.
On June 26, 1997, the Adviser entered into an agreement with The Zurich
Insurance Company ("Zurich"), an international insurance and financial services
organization, pursuant to which Zurich will acquire a majority interest in the
Adviser, and the Adviser will form a new global investment organization by
combining with Zurich's subsidiary, Zurich Kemper Investments, Inc. and change
its name to Scudder Kemper Investments, Inc. Subject to the receipt of the
required regulatory and shareholder approvals, the transaction is expected to
close in the fourth quarter of 1997.
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, 1997, the amount charged to the Fund by SSC aggregated
$271,291, of which $45,878 is unpaid at June 30, 1997.
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, 1997, the Officers and Directors fees and
expenses aggregated $65,150.
21
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
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, 1997, Directors' retirement benefits amounted to $26,544.
At June 30, 1997, the Fund has accrued $206,713 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>
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; Guest Scholar, Brookings Institute
John F. Loughran
Director
Director, The Finisterre Fund
Yoshihiko Miyauchi
Director
President and CEO, ORIX Corporation
William V. Rapp
Director
Academic Director, International Relations, Yale University;
Senior Research Fellow, Columbia University;
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
Emeritus and Director, Kirby Corporation
* Scudder Stevens & Clark, Inc.
23
<PAGE>
(logo)
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 617-295-1000)
The Japan Fund
Shareholder Service Center
Two International Place
Boston, MA 02110
Scudder, Stevens & Clark, Inc.
Investment Manager
