<PAGE>
THE JAPAN EQUITY FUND, INC.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
THE FUND
The Japan Equity Fund, Inc. (the "Fund") is a diversified, closed-end
management investment company. The Fund invests substantially all of its assets
in equity securities of non-financial Japanese companies whose securities are
traded on the First Section of the Tokyo Stock Exchange ("TSE").
The investment objective of the Fund is to outperform over the long term, on
a total return basis (including appreciation and dividends), the non-financial
services sectors of the Tokyo Stock Price Index (TOPIX), a composite
market-capitalization weighted index of all common stocks listed on the First
Section of the TSE. Daiwa International Capital Management Corp. is the Fund's
Investment Manager. The Fund utilizes a statistical and optimization stock
selection process, known as the Daiwa Portfolio Optimization System ("DPOS"),
developed by the Global Portfolio Research Department of Daiwa Securities Trust
Company ("DST"), the Fund's Investment Adviser. DST believes that, by using
DPOS, it is able to identify undervalued securities of non-financial services
companies.
SHAREHOLDER INFORMATION
The Fund's shares are listed on the New York Stock Exchange ("NYSE"). The
Fund understands that its shares may trade periodically on certain exchanges
other than the NYSE, but the Fund has not listed its shares on those other
exchanges and does not encourage trading on those exchanges.
The Fund's NYSE trading symbol is "JEQ". Weekly comparative net asset value
(NAV) and market price information about the Fund is published each Monday in
THE WALL STREET JOURNAL, each Sunday in THE NEW YORK TIMES, and each Saturday in
BARRON'S, and also appears in many other newspapers.
The Fund held its Annual Meeting of Shareholders on June 6, 1996, which was
subsequently adjourned to and completed on July 16, 1996. Press releases
summarizing the results of these meetings were sent to the Fund's registered
holders shortly thereafter. If you would like a copy of these releases, please
contact DST, the Fund's Administrator (the "Administrator"), at the number shown
below.
INQUIRIES
It is the policy of the Fund to respond to inquiries about its portfolio
holdings and performance. Such inquiries should be directed to the Administrator
at (800) 933-3440 or (201) 915-3020. Inquiries concerning your share account
should be directed to PNC Bank, National Association (the "Plan Agent") at the
number noted below. All written inquiries should be directed to the Fund, c/o
Daiwa Securities Trust Company, One Evertrust Plaza, 9th Floor, Jersey City, New
Jersey 07302.
<PAGE>
THE JAPAN EQUITY FUND, INC.
- --------------------------------------------------------------------------------
GENERAL INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
A Dividend Reinvestment and Cash Purchase Plan (the "Plan") is available to
provide Shareholders with automatic reinvestment of dividends and capital gain
distributions in additional Fund shares. The Plan also allows you to make
optional annual cash investments in Fund shares through the Plan Agent. A
brochure fully describing the Plan's terms and conditions is available from the
Plan Agent by calling (800) 852-4750 or by writing PNC Bank, National
Association, c/o The Japan Equity Fund, Inc., P.O. Box 8950, Wilmington, DE
19899.
WHO CAN PARTICIPATE IN THE PLAN? If you wish to participate and your shares
are held in your name, you may elect to become a direct participant in the Plan
by completing and mailing the Enrollment Authorization form on the back cover of
the Dividend Reinvestment and Cash Purchase Plan Brochure available from the
Plan Agent. However, if your shares are held in the name of a brokerage firm,
bank or nominee, you should instruct your nominee to participate in the Plan on
your behalf. If your nominee is unable to participate in the Plan for you, you
should request that your shares be registered in your name, so that you may
elect to participate directly in the Plan.
MAY I WITHDRAW FROM THE PLAN? If your shares are held in your name and you
wish to receive all dividends and capital gain distributions in cash rather than
in shares, you may withdraw from the Plan without penalty at any time by
contacting the Plan Agent. If your shares are held in nominee name, you should
be able to withdraw from the Plan without a penalty at any time by sending
written notice to your nominee. If you withdraw, you or your nominee will
receive a share certificate for all full shares or, if you wish, the Plan Agent
will sell your shares and send you the proceeds, after the deduction of
brokerage commissions. The Plan Agent will convert any fractional shares to cash
at the then-current market price and send to you a check for the proceeds.
HOW ARE THE DIVIDENDS AND DISTRIBUTIONS REINVESTED? If the market price of
the Fund's shares on the payment date should equal or exceed their net asset
value per share, the Fund will issue new shares to you at the higher of net
asset value or 95% of the then-current market price. If the market price is
lower than net asset value per share, the Fund will issue new shares to you at
the market price. If the dividends or distributions are declared and payable as
cash only, you will receive shares purchased for you by the Plan Agent on the
NYSE or otherwise on the open market to the extent available.
WHAT IS THE CASH PURCHASE FEATURE? The Plan participants have the option of
making annual investments in Fund shares through the Plan Agent. You may invest
any amount from $100 to $3,000 annually. The Plan Agent will purchase shares for
you on the NYSE or otherwise on the open market on or about February 15th of
each year. Plan participants should send voluntary cash payments to be received
by the Plan Agent approximately ten days before the annual purchase date. The
Plan Agent will return any cash payments received more than thirty days prior to
the purchase date. You may withdraw a voluntary cash payment by written notice,
if the notice is received by the Plan Agent not less than two business days
before the purchase date.
IS THERE A COST TO PARTICIPATE? There are no Plan charges or brokerage
charges for shares issued directly by the Fund. However, each participant will
pay a pro rata portion of brokerage commissions for shares purchased on the NYSE
or on the open market by the Plan Agent.
2
<PAGE>
THE JAPAN EQUITY FUND, INC.
- --------------------------------------------------------------------------------
GENERAL INFORMATION (CONCLUDED)
- --------------------------------------------------------------------------------
WHAT ARE THE TAX IMPLICATIONS? The automatic reinvestment of dividends and
distributions does not relieve you of any income tax which may be payable (or
required to be withheld) on such dividends and distributions. In addition, the
Plan Agent will reinvest dividends for foreign participants and for any
participant subject to federal backup withholding after the deduction of the
amounts required to be withheld.
PLEASE NOTE THAT, IF YOU PARTICIPATE IN THE PLAN THROUGH A BROKERAGE
ACCOUNT, YOU MAY NOT BE ABLE TO CONTINUE AS A PARTICIPANT IF YOU TRANSFER THOSE
SHARES TO ANOTHER BROKER. CONTACT YOUR BROKER OR NOMINEE OR THE PLAN AGENT TO
ASCERTAIN WHAT IS THE BEST ARRANGEMENT FOR YOU TO PARTICIPATE IN THE PLAN.
3
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
December 1, 1996
DEAR SHAREHOLDERS:
It is our pleasure, on behalf of The Board of Directors, to present the
Annual Report for The Japan Equity Fund, Inc. (the "Fund") for the fiscal year
ended October 31, 1996.
BACKGROUND
The objective of the Fund is to outperform the Tokyo Stock Price Index
("TOPIX") excluding its financial stocks. The TOPIX includes approximately 1,200
stocks traded on the First Section of the Tokyo Stock Exchange ("TSE") weighted
by their market value. The way in which the Fund seeks to meet its objective is
to examine certain fundamental characteristics of every non-financial stock in
the First Section of the TSE. These fundamental characteristics include, among
others, the earnings-to-price ratio and the book-to-price ratio. The various
fundamental characteristics are weighted by a method which has been developed by
Daiwa Securities Trust Company, the Fund's Investment Adviser. In this manner,
the Fund seeks to identify currently undervalued stocks.
FUND PERFORMANCE
As of October 31, 1996, the Fund's net assets were approximately $113.6
million, which represents a net asset value of $10.52 per share. The Fund issued
2,702,000 new shares on November 17, 1995 upon completion of a successful rights
offering, which raised approximately $26.5 million (after deducting for offering
costs). The Fund paid a dividend of $0.67 per share on December 29, 1995, and
issued 15,985 new shares as a result of dividend reinvestment. Adjusting for
this dividend payment and for the issuance of shares upon the exercise of
rights, the time-weighted return on the Fund's net assets was 1.57% since the
Fund's previous fiscal year-end on October 31, 1995. Over the same annual
period, the benchmark (the TOPIX less its financial firms component) decreased
0.90%, as measured in U.S. Dollars.
The change in net asset value in U.S. Dollars depends on several factors;
among them: (1) the percentage change in the benchmark during the period; (2)
the over or under performance of the Fund's portfolio, after expenses, relative
to the benchmark; (3) the change in the Japanese Yen/U.S. Dollar exchange rate;
and (4) dividends paid by the Fund during the period.
The Nikkei 225 Average (the Nikkei 225) closed at 20,467 on October 31,
1996, up 15.93% (in Yen terms) over the last twelve months, but down 7.14% since
April 30, 1996. On June 26, 1996, the market reached a post-bubble high of
22,666, and it has been experiencing a correction since that time.
The management of the Fund believes the upward market movement during the
last twelve months has been primarily attributable to Japan's economic recovery,
as depreciation in the Yen resulted in an improvement in corporate earnings. The
Yen has moved to Y113 vs. the U.S. Dollar from last year's trading range of Y80
- -Y105.
The recent market correction reflects a slowdown in the pace of economic
recovery combined with uncertainty regarding the Japanese October 20th general
election results. Specifically, the growth rate of forecasted corporate earnings
has slowed. Daiwa Institute of Research (DIR), an affiliate of the Fund's
Investment Adviser, has revised downwardly its 1996 corporate earnings forecasts
to +6.8% from +7.7%. Furthermore, The Bank of Japan's Tankan (quarterly economic
survey) has indicated some deterioration in the
4
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
sentiment of Japanese corporate management. Since the general election failed to
produce any one political party with a majority of seats in the Diet (Japanese
Parliament), the need to form a coalition government may impede the
administrative and economic reform efforts now underway in Japan.
Despite the political concerns, a combination of fundamental factors,
including moderate economic expansion, rising profits, and continued low
interest rates, suggest a cautiously optimistic outlook for the Japanese equity
market. In addition, the deregulation of Japan's pension funds has begun, as
over Y1 trillion of low-yielding fixed-income investments are now being shifted
into the equity market.
It is important to emphasize again that it is not an objective of the Fund
to predict changes in its benchmark. Rather, its goal is to outperform the
benchmark, while staying fairly fully invested. Specifically, the goal is to
hold no more than 5% in cash. On October 31, 1996, the proportion of the Fund's
net assets invested in non-financial Japanese equities listed on the First
Section of the TSE was 99.44%, while short term investments and other net assets
represented 0.56%.
Using the close of July 24, 1992 (the date upon which the Fund commenced
operations) as the performance measurement starting point of 100, by the end of
October 1996, the benchmark as measured in Yen equaled 126.56, whereas the value
of the Fund's portfolio equaled 141.17 in Yen (including cash, after expenses,
and adjusting for dividend payments, dividend reinvestment, and two rights
offerings). Thus, in Yen terms, the Fund outperformed its benchmark by 14.61
percentage points from commencement through October 31, 1996.
At the end of October 1996, the benchmark, as measured in U.S. Dollars,
equaled 141.80, whereas the value of the Fund's portfolio equaled 158.17 in U.S.
Dollars (including cash, after expenses, and adjusting for dividend payments,
dividend reinvestment, and two rights offerings). Thus, in U.S. Dollar terms,
the Fund outperformed its benchmark by 16.37 percentage points from commencement
through October 31, 1996. The difference between Yen and Dollar performance
reflects a change for the Fund in the exchange rate from Y126.900 per Dollar on
July 24, 1992 to Y113.265 per Dollar on October 31, 1996.
The invested position of the Fund's assets consisted of common stocks of
companies operating in 25 different industries. The Fund has relatively large
weightings in Electrical Machinery (17.3% of net assets), Construction (11.1%),
Transportation Equipment (10.9%), Iron & Steel (7.9%), Chemicals (6.3%), Retail
(6.0%), and Foods (5.8%). Note that the industry sector classification system
used in this report is that of the Tokyo Stock Exchange, which differs from that
used in previous reports. This change in the Fund's classification system is the
main reason for the increase in the Electrical Machinery weighting.
During the Fund's fiscal year ended October 31, 1996, the Fund's market
price ranged from a low of $10 1/4 per share on October 30, 1996 to a high of
$15 on January 9, 1996. The Fund's market price closed at $10 3/8 per share on
October 31, 1996.
The NYSE trading price in relation to the Fund's net asset value per share,
as measured by the weekly closing prices during the Fund's fiscal year ended
October 31, 1996 ranged from a premium of 28.77% on January 26, 1996 to a
discount of 5.42% on November 17, 1995, and ended the period at a discount of
1.38%.
The Fund has not invested, and presently does not intend to invest, in
derivative securities. Although foreign currency hedging is permitted by the
Fund's prospectus, the Fund has not engaged in any foreign currency hedging.
5
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Dr. Harry Markowitz, winner of the 1990 Nobel Prize in Economic Sciences, is
the Fund's portfolio manager and is responsible for the day-to-day management of
the Fund's portfolio. Dr. Markowitz has been the Director of Research with Daiwa
Securities Trust Company since 1990; Marvin Speiser Distinguished Professor of
Finance and Economics, Baruch College (currently, Distinguished Professor,
Emeritus) 1982-1993; and Research Director with Brignoli Models, Inc. from 1984
to 1989.
We welcome your participation in The Japan Equity Fund, Inc. and your
continued interest in the Japanese economy and marketplace.
<TABLE>
<S> <C>
Sincerely,
[SIG] [SIG]
KATSUNARI REMBUTSU HARRY M. MARKOWITZ
CHAIRMAN OF THE BOARD PRESIDENT
</TABLE>
6
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
- -------------------------------------------
JAPANESE COMMON STOCKS--99.44%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
CHEMICALS--6.30%
45,000 Fuji Photo Film Co., Ltd........... $ 1,299,166
91,000 Gun-ei Chemical Industry Co.,
Ltd.............................. 388,055
34,000 Hokko Chemical Industry Co.,
Ltd.............................. 211,027
281,000 Konica Corporation................. 1,887,971
139,000 Mitsubishi Gas Chemical Co.,
Inc.............................. 570,653
42,000 Nihon Tokushu Toryo Co., Ltd....... 193,193
83,000 Nippon Sanso Corporation........... 355,405
122,000 Okura Industrial Co., Ltd.......... 737,827
79,000 Shiseido Co., Ltd.................. 927,648
12,000 Tenma Corporation.................. 214,011
67,000 Tokuyama Corporation............... 373,849
------------
7,158,805
------------
CONSTRUCTION--11.06%
112,000 Asanuma Corporation Ltd............ 525,070
80,000 Daiwa House Industry Co., Ltd...... 1,115,967
341,000 Fujita Corporation................. 1,270,490
149,000 Hazama Corporation................. 526,200
373,000 Kumagai Gumi Co., Ltd.............. 1,185,538
70,600 Kyudenko Corporation............... 816,545
148,000 Maeda Corporation.................. 1,208,670
44,000 Nichiei Construction Co., Ltd...... 379,146
17,000 Nippon Hodo Co., Ltd............... 238,644
158,000 Sekisui House, Ltd................. 1,673,950
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
190,000 SXL Corporation.................... $ 1,664,062
29,700 Toenec Corporation................. 225,244
74,800 Tokyo Denki Komusho Co., Ltd....... 615,491
288,000 Tokyu Construction Co., Ltd........ 1,113,707
------------
12,558,724
------------
ELECTRIC POWER & GAS--1.51%
48,100 Kyushu Electric Power Co., Inc..... 989,476
251,000 Toho Gas Co., Ltd.................. 729,078
------------
1,718,554
------------
ELECTRICAL MACHINERY--17.32%
35,000 Fuji Electric Co., Ltd............. 159,758
254,000 Fujitsu Ltd........................ 2,242,529
22,000 Graphtec Corporation+.............. 178,307
131,000 Hitachi Koki Co., Ltd.............. 1,104,534
264,000 Hitachi Ltd........................ 2,354,125
21,000 Idec Izumi Corporation............. 184,664
37,000 Kyocera Corporation................ 2,453,273
140,000 Matsushita Electric Industrial Co.,
Ltd.............................. 2,249,592
238,000 NEC Corporation.................... 2,605,571
23,000 Nippon Chemi-con Corporation....... 135,240
13,000 Pioneer Electronic Corporation..... 258,244
338,000 Sanyo Electric Co., Ltd............ 1,647,252
35,000 Sony Corporation................... 2,110,537
300,000 Toshiba Corporation................ 1,885,843
9,000 Victor Company of Japan, Ltd....... 101,708
------------
19,671,177
------------
</TABLE>
7
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
FISHERY, AGRICULTURE & FORESTRY--0.83%
245,000 Nippon Suisan Kaisha, Ltd.+........ $ 943,098
------------
FOODS--5.78%
62,000 Asahi Breweries, Ltd............... 640,445
289,000 Itoham Foods Inc................... 1,888,138
49,000 Kirin Brewery Co., Ltd............. 506,158
121,000 Marudai Food Co., Ltd.............. 748,872
239,000 Nichirei Corporation............... 1,436,975
77,000 Nippon Flour Mills Co., Ltd........ 399,055
91,800 Pokka Corporation.................. 948,272
------------
6,567,915
------------
GLASS & CERAMIC PRODUCTS--3.10%
296,000 Chichibu Onoda Cement Co., Ltd..... 1,405,977
105,000 INAX Corporation................... 897,365
13,000 Nippon Hume Pipe Co., Ltd.......... 86,655
240,000 Sumitomo Osaka Cement Co., Ltd..... 985,300
31,000 Yamamura Glass Co., Ltd............ 145,058
------------
3,520,355
------------
IRON & STEEL--7.94%
120,000 Aichi Steel Works, Ltd............. 614,488
554,000 Kobe Steel, Ltd.+.................. 1,320,620
44,000 Kurimoto, Ltd...................... 423,432
156,000 Nippon Metal Industry Co., Ltd..... 571,580
791,000 Nippon Steel Co., Ltd.............. 2,318,563
261,000 Nisshin Steel Co., Ltd............. 811,124
156,000 Sanyo Special Steel Co., Ltd....... 539,902
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
658,000 Sumitomo Metal Industries, Ltd..... $ 1,818,338
91,000 Yodogawa Steel Works, Ltd.......... 594,535
------------
9,012,582
------------
LAND TRANSPORT--0.65%
145,000 Nishi-Nippon Railroad Co., Ltd..... 531,276
15,000 Seino Transportation Co., Ltd...... 209,244
------------
740,520
------------
MACHINERY--0.14%
20,000 Torishima Pump Manufacturing Co.,
Ltd.............................. 162,451
------------
METAL PRODUCTS--1.94%
63,000 Bunka Shutter Co., Ltd............. 441,637
76,000 Hokkai Can Co., Ltd................ 507,271
114,000 Komai Tekko Inc.................... 819,282
37,000 Yokogawa Bridge Corporation........ 437,734
------------
2,205,924
------------
MINING--1.55%
205,000 Nittetsu Mining Co., Ltd........... 1,764,667
------------
NON-FERROUS METALS--3.90%
317,000 Dowa Mining Co., Ltd............... 1,376,983
36,000 Furukawa Co., Ltd.................. 157,648
438,000 Furukawa Electric Co., Ltd......... 2,335,691
140,000 Optec Dai-Ichi Denko Co., Ltd...... 561,162
------------
4,431,484
------------
</TABLE>
8
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
OIL & COAL PRODUCTS--2.11%
204,000 Japan Energy Corporation........... $ 673,606
301,000 Nippon Oil Co., Ltd................ 1,727,365
------------
2,400,971
------------
OTHER PRODUCTS--1.94%
101,000 Gakken Co., Ltd.................... 686,620
57,000 Itoki Crebio Corporation........... 457,953
17,000 Sun Wave Corporation............... 195,118
89,000 Takara Co., Ltd.................... 652,187
17,000 Toppan Printing Co., Ltd........... 208,626
------------
2,200,504
------------
PHARMACEUTICALS--2.83%
69,000 Fujisawa Pharmaceutical Co.,
Ltd.............................. 609,191
197,000 Shionogi & Co., Ltd................ 1,539,266
58,000 Tanabe Seiyaku Co., Ltd............ 434,750
45,000 Teikoku Hormone Manufacturing Co.,
Ltd.............................. 631,704
------------
3,214,911
------------
PULP & PAPER--1.03%
97,000 Chuetsu Pulp & Paper Co., Ltd...... 459,030
27,600 Daio Paper Corporation............. 287,538
74,000 Nippon Paper Industries............ 419,441
------------
1,166,009
------------
REAL ESTATE--0.49%
76,000 Sumitomo Realty & Development Co.,
Ltd.............................. 555,582
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
RETAIL--6.01%
71,500 Aoyama Trading Co., Ltd............ $ 1,836,975
19,000 Ito-Yokado Co., Ltd................ 952,810
56,000 Kasumi Co., Ltd.................... 447,941
20,000 Maruetsu, Inc...................... 144,087
41,500 Parco Co., Ltd..................... 392,045
229,000 Seiyu, Ltd......................... 2,325,078
16,000 Senshukai Co., Ltd................. 226,019
37,000 Tobu Store Co., Ltd................ 234,874
48,000 Totenko Co., Ltd................... 270,375
------------
6,830,204
------------
RUBBER PRODUCTS--0.79%
228,000 Toyo Tire & Rubber Co., Ltd........ 895,775
------------
SERVICES--1.16%
10,000 CSK Corporation.................... 295,767
7,000 Intec, Inc......................... 98,883
60,000 Tokyo Broadcasting System Inc...... 921,732
------------
1,316,382
------------
TEXTILE & APPAREL--4.22%
122,000 Atsugi Nylon Industrial Co.,
Ltd.............................. 499,784
139,000 Gunze, Ltd......................... 785,415
35,000 Ichikawa Woolen Textile Co.,
Ltd.............................. 152,960
21,000 Japan Wool Textile Co., Ltd........ 176,136
426,000 Kurabo Industries Co., Ltd......... 1,414,170
121,000 Nippon Felt Co., Ltd............... 780,921
85,000 Nisshinbo Industries Inc........... 743,698
</TABLE>
9
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONCLUDED)
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
TEXTILE & APPAREL (CONCLUDED)
18,000 Renown Look, Inc................... $ 108,065
27,000 Teijin Ltd......................... 125,626
------------
4,786,775
------------
TRANSPORTATION EQUIPMENT--10.88%
97,000 Aichi Machine Industry Co., Ltd.... 626,884
133,000 Daihatsu Motor Co., Ltd............ 823,140
507,000 Fuji Heavy Industries, Ltd......... 2,372,401
17,000 Futaba Industrial Co., Ltd......... 286,673
119,000 Kanto Auto Works, Ltd.............. 873,076
213,000 Mitsubishi Motors Corporation...... 1,771,474
295,000 Nissan Motor Co., Ltd.............. 2,242,484
36,000 Tokai Rika Co., Ltd................ 321,017
94,000 Toyoda Automatic Loom Works,
Ltd.............................. 1,751,115
</TABLE>
<TABLE>
<C> <S> <C>
51,000 Toyota Auto Body Co., Ltd.......... 531,320
32,000 Toyota Motor Corporation........... 759,988
------------
12,359,572
------------
WAREHOUSING--0.79%
141,000 Sumitomo Warehouse Co., Ltd........ 892,570
------------
WHOLESALE--5.17%
46,000 Marubeni Corporation............... 214,029
16,000 Mitsubishi Corporation............. 179,402
32,000 Nagase & Co., Ltd.................. 274,048
175,000 Nichiei Co., Ltd................... 492,871
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
331,000 Nichimen Corporation............... $ 1,347,203
90,000 Nichimo Co., Ltd.+................. 357,569
22,000 Sankyo Seiko Co., Ltd.............. 136,353
15,000 Sato Shoji Corporation............. 108,595
31,000 Sumitomo Corporation............... 251,525
201,000 Sun Telephone Co., Ltd............. 1,350,470
111,000 Toyota Tsusho Corporation.......... 647,782
112,000 Yuasa Trading Co., Ltd............. 507,271
------------
5,867,118
------------
Total Japanese Common Stocks
(Cost--$115,646,567)......................... 112,942,629
------------
</TABLE>
- -------------------------------------------
SHORT-TERM INVESTMENTS--0.07%
- -------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
- ---------- ------------
<C> <S> <C>
U.S. DOLLAR TIME DEPOSIT--0.07%
82 Bank of New York, 3.40% due 11/1/96
(Cost--$82,128).................. 82,128
------------
Total Investments--99.51%
(Cost--$115,728,695)......................... 113,024,757
Other assets less liabilities--0.49%........... 552,035
------------
NET ASSETS (Applicable to 10,795,862 shares of
capital stock outstanding; equivalent to
$10.52 per share)--100.00%................... $113,576,792
------------
------------
</TABLE>
- ------------------------
+ Non-income producing securities.
See accompanying notes to financial statements.
10
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
TEN LARGEST COMMON STOCK CLASSIFICATIONS HELD
OCTOBER 31, 1996
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY NET ASSETS
- ----------------------------------- ----------
<S> <C>
Electrical Machinery............... 17.32%
Construction....................... 11.06
Transportation Equipment........... 10.88
Iron & Steel....................... 7.94
Chemicals.......................... 6.30
Retail............................. 6.01
Foods.............................. 5.78
Wholesale.......................... 5.17
Textile & Apparel.................. 4.22
Non-Ferrous Metals................. 3.90
</TABLE>
TEN LARGEST COMMON STOCK POSITIONS HELD
OCTOBER 31, 1996
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
ISSUE NET ASSETS
- ----------------------------------- ----------
<S> <C>
NEC Corporation.................... 2.29%
Kyocera Corporation................ 2.16
Fuji Heavy Industries, Ltd......... 2.09
Hitachi Ltd........................ 2.07
Furukawa Electric Co., Ltd......... 2.06
Seiyu, Ltd......................... 2.05
Nippon Steel Co., Ltd.............. 2.04
Matsushita Electric Industrial Co.,
Ltd............................... 1.98
Fujitsu Ltd........................ 1.97
Nissan Motor Co., Ltd.............. 1.97
</TABLE>
11
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost-$115,728,695)....................... $ 113,024,757
Cash denominated in foreign currency
(cost-$321,626)........................... 318,295
Interest and dividends receivable.......... 308,867
Deferred organizational expenses........... 29,142
Prepaid expenses........................... 23,809
-------------
Total assets............................. 113,704,870
-------------
LIABILITIES
Payable to investment manager.............. 31,777
Payable to administrator................... 16,735
Accrued expenses and other liabilities..... 79,566
-------------
Total liabilities........................ 128,078
-------------
NET ASSETS
Capital stock, $0.01 par value per share;
total 30,000,000 shares authorized;
10,795,862 shares issued and
outstanding............................... 107,959
Paid-in capital in excess of par value..... 109,199,096
Accumulated net investment loss............ (56,186)
Undistributed net realized gain on
investments............................... 7,043,020
Net unrealized depreciation on investments
and other assets and liabilities
denominated in foreign currency........... (2,717,097)
-------------
Net assets applicable to shares
outstanding............................. $ 113,576,792
-------------
-------------
NET ASSET VALUE PER SHARE............ $ 10.52
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of
$172,544)................................. $ 985,630
Interest................................... 51,120
------------
Total investment income.................. 1,036,750
------------
EXPENSES:
Investment management fee and expenses..... 390,747
Administration fees and expenses........... 200,627
Custodian fees and expenses................ 132,927
Reports and notices to shareholders........ 81,285
Legal fees and expenses.................... 65,640
Audit and tax services..................... 53,600
Directors' fees and expenses............... 43,008
Amortization of organizational expenses.... 40,252
Insurance expense.......................... 32,183
Transfer agency fee and expenses........... 21,630
Other...................................... 29,222
------------
Total expenses........................... 1,091,121
------------
NET INVESTMENT LOSS.......................... (54,371)
------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT ACTIVITIES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gains on investments.......... 7,398,313
Net realized foreign currency transaction
losses.................................... (215,519)
Net change in unrealized appreciation
(depreciation) on investments in equity
securities................................ (5,716,978)
Net change in unrealized appreciation
(depreciation) on translation of
short-term investments and other assets
and liabilities denominated in foreign
currency.................................. 19,335
------------
Net realized and unrealized gains from
investment activities and foreign currency
transactions................................ 1,485,151
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $ 1,430,780
------------
------------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
OCTOBER 31,
-------------------------------
1996 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss........................ $ (54,371) $ (75,831)
Net realized gain (loss) on:
Investments.............................. 7,398,313 7,351,511
Foreign currency transactions............ (215,519) (155,252)
Net change in unrealized appreciation
(depreciation) on:
Investments in equity securities......... (5,716,978) (22,527,635)
Translation of short-term investments and
other assets and liabilities denominated
in foreign currency..................... 19,335 (36,857)
------------- -------------
Net increase (decrease) in net assets
resulting from operations................. 1,430,780 (15,444,064)
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized gains from investment and
foreign currency transactions............. (7,222,517) (11,872,529)
------------- -------------
FROM CAPITAL STOCK TRANSACTIONS:
Sale of capital stock resulting from:
Reinvestment of dividends................ 203,106 365,121
Exercise of rights issued................ 26,502,050 --
------------- -------------
Net increase in net assets derived from
capital stock transactions................ 26,705,156 365,121
------------- -------------
Net increase (decrease) in net assets...... 20,913,419 (26,951,472)
NET ASSETS:
Beginning of year.......................... 92,663,373 119,614,845
------------- -------------
End of year (including accumulated net
investment loss of $56,186 and $40,413,
respectively)............................. $ 113,576,792 $ 92,663,373
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Japan Equity Fund, Inc. (the "Fund") was incorporated in Maryland on
July 12, 1990 under its former name "The Japan Emerging Equity Fund, Inc.". It
is registered with the Securities and Exchange Commission as a closed-end,
diversified management investment company. Prior to commencing its operations on
July 24, 1992, the Fund had no operations other than the sale of 10,700 shares
of common stock for a total of $100,580 on July 13, 1992 to Daiwa Securities
America Inc. ("DSA"), the lead underwriter of the Fund and an affiliate of Daiwa
International Capital Management Corp., the Fund's investment manager, and of
Daiwa Securities Trust Company, the Fund's investment adviser, administrator and
custodian. On July 24, 1992, 6,000,000 shares of common stock were issued in
conjunction with its initial underwriting. Organizational costs of approximately
$202,000 have been deferred and are being amortized using the straight line
method over a five year period beginning with the date on which the Fund
commenced investment operations.
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts and disclosures in the financial statements.
Actual reporting results could differ from those estimates.
VALUATION OF INVESTMENTS--Securities which are listed on the First Section
of the Tokyo Stock Exchange and for which market quotations are readily
available are valued at the last reported sales price available to the Fund at
the close of business on the day the securities are being valued or, lacking any
such sales, at the last available bid price. In instances where quotations are
not readily available or where the price as determined by the above procedures
is deemed not to represent fair market value, fair value will be determined in
such manner as the Board of Directors (the "Board") may prescribe. Short-term
investments having a maturity of 60 days or less are valued at amortized cost,
except where the Board determines that such valuation does not represent the
fair value of the investment. All other securities and assets are valued at fair
value as determined in good faith by, or under the direction of, the Board.
FOREIGN CURRENCY TRANSLATION--The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities and other assets and liabilities stated in Japanese yen
are translated at the exchange rates prevailing at the end of the period; and
(2) purchases, sales, income and expenses are translated at the rate of exchange
prevailing on the respective dates of such transactions. The resulting exchange
gains and losses are included in the Statement of Operations. The Fund does not
generally isolate the effect of fluctuations in foreign exchange rates from the
effect of fluctuations in the market price of securities.
TAX STATUS--The Fund intends to continue to distribute substantially all of
its taxable income and to comply with the minimum distribution and other
requirements of the Internal Revenue Code applicable to regulated investment
companies. Accordingly, no provision for federal income or excise taxes is
required.
15
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Fund is not subject to any Japanese income, capital gains or other taxes
except for withholding taxes on certain income, generally imposed at rates of
10% on interest and 15% on dividends, paid to the Fund by Japanese corporations.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date (the date upon which the order to buy or sell is
executed). Realized and unrealized gains and losses from security and foreign
currency transactions are calculated on the identified cost basis. Dividend
income and corporate actions are recorded generally on the ex-date, except for
certain dividends and corporate actions from Japanese securities which may be
recorded after the ex-date, but recorded as soon as the Fund acquires
information regarding such dividends or corporate actions. Interest income is
recorded on an accrual basis.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--The Fund records dividends and
distributions payable to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations, which
may differ from generally accepted accounting principles. These book basis/tax
basis differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax basis treatment;
temporary differences do not require reclassifications. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in capital.
INVESTMENT MANAGER AND INVESTMENT ADVISER
The Fund has an Investment Management Agreement dated July 17, 1992 with
Daiwa International Capital Management Corp. (the "Manager"). Daiwa Securities
Trust Company ("DST" or the "Adviser") acts as the Fund's investment adviser
pursuant to an Investment Advisory Agreement dated July 17, 1992 between the
Manager and DST. For such investment services, the Fund pays the Manager a
monthly fee at an annual rate of 0.60% of the first $20 million, 0.40% of the
next $30 million and 0.20% of the excess over $50 million of the Fund's average
weekly net assets, of which fee 70% is paid by the Manager to DST.
Brokerage commissions of $314,579 were paid by the Fund to Daiwa Securities
Co. Ltd., an affiliate of the Manager and DST, in connection with portfolio
transactions for the year ended October 31, 1996. In addition, the Fund will
reimburse the Manager and the Adviser for all out-of-pocket expenses related to
the Fund. For the year ended October 31, 1996, investment management fees and
expenses include expenses of $8,295 paid to the Adviser, representing
reimbursement to the Adviser of costs relating to the attendance by an employee
of the Adviser at meetings of the Fund's Board.
16
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
ADMINISTRATOR AND CUSTODIAN AND OTHER RELATED PARTIES
DST provides certain administrative services to the Fund, for which the Fund
pays to DST a monthly fee at an annual rate of 0.20% of the first $60 million of
the Fund's average weekly net assets, 0.15% of the next $40 million and 0.10% of
the excess over $100 million, with a minimum annual fee of $120,000.
DST also acts as custodian for the Fund's assets and has appointed The
Sumitomo Bank, Limited to act as the sub-custodian for all of the cash and
securities of the Fund held in Japan. As compensation for its services as
custodian, DST receives a monthly fee and reimbursement of out-of-pocket
expenses. Such expenses include fees and out-of-pocket expenses of the
sub-custodian. During the year ended October 31, 1996, DST earned $64,661,
excluding sub-custodian fees and expenses, as compensation for its custodial
services to the Fund.
At October 31, 1996, the Fund owed $16,735 and $5,266 to DST for
administration and custodian fees, excluding sub-custodian fees and expenses,
respectively.
During the year ended October 31, 1996, the Fund paid or accrued $59,640,
excluding approximately $101,000 paid in connection with the Fund's rights
offering, for legal services in connection with the Fund's on-going operations
to a law firm of which the Fund's Assistant Secretary is a partner.
INVESTMENTS IN SECURITIES AND FEDERAL INCOME TAX MATTERS
For federal income tax purposes, the cost of securities owned at October 31,
1996 was substantially the same as the cost of securities for financial
statement purposes. At October 31, 1996, the net unrealized depreciation of
investments for federal income tax purposes, excluding short-term securities, of
$2,703,938 was composed of gross appreciation of $6,650,399 for those
investments having an excess of value over cost, and gross depreciation of
$9,354,337 for those investments having an excess of cost over value. For the
year ended October 31, 1996, total aggregate purchases and sales on portfolio
securities, excluding short-term securities, were $61,501,268 and $40,332,167,
respectively.
As of October 31, 1996, the Fund had permanent book/tax differences
attributable to a net operating loss. To reflect reclassifications arising from
permanent book/tax differences for the year ended October 31, 1996, $38,598 was
reclassified from accumulated net investment loss and charged to undistributed
net realized gain on investments.
CAPITAL STOCK
There are 30,000,000 shares of $.01 par value common stock authorized.
During the years ended October 31, 1996 and 1995, 15,985 and 28,705 shares were
issued, respectively, as a result of the reinvestment of dividends paid to those
shareholders electing to reinvest dividends.
The Fund issued 2,702,000 shares on November 17, 1995 in connection with a
rights offering of the Fund's shares, the proceeds of which, net of fees and
expenses, were approximately $26.5 million. Shareholders of record on October
31, 1995 were issued one transferable right for each share of common stock
owned, entitling shareholders to acquire one newly-issued share of common stock
for every three rights held at a subscription price of $10.31, which was
determined on November 17, 1995. Offering costs of approximately $315,000 ($0.03
17
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
per share), including approximately $62,000 paid to DSA, as reimbursement for
its expenses incurred in acting as dealer manager, were charged to paid-in
capital in excess of par value upon completion of the offering. Dealer manager
and soliciting fees of $1,044,661 ($0.10 per share) were netted against the
proceeds of the subscription. DSA earned approximately $538,846 of the
aforementioned fees with respect to its participation in the offering.
Of the 10,795,862 shares of the Fund outstanding at October 31, 1996, DSA
owned 13,549 shares.
SUBSEQUENT EVENT
On December 5, 1996, a dividend was declared by the Board. The distribution
of $0.6550 per share is payable on December 27, 1996, to shareholders of record
at the close of business on December 16, 1996. The New York Stock Exchange has
determined that the ex-dividend date is December 12, 1996.
18
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS NET INCREASE
(LOSSES) ON (DECREASE) IN
NET INVESTMENTS AND NET
INVESTMENT INVESTMENT FOREIGN CURRENCY ASSETS RESULTING
INCOME INCOME (LOSS) TRANSACTIONS FROM OPERATIONS
-------------- ------------- ---------------- ----------------
TOTAL PER TOTAL PER TOTAL PER TOTAL PER
QUARTER ENDED (000) SHARE (000) SHARE (000) SHARE (000) SHARE
- --------------------------------------- ------ ------ ----- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 31, 1996....................... $ 111 $ 0.01 $(161) $(0.02) $ 10,409 $ 1.02 $ 10,248 $ 1.00
April 30, 1996......................... 517 0.06 247 0.03 13,139 1.21 13,386 1.24
July 31, 1996.......................... 65 0.01 (224) (0.02) (13,611) (1.31) (13,835) (1.33)
October 31, 1996....................... 344 0.03 84 0.00 (8,452) (0.73) (8,368) (0.73)
------ ------ ----- ------ -------- ------ -------- ------
For the year ended October 31, 1996.... $1,037 $ 0.11 $ (54) $(0.01) $ 1,485 $ 0.19 $ 1,431 $ 0.18
------ ------ ----- ------ -------- ------ -------- ------
------ ------ ----- ------ -------- ------ -------- ------
January 31, 1995....................... $ 1 $ 0.00 $(250) $(0.03) $ (3,323) $(0.41) $ (3,573) $(0.44)
April 30, 1995......................... 609 0.07 355 0.04 3,191 0.40 3,546 0.44
July 31, 1995.......................... 631 0.08 (220) (0.02) (6,529) (0.81) (6,749) (0.83)
October 31, 1995....................... (333) (0.04) 39 0.00 (8,707) (1.08) (8,668) (1.08)
------ ------ ----- ------ -------- ------ -------- ------
For the year ended October 31, 1995.... $ 908 $ 0.11 $ (76) $(0.01) $(15,368) $(1.90) $(15,444) $(1.91)
------ ------ ----- ------ -------- ------ -------- ------
------ ------ ----- ------ -------- ------ -------- ------
</TABLE>
PER SHARE SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET MARKET
VALUE PRICE* SHARE
---------------- ---------------- VOLUME*
QUARTER ENDED HIGH LOW HIGH LOW (000)
- --------------------------------------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
January 31, 1996....................... $ 11.77 $ 11.06 $ 15 $10 3/8 5,157
April 30, 1996......................... 12.58 10.99 14 12 2,199
July 31, 1996.......................... 12.31 11.30 14 10 3/8 1,570
October 31, 1996....................... 11.46 10.52 11 7/8 10 1/4 1,143
January 31, 1995....................... 14.71 12.18 15 5/8 11 2,151
April 30, 1995......................... 13.54 11.84 13 5/8 12 1,801
July 31, 1995.......................... 13.50 11.75 14 5/8 11 1/2 2,511
October 31, 1995....................... 12.35 11.43 16 1/8 12 1/4 2,578
</TABLE>
- ------------------------
* As reported on the New York Stock Exchange.
19
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding during each period is
presented below:
<TABLE>
<CAPTION>
FOR THE
PERIOD
JULY 24,
1992* TO,
FOR THE YEARS ENDED OCTOBER 31, OCTOBER
------------------------------------------------- 31,
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period..................... $ 11.47 $ 14.86 $ 14.69 $ 9.93 $ 9.40
---------- ---------- ---------- ---------- ----------
Net investment loss...................................... (0.01) (0.01) (0.03) (0.05) --
Net realized and unrealized gains (losses) on investments
and foreign currency transactions....................... 0.19 (1.90) 1.75 4.81 0.67
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net asset value resulting from
operations.............................................. 0.18 (1.91) 1.72 4.76 0.67
---------- ---------- ---------- ---------- ----------
Less: dividends and distributions to shareholders
Net realized gains on investments and foreign currency
transactions.......................................... (0.67) (1.48) (1.09) -- --
---------- ---------- ---------- ---------- ----------
Dilutive effect of rights offering....................... (0.43) -- (0.42) -- --
---------- ---------- ---------- ---------- ----------
Offering costs charged to paid-in capital in excess of
par value............................................... (0.03) -- (0.04) -- (0.14)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period........................... $ 10.52 $ 11.47 $ 14.86 $ 14.69 $ 9.93
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Per share market value, end of period.................... $ 10.375 $ 12.875 $ 15.000 $ 13.625 $ 9.500
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total investment return:
Based on market price at beginning and end of year,
assuming reinvestment of dividends+................... (13.55)% (4.21)% 22.10% 43.42% 1.33%
Based on net asset value at beginning and end of year,
assuming reinvestment of dividends+................... (1.18)% (13.86)% 11.88% 47.94% 5.64%
Ratios and supplemental data:
Net assets, end of year (in millions).................. $113.6 $ 92.7 $119.6 $ 88.3 $ 59.7
Ratios to average net assets of:
Expenses............................................. 0.90% 0.97% 0.93% 1.18% 1.65%**
Net investment loss.................................. (0.04)% (0.07)% (0.19)% (0.34)% (0.16)%**
Portfolio turnover..................................... 33.89% 28.35% 30.76% 25.42% 0.57%
Average commission rate per share...................... $0.0325 N/A N/A N/A N/A
</TABLE>
- --------------------------
* Commencement of operations.
** Annualized.
+ For the years ended October 31, 1996 and 1994, the total investment
return includes the benefit of shares resulting from the exercise of
rights.
20
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and
Board of Directors of
The Japan Equity Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Japan Equity Fund, Inc. (the
"Fund") at October 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the four years in the period
then ended and for the period July 24, 1992 (commencement of operations) to
October 31, 1992, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1996 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 5, 1996
21
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
The Fund is required by Subchapter M of the Internal Revenue Code of 1986,
as amended, to advise you within 60 days of the Fund's fiscal year end (October
31, 1996) as to the federal tax status of distributions received by you during
such fiscal year. Accordingly, the Fund is hereby advising you that of the
$0.6700 per share distribution paid during the fiscal year, on December 29,
1995, $0.1050 represented an ordinary income dividend, and $0.5650 represented a
long-term capital gain distribution.
In addition, on December 5, 1996, the Board of Directors of the Fund
declared a total distribution of $0.6550 per share, of which $0.0420 represents
a dividend from ordinary income and $0.6130 represents a distribution of
long-term capital gains.
During the Fund's fiscal year ended October 31, 1996, the Fund paid $156,771
in foreign taxes. The Fund has elected to give the benefit of the foreign tax
credit to its shareholders.
Because the Fund's fiscal year is not the calendar year, a notification will
be sent to shareholders in respect of calendar year 1996. This notification,
which will reflect the amount of income from foreign sources to be used by
calendar year taxpayers on their federal income tax returns, as well as the
amount of any foreign tax credit available to its shareholders, will be made in
conjunction with Form 1099 DIV and will be mailed in January 1997.
SHAREHOLDERS ARE STRONGLY ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH
RESPECT TO THE TAX CONSEQUENCES OF THEIR INVESTMENT IN THE FUND.
22
<PAGE>
- ----------------------------------------
BOARD OF DIRECTORS
Katsunari Rembutsu, CHAIRMAN
Austin C. Dowling
Martin J. Gruber
Robert F. Gurnee
Harry M. Markowitz
Frederick W. Zuckerman
- --------------------------------------------
OFFICERS
Harry M. Markowitz
PRESIDENT
Daniel F. Barry
VICE PRESIDENT
Lawrence Jacob
SECRETARY
Edward J. Grace
TREASURER
John J. O'Keefe
ASSISTANT TREASURER
Laurence E. Cranch
ASSISTANT SECRETARY
- --------------------------------------------
ADDRESS OF THE FUND
c/o Daiwa Securities Trust Company
One Evertrust Plaza, 9th Floor
Jersey City, New Jersey 07302
- --------------------------------------------
INVESTMENT MANAGER
Daiwa International Capital Management Corp.
INVESTMENT ADVISER
Daiwa Securities Trust Company
ADMINISTRATOR AND CUSTODIAN
Daiwa Securities Trust Company
TRANSFER AGENT AND REGISTRAR
PNC Bank, National Association
LEGAL COUNSEL
Rogers & Wells
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
- --------------------------------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that from time to time the Fund may purchase shares of its
common stock in the open market at prevailing market prices.
This report is sent to shareholders of the Fund for their information. It is not
a prospectus, circular or representation intended for use in the purchase or
sale of shares of the Fund or of any securities mentioned in the report.
ANNUAL REPORT
OCTOBER 31, 1996
- -------------------------
[LOGO]
- -------------------------
THE JAPAN EQUITY
FUND, INC.
c/o Daiwa Securities Trust Company
One Evertrust Plaza
Jersey City, New Jersey 07302
INVESTMENT MANAGER
Daiwa International Capital
Management Corp.
INVESTMENT ADVISER
Daiwa Securities Trust Company
