SOURCE: Japan Equity Fund

February 24, 2010 11:55 ET

The Japan Equity Fund Announces First Quarter Earnings

JERSEY CITY, NJ--(Marketwire - February 24, 2010) - The Japan Equity Fund, Inc. (NYSE: JEQ), a closed-end management investment company, today announced its performance results for the three months ended January 31, 2010, the first quarter of its 2010 fiscal year.

For the quarter ended January 31, 2010, the Fund incurred a net investment loss of approximately U.S. $212,000 (equivalent to a loss of U.S. $0.01 per share). In addition, net realized and unrealized gains from investment activities and foreign currency transactions during that same three-month period were approximately U.S. $2,190,000 (equivalent to a gain of U.S. $0.15 per share). In comparison, during the quarter ended January 31, 2009, the Fund incurred a net investment loss of approximately U.S. $140,000 (equivalent to a loss of U.S. $0.01 per share). In addition, net realized and unrealized losses from investment activities and foreign currency transactions during that same three-month period were approximately U.S. $249,000 (equivalent to a loss of U.S. $0.02 per share).

On January 31, 2010, the total net assets of the Fund were approximately U.S. $88.4 million. The net asset value ("NAV") per share on that date was U.S. $6.12, based on 14,446,336 shares outstanding. In comparison, total net assets on January 31, 2009 were approximately U.S. $77.2 million, equivalent to a NAV of U.S. $5.34 per share, based on 14,441,200 shares outstanding. Assuming the reinvestment of the U.S. $0.038 per share dividend paid on December 30, 2009, the Fund generated an investment return of 2.40% for the three months ended January 31, 2010, when measured against the NAV per share of U.S. $6.02 on October 31, 2009, based on 14,441,200 shares outstanding at that time. During the same period, the Fund's benchmark, the Tokyo Stock Price Index (the "TOPIX Index"), increased by 1.52% in U.S. dollar ("USD") terms.

As of January 31, 2010, the Fund had 98.82% of its net assets invested in Japanese common stocks. The remaining net assets were represented by a short-term USD-denominated time deposit (0.20%) and other assets less liabilities (0.98%).

As of February 23, 2010, the Fund's net asset value per share was U.S. $6.14, based on net assets of U.S. $88.7 million. On the same date, the market price of the Fund's shares on the New York Stock Exchange closed at U.S. $5.41, representing a trading discount to net asset value per share of 11.89%.

Market Review and Outlook

In Japanese yen ("JPY") terms, the TOPIX Index returned +0.80% during the three-month period from November 2009 to January 2010. Although the TOPIX ended the period less than 1% higher than at the close of last period, it had rallied almost 20% from a late-November low to hit a high in the middle of January. The major reason for the steep November fall was sharp appreciation of the yen. The Japanese yen, undoubtedly a reverse indicator of investors' risk appetites, appreciated substantially to 84 JPY per USD as of the end of November, mainly due to fears of default by government-related institutions in Dubai. Soon after, however, we saw a relief rally thanks to some measure of support from the Abu Dhabi government, Dubai's wealthy neighbor. From early December through mid-January, the Tokyo market, which had been a laggard for most of the second half of 2009, rose significantly, reaching its highest level since August 2009, and outperformed most of the world's emerging markets such as China and India as well as its peers in the developed markets. However, the Tokyo market soon surrendered half of its gains, as three concerns began to loom over the global market, including an apparent end to China's loose monetary policies, the possible implementation of much tighter credit adequacy regulations on U.S. banks labeled the "Volcker Plan", and the recent credit problems in Greece.

The following points are also important in watching the Tokyo market:

-- Purchases by foreign investors

Since December, the main driver of the Tokyo market's outperformance has been strong demand from foreign investors. This group was a neutral factor for most of 2009, as they accumulated just 473 billion yen in net purchases, including futures, through November. However, in December, foreign investors bought 1,909 billion yen worth of Japanese equities and net purchases continued last month, with 1,533 billion yen in purchases made during the first three weeks of January.

Aggressive buying by foreign investors has often been a precursor to a rally in the Tokyo market, as illustrated by the rallies of 1999 and 2005, which were both initially led by foreign purchases. However, we should not presume that these purchases will continue, as we have seen significant selling since the end of January, although a catch-up rally is still conceivable given the underperformance of the Japanese market in 2009.

-- Toyota recalls

One additional factor behind the decline in the Tokyo market since mid-January has been Toyota Motor Corporation's ("Toyota") announcement of several recalls in connection with malfunctioning accelerator pedals on several of its models, which has only added pressure to the market. Toyota, which boasts the largest market capitalization in Japan, saw its shares plunge 16.7% through the end of January amid the wave of recalls, while the overall market declined by only 5.7% over the same period. Looking closer, this appears to be a multi-faceted problem. First, huge repair expenses and lost opportunity costs from production stoppages will have a negative effect on the company's balance sheet, although this is something we consider to be a one-off loss. However, it will take some time to assess the damage caused by mounting concerns about the deterioration in quality of Toyota vehicles and Toyota's mismanagement of public relations, as evidenced by the delays in issuing a company statement on the matter, and it is perhaps too early to gauge the extent of their impact on Toyota's intrinsic value, although initial reactions to the recalls look exaggerated in our opinion.

-- Economic outlook

The Japanese economy has continued to move higher after reaching a bottom in the first quarter of 2009. Through November 2009, industrial production has notched ten consecutive MoM gains, while consensus economic forecasts call for greater than 4% annualized GDP growth in the fourth quarter of 2009, thanks to growing exports to Asia and the positive effects of government incentives on cars and flat-screen televisions. Looking ahead, the economic recovery is expected to reach a plateau at 0-1% growth in the first half of 2010, due to reductions in public works spending and a tapering-off of government incentive programs excluding housing. The positive effects, if any, from child care and other household support programs will not begin to be felt until at least the second half of 2010.

-- Corporate profit outlook

Business results have been generally better-than-expected, with management upwardly revising their profit forecasts, particularly in the technology, automotive and materials sectors, thanks to the strong growth of Asian operations. The Daiwa Institute of Research's ("DIR") recurring operating profit forecasts, which call for increases of 4% in the year to March 2010 and 54% in the year to March 2011, are likely to be revised upwards, at least for the current year ending March 2010. The only remaining concern, then, is the JPY exchange rate, particularly against the euro, which currently trades at 125 JPY/euro instead of the assumed 135 JPY/euro predicted by DIR. However, U.S. dollar-based trading covering Asia is much larger than euro-based trading, and the JPY/USD rate remains in-line with the assumed rate of 90 JPY per USD. In any event, a stable or even somewhat weaker JPY is one condition needed for Japan to experience robust profit growth in 2010 and 2011.

-- Risk factors

--  New U.S. financial industry regulations;
--  Credit tightening in China and the revaluation of the Chinese renminbi
   (RMB), which will probably be required in 2010;
--  Sovereign debt problems in the EU and a weakening of the euro;
--  An appreciation of the yen towards the end of March, amid the seasonal
    repatriation of Japanese money from abroad.

With regard to sector strategy, there will be no significant changes to our overweighting of cyclical sectors, including Materials, Industrials and Consumer Discretionary, nor to our underweighting of defensive sectors such as Utilities, Health Care and Consumer Staples. We are also underweight in the Energy sector due to its lack of attractive stocks, and we will maintain our neutral weights in Financials, IT and Telecom. With regard to stock selection, we will continue to focus on the beneficiaries of higher private consumption growth in China, India and some other emerging markets, as well as on green technology-related names.

The ten largest industry classifications of the Fund's Japanese equity investments held as of

January 31, 2010 were:

                                                              Percentage of
    Industry                                                   Net Assets
    --------                                                   -----------
 1. Electric Appliances                                              15.76%
 2. Transportation Equipment                                         10.70
 3. Banks                                                             9.04
 4. Wholesale Trade                                                   7.12
 5. Machinery                                                         5.65
 6. Chemicals                                                         5.51
 7. Retail Trade                                                      4.52
 8. Communication                                                     4.03
 9. Pharmaceutical                                                    3.96
10. Insurance                                                         3.34

The Fund's ten largest individual common stock holdings at the same date were:

                                                              Percentage of
    Issue                                                      Net Assets
    -----                                                      -----------
 1. Mitsubishi UFJ Financial Group, Inc.                              4.16%
 2. Honda Motor Co., Ltd.                                             3.35
 3. Toyota Motor Corp.                                                2.89
 4. Sony Corp.                                                        2.53
 5. Mitsubishi Corp.                                                  2.40
 6. Panasonic Corp.                                                   2.16
 7. NTT Corp.                                                         2.05
 8. Sumitomo Corp.                                                    2.02
 9. Sumitomo Electric Industries, Ltd.                                1.79
10. Mitsui & Co., Ltd.                                                1.75




QUARTERLY RESULTS OF OPERATIONS

                                     Net Realized and      Net Increase
                                     Unrealized Gains     (Decrease) in
                                       (Losses) on          Net Assets
                    Net Investment   Investments and      Resulting From
                    Income (Loss)  Currency Transactions    Operations
                   ---------------  ------------------  ------------------
                    Total    Per      Total      Per      Total      Per
QUARTER ENDED       (000)   Share     (000)     Share     (000)     Share
                   ------  -------  ---------  -------  ---------  -------
January 31, 2010   $(212)   $(0.01) $   2,190  $  0.15  $   1,978  $  0.14
                   =====   =======  =========  =======  =========  =======

January 31, 2009   $(140)   $(0.01) $    (249) $ (0.02) $    (389) $ (0.03)
April 30, 2009       438      0.03     (3,288)   (0.22)    (2,850)   (0.19)
July 31, 2009       (233)    (0.02)    12,775     0.88     12,542     0.86
October 31, 2009     266      0.02       (163)   (0.01)       103     0.01
                   ------  -------  ---------  -------  ---------  -------

For the Year Ended
 October 31, 2009  $ 331    $ 0.02  $   9,075  $  0.63  $   9,406  $  0.65
                   =====   =======  =========  =======  =========  =======



PER SHARE SELECTED QUARTERLY FINANCIAL DATA

                                      Net Asset         Market      Share
QUARTER ENDED                           Value           Price*      Volume*
                                    --------------- --------------- -------
                                     High     Low    High     Low    (000)
                                    ------- ------- ------- ------- -------
January 31, 2010                    $  6.54 $  5.73 $  5.69 $  4.74   1,548

January 31, 2009                    $  5.98 $  5.06 $  5.43 $  4.26   1,709
April 30, 2009                         5.36    4.28    4.84    3.56   1,965
July 31, 2009                          6.01    5.15    5.52    4.37   1,407
October 31, 2009                       6.37    5.88    5.76    5.01   1,932


*As reported on the New York Stock Exchange.

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