<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. Prior to May 1, 2000, the Fund invested
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"). Upon the shareholders' approval at the 2000 Annual Meeting of
Stockholders, effective April 28, 2000, the Fund's investment objective has been
changed.
The investment objective of the Fund is to outperform over the long term, on
a total return basis (including appreciation and dividends), the sectors of the
Tokyo Stock Price Index (TOPIX), a composite market-capitalization weighted
index of all common stocks listed on the First or Second Section of the TSE or
listed on the over-the-counter market in Japan or listed on other stock
exchanges in Japan. Daiwa SB Investments (U.S.A.) Ltd. is the Fund's Investment
Manager. Daiwa SB Investments Ltd. is the Fund's Investment Adviser. Effective
January 1, 2000, the Fund implemented an "active" portfolio management policy,
which is an approach that involves quantitative valuation of securities to
identify an appropriate universe of securities from which to select investments,
with judgmental analysis then applied to this universe to determine the actual
investments to be made by the Fund.
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's weekly NAV is
also available by visiting www.daiwast.com or calling (800) 933-3440 or
(201) 915-3020. Also, the Fund's website includes a monthly market review and a
list of the Fund's top ten industries and holdings.
INQUIRIES
Inquiries concerning your share account should be directed to PFPC Inc. (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) 331-1710 or by writing The Japan Equity Fund, Inc.,
c/o PFPC Inc. P.O. Box 8030, Boston, MA 02266-8030.
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
A brief summary of the material aspects of the Plan follows:
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 that 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.
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.
2
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
December 5, 2000
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, 2000.
BACKGROUND
Effective April 28, 2000, the objective of the Fund is to outperform over
the long term, on a total return basis (including appreciation and dividends),
the Tokyo Stock Price Index ("TOPIX"). As a result of this change in investment
objective, the Fund is now permitted to invest in companies in the financial
services sector of the TOPIX. Stock selection in Japan is facilitated by the use
of a value screen applied to all stocks listed on the First and Second Sections
of the Tokyo Stock Exchange ("TSE"), the over-the-counter market in Japan and
listed on other stock exchanges in Japan. The way in which the Fund seeks to
meet its objective is to identify under-valued stocks by examining certain
fundamental characteristics of stocks which are listed on the exchanges listed
above. These fundamental characteristics include, among others, the
earnings-to-price ratio and the book-to-price ratio. This method of stock
selection results in a master list of 300 stocks (from a universe of 3,300
stocks) from which stocks are selected for the Fund in accordance with
predetermined sector and size parameters.
This method of stock selection replaces the prior quantitative strategy that
weighted fundamental characteristics by a method known as the Daiwa Portfolio
Optimization System (DPOS), which was developed by Daiwa Securities Trust
Company ("DSTC").
PERFORMANCE OF THE JAPANESE STOCK MARKET
During the year ended October 31, 2000, the Tokyo stock market declined by
9.3% and 15.6% in terms of TOPIX and Nikkei 225 Indices, respectively.
The movement of the stock market during that period can be divided into two
completely different phases: the first was a rebound phase. This period was
characterized by a strong rally in information technology-related stocks. This
phase lasted until the end of March of this year. The second phase was a
correction period. Both phases were significantly affected by the movement of
the U.S. Nasdaq market.
During October-December 1999 the Tokyo stock market turned upward. This
trend reflected positive factors. They included the rally in the U.S. stock
market, solid inflow of individual funds via investment trusts, and a perception
that the Japanese economy had passed the worst.
In early 2000, the equity market was little affected by Y2K, but it was
nevertheless volatile. This volatility reflected sharp movements in the U.S.
markets. For example, the Nasdaq lost a record 229 points on January 5th in
reaction to its steep gains at the end of 1999. This sharp decline in the U.S.
caused aggressive selling by foreign investors in Tokyo. The result was a sharp
correction in technology, media and telecommunications (TMT) stocks in
particular.
April 2000 got off to a solid start. The Bank of Japan's Tankan Diffusion
Index (DI) of business conditions improved for a fifth straight quarter in the
March survey. This news caused an influx of cash from a large number of matured
postal savings funds. As a result, the Japanese stock market rose. On April
12th, the Nikkei 225 posted a new yearly high of 20,833. This level was also the
highest close since December 5, 1996.
3
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
However, fears of renewed inflation sent the U.S. markets into turmoil. On
April 14th, the Nasdaq and the Dow posted their largest-ever point declines of
355 and 618 points, respectively. Also, on April 14th, revisions to the Nikkei
225 were announced. Technical selling associated with this change combined with
the overseas declines to drive the Nikkei 225 down 1,426 points on April 17th.
This drop was the fifth largest absolute decline in history.
The market finished higher than it started in August. Unenthusiastic
investing activity dragged the Nikkei and TOPIX to new lows in U.S. stocks for
the year on August 4th. However, rising expectations of a U.S. economic soft
landing spurred a rebound, and the Tokyo markets followed. On August 11th, the
Bank of Japan finally decided to pull back from its zero-interest-rate policy.
However, this move had little effect on the stock market.
The dissolution of cross-shareholdings and other factors dragged the market
down in September. From the end of August and into September, the Nikkei endured
its first eight-day slide since August 1998. On September 11th, a 1.0%
year-on-year (Y-O-Y) estimated April-June Gross Domestic Product (GDP) increase
was announced. This growth was the second consecutive monthly rise. However,
investors did not take this data as notably good news.
In October, the Tokyo stock market plummeted amid weak movement in the U.S.
stock market. The Nasdaq was especially weak. In addition, the weak Euro and the
problems in the Middle East pressured the market. Furthermore, concerns about
credit risk overshadowed investor sentiment after the failures of Chiyoda Mutual
Life and Kyoei Life Insurance.
FUND PERFORMANCE
As of October 31, 2000, the Fund's net assets were approximately
$90.3 million, which represents a net asset value of $8.35 per share. The return
on the Fund's net assets was -11.08% since the Fund's fiscal year-end on
October 31, 1999. Over the same annual period, the Benchmark (TOPIX) return was
-15.22%, as measured in U.S. Dollars.
The change in net asset value in U.S. Dollars depends on several factors
such as: (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 measurement period.
Our investment strategy is to invest in undervalued securities based on
intensive bottom-up analysis supported by quantitative screening. In our
research efforts, we placed a priority on evaluation of the top management, and
its commitment to enhance shareholders' value through clear-cut strategies,
including restructuring, that will be eventually reflected in share prices. We
add value primarily through a bottom-up stock selection approach for the
fundamental Japan equity product.
It is important to emphasize again that it has not been 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, 2000, the proportion of the Fund's
net assets invested in Japanese equities listed on the First Section of the TSE
was 97.29%, while short-term investments and other net assets represented 2.71%.
4
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
The invested position of the Fund's assets consisted of common stocks of
companies operating in 20 different industries. The Fund had relatively large
weightings in Electric Appliances (21.03% of net assets), Communication
(11.44%), Services (9.18%), Chemicals (8.95%), Transportation Equipment (7.79%),
Banks (6.58%), and Pharmaceuticals (5.83%).
During the Fund's fiscal year ended October 31, 2000, the Fund's market
price on the New York Stock Exchange ("NYSE") ranged from a low of $6.75 per
share on July 28, 2000 to a high of $10.0625 on November 23, 1999. The Fund's
NYSE market price closed at $7.0625 per share on October 31, 2000.
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, 2000 ranged from a premium of 2.43% on November 5, 1999 to a
discount of 24.86% on March 30, 2000, and ended the period at a discount of
15.42%.
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.
PORTFOLIO MANAGEMENT
Mr. Koichi Ogawa, CFA, is the Executive Director and Chief Portfolio Manager
of Daiwa SB Investments Ltd. ("DSBI") for all North American clients. A senior
member of the Investment Policy Committee (IPC), Mr. Ogawa possesses 26 years of
investment experience and has been responsible for Japan stock selection since
1984. He spent nine years with Daiwa Securities as an institutional research
analyst and three years in New York analyzing U.S. securities. He graduated from
Tohoku University with a B.A. in Law in 1972.
Mr. Kazuhiko Hosaka, CMA, is a Senior Portfolio Manager, with a total of 12
years of experience in the Japanese equity market. He joined Daiwa in 1990 as a
portfolio manager after spending two years as a securities analyst at Barclays
Securities Group. He has been directly responsible for managing Japanese equity
portfolios for several North American and European pension clients. He graduated
from Aoyama Gakuin University with a B.A. in Law in 1988.
The Fund's investment objective is to outperform over the long-term, on a
total return basis (including appreciation and dividends) the TOPIX. To meet
these objectives, the Fund will follow an "active" management style of
securities selection that is based on intensive bottom-up analysis supported by
a quantitative screening.
We thank you for your support of The Japan Equity Fund, Inc. and your
continued interest in the Japanese economy and marketplace.
<TABLE>
<S> <C>
Sincerely,
/s/ HIDEAKI MATSUURA /s/ SHUNSUKE ICHIJO
HIDEAKI MATSUURA SHUNSUKE ICHIJO
CHAIRMAN OF THE BOARD PRESIDENT
</TABLE>
5
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2000
--------------------------------------------------------------------------------
-------------------------------------------
JAPANESE COMMON STOCKS--97.29%
--------------------------------------------------------------------------------
<TABLE>
SHARES VALUE
---------- -----------
<C> <S> <C>
BANKS--6.58%
120,000 Bank of Tokyo-Mitsubishi Ltd............ $ 1,438,857
300 Mizuho Holdings, Inc.................... 2,305,578
285,000 The Sumitomo Trust & Banking
Co., Ltd............................... 2,192,910
-----------
5,937,345
-----------
CHEMICALS--8.95%
47,000 Fuji Photo Film Co., Ltd................ 1,743,611
100,000 Kao Corp................................ 2,995,328
49,000 Shin-Etsu Chemical Co., Ltd............. 2,010,809
270,000 Sumitomo Chemical Co., Ltd.............. 1,330,585
-----------
8,080,333
-----------
COMMUNICATION--11.44%
116 DDI Corp................................ 544,032
398 NTT Corp................................ 3,620,170
250 NTT DoCoMo, Inc......................... 6,160,117
-----------
10,324,319
-----------
CONSTRUCTION--1.36%
116,000 Sekisui House, Ltd...................... 1,226,198
-----------
ELECTRIC APPLIANCES--21.03%
43,000 Canon Inc............................... 1,705,505
12,200 Fanuc Ltd............................... 1,095,173
65,000 Fujitsu Ltd............................. 1,157,461
210,000 Hitachi Ltd............................. 2,250,618
7,500 Kyocera Corp............................ 975,543
88,000 Matsushita Electric Industrial
Co., Ltd............................... 2,555,281
85,000 Minebea Co., Ltd........................ 848,676
16,000 Murata Manufacturer Co., Ltd............ 1,914,079
85,000 NEC Corp................................ 1,619,493
</TABLE>
<TABLE>
SHARES VALUE
---------- -----------
<C> <S> <C>
10,000 Rohm Co., Ltd........................... $ 2,519,923
29,400 Sony Corp............................... 2,348,337
-----------
18,990,089
-----------
ELECTRIC POWER & GAS--1.21%
44,800 Tokyo Electric Power Co., Inc........... 1,087,478
-----------
INSURANCE--1.46%
119,000 Tokyo Marine & Fire Insurance
Co., Ltd............................... 1,314,592
-----------
LAND TRANSPORTATION--3.21%
49 East Japan Railway Co................... 281,423
100,000 Nippon Express Co., Ltd................. 599,982
100,000 Yamato Transport Co., Ltd............... 2,019,786
-----------
2,901,191
-----------
MACHINERY--1.77%
312,000 Kubota Corp............................. 1,048,860
20,000 Mori Seiki Co., Ltd..................... 182,101
15,000 THK Co., Ltd............................ 370,981
-----------
1,601,942
-----------
MARINE TRANSPORTATION--1.34%
552,000 Mitsui O.S.K. Lines, Ltd................ 1,213,520
-----------
NON-FERROUS METALS--2.04%
100,000 Sumitomo Electric Industries, Ltd....... 1,845,745
-----------
OTHER FINANCING BUSINESS--1.98%
17,000 Orix Corp............................... 1,782,999
-----------
OTHER PRODUCTS--2.69%
58,000 Dai Nippon Printing Co., Ltd............ 908,491
9,200 Nintendo Co., Ltd....................... 1,521,114
-----------
2,429,605
-----------
</TABLE>
6
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONCLUDED)
OCTOBER 31, 2000
--------------------------------------------------------------------------------
JAPANESE COMMON STOCKS (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
SHARES VALUE
---------- -----------
<C> <S> <C>
PHARMACEUTICAL--5.83%
49,000 Takeda Chemical Industries, Ltd......... $ 3,227,169
45,000 Yamanouchi Pharmaceutical Co., Ltd...... 2,036,274
-----------
5,263,443
-----------
REAL ESTATE--1.22%
91,000 Mitsui Fudosan Co., Ltd................. 1,101,969
-----------
RETAIL TRADE--3.68%
18,000 Ito-Yokado Co., Ltd..................... 812,861
18,200 Saizeriya Co., Ltd...................... 1,016,946
23,000 Seven-Eleven Japan Co., Ltd............. 1,495,832
-----------
3,325,639
-----------
SECURITIES--3.79%
200,000 Nikko Securities Co., Ltd............... 1,725,749
80,000 Nomura Securities Co., Ltd.............. 1,696,437
-----------
3,422,186
-----------
SERVICES--9.18%
9,300 Hitachi Software Engineering
Co. Ltd................................ 1,005,221
3,800 Konami Co., Ltd......................... 320,235
3,060 Nippon Television Network Corp.......... 1,723,825
94 NTT Data Corp........................... 731,886
34,000 Secom Co., Ltd.......................... 2,423,010
23,000 Tokyo Broadcasting System, Inc.......... 899,606
16,000 Toyo Information Systems Co., Ltd....... 1,084,547
</TABLE>
<TABLE>
SHARES VALUE
---------- -----------
<C> <S> <C>
1,700 Venture Link Co., Ltd................... $ 98,104
-----------
8,286,434
-----------
TRANSPORTATION EQUIPMENT--7.79%
43,000 Honda Motor Co., Ltd.................... 1,484,932
139,000 Toyota Motor Corp....................... 5,551,342
-----------
7,036,274
-----------
WHOLESALE TRADE--0.74%
11,100 Softbank Corp........................... 665,980
-----------
Total Common Stocks
(Cost--$82,943,287)................................. 87,837,281
-----------
</TABLE>
-------------------------------------------
SHORT-TERM INVESTMENTS--0.28%
-------------------------------------------
<TABLE>
PRINCIPAL
AMOUNT
(000) VALUE
---------- -----------
<C> <S> <C>
U.S. DOLLAR TIME DEPOSIT--0.28%
$257 Bank of New York Time Deposit, 4.20%,
due 11/1/01 (Cost--$256,731)........... 256,731
-----------
Total Investments--97.57%
(Cost--$83,200,018)................................. 88,094,012
Other assets less liabilities--2.43%.................. 2,192,304
-----------
NET ASSETS (Applicable to 10,815,688 shares of capital
stock outstanding; equivalent to $8.35 per
share)--100.00%..................................... $90,286,316
===========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
OCTOBER 31, 2000
-------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY NET ASSETS
-------- ----------
<S> <C>
Electric Appliances................ 21.03%
Communication...................... 11.44
Services........................... 9.18
Chemicals.......................... 8.95
Transportation Equipment........... 7.79
Banks.............................. 6.58
Pharmaceutical..................... 5.83
Securities......................... 3.79
Retail Trade....................... 3.68
Land Transportation................ 3.21
</TABLE>
TEN LARGEST COMMON STOCK
POSITIONS HELD
OCTOBER 31, 2000
-------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
ISSUE NET ASSETS
----- ----------
<S> <C>
NTT DoCoMo, Inc.................... 6.82%
Toyota Motor Corp.................. 6.15
NTT Corp........................... 4.01
Takeda Chemical
Industries, Ltd.................. 3.57
Kao Corp........................... 3.32
Matsushita Electric Industrial
Co., Ltd......................... 2.83
Rohm Co., Ltd...................... 2.79
Secom Co., Ltd..................... 2.68
Sony Corp.......................... 2.60
Mizuho Holdings, Inc............... 2.55
</TABLE>
8
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost--$83,200,018)....................... $ 88,094,012
Cash denominated in foreign currency
(cost--$2,153,604)........................ 2,128,492
Interest and dividends receivable.......... 170,122
Prepaid expenses........................... 15,096
------------
Total assets............................. 90,407,722
------------
LIABILITIES
Accrued expenses and other liabilities..... 121,406
------------
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..... 108,486,746
Accumulated net realized loss on
investments............................... (23,174,480)
Net unrealized appreciation on investments
and other assets and liabilities
denominated in foreign currency........... 4,865,893
------------
Net assets applicable to shares
outstanding............................. $ 90,286,316
============
NET ASSET VALUE PER SHARE............ $ 8.35
============
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of
$88,583).................................. $ 501,970
Interest................................... 8,540
------------
Total investment income.................. 510,510
------------
EXPENSES:
Investment management fee and expenses..... 352,466
Administration fee......................... 202,210
Custodian fees and expenses................ 96,824
Reports and notices to shareholders........ 82,207
Directors' fees and expenses............... 71,444
Audit and tax services..................... 68,450
Legal fees and expenses.................... 65,951
Insurance expense.......................... 20,009
Transfer agency fee and expenses........... 14,479
Other...................................... 35,886
------------
Total expenses........................... 1,009,926
------------
NET INVESTMENT LOSS.......................... (499,416)
------------
REALIZED AND UNREALIZED GAINS FROM INVESTMENT
ACTIVITIES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gains on investments.......... 5,683,608
Net realized foreign currency transaction
losses.................................... (33,032)
Net change in unrealized appreciation
(depreciation) on investments in equity
securities................................ (16,403,238)
Net change in unrealized appreciation
(depreciation) on other assets and
liabilities denominated in foreign
currency.................................. (30,733)
------------
Net realized and unrealized losses from
investment activities and foreign currency
transactions................................ (10,783,395)
------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $(11,282,811)
============
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
OCTOBER 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income (loss)............... $ (499,416) $ (86,450)
Net realized gain (loss) on:
Investments.............................. 5,683,608 6,272,776
Foreign currency transactions............ (33,032) 85,132
Net change in unrealized appreciation
(depreciation) on:
Investments in equity securities......... (16,403,238) 29,562,935
Translation of short-term investments and
other assets and liabilities denominated
in foreign currency..................... (30,733) (34,367)
------------ ------------
Net increase (decrease) in net assets
resulting from operations................. (11,282,811) 35,800,026
------------ ------------
NET ASSETS:
Beginning of year.......................... 101,569,127 65,769,101
------------ ------------
End of year................................ $ 90,286,316 $101,569,127
============ ============
</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
accounting principles generally accepted in the United States of America
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 or Second
Section of the Tokyo Stock Exchange or listed on the over-the-counter market in
Japan or listed on other exchanges in Japan 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
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, 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 with Daiwa SB Investments
(U.S.A.) Ltd. (the "Manager"). Prior to January 1, 2000, Daiwa Securities Trust
Company ("DSTC") an affiliate of the Manager acted as the investment adviser to
the Manager with respect to the Fund's investments. Effective Janaury 1, 2000,
Daiwa SB Investments Ltd. ("DSBI" or the "Adviser") also an affiliate of the
Manager replaced DSTC as the Fund's investment adviser pursuant to an Investment
Advisory Agreement between the Manager and DSBI. For such investment services,
the Fund is obligated to pay 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
60% is paid by the Manager to DSBI.
Brokerage commissions of approximately $41,781 were paid by the Fund to
Daiwa Securities America, Inc., an affiliate of both the Manager and DSBI, in
connection with portfolio transactions during the year ended October 31, 2000.
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 year ended October 31,
2000, investment management fees and expenses include expenses of $2,465 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.
At October 31, 2000, the Fund owed $27,861 to the Manager and the Manager
informed the Fund that it owed the Adviser $16,717.
ADMINISTRATOR AND CUSTODIAN AND OTHER RELATED PARTIES
DSTC provides certain administrative services to the Fund, for which the
Fund pays to 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.
13
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
DSTC also acts as custodian for the Fund's assets and has appointed The
Sumitomo Bank, Limited (the "Sub-Custodian"), an affiliate of the Manager, 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 fees and
out-of-pocket expenses of the Sub-Custodian. During the year ended October 31,
2000, DSTC and the Sub-Custodian earned $55,936 and $40,888, respectively, as
compensation for custodial service to the Fund.
At October 31, 2000, the Fund owed $14,543 and $4,202 to DSTC for
administration and custodian fees, respectively, excluding fees and expenses of
$3,000 payable to the Sub-Custodian.
During the year ended October 31, 2000, the Fund paid or accrued $65,951 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,
2000 was substantially the same as the cost of securities for financial
statement purposes. At October 31, 2000, the net unrealized appreciation of
investments for federal income tax purposes, excluding short-term securities, of
$4,893,994 was composed of gross appreciation of $12,313,862 for those
investments having an excess of value over cost, and gross depreciation of
$7,419,868 for those investments having an excess of cost over value. For the
year ended October 31, 2000, total aggregate purchases and sales of portfolio
securities, excluding short-term securities, were $63,854,978 and $66,464,423,
respectively.
During the year ended October 31, 2000, the Fund utilized $5,683,608 in
carryover capital loss from prior periods to offset net gains realized in the
fiscal year. At October 31, 2000, the Fund had a remaining capital loss
carryover of $23,174,480, of which $6,264,639 expires in the year 2005 and
$16,909,841 expires in the year 2006.
At October 31, 2000, the Fund made capital account reclassifications due to
permanent book/tax differences. The Fund reclassified $33,032 from accumulated
net realized loss on investments to accumulated net investment loss as result of
permanent book/tax differences, primarily relating to net realized foreign
currency losses. The Fund also reclassified $532,448 from paid-in-capital in
excess of par value to accumulated net investment loss, primarily relating to a
net operating loss for the year ended October 31, 2000.
CAPITAL STOCK
There are 30,000,000 shares of $.01 par value common stock authorized. Of
the 10,815,688 shares of the Fund outstanding at October 31, 2000, Daiwa
Securities America Inc. an affiliate of the Manager, Adviser 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 year is
presented below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year..................... $ 9.39 $ 6.08 $ 6.99 $ 10.52 $ 11.47
------- ------- ------- ------- -------
Net investment loss.................................... (0.04) (0.01) (0.01) (0.01) (0.01)
Net realized and unrealized gains (losses) on
investments and foreign currency transactions......... (1.00) 3.32 (0.90) (2.86) 0.19
------- ------- ------- ------- -------
Net increase (decrease) in net asset value resulting
from operations....................................... (1.04) 3.31 (0.91) (2.87) 0.18
------- ------- ------- ------- -------
Less: dividends and distributions to shareholders
Net realized gains on investments and foreign
currency transactions............................... -- -- -- (0.66) (0.67)
Dilutive effect of rights offering..................... -- -- -- -- (0.43)
------- ------- ------- ------- -------
Offering costs charged to paid-in capital in excess of
par value............................................. -- -- -- -- (0.03)
------- ------- ------- ------- -------
Net asset value, end of year........................... $ 8.35 $ 9.39 $ 6.08 $ 6.99 $ 10.52
======= ======= ======= ======= =======
Per share market value, end of year.................... $ 7.063 $ 9.813 $ 6.875 $ 7.375 $ 10.375
======= ======= ======= ======= =======
Total investment return:
Based on market price at beginning and end of year,
assuming reinvestment of dividends.................. (28.02)% 42.73 % (6.78)% (23.76)% (13.55)%+
Based on net asset value at beginning and end of
year, assuming reinvestment of dividends............ (11.08)% 54.44 % (13.02)% (28.73)% (1.18)%+
Ratios and supplemental data:
Net assets, end of year (in millions)................ $ 90.3 $101.6 $ 65.8 $ 75.6 $113.6
Ratios to average net assets of:
Expenses........................................... 0.96 % 1.08 % 1.19 % 1.03 % 0.90 %
Net investment loss................................ (0.48)% (0.11)% (0.13)% (0.13)% (0.04)%
Portfolio turnover................................... 61.91 % 58.70 % 52.07 % 61.75 % 33.89 %
</TABLE>
---------------------------------------------------------------------------
+ For the year ended October 31, 1996, the total investment return
includes the benefit of shares resulting from the exercise of rights.
15
<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, 2000, 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 five years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. 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 accounting principles generally accepted
in the United States of America, 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, 2000 by correspondence with the custodian, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 6, 2000
16
<PAGE>
THE JAPAN EQUITY FUND, INC.
----------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------
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, 2000) as to the federal tax status of distributions received by you during
such fiscal year. There were no dividend payments or foreign tax credits with
respect to the fiscal year 2000.
SHAREHOLDERS ARE STRONGLY ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH
RESPECT TO THE TAX CONSEQUENCES OF THEIR INVESTMENT IN THE FUND.
17
<PAGE>
-----------------------------------------
BOARD OF DIRECTORS
Hideaki Matsuura, CHAIRMAN
Austin C. Dowling
Martin J. Gruber
David G. Harmer
Harry M. Markowitz
Alfred C. Morley
Oren G. Shaffer
-----------------------------------------
OFFICERS
Shunsuke Ichijo
PRESIDENT
John J. O'Keefe
VICE PRESIDENT AND TREASURER
Judy Runrun Tu
SECRETARY
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 SB Investments (U.S.A.) Ltd.
INVESTMENT ADVISER
Daiwa SB Investments Ltd.
ADMINISTRATOR AND CUSTODIAN
Daiwa Securities Trust Company
TRANSFER AGENT AND REGISTRAR
PFPC Inc.
LEGAL COUNSEL
Clifford Chance Rogers & Wells LLP
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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, 2000
-------------------------
[LOGO]
-------------------------
THE JAPAN EQUITY
FUND, INC.
c/o Daiwa Securities Trust Company
One Evertrust Plaza
Jersey City, New Jersey 07302
INVESTMENT MANAGER
Daiwa SB Investments (U.S.A.) Ltd.
INVESTMENT ADVISER
Daiwa SB Investments Ltd.
