[LOGO]
THE JAPAN FUND, INC.
Annual Report
December 31, 1999
A no-load mutual fund
Scudder Kemper Investments, Inc.
Investment Adviser
<PAGE>
Contents
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3 Portfolio Management Discussion
9 Performance Update
11 Portfolio Summary
13 Investment Portfolio
17 Financial Statements
20 Financial Highlights
21 Notes to Financial Statements
26 Report of Independent Accountants
27 Tax Information
28 Officers and Directors
2 | The Japan Fund, Inc.
<PAGE>
Portfolio Management Discussion
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December 31, 1999
Dear Shareholders,
In 1999, the combination of an improved economic outlook and the acceleration of
corporate restructuring propelled the Japanese stock market to its best showing
since the bubble collapsed in 1990. The widely-followed Nikkei 225 Index rose
36.79% in dollar terms and closed the year just short of 19,000, a level not
seen since August of 1997. Small capitalization stocks provided exceptional
performance over the full year, as evidenced by the 121.27% return of the Topix
Second Section and the 213.13% return of the Nikkei OTC Index. In a development
that paralleled events in the U.S. and other major markets, growth stocks surged
while value stocks lagged significantly. The narrow nature of the rally is
illustrated by the fact that only seven industry groups out of 33 --
communications, services, wholesale trade, securities, electric appliances,
retail trade, and precision instruments -- outperformed the Topix in 1999. The
strength in the yen provided a boost to dollar-based investors. After starting
the year at 113.6O/$, the yen sank to a low of 124.32O/$ on May 20 before
surging to 102.51O/$ by year-end. Both the strength of the stock market and the
rise of the yen can be attributed, in part, to increased interest in the
Japanese market among foreign investors.
Against this backdrop, The Japan Fund returned 119.88%, which beat the 76.02%
return of the Topix Index (as measured in dollar terms) and the 105.13% median
return of the 49 Japan funds tracked by Lipper Analytical Services. The fund's
return also places it above the peer group median for the three, five, and
ten-year periods.^1
^1 Source: Lipper Analytical Services, Inc., is an independent analyst of
investment performance. Performance includes reinvestment of dividends and
capital gains. For the period ended December 31, 1999, The Japan Fund's
Lipper ranking was 22 out of 48 funds for the one-year period, 11 out of 28
funds for the three-year period, 6 out of 14 for the five-year period, and
1 out of 5 for the ten-year period.
3 | The Japan Fund, Inc.
<PAGE>
Economic Backdrop
The Japanese economy produced mixed results in 1999. Japan's third quarter GDP
declined by 3.8% (on an annualized, quarter-over-quarter basis), which was below
the markets' expectations. Private consumption, private capital expenditures,
housing, and public investments were weak, offsetting the growth in inventories
and net exports. The contraction in GDP, which followed two consecutive
quarterly upturns, indicated that the condition of the Japanese economy is still
fragile.
However, more recent economic indicators seem to show that a recovery has indeed
begun to unfold, albeit at a gradual pace. The inventory cycle is turning up
behind an acceleration of industrial production, and the decline in capital
expenditures appears to be moderating. The December Tankan (the Bank of Japan's
Short Term Economic Survey) also indicated a gradual improvement in corporate
sentiment. The mixed signals being flashed by these indicators was one of the
causes of the stock market's choppy performance in the second half of the year.
Nevertheless, we expect the Japanese economy to recover in 2000 and into 2001,
with the primary risks to the outlook being yen strength and a slowdown in U.S.
demand.
Key Market Events
The strong performance of the Japanese market in 1999 can be attributed in large
part to the tremendous changes that are taking place on the corporate level. One
of the most important developments of the past year was the announcement by
three leading banks -- IBJ, Fuji, and Daichi-Kangyo Bank -- that they would be
merging into a single holding company, "The Mizuho Bank." Sakura and Sumitomo
also announced a merger later in the year. The consolidation of major banks is
new in Japanese corporate history, and we expect significant ramifications
across corporate Japan in coming years given the traditionally important role
that major banks have played in corporate finance.
4 | The Japan Fund, Inc.
<PAGE>
In this sense, the investment story in Japan is not so much a story of economic
recovery as it is a story of fundamental change at the corporate level. More and
more Japanese companies are becoming stock price sensitive and
shareholder-oriented. For the first time in post-war history, Japanese companies
are downsizing by consolidating within industries and closing down factories and
unprofitable business segments. These companies have begun to focus on
efficiency and profitability measures such as return on equity, return on
investment, and economic value added. Regulatory and policy measures, including
deregulation of share buybacks and stock options, have been introduced to
promote a more market-oriented management style. We are already witnessing an
acceleration of merger and acquisition activity, alliances, and consolidation
across a number of industries. Most important, the companies that are
implementing these measures are not marginal players but leading Japanese
companies such as Toshiba, Fujitsu, and NEC.
Fund Strategy
In 1999, one of the primary drivers of fund performance was our position in
technology and telecom stocks, two sectors that were propelled by the explosive
growth of the Internet in Japan. Japan is the world leader in wireless data
technology, digital consumer electronics, and key electrical components, and we
expect many Japanese companies to benefit from the growth of Internet and
wireless communications on a global basis. NTT Mobile (which rose 323%), Nippon
Telegraph & Telephone Corp. (101%), Sony, and Fujitsu, Ltd. are examples of
stocks in this sector that performed extremely well for us.
Fund performance was also boosted by our holdings in leading machinery stocks
such as Fanuc, SMC, and THK; financial stocks such as JAFCO, Daiwa Securities,
Nikko Securities, and Sakura Bank; and service sector stocks such as Tokyo
Broadcasting System and Nippon Television Network. We recently identified
broadcasting in media as potentially favorable investment opportunities in
Japan,
5 | The Japan Fund, Inc.
<PAGE>
and we believe that several leading companies in these sectors can benefit from
a cyclical recovery in advertising spending, as well as secular growth in media
content from digitalization, expanding distribution, and future interactive
functionality in TV media.
We continue to focus on companies trading at a discount to what we believe is
their future value three years out. The fund remains broadly diversified among
"future blue chips"; growth stocks with lucrative business structures; global
companies, such as Sony, NEC, and Fujitsu; and domestic restructuring stories,
including NTT, Fuji Bank, Asahi Glass, and Sakura Bank. As always, we seek to
maximize risk-adjusted returns by balancing bottom-up research with a risk
management program that seeks to anticipate and prepare for a range of
macroeconomic and market scenarios. We remain particularly keen on the select
machinery, health care, and media sectors, as well as domestic restructuring
companies and the fast-growing technology and telecom sectors. In recent months,
we have begun to emphasize "quality value" opportunities, focusing on companies
with strong balance sheets, rich cash flows, high earnings growth, and
attractive franchise values. In turn, we have trimmed our positions in some of
the growth stocks and small caps that have appreciated to our price targets.
Recent additions to the portfolio include DDI Corp., Japan's second largest
long-distance telephone company. We believe that DDI should benefit from its
merger with KDD Corp. and IDO Corp. We also added positions in Kyocera, which is
attractively positioned in the communications technology field.
Outlook
Looking forward, we remain positive on the outlook for Japanese equities. The
underlying valuations of the majority of Japanese stocks remain attractive on
both a global and a historical basis in terms of price to sales, price to book,
and price to cash flow. We see growing evidence of an acceleration in the
necessary management changes to
6 | The Japan Fund, Inc.
<PAGE>
raise margins, improve returns on equity, and realize greater shareholder value.
The increasing incidence of consolidation and alliances within industries is
also a positive in increasing capital and operating efficiencies. We also note
that corporate profits are already beginning to recover despite falling sales
and a very modest economic pickup, an anomaly that is primarily due to the
acceleration of restructuring initiatives. From a supply and demand viewpoint,
we anticipate that Japanese citizens will redeem trillions of yen worth of
postal savings deposits and long-term CDs in 2000 and beyond. This huge
liquidity inflow may add another positive backdrop to the Japanese equity
market. While substantial risks continue to exist, we believe that the
fundamental backdrop can support additional strong gains in the Japanese stock
market in the years ahead.
Sincerely,
/s/Lynn S. Birdsong, /s/Henry Rosovsky,
Lynn S. Birdsong, Henry Rosovsky,
President Chairman
7 | The Japan Fund, Inc.
<PAGE>
The Japan Fund:
A Team Approach to Investing
The Japan Fund is managed by a team of Scudder Kemper Investments, Inc. (the
"Adviser") professionals, each of whom plays an important role in the fund's
management process. Team members work together to develop investment strategies
and select securities for the fund's portfolio. They are supported by the
Adviser'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 our 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 the Adviser 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 the Adviser in 1987 and has numerous years of Pacific Basin
research and investing experience.
8 | The Japan Fund, Inc.
<PAGE>
Performance Update
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December 31, 1999
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
The Japan
Fund, Inc. TOPIX*
'89 10000 10000
'90 8364 6412
'91 8624 6950
'92 7180 5357
'93 8877 6648
'94 9768 8108
'95 8883 8003
'96 7913 6682
'97 6774 4808
'98 8419 5178
'99 18512 9114
Yearly periods ended December 31
- --------------------------------------------------------------------------------
Fund Index Comparison
- --------------------------------------------------------------------------------
Total Return
Growth of Average
Period ended 12/31/1999 $10,000 Cumulative Annual
- --------------------------------------------------------------------------------
The Japan Fund, Inc.
- --------------------------------------------------------------------------------
1 year $ 21,988 119.88% 119.88%
- --------------------------------------------------------------------------------
5 year $ 18,951 89.51% 13.64%
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10 year $ 18,512 85.12% 6.35%
- --------------------------------------------------------------------------------
TOPIX*
- --------------------------------------------------------------------------------
1 year $ 17,602 76.02% 76.02%
- --------------------------------------------------------------------------------
5 year $ 11,242 12.42% 2.37%
- --------------------------------------------------------------------------------
10 year $ 9,114 -8.86% -.92%
- --------------------------------------------------------------------------------
* 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 are reinvested net of withholding tax and, unlike Fund
returns, do not reflect any fees or expenses.
9 | The Japan Fund, Inc.
<PAGE>
- --------------------------------------------------------------------------------
Returns and Per Share Information
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
Yearly periods ended December 31
The Japan
Fund, Inc. TOPIX*
1990 -16.36 -35.88
1991 3.11 8.39
1992 -16.74 -22.92
1993 23.64 24.07
1994 10.03 21.96
1995 -9.07 -1.29
1996 -10.92 -16.51
1997 -14.40 -28.05
1998 24.29 7.71
1999 119.88 76.02
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Total
Return (%) -16.36 3.11 -16.74 23.64 10.03 -9.07 -10.92 -14.40 24.29 119.88
- ------------------------------------------------------------------------------------
Index Total
Return (%) -35.88 8.39 -22.92 24.07 21.96 -1.29 -16.51 -28.05 7.71 76.02
- ------------------------------------------------------------------------------------
Net Asset Value
($) 10.76 10.69 8.90 10.33 10.50 9.44 8.33 6.77 8.33 16.41
- ------------------------------------------------------------------------------------
Income
Dividends ($) .09 -- -- .28 -- -- .08 .37 .08 .08
- ------------------------------------------------------------------------------------
Capital Gains
Distributions
($) 1.10 .41 -- .39 .85 .11 -- -- -- 1.77
- ------------------------------------------------------------------------------------
</TABLE>
* 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 are reinvested net of withholding tax and, unlike Fund
returns, do not reflect any fees or expenses.
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.
10 | The Japan Fund, Inc.
<PAGE>
Portfolio Summary
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December 31, 1999
- --------------------------------------------------------------------------------
Asset Allocation
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A PIE CHART
PIE CHART DATA:
Equity Holdings 93% Management strives to
Cash Equivalents 7% stay as close to fully
- ------------------------------------ invested in equities as
100% possible.
- ------------------------------------
- --------------------------------------------------------------------------------
Sector Diversification
- --------------------------------------------------------------------------------
(Excludes 7% Cash Equivalents)
THE ORIGINAL DOCUMENT CONTAINS A PIE CHART
PIE CHART DATA:
Manufacturing 22% The fund's weighting in
Financial 18% the technology and
Technology 15% communications sectors
Communications 14% provided a significant
Consumer Staples 9% boost to performance
Health 5% over the second half of
Media 5% the year.
Consumer Discretionary 4%
Service Industries 4%
Other 4%
- ---------------------------------------
100%
- ---------------------------------------
11 | The Japan Fund, Inc.
<PAGE>
- --------------------------------------------------------------------------------
Ten Largest Equity Holdings
- --------------------------------------------------------------------------------
(43% of Portfolio) The fund's top holding,
NTT Mobile, rose
323% in 1999.
1. NTT Mobile Communications Network, Inc.
Provider of various telecommunication services and
equipment
2. Sony Corp.
Manufacturer of consumer electronic products
3. Fujitsu Ltd.
Manufacturer of computers
4. Nippon Telegraph & Telephone Corp.
Telecommunication services
5. Fanuc Ltd.
Manufacturer of numerically controlled equipment for
machine tools
6. ORIX Corp.
Leasing company
7. Yaskawa Electric Corp.
Manufacturer of electric motors
8. Ricoh Co., Ltd.
Manufacturer of copiers and information equipment
9. Kyocera Corp.
Ceramic package manufacturer
10. Tokyo Broadcasting System, Inc.
Provider of television and radio programs
For more complete details about the Fund's investment portfolio, see page 13. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
12 | The Japan Fund, Inc.
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio as of December 31, 1999
- ---------------------------------------------------------------------------------------------
Principal
Amount (b) Value ($)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Short-Term Investments 7.1%
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Mortgage Corp. 1.5%*, 1/3/2000
(Cost $77,580,534) ................................................ 77,587,000 77,587,000
- ---------------------------------------------------------------------------------------------
Convertible Bonds 0.2%
- ---------------------------------------------------------------------------------------------
Manufacturing
Office Equipment/Supplies
Ricoh Co., Ltd., 1.5%, 3/29/2002 (Cost $1,384,356) ........... JPY 123,000,000 2,310,464
Shares
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Common Stocks 92.7%
- ---------------------------------------------------------------------------------------------
Consumer Discretionary 4.0%
Department & Chain Stores 2.9%
FamilyMart Co., Ltd. .............................................. 327,600 21,805,795
York-Benimaru Co., Ltd. ........................................... 390,400 10,165,074
-----------
31,970,869
-----------
Home Furnishings 0.7%
Sangetsu Co., Ltd. ................................................ 385,000 8,102,486
-----------
Restaurants 0.4%
Yoshinoya D&C Co., Ltd. ........................................... 220 3,876,273
-----------
Specialty Retail 0.0%
Shimachu Co., Ltd. ................................................ 27,300 376,791
-----------
Consumer Staples 8.1%
Consumer Electronic & Photographic 6.1%
Citizen Watch Co., Ltd. ........................................... 827,000 5,261,844
Sony Corp. ........................................................ 206,200 61,157,596
-----------
66,419,440
-----------
Food & Beverage 0.4%
Rock Field Co., Ltd. .............................................. 120,600 4,662,980
-----------
Package Goods/Cosmetics 1.2%
Uni-Charm Co. ..................................................... 224,900 12,966,533
-----------
</TABLE>
The accompanying notes are in integral part of the financial statements.
13 | The Japan Fund, Inc.
<PAGE>
Shares Value ($)
- --------------------------------------------------------------------------------
Textiles 0.4%
Gunze, Ltd. ........................... 1,698,000 4,520,908
----------
Health 4.9%
Health Industry Services 1.3%
Nichii Gakkan Co. ..................... 48,900 9,568,432
Nichii Gakkan Co., (New) .............. 24,450 4,422,826
----------
13,991,258
----------
Pharmaceuticals 3.6%
Fujisawa Pharmaceutical Co. ........... 748,000 18,158,183
Yamanouchi Pharmaceutical Co., Ltd. ... 629,000 21,980,521
----------
40,138,704
----------
Communications 12.9%
Telephone/Communications
DDI Corp. ............................. 1,130 15,485,513
NTT Mobile Communications Network, Inc. 1,926 74,091,425
Nippon Telegraph & Telephone Corp. .... 3,022 51,766,836
----------
141,343,774
----------
Financial 16.9%
Banks 5.2%
Fuji Bank, Ltd. ....................... 2,439,000 23,707,195
Sakura Bank, Ltd. ..................... 4,583,000 26,557,713
Sumitomo Trust & Banking Co., Ltd. .... 1,043,000 7,044,538
----------
57,309,446
----------
Other Financial Companies 11.7%
Daiwa Securities Co., Ltd. ............ 1,231,000 19,267,512
JAFCO Co., Ltd. ....................... 31,000 11,075,764
Japan Securities Finance Co., Ltd. .... 927,000 5,217,551
Nikko Securities Co., Ltd. ............ 1,528,000 19,339,311
Nomura Securities Co., Ltd. ........... 1,744,000 31,496,476
ORIX Corp. ............................ 186,300 41,979,503
----------
128,376,117
----------
Media 4.5%
Broadcasting & Entertainment
Nippon Television Network Corp. ....... 13,710 16,104,150
Tokyo Broadcasting System, Inc. ....... 992,000 33,597,494
----------
49,701,644
----------
The accompanying notes are in integral part of the financial statements.
14 | The Japan Fund, Inc.
<PAGE>
Shares Value ($)
- --------------------------------------------------------------------------------
Service Industries 3.8%
Environmental Services 0.5%
Sanix Inc. ........................... 49,100 5,382,929
----------
Miscellaneous Commercial Services 3.3%
Benesse Corp. ........................ 94,200 22,683,242
Fujitsu Support and Service Inc. ..... 11,900 5,835,846
Secom Co., Ltd. ...................... 67,000 7,378,132
----------
35,897,220
----------
Durables 0.4%
Automobiles
Nissan Motor Co., Ltd. ............... 1,110,000 4,367,854
----------
Manufacturing 19.8%
Containers & Paper 0.5%
Hokuetsu Paper Mills, Ltd. ........... 883,000 5,255,129
----------
Diversified Manufacturing 2.2%
Sumitomo Electric Industries, Ltd. ... 2,098,000 24,253,504
----------
Electrical Products 4.8%
Matsushita Electric Works, Ltd. ...... 982,000 9,708,496
Toshiba Corp. ........................ 202,000 1,542,287
Yaskawa Electric Corp. ............... 5,760,000 40,933,438
----------
52,184,221
----------
Industrial Specialty 2.1%
Asahi Glass Co., Ltd. ................ 1,042,000 8,067,952
NHK Spring Co., Ltd. ................. 1,921,000 9,401,919
Teijin, Ltd. ......................... 1,631,000 6,018,863
----------
23,488,734
----------
Machinery/Components/Controls 7.0%
Fanuc Ltd. ........................... 364,600 46,431,539
SMC Corp. ............................ 67,800 15,005,462
THK Co., Ltd. ........................ 365,000 14,755,775
----------
76,192,776
----------
Office Equipment/Supplies 3.2%
Canon Chemicals, Inc. ................ 280,700 2,280,550
Ricoh Co., Ltd. ...................... 1,765,000 33,275,157
----------
35,555,707
----------
The accompanying notes are in integral part of the financial statements.
15 | The Japan Fund, Inc.
<PAGE>
<TABLE>
<CAPTION>
Shares Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Technology 13.7%
Diverse Electronic Products 0.7%
Matsushita Electric Industrial Co., Ltd. .................. 283,000 7,839,565
-----------
Electronic Components/Distributors 8.1%
Kyocera Corp. ............................................. 129,700 33,643,794
NEC Corp. ................................................. 1,271,000 30,294,489
Nidec Corp. ............................................... 87,300 25,208,986
-----------
89,147,269
-----------
Electronic Data Processing 4.9%
Fujitsu Ltd. .............................................. 1,185,000 54,053,446
-----------
Energy 1.8%
Oil & Gas Production
Tokyo Gas Co. ............................................. 8,111,000 19,769,372
-----------
Construction 0.5%
Building Materials
Taiheiyo Cement Corp. ..................................... 2,712,000 5,176,586
-----------
Transportation 1.4%
Miscellaneous
Yamato Transport Co., Ltd. ................................ 383,000 14,846,124
-----------
- -------------------------------------------------------------------------------------------
Total Common Stocks (Cost $647,313,649) 1,017,167,659
- -------------------------------------------------------------------------------------------
Total Investment Portfolio-- 100.0% (Cost $726,278,539) (a) 1,097,065,123
- -------------------------------------------------------------------------------------------
</TABLE>
* Annualized yield at time of purchase, not a coupon rate.
(a) The cost for federal income tax purposes was $752,157,300. At December 31,
1999, net unrealized appreciation for all securities based on tax cost was
$344,907,823. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost of
$364,431,140 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $19,523,317.
(b) Principal amount stated in U.S. dollars unless otherwise noted.
Currency Abbreviation
------------------------------------------------------------------------
JPY Japanese Yen
The accompanying notes are in integral part of the financial statements.
16 | The Japan Fund, Inc.
<PAGE>
Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities as of December 31, 1999
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Investments in securities, at value (cost $726,278,539) $1,097,065,123
Cash .................................................. 10,754
Receivable for Fund shares sold ....................... 3,054,331
Dividends and interest receivable ..................... 131,133
Other assets .......................................... 161,113
--------------
Total assets .......................................... 1,100,422,454
Liabilities
- --------------------------------------------------------------------------------
Payable for Fund shares redeemed ...................... 9,441,011
Accrued management fee ................................ 977,007
Other accrued expenses and payables ................... 751,310
--------------
Total liabilities ..................................... 11,169,328
Net assets, at value $1,089,253,126
Net Assets
- --------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ................... 7,308,173
Net unrealized appreciation (depreciation) on:
Investments ......................................... 370,786,584
Foreign currency related transactions ............... 3,979
Accumulated net realized gain (loss) .................. 55,009,471
Paid-in capital ....................................... 656,144,919
Net assets, at value $1,089,253,126
Net Asset Value
- --------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per
share ($1,089,253,126 / 66,390,778 outstanding shares
of capital stock, $.333 par value, 600,000,000
shares authorized)..................................... $ 16.41
The accompanying notes are in integral part of the financial statements.
17 | The Japan Fund, Inc.
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations for the year ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income
- --------------------------------------------------------------------------------
<S> <C> <C>
Dividends (net of foreign taxes withheld of $597,691) .......... $ 3,381,920
Interest (net of foreign taxes withheld of $2,984) ............. 2,186,174
-------------
Total income ................................................... 5,568,094
-------------
Expenses:
Management fee ................................................. 5,057,471
Services to shareholders ....................................... 877,024
Custodian and accounting fees .................................. 352,086
Directors' fees and expenses ................................... 214,508
Auditing ....................................................... 60,030
Registration fees .............................................. 71,333
Reports to shareholders ........................................ 127,329
Legal .......................................................... 73,962
Interest expense ............................................... 122,897
Other .......................................................... 3,631
-------------
Total expenses, before expense reductions ...................... 6,960,271
Expense reductions ............................................. (17,123)
-------------
Total expenses, after expense reductions ....................... 6,943,148
Net investment income (loss) ................................... (1,375,054)
Realized and unrealized gain (loss) on investment transactions
- --------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments .................................................... 236,340,237
Futures ........................................................ 4,136,543
Foreign currency related transactions .......................... 1,603,804
-------------
242,080,584
-------------
Net unrealized appreciation (depreciation) during the period on:
Investments .................................................... 363,927,366
Foreign currency related transcations .......................... (11,093)
-------------
363,916,273
Net gain (loss) on investment transactions 605,996,857
Net increase (decrease) in net assets resulting from operations $ 604,621,803
</TABLE>
The accompanying notes are in integral part of the financial statements.
18 | The Japan Fund, Inc.
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) in Net Assets 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Operations:
<S> <C> <C>
Net investment income (loss) ................................................. $ (1,375,054) $ (427,405)
Net realized gain (loss) on investment transactions .......................... 242,080,584 (22,778,794)
Net unrealized appreciation (depreciation) on
investment transactions during the period ................................ 363,916,273 93,971,345
--------------- ---------------
Net increase (decrease) in net assets resulting
from operations............................................................. 604,621,803 70,765,146
--------------- ---------------
Distributions to shareholders:
From net investment income ................................................... (4,922,799) --
--------------- ---------------
From net realized gains ...................................................... (108,916,942) --
--------------- ---------------
In excess of net investment income ........................................... -- (3,176,155)
--------------- ---------------
Fund share transactions:
Proceeds from shares sold .................................................... 2,411,950,009 657,707,572
Reinvestment of distributions ................................................ 101,465,448 2,709,032
Cost of shares redeemed ...................................................... (2,262,070,034) (646,061,885)
--------------- ---------------
Net increase (decrease) in net assets from Fund
share transactions............................................................ 251,345,423 14,354,719
--------------- ---------------
Increase (decrease) in net assets ............................................ 742,127,485 81,943,710
Net assets at beginning of period ............................................ 347,125,641 265,181,931
Net assets at end of period (including undistributed net investment income of
$7,308,173 and accumulated distributions in excess of net investment income of
$256,142, respectively) ...................................................... $ 1,089,253,126
$ 347,125,641
Other Information
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................................... 41,668,266 39,174,523
--------------- ---------------
Shares sold .................................................................. 192,144,389 90,183,280
Shares issued to shareholders in reinvestment of
distributions............................................................... 6,369,458 367,077
Shares redeemed .............................................................. (173,791,335) (88,056,614)
--------------- ---------------
Net increase (decrease) in Fund shares ....................................... 24,722,512 2,493,743
Shares outstanding at end of period .......................................... 66,390,778 41,668,266
</TABLE>
The accompanying notes are in integral part of the financial statements.
19 | The Japan Fund, Inc.
<PAGE>
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>
- ---------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.33 $ 6.77 $ 8.33 $ 9.44 $10.50
-------------------------------------------
- ---------------------------------------------------------------------------------
Income (loss) from investment
operations:
- ---------------------------------------------------------------------------------
Net investment income (loss) (a) (.02) (.01) (.03) (.03) (.01)
- ---------------------------------------------------------------------------------
Net realized and unrealized gain 9.95 1.65 (1.16) (1.00) (.94)
(loss) on investment transactions
-------------------------------------------
- ---------------------------------------------------------------------------------
Total from investment operations 9.93 1.64 (1.19) (1.03) (.95)
- ---------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------
Net investment income (.08) -- -- -- --
- ---------------------------------------------------------------------------------
Net realized gains on investment (1.77) -- -- -- --
transactions
- ---------------------------------------------------------------------------------
In excess of net investment income -- (.08) (.37) (.08) --
- ---------------------------------------------------------------------------------
In excess of net realized gains -- -- -- -- (.11)
---------------------------------------------
- ---------------------------------------------------------------------------------
Total distributions (1.85) (.08) (.37) (.08) (.11)
- ---------------------------------------------------------------------------------
Net asset value, end of period $16.41 $ 8.33 $ 6.77 $ 8.33 $ 9.44
---------------------------------------------
- ---------------------------------------------------------------------------------
Total Return (%) 119.88 24.29 (14.40) (10.92) (9.07)
- ---------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------
Net assets, end of period ($ millions) 1,089 347 265 386 549
- ---------------------------------------------------------------------------------
Ratio of expenses (%) 1.00 1.26 1.21 1.16 1.21
- ---------------------------------------------------------------------------------
Ratio of net investment income (loss) (.20) (.14) (.38) (.34) (.24)
(%)
- ---------------------------------------------------------------------------------
Portfolio turnover rate (%) 114 90 96 73 70
- ---------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
20 | The Japan Fund, Inc.
<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 (the "1940 Act"), as an open-end, diversified management
investment company organized as a Maryland Corporation.
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. Investments are stated at value determined as of the close
of regular trading on the New York Stock Exchange. Securities which are traded
on U.S. or foreign stock exchanges 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 quoted on the
Nasdaq Stock Market ("Nasdaq"), for which there have been sales, are valued at
the most recent sale price reported. If there are no such sales, the value is
the most recent bid quotation. Securities which are not quoted on Nasdaq but are
traded in another over-the-counter market are valued at the most recent sale
price, or if no sale occurred, at the calculated mean between the most recent
bid and asked quotations on such market. If there are no such bid and asked
quotations, the most recent bid quotation shall be used.
Portfolio debt securities purchased with an original maturity greater than sixty
days are valued by pricing agents approved by the officers of the Corporation,
whose 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. Money market instruments purchased with an original 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.
Foreign Currency Translations. The books and records of the Fund are maintained
in U.S. dollars. Investment securities and other assets and liabilities
denominated in a foreign currency are translated into U.S. dollars at the
prevailing exchange rates at period end. Purchases and sales of investment
21 | The Japan Fund, Inc.
<PAGE>
securities, income and expenses are translated into U.S. dollars at the
prevailing exchange rates on the respective dates of the transactions.
Net realized and unrealized gains and losses on foreign currency transactions
represent net gains and losses between trade and settlement dates on securities
transactions, the disposition of forward foreign currency exchange contracts and
foreign currencies, and the difference between the amount of net investment
income accrued and the U.S. dollar amount actually received. That portion of
both realized and unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately disclosed but
is included with net realized and unrealized gains and losses on investment
securities.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian or
sub-custodian bank, receives delivery of the underlying securities, the amount
of which at the time of purchase and each subsequent business day is required to
be maintained at such a level that the market value is equal to at least the
principal amount of the repurchase price plus accrued interest.
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 a financial
instrument 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. In addition, the Fund also sold securities
index futures as a temporary substitute for selling selected investments.
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 dependent upon
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
22 | The Japan Fund, Inc.
<PAGE>
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with the 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.
Taxes. The Fund's policy is to comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to regulated investment companies
and to distribute all of its taxable income to its shareholders. Accordingly,
the Fund paid no federal income taxes and no federal income tax provision was
required. 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.
Distribution of Income and Gains. Distributions of net investment income, if
any, are made annually. 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 at least
annually.
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 futures, 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.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis. Dividend income is recorded on the ex-dividend date. Certain dividends
from foreign securities may be recorded subsequent to the ex-dividend date as
soon as the Fund is informed of such dividends. Realized gains and losses from
investment transactions are recorded on an identified cost basis.
All discounts are accreted for both tax and financial reporting purposes.
23 | The Japan Fund, Inc.
<PAGE>
B. Purchases and Sales of Securities
During the year ended December 31, 1999, purchases and sales of investment
securities (excluding short-term investments) aggregated $827,580,547 and
$739,138,373, respectively.
C. Related Parties
Under the Investment Management Agreement (the "Agreement") with Scudder Kemper
Investments, 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 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 net assets,
0.70% of the next $300,000,000 of such net 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, 1999, the fee pursuant to the Agreement amounted to
$5,057,471, which was equivalent to an annual effective rate of 0.73% of the
Fund's average daily net assets.
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, 1999, the amount charged to the Fund by SSC aggregated
$516,599, of which $74,848 is unpaid at December 31, 1999.
The Fund pays each of its Directors not affiliated with the Adviser an annual
fee plus specified amounts for attended board and committee meetings. For the
year ended December 31, 1999, Directors' fees and expenses aggregated $155,177,
of which $11,906 is unpaid at December 31, 1999.
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 an unfunded noncontributory 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 Director's fees and length
of service. For the year ended December 31, 1999, Directors'
24 | The Japan Fund, Inc.
<PAGE>
retirement benefits amounting to $59,331 are included in Directors' fees and
expenses in the statement of operations. Included in accrued expenses and other
payables in the statement of assets and liabilities at December 31, 1999, is
$287,039 accrued by the Fund for such benefits.
E. Line of Credit
The Fund and several other Scudder Funds (the "Participants") share in a $1
billion 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 pro rata 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.
F. Expense Off-Set Arrangements
The Fund has entered into an arrangement with its transfer agent whereby credits
realized as a result of uninvested cash balances were used to reduce a portion
of the Fund's expenses. For the year ended December 31, 1999, the Fund's
transfer agent fees were reduced by $17,123 under this arrangement.
25 | The Japan Fund, Inc.
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and the Shareholders of The Japan Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, 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, 1999, the results of its operations, the changes in its net
assets, and the financial highlights for the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
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 auditing standards generally accepted in the United States 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, 1999 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
February 11, 2000
26 | The Japan Fund, Inc.
<PAGE>
Tax Information
- --------------------------------------------------------------------------------
December 31, 1999
The Fund paid distributions of $0.955 per share from net long-term capital gains
during its year ended December 31, 1999, of which 100% represents 20% rate
gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$68,000,000 as capital gain dividends for its year ended December 31, 1999, of
which 100% represents 20% rate gains.
The Fund paid foreign taxes of $601,000 and earned $3,388,000 of foreign source
income during the year ended December 31, 1999. Pursuant to Section 853 of the
Internal Revenue Code, the Fund designates $0.01 per share as foreign taxes paid
and $0.051 per share as income earned from foreign sources for the year ended
December 31, 1999.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your account, please call 1-800-SCUDDER.
27 | The Japan Fund, Inc.
<PAGE>
Officers and Directors
- --------------------------------------------------------------------------------
Henry Rosovsky
o Chairman of the Board and
Director
o Professor Emeritus, Harvard
University; Professor, Geyser
University
Lynn Birdsong*
o President
Peter Booth
o Director
o Senior Vice President;
Corning Incorporated
William L. Givens
o Director
o President, Twain Associates
Thomas M. Hout
o Director
o Senior Advisor,
Boston Consulting Group
John F. Loughran
o Director
o Director, The Finisterre Fund
Yoshihiko Miyauchi
o Director
o President and CEO, ORIX Corporation
William V. Rapp
o Director
o Academic Director, International
Relations, Yale University; Senior
Research Associate, Columbia
University; Managing Director, Rue
Associates
Takeo Shiina
o Director
o Chairman, President and CEO, IBM
Japan, Ltd.
O. Robert Theurkauf*
o Director
Hiroshi Yamanaka
o Director
o Advisor to the Board, The Meiji
Mutual Life Insurance Company
Elizabeth J. Allan*
o Vice President
William E. Holzer*
o Vice President
Maureen E. Kane*
o Assistant Secretary
Seung Kwak*
o Vice President
Miyuki Wakatsuki*
o Vice President
Gina Provenzano*
o Vice President and Treasurer
Kathryn L. Quirk*
o Vice President and Secretary
John R. Hebble*
o Assistant Treasurer
* Scudder Kemper Investments, Inc.
28 | The Japan Fund, Inc.
<PAGE>
HONORARY DIRECTORS
William H. Gleysteen, Jr.
o Consultant; Guest Scholar,
Brookings Institute
Jonathan Mason
o Former Chairman of the Board and
Director, The Japan Fund, Inc.
James W. Morley
o Professor of Political Science
Emeritus, Columbia University
Robert G. Stone, Jr.
o Chairman Emeritus and Director,
Kirby Corporation
Shoji Umemura
o Former Director of The Japan
Fund, Inc.
o Board Counselor, The Nikko
Securities Co., Ltd.
29 | The Japan Fund, Inc.
<PAGE>
Notes
<PAGE>
Notes
<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 Kemper Investments, Inc.
Investment Manager
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
