<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 ("DSTC"), the Fund's Investment Adviser. DSTC 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.
INQUIRIES
It is the policy of the Fund to respond to inquiries about its portfolio
holdings and performance. Such inquiries should be directed to DSTC, the Fund's
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.
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 (302) 791-2748, or by writing The Japan
Equity Fund, Inc., c/o PNC Bank, National Association, P.O. Box 8950,
Wilmington, DE 19899.
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
June 1, 1998
DEAR SHAREHOLDERS:
It is our pleasure, on behalf of The Board of Directors, to present the
Semi-Annual Report for The Japan Equity Fund, Inc. (the "Fund") for the six
months ended April 30, 1998.
BACKGROUND
The objective of the Fund is to outperform its benchmark, which is the Tokyo
Stock Price Index (TOPIX) excluding its financial stocks (the "Benchmark"). The
TOPIX includes approximately 1,300 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, known as the Daiwa Portfolio Optimization System ("DPOS"),
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.
PERFORMANCE OF THE JAPANESE STOCK MARKET
The Nikkei 225 Average closed at 15,641 on April 30, 1998, down 18.26% over
the last 12 months and down 4.97% since October 31, 1997. The market continued
to stagnate through the first half of 1998. During the last six months the TSE
was characterized by pushing and shoving between expectations and subsequent
disappointments in the Japanese government's inability to implement a solid
economic stimulus package.
Prime Minister Hashimoto has launched two contradictory fiscal programs. On
December 17, 1997, he announced a modest Y2 trillion tax cut seeking to
stimulate consumer spending and keep the economy out of recession. However, a
week later, his cabinet approved a tight fiscal 1998 budget that cut
discretionary spending for the first time in 11 years. This inconsistency has
led to a lack of confidence in the Japanese government. Contradictory fiscal
policies and a ballooning economic package (Y16 trillion) have exhausted market
participants and created skepticism. Consumers in Japan are expressing a lack of
confidence in the present government by cutting back consumption.
Other reasons for the poor Japanese stock market performance include the
continuing Asian crisis and Moody's downgrading of Japan's country weighting
from stable to negative, which resulted in a sale of equities, bonds and yen.
At this point, the market in Japan appears to be range-bound, centering
around 16,000 for the time being. Necessary prerequisites for the market to
break out of its trading range require a commitment from government to: (1)
create a policy to overhaul the fiscal/tax system; (2) develop a resolution to
the real estate banking sector problem; and, (3) make substantive progress in
corporate restructuring and greater stability within the Asian region.
FUND PERFORMANCE
As of April 30, 1998, the Fund's net assets were approximately $65.6
million, which represents a net asset value of $6.07 per share. The
time-weighted return on the Fund's net assets was -13.16% since the Fund's
previous fiscal year-end on October 31, 1997. Over the same six-month period,
the Benchmark (the TOPIX less its financial firms component) return was -11.82%,
as measured in U.S. Dollars.
2
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
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) any dividends paid by the Fund during the measurement period.
The investment process of the Fund, utilizing DPOS, may be divided into two
parts: one part consists of calculations for estimating the expected return on
any security, given its earnings, book value, dividend yield, stock price and
the like. The other part constitutes risk control procedures for reducing
tracking error relative to the Benchmark. These risk control procedures include
constraints on certain characteristics of the Fund's portfolio, such as
constraints on sector holdings, so that the portfolio's characteristics do not
differ excessively from those of the Benchmark. The risk control procedures also
include a computation which finds the combination of securities which had
minimum historical tracking error among portfolios which meet certain
constraint, expected return and low turnover criteria.
Since the above mentioned expected return calculation favors stocks with low
price/earnings ratios, low price-to-book ratios, etc., the process generally
selects what are called "value stocks." Historically, value stocks have
outperformed the market in Japan. However, value stocks have significantly
under-performed since the fourth quarter of 1996, although their performance has
improved since January 1998. Selection of stocks by value criteria alone will
generally overweight a portfolio with stocks of smaller companies and
lower-priced stocks than is found in the Benchmark portfolio. An analysis by the
Fund's management shows that much of the under-performance of value stocks since
fourth quarter 1996 has been due to under-performance of small-capitalization
stocks and lower-priced stocks.
In August 1997, the Fund's portfolio was modified to reflect a tightened
constraint on small capitalization stocks, and a newly-introduced constraint on
lower-priced stocks, as compared to the Benchmark's holding of such stocks. The
Fund's investment process continues to seek stocks which are attractively priced
in terms of forecasted earnings and other fundamental variables, but the
portfolio is now selected subject to these tightened constraints. As a result,
since last August the Fund's performance has shown a reduced sensitivity to the
weakness in small capitalization and lower-priced stocks, which continued
through December 1997. Since January 1998, the performance of value stocks has
improved. For the first four months of 1998, the return on the Fund's net assets
was 7.43%, compared with 3.35% for the Benchmark.
It is important to emphasize once 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 April 30, 1998, the proportion of the Fund's
net assets invested in non-financial Japanese equities listed on the First
Section of the TSE was 98.68%, while short-term investments and other net assets
represented 1.32%.
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
April 1998, the Benchmark as measured in Yen equaled 107.63, whereas the Fund's
portfolio for that same period equaled 101.41 in Yen (including cash, after
expenses, and adjusting for dividend payments, dividend reinvestment, and two
rights offerings). Thus, in Yen terms, the Fund under-performed its Benchmark by
6.22 percentage points from commencement through April 30, 1998.
At the end of April 1998, the Benchmark, as measured in U.S. Dollars,
equaled 103.51, whereas the value of the Fund's portfolio equaled 97.53 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 under-performed its Benchmark by 5.98 percentage points from
commencement through April 30, 1998. The difference between Yen and Dollar
performance reflects an unfavorable change for the Fund in the exchange rate
from Y126.900 per Dollar on July 24, 1992 to Y131.945 per Dollar on April 30,
1998.
3
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
The invested position of the Fund's assets consisted of common stocks of
companies operating in 23 different industries. The Fund has relatively large
weightings in Electrical Machinery (18.20% of net assets), Transportation
Equipment (15.34%), Chemicals (8.52%), Pharmaceuticals (8.31%), and Other
Products (5.88%).
During the six-month period ended April 30, 1998, the Fund's market price on
the New York Stock Exchange (NYSE) ranged from a low of $6 1/2 per share on
December 29, 1997 to a high of $8 1/4 on February 4, 1998. The Fund's NYSE
market price closed at $7 1/2 per share on April 30, 1998.
The NYSE trading price in relation to the Fund's net asset value per share,
as measured by the weekly closing prices during the six-month period ended April
30, 1998, ranged from a premium of 31.69% on January 16, 1998 to a premium of
6.06% on November 7, 1997, and ended the six-month period at a premium of
23.56%.
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.
The Fund continues to review the current status of its exposure to the Year
2000 computer issue. Like other investment companies and financial and business
organizations, the Fund could be adversely affected if the computer systems used
by the Fund's service providers do not properly address this problem prior to
January 1, 2000. After analysis of these issues, the management of the Fund does
not anticipate that the transition to the 21st Century will have any material
impact on the Fund's operations. In addition, the management of the Fund has
sought assurances from the Fund's service providers that they are taking all
necessary steps to ensure that their computer systems will accurately reflect
the year 2000, and the management of the Fund will continue to monitor the
situation. At this time, however, no assurances can be given that the Fund's
service providers have anticipated every step necessary to avoid any adverse
effect to their respective operations, and consequently to the Fund,
attributable to the Year 2000 problem.
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 1982-1993 (currently, Distinguished
Professor, Emeritus); 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,
[SIGNATURE] [SIGNATURE]
HIDEAKI MATSUURA HARRY M. MARKOWITZ
CHAIRMAN OF THE BOARD PRESIDENT
</TABLE>
4
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
APRIL 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
- -------------------------------------------
JAPANESE COMMON STOCKS--98.68%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
CHEMICALS--8.52%
47,000 Fuji Photo Film Co., Ltd........... $ 1,677,745
33,000 Kansai Paint Co., Ltd.............. 83,535
281,000 Konica Corporation................. 1,294,843
191,000 Mitsubishi Gas Chemical Co.,
Inc............................... 495,070
220,000 Mitsui Petrochemical Industries,
Ltd............................... 480,200
321,000 Nippon Kayaku Co., Ltd............. 1,296,699
14,000 Okura Industrial Co., Ltd.......... 35,015
12,000 Tenma Corporation.................. 140,058
55,000 Toagosei Co., Ltd.................. 88,370
------------
5,591,535
------------
COMMUNICATION--1.13%
84 NTT Corporation.................... 738,490
------------
CONSTRUCTION--3.32%
9,000 Chudenko Corporation Co., Ltd...... 208,723
51,000 Daiwa House Industry Co., Ltd...... 413,581
600 Kyudenko Corporation............... 4,343
167,000 Sekisui House, Ltd................. 1,308,712
700 Toenec Corporation................. 2,387
54,800 Tokyo Denki Komusho Co., Ltd....... 238,396
------------
2,176,142
------------
ELECTRIC POWER & GAS--4.88%
15,200 Chugoku Electric Power Co., Inc.... 224,639
48,500 Hokkaido Electric Power Co.,
Inc............................... 674,505
97,300 Kyushu Electric Power Co., Inc..... 1,454,946
44,200 Tokyo Electric Power Co., Inc...... 849,195
------------
3,203,285
------------
ELECTRICAL MACHINERY--18.20%
8,800 Advantest Corporation.............. 593,581
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
82,000 Canon Inc.......................... $ 1,945,204
48,000 Fuji Electric Co., Ltd............. 156,429
65,000 Hitachi Ltd........................ 467,505
24,000 KOA Corporation.................... 238,281
29,400 Kyocera Corporation................ 1,546,372
171,000 Matsushita Electric Industrial Co.,
Ltd............................... 2,747,508
22,000 Matsushita Electric Works, Ltd..... 198,416
22,000 Matsushita-Kotobuki Electronics
Industries, Ltd................... 611,922
78,000 Nichicon Corporation............... 851,264
23,000 Nippon Chemi-con Corporation....... 73,910
2,000 Rohm Co., Ltd...................... 226,458
17,500 Sony Corporation................... 1,460,268
9,000 TDK Corporation.................... 713,479
46,000 Tokyo Electric Co., Ltd............ 119,580
------------
11,950,177
------------
FOODS--1.07%
11,000 Chukyo Coca Cola Co., Ltd.......... 89,204
13,000 Fujicco Co. Ltd.................... 142,863
10,000 Kirin Brewery Co., Ltd............. 87,536
69,000 Nippon Flour Mills Co., Ltd........ 167,342
800 Pokka Corporation.................. 3,553
26,000 Takara Shuzo Co., Ltd.............. 103,649
16,000 Yomeishu Seizo Co. Ltd............. 106,105
------------
700,252
------------
GLASS & CERAMIC PRODUCTS--4.25%
289,000 Asahi Glass Co., Ltd............... 1,566,069
254,000 Chichibu Onoda Cement Co., Ltd..... 413,885
105,000 INAX Corporation................... 389,935
92,000 Sumitomo Osaka Cement Co., Ltd..... 135,269
</TABLE>
5
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
GLASS & CERAMIC PRODUCTS (CONCLUDED)
168,000 Tokai Carbon....................... $ 286,483
------------
2,791,641
------------
IRON & STEEL--1.11%
24,000 Maruichi Steel Tube Co., Ltd....... 299,579
28,000 Nippon Steel Co., Ltd.............. 45,201
91,000 Yodogawa Steel Works, Ltd.......... 386,222
------------
731,002
------------
LAND TRANSPORT--2.93%
71,000 Maruzen Showa Unyu Co., Ltd........ 137,216
120,000 Nippon Express Co., Ltd............ 686,650
33,000 Nippon Konpo Unyu Soko Co., Ltd.... 188,328
270 Nishi-Nippon Railroad Co., Ltd..... 647
157,000 Seino Transportation Co., Ltd...... 907,886
------------
1,920,727
------------
MACHINERY--2.66%
113,000 Heiwa Corporation.................. 1,194,702
10,000 Max Co., Ltd....................... 91,932
9,000 Takuma Co., Ltd.................... 67,528
48,000 Tsubaki Nakashima Co Ltd........... 259,017
61,000 Tsudakoma Corp..................... 135,920
------------
1,749,099
------------
METAL PRODUCTS--1.08%
28,000 Bunka Shutter Co., Ltd............. 75,334
114,000 Komai Tekko Inc.................... 228,959
32,000 Takada Kiko Co., Ltd............... 116,412
9,000 Toyo Exterior Co., Ltd............. 89,355
15,000 Toyo Seikan Corporation............ 193,831
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
700 Yokogawa Bridge Corporation........ $ 1,910
------------
705,801
------------
MINING--1.07%
96,000 Nittetsu Mining Co., Ltd........... 376,157
110,000 Teikoku Oil Co., Ltd............... 327,637
------------
703,794
------------
NON-FERROUS METALS--2.06%
524,000 Dowa Mining Co., Ltd............... 1,298,632
15,000 Furukawa Electric Co., Ltd......... 54,568
------------
1,353,200
------------
OTHER PRODUCTS--5.88%
108,000 Dainippon Printing Co., Ltd........ 1,841,676
57,000 Itoki Crebio Corporation........... 168,911
16,700 Nintendo Co., Ltd.................. 1,536,534
26,000 Toppan Printing Co., Ltd........... 309,963
------------
3,857,084
------------
PHARMACEUTICALS--8.31%
71,000 Chugai Pharmaceutical Co., Ltd..... 462,769
125,000 Daiichi Pharmaceutical Co., Ltd.... 1,799,045
31,000 Ono Pharmaceutical Co., Ltd........ 676,646
4,000 Sankyo Co., Ltd.................... 99,435
182,000 Shionogi & Co., Ltd................ 990,382
60,000 Yamanouchi Pharmaceutical Co.,
Ltd............................... 1,423,320
------------
5,451,597
------------
</TABLE>
6
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
PULP & PAPER--1.38%
97,000 Chuetsu Pulp & Paper Co., Ltd...... $ 166,145
600 Daio Paper Corporation............. 3,183
164,000 Nippon Paper Industries Co.,
Ltd............................... 737,065
------------
906,393
------------
RETAIL--4.10%
10,000 Heiwado Co., Ltd................... 58,282
20,000 Ito-Yokado Co., Ltd................ 1,038,311
56,000 Kasumi Co., Ltd.................... 209,663
29,000 Nissho Corporation................. 217,151
8,500 Parco Co., Ltd..................... 32,726
5,000 Seven Eleven Co., Ltd.............. 335,367
26,200 Xebio Co., Ltd..................... 337,565
21,300 York-Benimaru Co., Ltd............. 464,114
------------
2,693,179
------------
RUBBER PRODUCTS--2.08%
28,000 Bando Chemical Industries, Ltd..... 67,058
25,000 Bridgestone Corporation............ 572,208
260,000 Mitsuboshi Belting Ltd............. 729,092
------------
1,368,358
------------
SERVICES--0.14%
310 Nippon Television Network
Corporation....................... 91,864
------------
TEXTILE & APPAREL--3.11%
35,000 Descente, Ltd...................... 79,579
144,000 Gunze, Ltd......................... 321,952
35,000 Ichikawa Woolen Textile Co.,
Ltd............................... 58,623
121,000 Nippon Felt Co., Ltd............... 394,331
32,000 Onward Kashiyma Co., Ltd........... 412,293
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
156,000 Teijin Ltd......................... $ 446,914
16,000 Toray Industries Inc............... 86,339
24,000 Wacoal Co., Ltd.................... 242,828
------------
2,042,859
------------
TRANSPORTATION EQUIPMENT--15.34%
77,000 Aichi Machine Industry Co., Ltd.... 160,484
170,000 Daihatsu Motor Co., Ltd............ 631,324
14,000 Futaba Industrial Co., Ltd......... 149,926
35,000 Honda Motor Co., Ltd............... 1,273,258
30,000 Mitsuba Electric Manufacturing Co.,
Ltd............................... 141,650
249,000 Mitsubishi Heavy Industries,
Ltd............................... 924,703
427,000 Nissan Motor Co., Ltd.............. 1,381,856
42,000 Toyota Auto Body Co., Ltd.......... 258,471
197,000 Toyota Motor Corporation........... 5,151,010
------------
10,072,682
------------
WAREHOUSING & HARBOR TRANSPORT SERVICES--3.24%
411,000 Kamigumi Co., Ltd.................. 1,541,892
141,000 Sumitomo Warehouse Co., Ltd........ 582,402
------------
2,124,294
------------
WHOLESALE--2.82%
3,900 Autobacs Seven Co., Ltd............ 130,054
37,000 C. Itoh Fuel Corporation........... 124,226
32,000 Nagase & Co., Ltd.................. 116,412
10,000 Ryosan Co., Ltd.................... 143,924
45,000 Ryoyo Electro Corporation.......... 579,446
</TABLE>
7
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONCLUDED)
APRIL 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONCLUDED)
- -------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
WHOLESALE (CONCLUDED)
33,000 Sangetsu Co., Ltd.................. $ 422,676
22,000 Sanshin Electronics
Co., Ltd........................ 221,759
35,000 Toyota Tsusho Corporation.......... 112,471
------------
1,850,968
------------
Total Japanese Common Stocks
(Cost--$79,791,533).......................... 64,774,423
------------
</TABLE>
- -------------------------------------------
SHORT-TERM INVESTMENTS--0.15%
- -------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000)
- ----------
<C> <S> <C>
U.S. DOLLAR TIME DEPOSIT--0.15%
$102 Bank of New York, 3.60% due
5/1/98............................ 102,416
------------
Total Short-Term Investments
(Cost--$102,416)............................. 102,416
------------
Total Investments--98.83%
(Cost--$79,893,949).......................... 64,876,839
Other assets less liabilities--1.17%........... 766,207
------------
NET ASSETS (Applicable to 10,815,688 shares of
capital stock outstanding; equivalent to
$6.07 per share)--100.00%.................... $ 65,643,046
------------
------------
</TABLE>
- -------------------------------------------
TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
APRIL 30, 1998 (UNAUDITED)
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY NET ASSETS
- ----------------------------------- ----------
<S> <C>
Electrical Machinery............... 18.20%
Transportation Equipment........... 15.34
Chemicals.......................... 8.52
Pharmaceuticals.................... 8.31
Other Products..................... 5.88
Electric Power & Gas............... 4.88
Glass & Ceramic Products........... 4.25
Retail............................. 4.10
Construction....................... 3.32
Warehousing & Harbor Transport
Services......................... 3.24
</TABLE>
- -------------------------------------------
TEN LARGEST COMMON STOCK
POSITIONS HELD
APRIL 30, 1998 (UNAUDITED)
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
ISSUE NET ASSETS
- ----------------------------------- ----------
<S> <C>
Toyota Motor Corporation........... 7.85%
Matsushita Electric Industrial
Co., Ltd......................... 4.19
Canon Inc.......................... 2.96
Dainippon Printing Co., Ltd........ 2.81
Daiichi Pharmaceutical Co., Ltd.... 2.74
Fuji Photo Film Co., Ltd........... 2.56
Asahi Glass Co., Ltd............... 2.39
Kyocera Corporation................ 2.36
Kamigumi Co., Ltd.................. 2.35
Nintendo Co., Ltd.................. 2.34
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost--$79,893,949)....................... $ 64,876,839
Cash denominated in foreign currency
(cost--$565,679).......................... 566,008
Interest and dividends receivable.......... 347,949
Prepaid expenses........................... 25,064
-------------
Total assets............................. 65,815,860
-------------
LIABILITIES
Payable to investment manager.............. 22,390
Payable to administrator................... 10,628
Accrued expenses and other liabilities..... 139,796
-------------
Total liabilities........................ 172,814
-------------
NET ASSETS
Capital stock, $0.01 par value per share;
total 30,000,000 shares authorized;
10,815,688 shares issued and
outstanding............................... 108,157
Paid-in capital in excess of par value..... 109,162,882
Accumulated net investment loss............ (1,271)
Accumulated net realized loss on
investments and foreign currency
transactions.............................. (28,601,550)
Net unrealized depreciation on investments
and other assets and liabilities
denominated in foreign currency........... (15,025,172)
-------------
Net assets applicable to shares
outstanding............................. $ 65,643,046
-------------
-------------
NET ASSET VALUE PER SHARE............ $ 6.07
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of
$69,276).................................. $ 402,723
Interest................................... 2,245
-------------
Total investment income.................. 404,968
-------------
EXPENSES:
Investment management fee and expenses..... 140,253
Administration fee......................... 63,194
Custodian fees and expenses................ 52,184
Reports and notices to shareholders........ 40,277
Audit and tax services..................... 28,227
Legal fees and expenses.................... 23,306
Directors' fees and expenses............... 18,483
Insurance expense.......................... 13,318
Transfer agency fee and expenses........... 9,919
Other...................................... 17,078
-------------
Total expenses........................... 406,239
-------------
NET INVESTMENT LOSS.......................... (1,271)
-------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT ACTIVITIES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized losses on investments......... (10,305,252)
Net realized foreign currency transaction
losses.................................... (75,275)
Net change in unrealized appreciation
(depreciation) on investments in equity
securities................................ 416,757
Net change in unrealized appreciation
(depreciation) on translation of
short-term investments and other assets
and liabilities denominated in foreign
currency.................................. (9,967)
-------------
Net realized and unrealized losses from
investment activities and foreign currency
transactions................................ (9,973,737)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $ (9,975,008)
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEAR
APRIL 30, ENDED
1998 OCTOBER 31,
(UNAUDITED) 1997
------------ -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss........................ $ (1,271) $ (122,119)
Net realized loss on:
Investments.............................. (10,305,252) (18,221,023)
Foreign currency transactions............ (75,275) (8,371)
Net change in unrealized appreciation
(depreciation) on:
Investments in equity securities......... 416,757 (12,729,929)
Translation of short-term investments and
other assets and liabilities denominated
in foreign currency..................... (9,967) 15,064
------------ -------------
Net decrease in net assets resulting from
operations................................ (9,975,008) (31,066,378)
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized gains from investment and
foreign currency transactions............. -- (7,071,290)
------------ -------------
FROM CAPITAL STOCK TRANSACTIONS:
Sale of capital stock resulting from:
Reinvestment of dividends................ -- 178,930
------------ -------------
Net decrease in net assets................. (9,975,008) (37,958,738)
NET ASSETS:
Beginning of period........................ 75,618,054 113,576,792
------------ -------------
End of period.............................. $ 65,643,046 $ 75,618,054
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements.
11
<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." and
commenced operations on July 24, 1992. It is registered with the Securities and
Exchange Commission as a closed-end, diversified management investment company.
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.
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
12
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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. 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 ("DSTC" or the "Adviser") acts as the Fund's investment adviser
pursuant to an Investment Advisory Agreement dated July 17, 1992 between the
Manager and DSTC. 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 DSTC.
Brokerage commissions of $72,205 were paid by the Fund to Universal
Securities Co., Ltd., an affiliate of the Manager and DSTC, in connection with
portfolio transactions during the six months ended April 30, 1998. In addition,
the Fund has agreed to reimburse the Manager and the Adviser for all
out-of-pocket expenses related to the Fund. For the six months ended April 30,
1998, the investment management fee and expenses include expenses of $4,958 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.
ADMINISTRATOR AND CUSTODIAN AND OTHER RELATED PARTIES
DSTC provides certain administrative services to the Fund, for which the
Fund pays DSTC 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.
DSTC 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, DSTC receives a monthly fee and reimbursement of out-of-pocket
expenses. Such expenses include
13
<PAGE>
THE JAPAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
fees and out-of-pocket expenses of the sub-custodian. During the six months
ended April 30, 1998, DSTC earned $17,070, excluding sub-custodian fees and
expenses, as compensation for its custodial services to the Fund.
At April 30, 1998, the Fund owed $10,628 and $2,944 to DSTC for
administration and custodian fees, excluding sub-custodian fees and expenses,
respectively.
During the six months ended April 30, 1998, the Fund paid or accrued
$23,306, 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 April 30,
1998 was substantially the same as the cost of securities for financial
statement purposes. At April 30, 1998, the net unrealized depreciation of
investments for federal income tax purposes, excluding short-term securities, of
$15,017,110 was composed of gross appreciation of $2,218,135 for those
investments having an excess of value over cost, and gross depreciation of
$17,235,245 for those investments having an excess of cost over value. For the
six months ended April 30, 1998, total aggregate purchases and sales on
portfolio securities, excluding short-term securities, were $17,045,039 and
$16,837,673 respectively.
At October 31, 1997, the Fund had a capital loss carryover of $18,221,023
which expires in 2005.
CAPITAL STOCK
There are 30,000,000 shares of $0.01 par value common stock authorized.
During the year ended October 31, 1997, 19,826 shares were issued as a result of
the reinvestment of dividends paid to those shareholders electing to reinvest
dividends.
Of the 10,815,688 shares of the Fund outstanding at April 30, 1998, Daiwa
Securities America Inc., an affiliate of the Manager and DSTC, owned 14,532
shares.
14
<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
SIX
MONTHS
ENDED
APRIL 30, FOR THE YEARS ENDED OCTOBER 31,
1998 --------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period................. $ 6.99 $ 10.52 $ 11.47 $ 14.86 $ 14.69 $ 9.93
---------- ---------- ---------- ---------- ---------- ----------
Net investment loss.................................. (0.00) (0.01) (0.01) (0.01) (0.03) (0.05)
Net realized and unrealized gains (losses) on
investments and foreign currency transactions....... (0.92) (2.86) 0.19 (1.90) 1.75 4.81
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net asset value resulting
from operations..................................... (0.92) (2.87) 0.18 (1.91) 1.72 4.76
---------- ---------- ---------- ---------- ---------- ----------
Less: dividends and distributions to shareholders
Net realized gains on investments and foreign
currency transactions............................. -- (0.66) (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) --
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period....................... $ 6.07 $ 6.99 $ 10.52 $ 11.47 $ 14.86 $ 14.69
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Per share market value, end of period................ $ 7.500 $ 7.375 $10.375 $12.875 $15.000 $13.625
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Total investment return:
Based on market price at beginning and end of
period, assuming reinvestment of dividends+....... 1.70% (23.76)% (13.55)% (4.21)% 22.10% 43.42%
Based on net asset value at beginning and end of
period, assuming reinvestment of dividends+....... (13.16)% (28.73)% (1.18)% (13.86)% 11.88% 47.94%
Ratios and supplemental data:
Net assets, end of period (in millions)............ $ 65.6 $ 75.6 $ 113.6 $ 92.7 $ 119.6 $ 88.3
Ratios to average net assets of:
Expenses........................................... 1.25%* 1.03% 0.90% 0.97% 0.93% 1.18%
Net investment income (loss)....................... 0.00%* (0.13)% (0.04)% (0.07)% (0.19)% (0.34)%
Portfolio turnover................................... 25.20%* 61.75% 33.89% 28.35% 30.76% 25.42%
Average commission rate per share.................... $ 0.0142 $0.0237 $0.0325 N/A N/A N/A
</TABLE>
- --------------------------
* 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.
15
<PAGE>
- ----------------------------------------
BOARD OF DIRECTORS
Hideaki Matsuura, CHAIRMAN
Austin C. Dowling
Martin J. Gruber
Robert F. Gurnee
David G. Harmer
Harry M. Markowitz
- --------------------------------------------
OFFICERS
Harry M. Markowitz
PRESIDENT
Daniel F. Barry
VICE PRESIDENT
Lawrence Jacob
SECRETARY
Sean J. Peters
TREASURER
John A. Koopman
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 LLP
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.
The financial information included herein is taken from the records of the Fund
without examination by independent accountants who do not express an opinion
thereon.
SEMI-ANNUAL REPORT
APRIL 30, 1998
- -------------------------
[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
