Washington, D.C. 20549
JAPAN SMALLER CAPITALIZATION FUND, INC.
Nomura Asset Management U.S.A. Inc.
Japan Smaller Capitalization Fund, Inc.
October 25, 2018
To Our Shareholders:
We present the Semi-Annual Report of Japan Smaller Capitalization Fund, Inc. (the “Fund”) for the six months ended August 31, 2018.
The net asset value per share (“NAV”) of the Fund decreased by 9.6% and the closing market price of the Fund (on the New York Stock Exchange) decreased by 12.8% for the six months ended August 31, 2018. The closing market price of the Fund on August 31, 2018 was $10.88, representing a discount of 14.1% to the NAV of $12.67. The net assets of the Fund totaled $358,913,909 on August 31, 2018.
The Russell/Nomura Small CapTM Index, the Fund’s benchmark (“Benchmark”), decreased by 5.9% in United States (“U.S.”) dollar terms for the six months ended August 31, 2018. During the six months ended August 31, 2018, the Fund underperformed the Benchmark by 3.7% on a NAV basis. The Tokyo Price Index (the “TOPIX”), a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange (the “TSE”), decreased by 5.7% and the Nikkei Stock Average Index (“Nikkei”), a price-weighted index of the 225 leading stocks on the TSE, decreased by 0.5% in U.S. dollar terms during the six months ended August 31, 2018. The Japanese yen (“Yen”) depreciated by 4.1% against the U.S. dollar during the six months ended August 31, 2018.
For the quarter ended August 31, 2018, the Benchmark decreased by 4.6%, the TOPIX decreased by 2.7%, and the Nikkei increased by 0.9% in U.S. dollar terms. The NAV of the Fund decreased by 8.1% and underperformed the Benchmark by 3.5%. The Fund’s share price decreased by 11.0% during the quarter. The Yen depreciated by 2.1% against the U.S. dollar during the quarter.
Investment Strategy
The Fund invests in undervalued stocks that offer fundamental strength and potential for improvement. The Fund performs extensive fundamental research to identify stocks that can create shareholder value. The Fund focuses on companies that are leaders in certain niche markets, companies with large or expanding market shares, stocks with superior shareholder distribution policies, and stocks that offer good growth prospects. In the Japanese small cap equity market, valuation anomalies do exist and can be exploited through active management. There are a number of factors that the Fund considers when selling an investment, including a stock which appears fully valued, unexpected deterioration in earnings or a substantial loss that impairs the company’s net assets, and a stock’s diminishing potential given declining competitiveness due to a change of business environment or failure of business strategy.
Performance
In terms of the sector allocation strategy, an overweight position in the Utilities sector and an underweight position in the Electric Appliances sector generated the largest positive contributions. Sector returns were eroded by an underweight position in the Information and Communication sector and an overweight position in the Metal Products sector.
Relative performance was positively impacted by Kusuri No Aoki Holdings Co., Ltd. in the Retail Trade sector, Okinawa Cellular Telephone Company in the Information and Communication sector, and Pigeon Corporation in the Other Products sector. Conversely, relative performance was negatively impacted by Saizeriya Co., Ltd., Daikokutenbussan Co., Ltd. and Amiyaki Tei Co., Ltd. in the Retail Trade sector.
Market Review
The Benchmark decreased by 2.0% and underperformed the TOPIX index, which decreased by 1.9% in local currency terms, for the six months ended August 31, 2018. Although Japanese companies have announced strong earnings during the period, the market fluctuated because of concerns over geopolitical risks.
The Japanese equity market fell given the prospect of a trade war between two of the largest national economies from the U.S. government’s decision to impose tariffs on Chinese goods. Also, a decline in the approval rating of Prime Minister Abe’s government triggered further sustained selling by foreign investors in the Japanese equity market.
From April to May 2018, the Japanese equity market rebounded and posted a strong rally as Japan’s corporate sector continued to offer stable earnings growth prospects supported by favorable foreign exchange rates and cost reduction efforts. In May 2018, volatility returned to the global equity market as the U.S. adopted a more hawkish attitude to both Iran and North Korea and difficult political transitions in Spain and Italy questioned the sustainability of the European Union.
Global growth prospects and political events appeared to affect the Japanese equity market in June 2018. President Trump’s statements regarding tariffs on imported goods to the U.S. spread uncertainty, especially for the earnings prospects of multinational companies. In July 2018, Japanese stocks remained steady as the shadow of the ongoing trade dispute between the U.S. and China seems to have been at least partly built into the markets. Economic stimulus policies announced by the Chinese government and favorable earnings results from Japanese companies also supported the recovery in market sentiment.
Despite favorable quarterly earnings results from Japanese companies, the Japanese equity market declined as trade tensions between the U.S., its neighboring North American Free Trade Agreement countries, and China remained unresolved. Also, the further political rift between the Trump administration and the Turkish government took a toll on investor confidence.
Outlook and Future Strategy
Despite signs that the global economy is approaching the later stages of the current cycle, steady economic growth continues due to support from expansionary fiscal policies in the U.S., including tax reform plans and infrastructure investment. In China, recently announced economic stimulus measures should mitigate the negative impact from higher U.S. tariffs on Chinese goods and prevent a sudden deterioration in the Chinese economy. Outside of the U.S. and China, downward sentiment in some economic indicators have levelled off gradually as noted in the European Purchasing Managers’ Index data. Central banks, including the U.S. Federal Reserve Bank and the Bank of Japan, still appear to prioritize steady economic growth momentum rather than quickening the normalization of current monetary easing policies. Thus, aside from uncertainty over the trade war issue, the Fund notes that the global macro outlook has improved compared to a few months ago.
Japanese companies have continued to deliver solid earnings momentum during the April to June 2018 earnings reporting period. Manufacturing sectors secured higher profit growth relative to domestic-oriented industries, aided to some extent by favorable currency trends. For the fiscal year ending March 2019, the recurring profit growth estimate for Russell/Nomura Small Cap stocks, excluding Financial sectors, is expected to increase 10.4% year over year. The forward price-earnings ratio of the Russell/Nomura Small Cap Index is expected to be around 16 for the fiscal year ending March 2019 earnings, which seems consistent with other major markets. Positive earnings revisions should strengthen the Japanese equity market assuming the currency remains within the current range of around 110 Yen-dollar rate.
Japanese companies are increasingly trying to raise product and service prices in response to a tighter supply-demand balance and higher labor and material costs. Such efforts are especially evident in sectors such as land transport, cosmetics, electronic components, commodities and chemical products. These price hikes indicate an improving competitive landscape and may lead to better margin prospects in some sectors, which could be an important growth driver for Japanese companies. The Fund believes the recent solid fundamentals of Japanese companies are not only due to the steady global macro conditions, but also to such company specific efforts. Therefore, steady corporate fundamentals, even amid rising input cost inflation, should support the Japanese equity market.
The Fund appreciates your continuing support.
| | Sincerely, | |
| | | |
| | | |
| | Yukata Itabashi | |
| | President | |
DISCLOSURES Sources: Nomura Asset Management U.S.A. Inc., Nomura Asset Management Co., Ltd., and Bloomberg L.P. Past performance is not indicative of future results. There is a risk of loss. The NAV price is adjusted for reinvestment of income dividends, ordinary income distributions, and long-term capital gain distributions. The New York Stock Exchange’s closing market price is adjusted for reinvestment of income dividends, ordinary income distributions, and long-term capital gain distributions. The Fund’s performance does not reflect sales commissions. This material contains the current opinions of the Fund’s manager, which are subject to change without notice. This material should not be considered investment advice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for the long term. Comparisons between changes in the Fund’s net asset value or market price per share and changes in the Fund’s benchmark should be considered in light of the Fund’s investment policy and objective, the characteristics and quality of the Fund’s investments, the size of the Fund, and variations in the Yen/U.S. Dollar exchange rate. This report is for informational purposes only. Investment products offered are not FDIC insured, may lose value, and are not bank guaranteed. Indices are unmanaged. An index cannot be directly invested into. Certain information discussed in this report may constitute forward-looking statements within the meaning of the U.S. federal securities laws. The Fund believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions and can give no assurance that the Fund's expectations will be achieved. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. The Russell/Nomura Small CapTM Index represents approximately 15% of the total market capitalization of the Russell/Nomura Total MarketTM Index. It measures the performance of the smallest Japanese equity securities in the Russell/Nomura Total MarketTM Index. As of August 31, 2018, there are 1,243 securities in the Russell/Nomura Small CapTM Index. |
SHAREHOLDERS ACCOUNT INFORMATION Shareholders whose accounts are held in their own name may contact the Fund’s registrar, Computershare Trust Company, N.A., at (800) 426-5523 for information concerning their accounts. |
PROXY VOTING A description of the policies and procedures that the Fund uses to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the website of the Securities and Exchange Commission (“SEC”) at http://www.sec.gov. Information about how the Fund voted proxies relating to securities held in the Fund’s portfolio during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the SEC’s website at http://www.sec.gov. Additional information about the Fund’s Board of Directors is available (1) without charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the website of the SEC at http://www.sec.gov in the Fund’s most recent proxy statement filing. |
AVAILABILITY OF QUARTERLY SCHEDULE OF INVESTMENTS The Fund files a schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at http://www.sec.gov. The Fund’s Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. |
FUND CERTIFICATIONS In December 2017, the Fund filed its Principal Executive Officer Certification with the New York Stock Exchange pursuant to Section 303A.12(a) of the New York Stock Exchange Corporate Governance Listing Standards. The Fund’s Principal Executive Officer and Principal Financial Officer Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the Fund’s Form N-CSR and are available on the SEC’s website at http://www.sec.gov. |
SHARE REPURCHASES 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 repurchase shares of its common stock in the open market. |
INTERNET WEBSITE Nomura Asset Management U.S.A. Inc. has established an Internet website which highlights its history, investment philosophy and process and products, which includes the Fund. The Internet web address is http://funds.nomura-asset.com/japan-smaller-capitalization. |
Japan Smaller Capitalization Fund, Inc.
FUND HIGHLIGHTS—AUGUST 31, 2018 (Unaudited)
KEY STATISTICS
| Net Assets | $358,913,909 | |
| Net Asset Value per Share | $12.67 | |
| Market Price | $10.88 | |
| Percentage Change in Net Asset Value per Share* | (9.6%) | |
| Percentage Change in Market Price* | (12.8%) | |
MARKET INDICES
| | YEN | U.S.$ |
| Percentage change in market indices:* | | |
Russell/Nomura Small CapTM Index | (2.0%) | (5.9%) |
| Tokyo Price Index | (1.9%) | (5.7%) |
| Nikkei Stock Average Index | 3.6% | (0.5%) |
| *From March 1, 2018 through August 31, 2018. | | |
INDUSTRY DIVERSIFICATION
| | | | | |
| Retail Trade | 20.1 | | | Transportation and Warehousing | 3.4 | |
| Wholesale Trade | 13.6 | | | Services | 3.2 | |
| Chemicals | 12.2 | | | Electric Appliances | 3.0 | |
| Machinery | 6.3 | | | Financing Business | 2.3 | |
| Construction | 5.4 | | | Real Estate | 1.8 | |
| Iron and Steel | 4.7 | | | Food. | 1.7 | |
| Metal Products | 4.4 | | | Utilities | 1.7 | |
| Banks | 4.3 | | | Transportation Equipment | 1.6 | |
| Information and Communication | 4.2 | | | Textiles and Apparel | 1.5 | |
| Other Products | 3.5 | | | Precision Instruments | 0.6 | |
TEN LARGEST EQUITY HOLDINGS BY FAIR VALUE
Security | | Fair Value | | | | |
| SIIX Corporation | | $ | 12,612,635 | | | | 3.5 | |
| Ryoden Corporation | | | 11,871,749 | | | | 3.3 | |
| Oiles Corporation | | | 10,490,305 | | | | 2.9 | |
| Saizeriya Co., Ltd. | | | 9,414,328 | | | | 2.6 | |
| Okinawa Cellular Telephone Company | | | 9,167,470 | | | | 2.6 | |
| Amiyaki Tei Co., Ltd. | | | 9,025,641 | | | | 2.5 | |
| Toenec Corporation | | | 9,009,448 | | | | 2.5 | |
| Sakata Inx Corporation | | | 8,971,217 | | | | 2.5 | |
| Osaka Steel Co., Ltd. | | | 8,631,299 | | | | 2.4 | |
| Daikokutenbussan Co., Ltd. | | | 7,685,082 | | | | 2.1 | |
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF INVESTMENTS
AUGUST 31, 2018
(Unaudited)
| | | Shares | | | Cost | | | Fair Value | | | | |
| JAPANESE EQUITIES SECURITIES | | | | | | | | | | | | |
| Banks | | | | | | | | | | | | |
| Fukuoka Financial Group, Inc. | | | 383,000 | | | $ | 2,048,836 | | | $ | 2,150,115 | | | | 0.6 | |
| General banking services | | | | | | | | | | | | | | | | |
| The Akita Bank, Ltd. | | | 133,600 | | | | 3,769,471 | | | | 3,441,878 | | | | 1.0 | |
| General banking services | | | | | | | | | | | | | | | | |
| The Bank of Okinawa, Ltd. | | | 57,800 | | | | 2,334,925 | | | | 2,252,624 | | | | 0.6 | |
| General banking services | | | | | | | | | | | | | | | | |
| The Keiyo Bank, Ltd. | | | 467,000 | | | | 2,137,401 | | | | 2,003,082 | | | | 0.5 | |
| General banking services | | | | | | | | | | | | | | | | |
| The Musashino Bank, Ltd. | | | 73,100 | | | | 2,389,043 | | | | 2,121,036 | | | | 0.6 | |
| General banking services | | | | | | | | | | | | | | | | |
| The Taiko Bank, Ltd. | | | 99,400 | | | | 2,015,073 | | | | 1,834,388 | | | | 0.5 | |
| General banking services | | | | | | | | | | | | | | | | |
| The Yamanashi Chuo Bank, Ltd. | | | 477,000 | | | | 2,066,789 | | | | 1,715,008 | | | | 0.5 | |
| General banking services | | | | | | | | | | | | | | | | |
| Total Banks | | | | | | | 16,761,538 | | | | 15,518,131 | | | | 4.3 | |
| | | | | | | | | | | | | | | | | |
| Chemicals | | | | | | | | | | | | | | | | |
| Adeka Corporation | | | 223,600 | | | | 3,404,149 | | | | 3,705,343 | | | | 1.0 | |
| Manufactures chemical and food products | | | | | | | | | | | | | | | | |
| C. Uyemura & Co., Ltd. | | | 50,000 | | | | 2,298,519 | | | | 3,379,139 | | | | 0.9 | |
| Plating chemicals | | | | | | | | | | | | | | | | |
| Fujikura Kasei Co., Ltd. | | | 1,008,100 | | | | 5,306,664 | | | | 6,095,383 | | | | 1.7 | |
| Specialty coating materials and fine chemicals | | | | | | | | | | | | | | | | |
| Koatsu Gas Kogyo Co., Ltd. | | | 594,200 | | | | 3,723,314 | | | | 4,486,953 | | | | 1.2 | |
| High-pressured gases and chemicals | | | | | | | | | | | | | | | | |
| Sakata Inx Corporation | | | 673,600 | | | | 9,856,744 | | | | 8,971,217 | | | | 2.5 | |
| Manufactures printing ink | | | | | | | | | | | | | | | | |
| Sekisui Jushi Corporation | | | 245,400 | | | | 4,201,881 | | | | 4,862,668 | | | | 1.4 | |
| Manufactures plastics and other resin materials | | | | | | | | | | | | | | | | |
| Shikoku Chemicals Corporation | | | 103,600 | | | | 1,106,452 | | | | 1,364,841 | | | | 0.4 | |
| Manufactures chemical products | | | | | | | | | | | | | | | | |
| Tenma Corporation | | | 358,800 | | | | 5,938,236 | | | | 5,981,347 | | | | 1.7 | |
| Manufactures synthetic resin products | | | | | | | | | | | | | | | | |
| T&K Toka Co., Ltd. | | | 177,100 | | | | 1,736,585 | | | | 1,857,575 | | | | 0.5 | |
| Manufactures specialized inks for printing applications | | | | | | | | | | | | | | | | |
| Yushiro Chemical Industry Co., Ltd. | | | 232,600 | | | | 3,114,911 | | | | 3,125,088 | | | | 0.9 | |
| Manufactures metalworking fluids | | | | | | | | | | | | | | | | |
| Total Chemicals | | | | | | | 40,687,455 | | | | 43,829,554 | | | | 12.2 | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF INVESTMENTS — (Continued)
AUGUST 31, 2018
(Unaudited)
| | | Shares | | | Cost | | | Fair Value | | | | |
| Construction | | | | | | | | | | | | |
| Toenec Corporation | | | 315,900 | | | $ | 8,660,798 | | | $ | 9,009,448 | | | | 2.5 | |
| Construction of comprehensive building facilities | | | | | | | | | | | | | | | | |
| Totetsu Kogyo Co., Ltd. | | | 245,900 | | | | 7,452,451 | | | | 6,609,774 | | | | 1.9 | |
| Operates construction-related businesses | | | | | | | | | | | | | | | | |
| Yondenko Corporation | | | 63,400 | | | | 1,264,557 | | | | 1,523,657 | | | | 0.4 | |
| Construction of electrical distribution systems | | | | | | | | | | | | | | | | |
| Yurtec Corporation | | | 275,600 | | | | 2,171,354 | | | | 2,195,363 | | | | 0.6 | |
| Engineering company | | | | | | | | | | | | | | | | |
| Total Construction | | | | | | | 19,549,160 | | | | 19,338,242 | | | | 5.4 | |
| | | | | | | | | | | | | | | | | |
| Electric Appliances | | | | | | | | | | | | | | | | |
| Kitagawa Industries Co., Ltd. | | | 255,600 | | | | 2,656,123 | | | | 3,388,040 | | | | 0.9 | |
| Manufactures various industrial and consumer products | | | | | | | | | | | | | | | | |
| Koito Manufacturing Co., Ltd. | | | 27,600 | | | | 1,646,640 | | | | 1,708,601 | | | | 0.5 | |
| Manufactures lighting equipment | | | | | | | | | | | | | | | | |
| Mabuchi Motor Co., Ltd. | | | 85,100 | | | | 4,203,180 | | | | 3,531,295 | | | | 1.0 | |
| Manufactures small motors | | | | | | | | | | | | | | | | |
| Maxell Holdings, Ltd. | | | 77,400 | | | | 1,314,376 | | | | 1,249,838 | | | | 0.4 | |
| Manufactures media devices, batteries and electrical appliances | | | | | | | | | | | | | | | | |
| Nissin Electric Co., Ltd. | | | 89,800 | | | | 835,054 | | | | 796,244 | | | | 0.2 | |
| Manufactures electric equipment | | | | | | | | | | | | | | | | |
| Total Electric Appliances | | | | | | | 10,655,373 | | | | 10,674,018 | | | | 3.0 | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF INVESTMENTS — (Continued)
AUGUST 31, 2018
(Unaudited)
| | | Shares | | | Cost | | | Fair Value | | | | |
| Financing Business | | | | | | | | | | | | |
| Hitachi Capital Corporation | | | 135,000 | | | $ | 3,145,386 | | | $ | 3,758,955 | | | | 1.0 | |
| General financial services | | | | | | | | | | | | | | | | |
| Ricoh Leasing Company, Ltd. | | | 137,300 | | | | 4,598,094 | | | | 4,546,767 | | | | 1.3 | |
| Leasing and financial services | | | | | | | | | | | | | | | | |
| Total Financing Business | | | | | | | 7,743,480 | | | | 8,305,722 | | | | 2.3 | |
| | | | | | | | | | | | | | | | | |
| Food | | | | | | | | | | | | | | | | |
| Kameda Seika Co., Ltd. | | | 92,300 | | | | 4,365,321 | | | | 4,096,215 | | | | 1.1 | |
| Manufactures confectioneries | | | | | | | | | | | | | | | | |
| Nichirei Corporation | | | 77,900 | | | | 1,997,228 | | | | 1,959,872 | | | | 0.6 | |
| Produces frozen foods and provides cold storage warehousing | | | | | | | | | | | | | | | | |
| Total Food | | | | | | | 6,362,549 | | | | 6,056,087 | | | | 1.7 | |
| | | | | | | | | | | | | | | | | |
| Information and Communication | | | | | | | | | | | | | | | | |
| NS Solutions Corporation | | | 61,400 | | | | 1,397,827 | | | | 1,989,034 | | | | 0.5 | |
| System consulting services and software development | | | | | | | | | | | | | | | | |
| OBIC Co., Ltd. | | | 23,700 | | | | 1,433,390 | | | | 2,229,583 | | | | 0.6 | |
| Computer system integration | | | | | | | | | | | | | | | | |
| Okinawa Cellular Telephone Company | | | 235,500 | | | | 7,047,085 | | | | 9,167,470 | | | | 2.6 | |
| Telecommunications | | | | | | | | | | | | | | | | |
| Otsuka Corporation | | | 49,900 | | | | 1,402,809 | | | | 1,809,845 | | | | 0.5 | |
| Computer information system developer | | | | | | | | | | | | | | | | |
| Total Information and Communication | | | | | | | 11,281,111 | | | | 15,195,932 | | | | 4.2 | |
| | | | | | | | | | | | | | | | | |
| Iron and Steel | | | | | | | | | | | | | | | | |
| Chubu Steel Plate Co., Ltd. | | | 240,900 | | | | 1,205,605 | | | | 1,458,751 | | | | 0.4 | |
| Manufactures steel-related products | | | | | | | | | | | | | | | | |
| Mory Industries Inc. | | | 41,600 | | | | 692,828 | | | | 1,103,585 | | | | 0.3 | |
| Manufactures steel tubing products | | | | | | | | | | | | | | | | |
| Nichia Steel Works, Ltd. | | | 1,970,000 | | | | 5,751,581 | | | | 5,716,062 | | | | 1.6 | |
| Manufactures steel-related products | | | | | | | | | | | | | | | | |
| Osaka Steel Co., Ltd. | | | 475,600 | | | | 8,927,831 | | | | 8,631,299 | | | | 2.4 | |
| Manufactures steel-related products | | | | | | | | | | | | | | | | |
| Total Iron and Steel | | | | | | | 16,577,845 | | | | 16,909,697 | | | | 4.7 | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF INVESTMENTS — (Continued)
AUGUST 31, 2018
(Unaudited)
| | | Shares | | | Cost | | | Fair Value | | | | |
| Machinery | | | | | | | | | | | | |
| Hisaka Works, Ltd. | | | 362,000 | | | $ | 3,064,596 | | | $ | 3,725,199 | | | | 1.0 | |
| Manufactures heat exchangers and other machinery | | | | | | | | | | | | | | | | |
| Miura Co. Ltd. | | | 73,700 | | | | 1,501,567 | | | | 2,068,714 | | | | 0.6 | |
| Manufactures boilers and related products | | | | | | | | | | | | | | | | |
| Nippon Pillar Packing Co., Ltd. | | | 106,300 | | | | 1,094,027 | | | | 1,525,892 | | | | 0.4 | |
| Manufactures mechanical seals | | | | | | | | | | | | | | | | |
| Nitto Kohki Co., Ltd. | | | 159,100 | | | | 3,423,152 | | | | 3,479,484 | | | | 1.0 | |
| Manufactures machine tools and motor pumps | | | | | | | | | | | | | | | | |
| Oiles Corporation | | | 486,080 | | | | 8,481,529 | | | | 10,490,305 | | | | 2.9 | |
| Manufactures bearing equipment | | | | | | | | | | | | | | | | |
| Shibuya Corporation | | | 15,400 | | | | 266,744 | | | | 572,426 | | | | 0.2 | |
| Packing plant business | | | | | | | | | | | | | | | | |
| Star Micronics Co., Ltd. | | | 12,200 | | | | 215,758 | | | | 220,419 | | | | 0.1 | |
| Manufactures machinery, electronic components, and precision parts | | | | | | | | | | | | | | | | |
| Yamashin-Filter Corporation | | | 50,000 | | | | 78,982 | | | | 459,563 | | | | 0.1 | |
| Manufactures filters | | | | | | | | | | | | | | | | |
| Total Machinery | | | | | | | 18,126,355 | | | | 22,542,002 | | | | 6.3 | |
| | | | | | | | | | | | | | | | | |
| Metal Products | | | | | | | | | | | | | | | | |
| Dainichi Co., Ltd. | | | 246,100 | | | | 1,771,026 | | | | 1,632,167 | | | | 0.4 | |
| Manufactures oil heating equipment | | | | | | | | | | | | | | | | |
| Neturen Co., Ltd. | | | 424,400 | | | | 3,258,127 | | | | 3,885,473 | | | | 1.1 | |
| Manufactures steel bars and induction heating equipment | | | | | | | | | | | | | | | | |
| NHK Spring Co., Ltd. | | | 304,300 | | | | 3,000,470 | | | | 3,221,919 | | | | 0.9 | |
| Manufactures automobile-related products | | | | | | | | | | | | | | | | |
| Piolax, Inc. | | | 142,400 | | | | 2,595,549 | | | | 3,123,240 | | | | 0.9 | |
| Manufactures automobile-related products | | | | | | | | | | | | | | | | |
| Rinnai Corporation | | | 51,500 | | | | 4,529,998 | | | | 3,837,846 | | | | 1.1 | |
| Manufactures heating appliances and components | | | | | | | | | | | | | | | | |
| Shinpo Co., Ltd | | | 1,800 | | | | 12,441 | | | | 23,016 | | | | 0.0 | |
| Manufactures smokeless roasters | | | | | | | | | | | | | | | | |
| Total Metal Products | | | | | | | 15,167,611 | | | | 15,723,661 | | | | 4.4 | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF INVESTMENTS — (Continued)
AUGUST 31, 2018
(Unaudited)
| | | Shares | | | Cost | | | Fair Value | | | | |
| Other Products | | | | | | | | | | | | |
| Fuji Seal International, Inc. | | | 24,500 | | | $ | 658,292 | | | $ | 865,420 | | | | 0.2 | |
| Packaging-related materials and machinery | | | | | | | | | | | | | | | | |
| Komatsu Wall Industry Co., Ltd. | | | 21,500 | | | | 378,202 | | | | 407,623 | | | | 0.1 | |
| Manufactures various partitions | | | | | | | | | | | | | | | | |
| Nishikawa Rubber Co., Ltd. | | | 185,200 | | | | 2,980,383 | | | | 3,469,527 | | | | 1.0 | |
| Manufactures rubber automobile parts | | | | | | | | | | | | | | | | |
| Pigeon Corporation | | | 43,600 | | | | 1,541,911 | | | | 2,109,772 | | | | 0.6 | |
| Manufactures baby care products | | | | | | | | | | | | | | | | |
| The Pack Corporation | | | 204,400 | | | | 5,691,328 | | | | 5,801,847 | | | | 1.6 | |
| Manufactures paper and chemical products | | | | | | | | | | | | | | | | |
| Total Other Products | | | | | | | 11,250,116 | | | | 12,654,189 | | | | 3.5 | |
| | | | | | | | | | | | | | | | | |
| Precision Instruments | | | | | | | | | | | | | | | | |
| Nakanishi Inc. | | | 103,200 | | | | 1,451,970 | | | | 2,077,484 | | | | 0.6 | |
| Manufactures dental instruments | | | | | | | | | | | | | | | | |
| Total Precision Instruments | | | | | | | 1,451,970 | | | | 2,077,484 | | | | 0.6 | |
| | | | | | | | | | | | | | | | | |
| Real Estate | | | | | | | | | | | | | | | | |
| Daibiru Corporation | | | 176,200 | | | | 1,827,926 | | | | 1,838,609 | | | | 0.5 | |
| Real estate leasing and building management | | | | | | | | | | | | | | | | |
| Sanyo Housing Nagoya Co., Ltd. | | | 282,200 | | | | 2,772,605 | | | | 2,832,807 | | | | 0.8 | |
| Designs and constructs housing | | | | | | | | | | | | | | | | |
| Starts Corporation Inc. | | | 79,300 | | | | 1,651,684 | | | | 1,805,017 | | | | 0.5 | |
| Construction, leasing and management of real estate | | | | | | | | | | | | | | | | |
| Total Real Estate | | | | | | | 6,252,215 | | | | 6,476,433 | | | | 1.8 | |
| | | | | | | | | | | | | | | | | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF INVESTMENTS — (Continued)
AUGUST 31, 2018
(Unaudited)
| | | Shares | | | Cost | | | Fair Value | | | | |
| Retail Trade | | | | | | | | | | | | |
| ABC-Mart, Inc. | | | 103,100 | | | $ | 5,677,305 | | | $ | 5,629,971 | | | | 1.6 | |
| Retail sales of shoes | | | | | | | | | | | | | | | | |
| AIN Holdings Inc. | | | 2,700 | | | | 102,793 | | | | 206,803 | | | | 0.1 | |
| Operates pharmacies and drug store chains | | | | | | | | | | | | | | | | |
| Amiyaki Tei Co., Ltd. | | | 227,900 | | | | 8,482,669 | | | | 9,025,641 | | | | 2.5 | |
| Operates barbecue restaurant chains | | | | | | | | | | | | | | | | |
| Cosmos Pharmaceutical Corporation | | | 26,600 | | | | 5,227,769 | | | | 5,577,671 | | | | 1.6 | |
| Operates drug stores | | | | | | | | | | | | | | | | |
| Create SD Holdings Co., Ltd. | | | 221,100 | | | | 5,486,994 | | | | 5,142,231 | | | | 1.4 | |
| Operates pharmacies and drug store chains | | | | | | | | | | | | | | | | |
| Daikokutenbussan Co., Ltd. | | | 198,800 | | | | 8,393,601 | | | | 7,685,082 | | | | 2.1 | |
| Operates supermarkets | | | | | | | | | | | | | | | | |
| Don Quijote Holdings Co., Ltd. | | | 69,700 | | | | 2,777,218 | | | | 3,391,575 | | | | 1.0 | |
| Operates discount stores | | | | | | | | | | | | | | | | |
| Hiday Hidaka Corp | | | 114,133 | | | | 2,081,638 | | | | 2,314,028 | | | | 0.7 | |
| Operates restaurant chains | | | | | | | | | | | | | | | | |
| Izumi Co., Ltd. | | | 38,500 | | | | 1,976,880 | | | | 2,307,051 | | | | 0.6 | |
| Operates shopping centers, real estate, and credit card services | | | | | | | | | | | | | | | | |
| Japan Meat Co., Ltd. | | | 105,900 | | | | 1,779,185 | | | | 2,065,038 | | | | 0.6 | |
| Supermarket business and operation of eating-out stores | | | | | | | | | | | | | | | | |
| JINS Inc. | | | 30,700 | | | | 1,254,265 | | | | 1,579,608 | | | | 0.4 | |
| Retail sales of eyewear and fashion accessories | | | | | | | | | | | | | | | | |
| Kura Corporation | | | 14,700 | | | | 678,465 | | | | 871,602 | | | | 0.2 | |
| Operates a sushi restaurant chain | | | | | | | | | | | | | | | | |
| Kusuri No Aoki Holdings Co., Ltd. | | | 25,700 | | | | 1,347,946 | | | | 1,878,144 | | | | 0.5 | |
| Operates drug stores | | | | | | | | | | | | | | | | |
| NAFCO Co., Ltd. | | | 74,200 | | | | 1,180,301 | | | | 1,226,916 | | | | 0.3 | |
| Operates a chain of home and furniture retail outlets | | | | | | | | | | | | | | | | |
| Saint Marc Holdings Co., Ltd. | | | 70,900 | | | | 1,962,716 | | | | 1,664,928 | | | | 0.5 | |
| Operates restaurant chains | | | | | | | | | | | | | | | | |
| Saizeriya Co., Ltd. | | | 468,500 | | | | 12,086,392 | | | | 9,414,328 | | | | 2.6 | |
| Operates restaurants | | | | | | | | | | | | | | | | |
| San-A Co., Ltd. | | | 153,000 | | | | 7,027,544 | | | | 7,141,608 | | | | 2.0 | |
| Retail sales of home goods | | | | | | | | | | | | | | | | |
| Seria Co. Ltd. | | | 77,300 | | | | 3,353,909 | | | | 3,169,317 | | | | 0.9 | |
| Discount retail sales | | | | | | | | | | | | | | | | |
| Start Today Co., Ltd. | | | 13,600 | | | | 330,661 | | | | 469,367 | | | | 0.1 | |
| Operates retail E-commerce websites | | | | | | | | | | | | | | | | |
| Sundrug Co., Ltd. | | | 24,900 | | | | 963,700 | | | | 895,256 | | | | 0.3 | |
| Operates pharmacies and drug store chains | | | | | | | | | | | | | | | | |
| Yossix Co., Ltd. | | | 12,100 | | | | 177,119 | | | | 305,621 | | | | 0.1 | |
| Operates restaurant chains | | | | | | | | | | | | | | | | |
| Total Retail Trade | | | | | | | 72,349,070 | | | | 71,961,786 | | | | 20.1 | |
| | | | | | | | | | | | | | | | | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF INVESTMENTS — (Continued)
AUGUST 31, 2018
(Unaudited)
| | | Shares | | | Cost | | | Fair Value | | | | |
| Services | | | | | | | | | | | | |
| EPS Holdings, Inc. | | | 73,800 | | | $ | 1,014,150 | | | $ | 1,504,928 | | | | 0.4 | |
| Performs contract medical research services | | | | | | | | | | | | | | | | |
| H.I.S. Co., Ltd. | | | 114,300 | | | | 3,423,230 | | | | 3,759,360 | | | | 1.0 | |
| Travel business | | | | | | | | | | | | | | | | |
| Nihon M&A Center Inc. | | | 31,200 | | | | 581,165 | | | | 817,849 | | | | 0.2 | |
| Provides merger and acquisition brokerage services | | | | | | | | | | | | | | | | |
| Nippon Air Conditioning Services Co., Ltd. | | | 371,200 | | | | 2,244,651 | | | | 2,685,953 | | | | 0.8 | |
| Provides maintenance and management of building facilities | | | | | | | | | | | | | | | | |
| Step Co., Ltd. | | | 152,200 | | | | 1,583,825 | | | | 2,127,166 | | | | 0.6 | |
| Operates preparatory schools | | | | | | | | | | | | | | | | |
| Tear Corporation | | | 67,700 | | | | 510,460 | | | | 603,337 | | | | 0.2 | |
| Funeral business | | | | | | | | | | | | | | | | |
| Total Services | | | | | | | 9,357,481 | | | | 11,498,593 | | | | 3.2 | |
| | | | | | | | | | | | | | | | | |
| Textiles and Apparel | | | | | | | | | | | | | | | | |
| Seiren Co., Ltd. | | | 320,500 | | | | 4,557,797 | | | | 5,467,056 | | | | 1.5 | |
| Manufactures synthetic fibers and textile products | | | | | | | | | | | | | | | | |
| Total Textiles and Apparel | | | | | | | 4,557,797 | | | | 5,467,056 | | | | 1.5 | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF INVESTMENTS — (Continued)
AUGUST 31, 2018
(Unaudited)
| | | Shares | | | Cost | | | Fair Value | | | | |
| Transportation and Warehousing | | | | | | | | | | | | |
| Alps Logistics Co., Ltd. | | | 244,800 | | | $ | 1,365,590 | | | $ | 1,852,958 | | | | 0.5 | |
| General logistics services | | | | | | | | | | | | | | | | |
| Japan Transcity Corporation | | | 789,600 | | | | 2,824,948 | | | | 3,685,630 | | | | 1.0 | |
| General logistics services | | | | | | | | | | | | | | | | |
| Meiko Trans Co., Ltd. | | | 385,400 | | | | 3,912,768 | | | | 4,170,898 | | | | 1.2 | |
| Marine logistics services | | | | | | | | | | | | | | | | |
| Trancom Co., Ltd. | | | 35,800 | | | | 1,835,794 | | | | 2,435,594 | | | | 0.7 | |
| General logistics services | | | | | | | | | | | | | | | | |
| Total Transportation and Warehousing | | | | | | | 9,939,100 | | | | 12,145,080 | | | | 3.4 | |
| | | | | | | | | | | | | | | | | |
| Transportation Equipment | | | | | | | | | | | | | | | | |
| Hi-Lex Corporation | | | 144,700 | | | | 3,708,896 | | | | 3,334,065 | | | | 0.9 | |
| Manufactures control cables | | | | | | | | | | | | | | | | |
| Morita Holdings Corporation | | | 75,700 | | | | 1,244,638 | | | | 1,633,033 | | | | 0.5 | |
| Operates five business transportation segments | | | | | | | | | | | | | | | | |
| Nippon Seiki Co., Ltd. | | | 4,200 | | | | 78,308 | | | | 78,153 | | | | 0.0 | |
| Manufactures transportation equipment parts | | | | | | | | | | | | | | | | |
| Nissin Kogyo Co., Ltd. | | | 49,900 | | | | 778,506 | | | | 835,901 | | | | 0.2 | |
| Manufactures automobile brake systems | | | | | | | | | | | | | | | | |
| Total Transportation Equipment | | | | | | | 5,810,348 | | | | 5,881,152 | | | | 1.6 | |
| | | | | | | | | | | | | | | | | |
| Utilities | | | | | | | | | | | | | | | | |
| Keiyo Gas Co., Ltd. | | | 97,200 | | | | 2,465,637 | | | | 2,440,182 | | | | 0.7 | |
| Produces gas and energy products | | | | | | | | | | | | | | | | |
| The Okinawa Electric Power Company, Incorporated | | | 173,477 | | | | 2,409,005 | | | | 3,493,770 | | | | 1.0 | |
| Produces thermal energy products | | | | | | | | | | | | | | | | |
| Total Utilities | | | | | | | 4,874,642 | | | | 5,933,952 | | | | 1.7 | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF INVESTMENTS — (Continued)
AUGUST 31, 2018
(Unaudited)
| | | Shares | | | Cost | | | Fair Value | | | | |
| Wholesale Trade | | | | | | | | | | | | |
| Ai Holdings Corporation | | | 31,900 | | | $ | 857,640 | | | $ | 720,642 | | | | 0.2 | |
| Information and security equipment | | | | | | | | | | | | | | | | |
| Kanaden Corporation | | | 314,200 | | | | 2,751,177 | | | | 3,335,234 | | | | 0.9 | |
| Factory automation business | | | | | | | | | | | | | | | | |
| Kohsoku Corporation | | | 357,400 | | | | 3,358,444 | | | | 3,925,845 | | | | 1.1 | |
| Food and industrial packaging materials | | | | | | | | | | | | | | | | |
| Kondotec Inc. | | | 59,200 | | | | 522,906 | | | | 563,860 | | | | 0.2 | |
| Manufactures construction materials | | | | | | | | | | | | | | | | |
| Matsuda Sangyo Co., Ltd. | | | 335,100 | | | | 4,148,825 | | | | 4,677,359 | | | | 1.3 | |
| Precious metals, electronic materials, and food | | | | | | | | | | | | | | | | |
| Nagaileben Co., Ltd. | | | 6,500 | | | | 169,328 | | | | 151,818 | | | | 0.0 | |
| Medical wear business | | | | | | | | | | | | | | | | |
| Paltac Corporation | | | 39,900 | | | | 879,825 | | | | 2,171,624 | | | | 0.6 | |
| Cosmetics and daily necessities | | | | | | | | | | | | | | | | |
| Ryoden Corporation | | | 792,700 | | | | 11,203,634 | | | | 11,871,749 | | | | 3.3 | |
| Purchases electronic and electrical devices | | | | | | | | | | | | | | | | |
| SIIX Corporation | | | 627,100 | | | | 9,006,467 | | | | 12,612,635 | | | | 3.5 | |
| Parts procurement, logistics, and manufacturing of electronics | | | | | | | | | | | | | | | | |
| Sugimoto & Co., Ltd. | | | 255,000 | | | | 2,956,445 | | | | 4,301,509 | | | | 1.2 | |
| Machine tools and measuring instruments | | | | | | | | | | | | | | | | |
| Techno Associe Co., Ltd. | | | 388,100 | | | | 3,862,492 | | | | 4,630,272 | | | | 1.3 | |
| Screws and nonferrous metal products | | | | | | | | | | | | | | | | |
| Total Wholesale Trade | | | | | | | 39,717,183 | | | | 48,962,547 | | | | 13.6 | |
| | | | | | | | | | | | | | | | | |
| TOTAL INVESTMENTS IN JAPANESE EQUITY SECURITIES | | | $ | 328,472,399 | | | $ | 357,151,318 | | | | 99.5 | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF INVESTMENTS — (Continued)
AUGUST 31, 2018
(Unaudited)
| | | Cost | | | Fair Value | | | % of Net
Asset | |
| FOREIGN CURRENCY | | | | | | | | | |
| Japanese Yen | | | | | | | | | |
| Interest bearing account | | $ | 1,588,477 | | | $ | 1,582,565 | | | | 0.4 | |
| TOTAL FOREIGN CURRENCY | | | | | | | | | | | 0.4 | |
| TOTAL INVESTMENTS IN JAPANESE EQUITY | | | | | | | | | | | | |
| SECURITIES AND FOREIGN CURRENCY | | $ | 330,060,876 | | | $ | 358,733,883 | | | | 99.9 | |
| OTHER ASSETS LESS LIABILITIES, NET | | | | | | | 180,026 | | | | 0.1 | |
| NET ASSETS | | | | | | $ | 358,913,909 | | | | 100.0 | |
Portfolio securities and foreign currency holdings were translated
at the following exchange rate as of August 31, 2018.
Japanese Yen JPY ¥ 110.975 = USD $1.00
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
SCHEDULE OF ASSETS AND LIABILITIES
AUGUST 31, 2018
(Unaudited)
| ASSETS: | | | |
| Investments in Japanese equity securities, at fair value (cost—$328,472,399) | | $ | 357,151,318 | |
| Foreign currency, at fair value (cost—$1,588,477) | | | 1,582,565 | |
| Receivable for dividends | | | 502,879 | |
| Prepaid expenses | | | 83,208 | |
| Cash | | | 64,775 | |
| Total Assets | | | 359,384,745 | |
| | | | | |
| LIABILITIES: | | | | |
| Accrued management fee | | | 260,913 | |
| Accrued directors’ fees and expenses | | | 9,804 | |
| Other accrued expenses | | | 200,119 | |
| Total Liabilities | | | 470,836 | |
| | | | | |
| NET ASSETS: | | | | |
| Capital stock (28,333,893 shares of capital stock outstanding, 100,000,000 shares authorized, par value $0.10 each) | | | 2,833,389 | |
| Paid-in capital | | | 286,055,217 | |
| Accumulated net realized gain on investments and foreign currency transactions | | | 48,634,669 | |
| Net unrealized appreciation on investments and foreign currency transactions | | | 28,673,083 | |
| Accumulated net investment loss | | | (7,282,449 | ) |
| Net Assets | | $ | 358,913,909 | |
| | | | | |
| Net asset value per share | | $ | 12.67 | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 31, 2018
(Unaudited)
| INCOME: | | | | | | |
| Dividend income (net of $379,590 withholding taxes) | | $ | 3,416,316 | | | | |
| Interest income | | | 374 | | | | |
| Total Income | | | | | | $ | 3,416,690 | |
| | | | | | | | | |
| EXPENSES: | | | | | | | | |
| Management fee | | | 1,615,940 | | | | | |
| Custodian fee | | | 139,313 | | | | | |
| Legal fees | | | 134,849 | | | | | |
| Directors’ fees and expenses | | | 109,431 | | | | | |
| Other expenses | | | 101,101 | | | | | |
| Total Expenses | | | | | | | 2,100,634 | |
| INVESTMENT INCOME—NET | | | | | | | 1,316,056 | |
| | |
| | |
| REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: | |
| Realized gain (loss) on investments and foreign currency transactions: | | | | | | | | |
| Net realized gain on investments | | | | | | | 15,812,165 | |
| Net realized loss on foreign currency transactions | | | | | | | (112,810 | ) |
| Net realized gain on investments and foreign currency transactions | | | | | | | 15,699,355 | |
| Net change in unrealized depreciation on investments | | | | | | | (42,134,363 | ) |
| Net change in unrealized depreciation on foreign currency transactions and translation | | | | | | | (13,054,222 | ) |
| Net realized and unrealized loss on investments and foreign currency transactions and translation | | | | | | | (39,489,230 | ) |
| NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS | | | | | | $ | (38,173,174 | ) |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
STATEMENTS OF CHANGES IN NET ASSETS
| | | For the Six
Months Ended
August 31, 2018
(Unaudited) | | | For the Year Ended
February 28,
2018 | |
| FROM OPERATIONS: | | | | | | |
| Net investment income | | $ | 1,316,056 | | | $ | 2,496,204 | |
| Net realized gain on investments | | | 15,812,165 | | | | 76,301,390 | |
| Net realized gain (loss) on foreign currency transactions | | | (112,810 | ) | | | 100,208 | |
| Net change in unrealized appreciation (depreciation) on investments | | | (42,134,363 | ) | | | 7,628,096 | |
| Net change in unrealized appreciation (depreciation) on foreign currency transactions and translation | | | (13,054,222 | ) | | | 21,216,611 | |
| Net increase (decrease) in net assets resulting from operations | | | (38,173,174 | ) | | | 107,742,509 | |
| | | | | | | | | |
| FROM DISTRIBUTIONS TO SHAREHOLDERS: | | | | | | | | |
| Ordinary income distribution | | | — | | | | (15,626,142 | ) |
| Capital gains distribution | | | — | | | | (37,542,408 | ) |
| Decrease in net assets derived from distributions to shareholders | | | — | | | | (53,168,550 | ) |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 397,087,083 | | | | 342,513,124 | |
| End of period (including accumulated net investment loss of $7,282,449 and $8,598,505 respectively) | | $ | 358,913,909 | | | $ | 397,087,083 | |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Significant Accounting Policies
Japan Smaller Capitalization Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”), as a non-diversified, closed-end management investment company. The Fund was incorporated in Maryland on January 25, 1990 and investment operations commenced on March 21, 1990. The Fund’s investment objective is to seek long-term capital appreciation through investments primarily in smaller capitalization Japanese equity securities.
The accompanying financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and are stated in United States dollars. The Fund is an investment company that follows the accounting and reporting guidance in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 946 Financial Services Investment Companies. The following is a summary of the significant accounting and reporting policies used in preparing the financial statements.
(a) Valuation of Securities — Investments traded in the over-the-counter market are fair valued at the last reported sales price as of the close of business on the day the securities are being valued or, if none is available, at the mean of the bid and offer price at the close of business on such day or, if none is available, the last reported sales price. Portfolio securities which are traded on stock exchanges are fair valued at the last sales price on the principal market on which securities are traded or, lacking any sales, at the last available bid price. Securities and other assets, including futures contracts and related options, that cannot be fair valued using one of the previously mentioned methods are stated at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund.
The net assets of the Fund are presented at the exchange rates and fair values on August 31, 2018. The Fund does isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates on investments from the fluctuations arising from changes in the market prices of securities held at August 31, 2018. Net realized gains or losses on investments include gains or losses arising from sales of portfolio securities and sales and maturities of short-term securities. Net realized gains or losses on the foreign currency transactions arise from sales of foreign currencies, currency gains or losses realized on securities transactions between trade and settlement date, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid.
Japan Smaller Capitalization Fund, Inc.
NOTES TO FINANCIAL STATEMENTS — (Continued) (Unaudited)
(c) Security Transactions, Investment Income and Distributions to Shareholders — Security transactions are accounted for on the trade date. Dividend income and distributions are recorded on the ex-dividend dates and interest income is recorded on the accrual basis. Realized gains and losses on the sale of investments are calculated on a first in, first out basis.
Distributions from net investment income and net realized capital gains are determined in accordance with Federal income tax regulations, which may differ from U.S. GAAP. To the extent these “book/tax” differences are permanent in nature (i.e., that they result from other than timing of recognition—“temporary”), such accounts are reclassified within the capital accounts based on their Federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net realized capital gains for financial reporting purposes, but not for tax purposes, are reported as distributions in excess of net realized capital gains.
Pursuant to a securities lending agreement with Brown Brothers Harriman & Co., the Fund may lend securities to qualified institutions. It is the Fund’s policy that, at origination, all loans shall be secured by collateral of at least 102% of the value of U.S. securities loaned and 105% of the value of foreign securities loaned. It is the Fund’s policy that collateral equivalent to at least 100% of the fair value of securities on loan must be maintained at all times (when applicable). Collateral is provided in the form of cash, which would be invested in certain money market funds. The Fund is entitled to receive all income on securities loaned, in addition to a portion of the income earned as a result of the lending transaction. Although each security loan is fully collateralized, there are certain risks. On November 21, 2008, the Fund suspended its participation in the securities lending program. The Fund may resume its participation in the future. During the fiscal year ended February 28, 2018 and the semi-annual period ended August 31, 2018, the Fund did not earn fees from lending Fund portfolio securities, pursuant to the securities lending agreement.
(d) Capital Account Reclassification — For the fiscal year ended February 28, 2018, the Fund’s accumulated net investment loss was decreased by $11,611,161 and the accumulated net realized gain on investments and foreign currency transactions was decreased by $11,611,161. These adjustments were primarily due to the result of the reclassification of foreign currency losses and the tax treatment of passive foreign investment companies. These adjustments had no impact on net assets.
(e) Income Taxes — A provision for U.S. income taxes has not been made since it is the intention of the Fund to continue to qualify as a regulated investment company under the Internal Revenue Code and to distribute within the allowable time limit all taxable income to its shareholders.
Japan Smaller Capitalization Fund, Inc.
NOTES TO FINANCIAL STATEMENTS — (Continued) (Unaudited)
Under Japanese tax laws, a withholding tax is imposed on dividends at a rate of 15.315% and such withholding taxes are reflected as a reduction of the related revenue. The withholding tax rate of 15.315% was reduced to 10% upon the submission of Form 17 — Limitation on Benefits Article. There is no withholding tax on realized gains.
In accordance with U.S. GAAP requirements regarding accounting for uncertainties in income taxes, management has analyzed the Fund's tax positions taken or expected to be taken on federal and state income tax returns for all open tax years (the current and the prior three tax years), and has concluded that no provision for income tax is required in the Fund's financial statements. The Fund recognizes interest and penalties, if any, related to uncertain tax positions as income tax expense in the statement of operations. During the current year and for the prior three tax years, the Fund did not incur any interest or penalties.
(f) Use of Estimates in Financial Statement Preparation — The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates.
(g) Concentration of Risk — A significant portion of the Fund’s net assets consists of Japanese securities which involve certain considerations and risks not typically associated with investments in the U.S. In addition to the smaller size, and greater volatility, there is often substantially less publicly available information about Japanese issuers than there is about U.S. issuers. Future economic and political developments in Japan could adversely affect the value of securities in which the Fund is invested. Further, the Fund may be exposed to currency devaluation and other exchange rate fluctuations.
(h) Indemnifications — Under the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising from the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representations which provide general indemnifications. The Fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote and as such no additional accruals were recorded on the Statement of Assets and Liabilities.
Japan Smaller Capitalization Fund, Inc.
NOTES TO FINANCIAL STATEMENTS — (Continued) (Unaudited)
2. Management Agreement and Transactions With Affiliated Persons
Nomura Asset Management U.S.A. Inc. (“NAM-USA” or the “Manager”) acts as the Manager of the Fund pursuant to a management agreement. Under the management agreement, the Manager provides all office space, facilities and personnel necessary to perform its duties. Pursuant to such management agreement, the Manager has retained its parent company, Nomura Asset Management Co., Ltd. (“NAM”), as Investment Adviser to the Fund.
As compensation for its services to the Fund, the Manager receives a monthly fee at the annual rate of 1.10% of the value of the Fund’s average weekly net assets not in excess of $50 million, 1.00% of the Fund’s average weekly net assets in excess of $50 million but not exceeding $100 million, 0.90% of the Fund’s average weekly net assets in excess of $100 million but not exceeding $175 million, 0.80% of the Fund’s average weekly net assets in excess of $175 million but not exceeding $250 million, 0.70% of the Fund’s average weekly net assets in excess of $250 million but not exceeding $325 million, 0.60% of the Fund’s average weekly net assets in excess of $325 million, but not exceeding $425 million and 0.50% of the Fund’s average weekly net assets in excess of $425 million. Under the management agreement, the Fund incurred fees to the Manager of $1,615,940 for the six months ended August 31, 2018. Under the investment advisory agreement, NAM earned investment advisory fees of $711,117 from the Manager, not the Fund, for the six months ended August 31, 2018. At August 31, 2018, the management fee payable to the Manager by the Fund was $260,913.
Certain officers and/or directors of the Fund are officers and/or directors of the Manager. Affiliates of Nomura Holdings, Inc. (the Manager’s indirect parent) did not earn any fees in commissions on the execution of portfolio security transactions for the six months ended August 31, 2018. The Fund pays each Director not affiliated with the Manager an annual fee of $30,000. In addition, the Fund pays each Director not affiliated with the Manager $3,000 per meeting attended, $2,000 per telephone meeting attended, and Director expenses related to attendance at meetings. The Chairman of the Board, presently Rodney A. Buck, is paid an additional annual fee of $8,000. The Chairman of the Audit Committee, presently David B. Chemidlin, is paid an additional annual fee of $4,000. Such fees and expenses for unaffiliated Directors aggregated $109,431 for the six months ended August 31, 2018.
3. Purchases and Sales of Investments
Purchases and sales of investments, exclusive of foreign currency and investments in short-term securities, for the six months ended August 31, 2018 were $48,790,049 and $48,160,864, respectively.
Japan Smaller Capitalization Fund, Inc.
NOTES TO FINANCIAL STATEMENTS — (Continued) (Unaudited)
4. Federal Income Tax
As of February 28, 2018, net unrealized appreciation on investments, exclusive of foreign currency, for federal income tax purposes was $71,615,567, of which $72,927,809 related to appreciated securities and $1,312,242 related to depreciated securities. The cost of investments, exclusive of foreign currency of $1,882,474, at February 28, 2018 for federal income tax purposes was $324,259,788.
At February 28, 2018, the components of accumulated earnings on a tax basis consisted of unrealized appreciation on investments and foreign currency transactions of $71,632,940, undistributed long-term capital gains of $28,085,599, and undistributed ordinary income of $8,479,938. The differences between book basis and tax basis for unrealized appreciation on investments and foreign currency transactions are attributable to the tax deferral of losses on wash sales and the tax treatment of passive foreign investment companies.
The Fund paid an ordinary income distribution of $18,113,858, which represents $0.6393 per share and a long-term capital gains distribution of $35,054,692, which represents $1.2372 per share to shareholders of record as of December 15, 2017. The distribution was paid on December 21, 2017.
The Fund paid an ordinary income distribution of $11,418,559, which represents $0.4030 per share and a long-term capital gains distribution of $15,104,798, which represents $0.5331 per share to shareholders of record as of December 19, 2016. The distribution was paid on December 23, 2016.
5. Fair Value Measurements
In accordance with U.S. GAAP, fair value is defined as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a framework for measuring fair value, and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Each investment is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below.
| | • | Level 1—quoted prices in active markets for identical investments |
| | • | Level 2—other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| | • | Level 3—significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
At August 31, 2018, all of the Fund’s investments were determined to be Level 1 securities.
During the six months ended August 31, 2018, there were no transfers between Level 1, Level 2 or Level 3 securities.
During the six months ended August 31, 2018, the Fund did not hold any instrument which used significant unobservable inputs (Level 3) in determining fair value.
Japan Smaller Capitalization Fund, Inc.
FINANCIAL HIGHLIGHTS
For a share of common stock outstanding throughout each period:
| | | For the Six Months Ended | | | For the Year Ended | |
| | | August 31, 2018 | | | February 28 | | | February 29, | | | February 28, | |
| | | (Unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | | | | | | | | | | | |
| Net asset value, beginning of period | | $ | 14.01 | | | $ | 12.09 | | | $ | 10.50 | | | $ | 10.98 | | | $ | 9.85 | | | $ | 8.83 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income* | | | 0.05 | | | | 0.09 | | | | 0.12 | | | | 0.06 | | | | 0.06 | | | | 0.05 | |
| Net realized and unrealized gain (loss) on investments and foreign currency | | | (1.39) | | | | 3.71 | | | | 2.41 | | | | 0.34 | | | | 1.20 | | | | 1.17 | |
| Total from investment operations | | | (1.34) | | | | 3.80 | | | | 2.53 | | | | 0.40 | | | | 1.26 | | | | 1.22 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Distributions: | | | | | | | | | | | | | | | | | | | | | | | | |
| Distributions from ordinary income | | | — | | | | (0.55) | | | | (0.35) | | | | (0.17) | | | | (0.12) | | | | (0.20) | |
| Distributions from capital gains | | | — | | | | (1.33) | | | | (0.59) | | | | (0.71) | | | | (0.01) | | | | — | |
| Total from distributions | | | — | | | | (1.88) | | | | (0.94) | | | | (0.88) | | | | (0.13) | | | | (0.20) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net asset value, end of period | | $ | 12.67 | | | $ | 14.01 | | | $ | 12.09 | | | $ | 10.50 | | | $ | 10.98 | | | $ | 9.85 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Market value, end of period | | $ | 10.88 | | | $ | 12.48 | | | $ | 10.60 | | | $ | 8.98 | | | $ | 9.69 | | | $ | 8.84 | |
| Total investment return** | | | (12.8%) | | | | 36.0% | | | | 24.9% | | | | 0.7% | | | | 11.2% | | | | 13.0% | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Ratio/Supplemental Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net assets, end of period (000) | | $ | 358,914 | | | $ | 397,087 | | | $ | 342,513 | | | $ | 297,550 | | | $ | 311,094 | | | $ | 278,994 | |
| Ratio of expenses to average net assets | | | 1.10%† | | | | 1.05% | | | | 1.09% | | | | 1.11% | | | | 1.13% | | | | 1.19% | |
| Ratio of net income to average net assets | | | 0.69%† | | | | 0.66% | | | | 0.99% | | | | 0.50% | | | | 0.62% | | | | 0.53% | |
| Portfolio turnover rate | | | 13% | | | | 50% | | | | 20% | | | | 24% | | | | 41% | | | | 101% | |
__________________
| * | Based on average shares outstanding. |
| ** | Based on market value per share, adjusted for reinvestment of income dividends, ordinary income distributions, long-term capital gain distributions, and capital share transactions. Total return does not reflect sales commissions. |
See notes to financial statements
Japan Smaller Capitalization Fund, Inc.
Board Review of the Management and Investment Advisory Agreements
The Board of Directors of the Fund (the “Board”) consists of five directors, four of whom are independent or non-interested directors (the “Independent Directors”). The Board considers matters relating to the Fund’s management and investment advisory agreements throughout the year. On an annual basis, the Board specifically considers whether to approve the continuance of these agreements for an additional one-year period. The specific agreements (the “Agreements”) consist of the Fund’s management agreement with Nomura Asset Management U.S.A. Inc. (the “Manager”) and the investment advisory agreement between the Manager and its parent, Nomura Asset Management Co., Ltd. (the “Investment Adviser”).
In prior years, the Board has considered the continuance of the Agreements at its quarterly meeting held during August of each year. This year the Board determined that it would be preferable for the current and future years to consider the annual continuance of the Agreements during its November quarterly meetings. To facilitate the transition, at its meeting on May 15, 2018, the Board approved the continuance of the Agreements through December 31, 2018. Consistent with its new policy, the Board will consider the continuance of the Agreements for a one-year period at its quarterly meeting scheduled to be held on November 20, 2018.
In connection with the Board’s deliberations prior to the May 15, 2018 meeting, counsel for the Fund, after consultations with the Independent Directors and their counsel, submitted a series of questions to the Manager relating to, among other items, the services the Manager and the Investment Adviser provide under the Agreements and the investment performance of the Fund. The Independent Directors considered the responses to these questions, which included performance data showing that for each of the one-year, three-year and five-year periods ended March 31, 2018, the Fund’s performance ranked second of six investment funds identified by the Manager as having comparable investment objectives. The Independent Directors further considered information provided to the Independent Directors by the Manager throughout the year regarding the operations of the Fund and the management and investment advisory activities undertaken by the Manager and the Investment Adviser relating to the Fund. The Independent Directors also recognized that they had received considerable information in connection with their most recent prior consideration of the Agreements, including a memorandum prepared by their independent counsel regarding their responsibilities in reviewing the Agreements and information regarding the profitability of the Agreements to the Manager and the Investment Adviser.
Board Review of the Management and Investment Advisory Agreements (continued)
Following their consideration of the information described above and other factors they deemed relevant, on May 15, 2018 the Independent Directors unanimously approved the continuance of the Agreements through December 31, 2018. In making this approval, the Independent Directors concluded that the investment performance of the Fund and the nature, extent and quality of services provided by the Manager and the Investment Adviser supported the continuance of the Agreements. The Independent Directors also noted the commitment of the Manager to provide updated information to the Independent Directors prior to their consideration of the continuance of the Agreements at the Board meeting scheduled to be held on November 20, 2018. This updated information will include recent performance data, together with comparative investment advisory fee data and information based on the two advisers’ most recent fiscal year concerning the costs of services provided by the Manager and the Investment Adviser and the profitability of the respective Agreements to the two advisers.
BOARD OF DIRECTORS
Rodney A. Buck
David B. Chemidlin
Yutaka Itabashi
E. Han Kim
Marcia L. MacHarg
OFFICERS
Yutaka Itabashi, President
Zheng Liu, Vice President
Maria R. Premole, Vice President
Neil A. Daniele, Secretary and Chief Compliance Officer
Amy J. Robles, Treasurer
Kelly S. Lee, Assistant Treasurer
MANAGER
Nomura Asset Management U.S.A. Inc.
Worldwide Plaza
309 West 49th Street
New York, New York 10019-7316
Internet Address
http://funds.nomura-asset.com/japan-smaller-capitalization
INVESTMENT ADVISER
Nomura Asset Management Co., Ltd.
1-12,1, Nihonbashi, Chuo-ku,
Tokyo 103-8260, Japan
DIVIDEND PAYING AGENT, TRANSFER AGENT
AND REGISTRAR
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, KY 40233
CUSTODIAN
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, Massachusetts 02110-1548
COUNSEL
Sidley Austin LLP
787 Seventh Avenue
New York, New York 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
RSM US LLP
80 City Square
Boston, Massachusetts 02129
JAPAN SMALLER CAPITALIZATION FUND, INC.
WORLDWIDE PLAZA
309 WEST 49TH STREET
NEW YORK, NEW YORK 10019-7316
This Report, including the Financial Statements, is transmitted to the Shareholders of Japan Smaller Capitalization Fund, Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in the Report.
JAPAN
Smaller Capitalization
Fund, Inc.
SEMI-ANNUAL REPORT
AUGUST 31, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Japan Smaller Capitalization Fund, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Amy J. Robles
