PUTNAM
JAPAN
FUND
ANNUAL REPORT
August 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
Dear Shareholder:
Below please find the annual report from your Trustees on Putnam Japan Fund
for the fiscal year ended August 31, 1997. As you know, this fund is still in
its incubation period, which means it is only open to Putnam employees and
their families who are Massachusetts residents.
Like those of other funds investing in the Japanese market, your fund's
results reflect the underperformance of a market experiencing painful economic
and financial changes. For more performance information, please see pages 4
and 5.
During the period, the Japanese economy failed to sustain signs of nascent
economic growth that were seen earlier in the year -- a result of what many
investors believe to be the lingering effects of an increase in the
consumption tax last April. The state of the economy was evidenced by
record-low bond yields and the weak yen. In this environment, fund managers
Robert J. Swift and David K. Thomas sought larger, export-oriented companies
that could benefit from the weakness of the Japanese currency. They also
avoided the stocks of banks, a sector suffering the burdens of nonperforming
loans and financial reform.
It may take some time for Japan's economic problems to correct themselves, but
we remain committed to finding attractive companies with very low measures of
valuation.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
October 15, 1997
International investing involves certain risks, such as currency fluctuations,
economic instability, and political developments, not present with domestic
investments. Funds investing in a single sector may be subject to more
volatility than funds investing in a diverse group of sectors.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Insurance and finance 35.9%
Electronics and electrical equipment 19.0%
Building and construction 4.9%
Utilities 4.3%
Retail 3.8%
Footnote reads:
*Based on net assets as of 8/31/97. Holdings will vary over time.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Japan Fund is designed for investors seeking long-term capital
appreciation primarily through common stocks of Japanese companies.
TOTAL RETURN FOR PERIODS ENDED 8/31/97
NAV POP
- ------------------------------------------------------------------------------
1 year -13.43% -18.44%
- ------------------------------------------------------------------------------
Life of fund (since 12/28/95) -18.83 -23.51
Annual average -11.68 -14.75
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 8/31/97
MSCI Consumer
Japan Index Price Index
- ------------------------------------------------------------------------------
1 year -11.57% 2.23%
- ------------------------------------------------------------------------------
Life of fund (since 12/28/95) -18.39 4.76
Annual average -11.48 2.83
- ------------------------------------------------------------------------------
TOTAL RETURN FOR PERIOD ENDED 9/30/97
(most recent calendar quarter)
NAV POP
- ------------------------------------------------------------------------------
1 year -19.28% -23.95%
- ------------------------------------------------------------------------------
Life of fund (since 12/28/95) -21.27 -25.81
Annual average -12.71 -15.60
- ------------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns and principal
value will fluctuate so that an investor's shares when sold may be worth
more or less than their original cost. POP assumes 5.75% maximum sales
charge. The short-term results of a relatively new fund are not
necessarily indicative of its long-term prospects.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 12/28/95
Plot points read:
MSCI Japan
Date/year Fund at POP Index CPI
12/28/95 9,425 10,000 10,000
2/29/96 9,451 9,693 10,091
5/31/96 9,821 10,060 10,202
8/31/96 8,935 9,228 10,248
11/30/96 8,711 9,077 10,398
2/28/97 7,526 7,706 10,430
5/31/97 8,363 8,575 10,476
8/31/97 7,649 8,161 10,476
Footnote reads:
Past performance is no assurance of future results.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 8/31/97
- ------------------------------------------------------------------------------
Distributions (number) 1
- ------------------------------------------------------------------------------
Income $0.077
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term --
- ------------------------------------------------------------------------------
Short-term 0.191
- ------------------------------------------------------------------------------
Total $0.268
- ------------------------------------------------------------------------------
Share value: NAV POP
- ------------------------------------------------------------------------------
8/31/96 $7.97 $8.46
- ------------------------------------------------------------------------------
8/31/97 6.65 7.06
- ------------------------------------------------------------------------------
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 5.75% sales charge.
COMPARATIVE BENCHMARKS
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Morgan Stanley Capital International (MSCI) Japan Index* is an unmanaged
list of Japanese equity securities, with all values expressed in U.S.
dollars.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities
in the fund do not match those in the indexes and performance of the
fund will differ. It is not possible to invest directly in an index.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Japan Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, 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 Putnam Japan Fund
(the "fund") at August 31, 1997, and the results of its operations, the
changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at August 31, 1997 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
October 10, 1997
Portfolio of investments owned
August 31, 1997
<TABLE>
<CAPTION>
COMMON STOCKS (96.4%) *
NUMBER OF SHARES VALUE
Automotive (3.0%)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
6,000 Fuji Machinery $ 17,399
8,000 NHK Spring Co., Ltd. 27,440
5,000 Suzuki Motor Co., Ltd. 47,225
--------------
92,064
Basic Industrial Products (1.8%)
- ------------------------------------------------------------------------------------------------------------
1,000 Enplas Corp. 16,156
2,200 Toya Seikan Kaisha 37,912
--------------
54,068
Building and Construction (4.9%)
- ------------------------------------------------------------------------------------------------------------
10,000 INAX Corp. 48,882
19,000 Kumagai Gumi Co., Ltd. 20,936
20,000 Taisei Corp. 78,542
--------------
148,360
Computer Services and Software (2.7%)
- ------------------------------------------------------------------------------------------------------------
7,000 Fujitsu Ltd. 83,513
Conglomerates (2.2%)
- ------------------------------------------------------------------------------------------------------------
16,000 Itochu Corp. 65,882
Cosmetics (2.7%)
- ------------------------------------------------------------------------------------------------------------
5,000 Shiseido Co., Ltd. + 81,607
Electronics and Electrical Equipment (19.0%)
- ------------------------------------------------------------------------------------------------------------
3,000 Fanuc 114,830
7,000 Hitachi, Ltd. 64,374
9,000 Matsushita Electric Works 96,935
3,000 NEC Corp. 33,554
1,000 Nippondenso Co., Ltd. 21,541
11,000 Oki Electric Industry Co. Ltd. 39,188
2,000 Tokyo Electron Ltd. 108,534
18,000 Toshiba Corp. 99,321
--------------
578,277
Food and Beverages (1.9%)
- ------------------------------------------------------------------------------------------------------------
6,000 Yakult Honsha 58,658
Insurance and Finance (35.9%)
- ------------------------------------------------------------------------------------------------------------
14,000 Akita Bank Ltd. 82,353
6,000 Chuo Trust & Banking Co., Ltd. 27,341
16,000 Fuji Fire & Marine Insurance 51,036
17,000 Joyo Bank 95,775
23,000 Keiyo Bank 81,939
7,000 Mitsubishi Bank Ltd. 127,003
16,000 Mitsui Marine and Fire Insurance Co., Ltd. 92,925
3,000 Mitsui Real Estate Sales Co. 31,566
11,000 Nippon Shinpan Co. 26,611
4,800 Nissan Fire & Marine Insurance 21,077
1,000 Orix Corp. 74,151
8,000 Sanwa Bank Ltd. 99,420
11,000 Sumitomo Marine & Fire 73,637
2,000 Takefuji Corp. 84,507
11,000 The Long-Term Credit Bank of Japan, Ltd. 54,408
6,000 Tokio Marine & Fire Insurance Co., Ltd. 68,600
--------------
1,092,349
Metals and Mining (2.9%)
- ------------------------------------------------------------------------------------------------------------
6,000 Hitachi Metals Ltd. 31,566
23,000 Kawasaki Steel Corp. 56,976
--------------
88,542
Paper and Forest Products (2.7%)
- ------------------------------------------------------------------------------------------------------------
14,000 Nippon Paper Industries Co., Ltd. 80,961
Pharmaceuticals and Biotechnology (3.7%)
- ------------------------------------------------------------------------------------------------------------
6,000 Shionogi & Co., Ltd. 40,315
3,000 Taisho Pharmaceutical Co. 73,322
--------------
113,637
Photography (3.3%)
- ------------------------------------------------------------------------------------------------------------
6,000 Nikon Corp. 98,923
Retail (3.8%)
- ------------------------------------------------------------------------------------------------------------
8,000 Seiyu, Ltd. 45,601
1,000 Seven-Eleven Japan 71,417
--------------
117,018
Specialty Consumer Products (0.9%)
- ------------------------------------------------------------------------------------------------------------
16,000 Renown, Inc. + 27,440
Transportation (0.7%)
- ------------------------------------------------------------------------------------------------------------
2,000 Seino Transportation 19,884
Utilities (4.3%)
- ------------------------------------------------------------------------------------------------------------
5,000 Chubu Electric Power, Inc. 83,679
3,000 Kyushu Electric Power, Inc. 48,716
--------------
132,395
--------------
Total Common Stocks (cost $3,363,606) $ 2,933,578
SHORT-TERM INVESTMENTS (4.6%) * (cost $139,064)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 139,000 Interest in $480,487,000 joint repurchase agreement
dated August 29, 1997 with UBS Securities due
September 2, 1997 with respect to various
U.S. Treasury obligations - maturity value of $139,086
for an effective yield of 5.55% $ 139,064
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $3,502,670) *** $ 3,072,642
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $3,044,571.
*** The aggregate identified cost on a tax basis is $3,514,541, resulting in gross unrealized appreciation
and depreciation of $131,768 and $573,667, respectively, or net unrealized depreciation of $441,899.
+ Non-income-producing security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
August 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $3,502,670) (Note 1) $3,072,642
- ---------------------------------------------------------------------------------------------------
Cash 263
- ---------------------------------------------------------------------------------------------------
Dividends receivable 585
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 165
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 3,248
- ---------------------------------------------------------------------------------------------------
Total assets 3,076,903
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,951
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 78
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 478
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 7
- ---------------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 3,662
- ---------------------------------------------------------------------------------------------------
Payable for reports to shareholders 2,343
- ---------------------------------------------------------------------------------------------------
Payable for auditing 21,000
- ---------------------------------------------------------------------------------------------------
Payable for legal 2,575
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 238
- ---------------------------------------------------------------------------------------------------
Total liabilities 32,332
- ---------------------------------------------------------------------------------------------------
Net assets $3,044,571
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,809,251
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 57,227
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign currency
transactions (Note 1) (391,870)
- ---------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and liabilities
in foreign currencies (430,037)
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding 3,044,571
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per share ($3,044,571 divided by
457,501 shares) $6.65
- ---------------------------------------------------------------------------------------------------
Offering price per share (100/94.25 of $6.65)* $7.06
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the
offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended August 31, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $4,215) $ 23,886
- --------------------------------------------------------------------------------------------------
Interest 357
- --------------------------------------------------------------------------------------------------
Total investment income 24,243
Expenses:
Compensation of Manager (Note 2) 23,046
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 6,065
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,048
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 40
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 246
- --------------------------------------------------------------------------------------------------
Reports to shareholders 4,742
- --------------------------------------------------------------------------------------------------
Registration fees 188
- --------------------------------------------------------------------------------------------------
Auditing 25,721
- --------------------------------------------------------------------------------------------------
Legal 5,311
- --------------------------------------------------------------------------------------------------
Other 14
- --------------------------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (25,403)
- --------------------------------------------------------------------------------------------------
Total expenses 42,018
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (3,273)
- --------------------------------------------------------------------------------------------------
Net expenses 38,745
- --------------------------------------------------------------------------------------------------
Net investment loss (14,502)
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (391,689)
- --------------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 66,970
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 6,427
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (132,447)
- --------------------------------------------------------------------------------------------------
Net loss on investments (450,739)
- --------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(465,241)
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
For the period
Dec. 28, 1995
(commencement
Year ended of operations)
August 31 to August 31
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment loss $ (14,502) $ (9,426)
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions (324,719) 114,878
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and
liabilities in foreign currencies (126,020) (304,017)
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (465,241) (198,565)
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (29,097) --
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments (72,178) --
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 591,344 218,308
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 24,828 19,743
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year (Note 5) 3,019,743 3,000,000
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $57,227 and $34,205, respectively) $3,044,571 $3,019,743
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended Dec. 28, 1995+
operating performance August 31 to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $7.97 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment loss (c) (.03) (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (1.02) (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.05) (.53)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.19) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.27) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $6.65 $7.97
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (13.43) (6.24)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,045 $3,020
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 1.46 .98 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%)(c) (.50) (.29)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 100.61 46.39 *
- ------------------------------------------------------------------------------------------------------------------------------------
Average commission
rate paid $.0507 $.0508
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation during the period (Note 2). As a result of such limitation, expenses for
the fund for the year ended August 31, 1997, and the period ended August 31, 1996, reflect a
reduction of $0.05 and $0.04 per share, respectively.
</TABLE>
Notes to financial statements
August 31, 1997
Note 1
Significant accounting policies
Putnam Japan Fund (the "fund") is one of a series of Putnam Investments Funds
(the "Trust") which is registered under the Investment Company Act of 1940, as
amended, as an open-end diversified management investment company. The
objective of the fund is to seek long-term capital appreciation by investing
primarily in common stocks and equity securities, including securities
convertible into common stocks or other equity securities, of Japanese
companies.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value which is determined using the last
reported sale price on its principle exchange, or if no sales are reported --
as in the case of some securities traded over-the-counter -- the last reported
bid price. Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost, which approximates market value. All other
investments are stated at fair market value following procedures approved by
the Trustees. Foreign securities quoted in foreign currencies are translated
into U.S. dollars at the current exchange rate.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc.. These balances may be invested in one
or more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
the resale price, including accrued interest. Putnam Management is responsible
for determining that the value of these underlying securities is at all times
at least equal to the resale price, including accrued interest.
D) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date except that certain dividends from foreign
securities are recorded as soon as the fund is informed of the ex-dividend
date.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities, currency
holdings, and other assets and liabilities are recorded in the books and
records of the fund after translation to U.S. dollars based on the exchange
rates on that day. The cost of each security is determined using historical
exchange rates. Income and withholding taxes are translated at prevailing
exchange rates when accrued or incurred. The fund does not isolate that
portion of realized or unrealized gains or losses resulting from changes in
the foreign exchange rate on investments from fluctuations arising from
changes in the market prices of the securities. Such fluctuations are included
with the net realized and unrealized gain or loss on investments. Net realized
gains and losses on foreign currency transactions represent net exchange gains
or losses on closed forward currency contracts, disposition of foreign
currencies and the difference between the amount of investment income and
foreign withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized appreciation and
depreciation of assets and liabilities in foreign currencies arise from
changes in the value of open forward currency contracts and assets and
liabilities other than investments at the period end, resulting from changes
in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell currencies
at a set price on a future date, to protect against a decline in value
relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of a
currency in which securities a fund intends to buy are denominated, when a
fund holds cash reserves and short-term investments). The U.S. dollar value of
forward currency contracts is determined using forward currency exchange rates
supplied by a quotation service. The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is "marked to
market" daily and the change in market value is recorded as an unrealized gain
or loss. When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. The fund could be exposed to
risk if the value of the currency changes unfavorably, if the counterparties
to the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains. At August 31, 1997 the fund had a
capital loss carryover of approximately $46,000 available to offset future net
capital gain, if any, which will expire on August 31, 2005.
H) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. Capital
gain distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences include treatment
of organization expenses, post-October loss deferrals, wash sales and realized
gains on foreign currency. Reclassifications are made to the fund's capital
accounts to reflect income and gains available for distribution (or available
capital loss carryovers) under income tax regulations. For the year ended
August 31, 1997, the fund reclassified $66,621 to increase undistributed net
investment income and $239 to decrease paid-in-capital, with an increase to
accumulated net realized loss on investments and foreign currency transactions
of $66,382. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
I) Expenses of the trust Expenses directly charged or attributable to any fund
will be paid from the assets of that fund. Generally, expenses of the trust
will be allocated among and charged to the assets of each fund on a basis that
the Trustees deem fair and equitable, which may be based on the relative
assets of each fund or the nature of the services performed and relative
applicability to each fund.
J) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public offering of
its shares were $3,662. These expenses are being amortized on projected net
asset levels over a five-year period. The fund will reimburse Putnam
Management for the payment of these expenses.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.80% of the first $500 million of
average net assets, 0.70% of the next $500 million, 0.65% of the next $500
million, 0.60% of the next $5 billion, 0.575% of the next $5 billion, 0.555%
of the next $5 billion, 0.54% of the next $5 billion, and 0.53% thereafter.
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through December 31, 1997, to the extent that
expenses of the fund (exclusive of brokerage, interest, taxes, deferred
organizational and extraordinary expense, and credits from Putnam Fiduciary
Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc.)
would exceed an annual rate of 1.45% of the fund's average net assets.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC, a wholly-owned
subsidiary of Putnam Investments, Inc. Investor servicing agent functions are
provided by Putnam Investor Services, a division of PFTC.
For the year ended August 31, 1997, fund expenses were reduced by $3,273 under
expense offset arrangements with PFTC. Investor servicing and custodian fees
reported in the Statement of operations exclude these credits. The fund could
have invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered into
such arrangements.
Trustees of the fund receive an annual Trustees fee of $108 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested
persons of Putnam Management and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable. The deferred fees remain in the fund and are invested in certain
Putnam funds until distribution in accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plan is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam
Investments, Inc., for services provided and expenses incurred by it in
distributing shares of the fund. The Plan provides for payment by the fund to
Putnam Mutual Funds Corp. at an annual rate of up to 0.35% of the fund's
average net assets. The fund is not currently making any payments pursuant to
the plan.
For the year ended August 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received no net commissions from the sale of shares of the fund.
Note 3
Purchases and sales of securities
During the year ended August 31, 1997, purchases and sales of investment
securities other than short-term investments aggregated $3,300,565 and
$2,738,791, respectively. There were no purchases and sales of U.S. government
obligations. In determining the net gain or loss on securities sold, the cost
of securities has been determined on the identified cost basis.
Note 4
Capital shares
At August 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
August 31, 1997
- ------------------------------------------------------------
Shares Amount
- ------------------------------------------------------------
Shares sold 342,830 $ 2,631,727
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 14,169 101,162
- ------------------------------------------------------------
356,999 2,732,889
Shares
repurchased (278,306) (2,141,545)
- ------------------------------------------------------------
Net increase 78,693 $ 591,344
- ------------------------------------------------------------
For the period
December 28, 1995
(commencement of
operations) to
August 31, 1996
- ------------------------------------------------------------
Shares Amount
- ------------------------------------------------------------
Shares sold 232,144 $ 1,985,263
- ------------------------------------------------------------
Shares
repurchased (206,277) (1,766,955)
- ------------------------------------------------------------
Net increase 25,867 $ 218,308
- ------------------------------------------------------------
Note 5
Initial capitalization and offering of shares
The trust was established as a Massachusetts business trust on October
31, 1994. During the period October 31, 1994 to December 28, 1995, the fund
had no operations other than those related to organizational matters,
including the initial capital contribution of $3,000,000, and $3,662 of
initial organizational expenses, and the issuance of 352,941 shares to Putnam
Investments, Inc.
At August 31, 1997, Putnam Investments, Inc. owned 407,613 shares of the fund
(89.1% of shares outstanding), valued at $2,710,626.
Federal tax information
(Unaudited)
For the period, interest and dividends from foreign countries were $28,101 or
$.061 per share. Taxes paid to foreign countries were $4,215 or $.009 per
share.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Robert Swift
Vice President and Fund Manager
David K. Thomas
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Japan Fund. It
may also be used as sales literature when preceded or accompanied by the
current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam
Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution; are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency;
and involve risk, including the possible loss of the principal amount
invested.
AN062-36564 10/97
