SOURCE: Japan Equity Fund

Japan Equity Fund

February 25, 2011 13:04 ET

The Japan Equity Fund Announces First Quarter Earnings

JERSEY CITY, NJ--(Marketwire - February 25, 2011) - 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, 2011, the first quarter of its 2011 fiscal year.

For the quarter ended January 31, 2011, the Fund incurred a net investment loss of approximately U.S. $232,000 (equivalent to a loss of U.S. $0.02 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. $9,226,000 (equivalent to a gain of U.S. $0.64 per share).

In comparison, during 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).

On January 31, 2011, the total net assets of the Fund were approximately U.S. $99.2 million. The net asset value ("NAV") per share on that date was U.S. $6.86, based on 14,456,819 shares outstanding. In comparison, total net assets on January 31, 2010 were approximately U.S. $88.4 million, equivalent to a NAV of U.S. $6.12 per share, based on 14,446,336 shares outstanding. Assuming the reinvestment of the U.S. $0.055 per share dividend paid on December 30, 2010, the Fund generated an investment return of 9.88% for the three months ended January 31, 2011, when measured against the NAV per share of U.S. $6.30 on October 31, 2010, based on 14,446,336 shares outstanding at that time. During the same period, the Fund's benchmark, the Tokyo Stock Price Index (the "TOPIX Index"), increased by 10.30% in U.S. dollar ("USD") terms.

As of January 31, 2011, the Fund had 99.14% of its net assets invested in Japanese common stocks. The remaining net assets were represented by a short-term USD-denominated time deposit (0.07%) and other assets less liabilities (0.79%).

As of February 24, 2011, the Fund's NAV per share was U.S. $7.05, based on net assets of U.S. $101.9 million. On the same date, the market price of the Fund's shares on the New York Stock Exchange closed at U.S. $6.44, representing a trading discount to net asset value per share of 8.65%.

Market Review and Outlook

The TOPIX returned 12.31% in Japanese yen terms in the three-month period between November 2010 and January 2011. Japanese equities have risen to the forefront of the global investment scene after previously being neglected. However, the catalysts for this change are not the corporate fundamentals, which have remained good in spite of adverse foreign exchange conditions, but the attitude of market participants. Japanese stocks continue to significantly lag names in peer developed countries, such as those in the United States, most of which have regained their pre-Lehman bankruptcy levels. And arguably many global investors have been deeply underweight Japanese equities. Hence the Tokyo market had been in over-sold, or over-neglected, territory. The recent market rally simply reflects a mean-reversion from such an extreme situation, though its pace may be somewhat steep.

Summary of Tokyo market-related themes:

-- Emergence from economic stasis
   Industrial production (IP) rose 1.0% MoM in November and by another 3.1%
   MoM in December, following five straight monthly declines (June-October)
   that aggregated to a drop of 5.4%. More recently, IP is expected to have
   risen 5.7% MoM in January, on the back of strong export growth. In terms
   of gross domestic product (GDP), the Japanese economy is expected to
   recover after it basically tread water in 4Q 2010 following the
   expiration of various fiscal incentive programs for autos and home
   appliances. Daiwa SBI forecasts sequential annualized GDP growth of
   -2.5% in 4Q 2010, +1.5% in 1Q 2011, +2.0% in 2Q 2011, +2.2% in 3Q 2011
   and +2.1% in 4Q 2011. Business capital expenditures will be the
   driver of any economic recovery in 2011. Positive core consumer price
   index (CPI) growth of +0.2% is expected in 2011, following a
   contraction of 0.8% in 2010. Despite the fact that deflationary
   pressure is receding, we expect the Bank of Japan to maintain its
   zero interest rate policy (along with some of its recently-announced
   asset purchase programs) through the 2011 calendar year.

-- Benign corporate profit outlook
   According to bottom-up earnings forecasts for 300 major Japanese
   companies provided by Daiwa Capital Markets, aggregate recurring
   profits are expected to grow by 14.9% (on 2.2% sales growth) in the
   year ending March 2012, following partially estimated recurring
   profit growth of 56.9% (on 4.9% sales growth) in the year to March
   2011, assuming exchange rates of 80 yen per U.S. dollar in FY2012
   and 112 yen per euro in FY2011. Cost controls will continue to be
   the driver of an earnings recovery, with wages estimated to rise by
   just 1.4% in the year to March 2012 following an estimated increase
   of 1.2% in the year ending March 2011.

-- Supply and demand aspects
   The Bank of Japan initiated a 450 billion yen equity exchange-traded
   fund (ETF) purchase program in December, although accumulated
   purchases totalled just 72 billion yen as of the end of January.
   Overseas investors continued to drive the Japanese equity market,
   with aggregate net purchases totalling 3.2 trillion yen in 2010.
   Among domestic investors, trust banks (which represent domestic
   pensions), net purchased 963 billion yen, although domestic
   individuals were the largest liquidators of Japanese equities, with
   net sales of 2.3 trillion yen for the year, including net sales of
   2.4 trillion yen between July and December alone. As such, the
   purchases by overseas investors essentially offset the selling by
   individual investors. With that said, domestic individuals began
   actively buying Japanese equities once again in mid-January, and
   posted their largest week of net purchases since May of 2010. Going
   forward, we expect to see some seasonal selling pressure from
   domestic institutions towards the close of the fiscal year in
   March, and this will have to be absorbed by the purchases of
   overseas investors, domestic individuals and the Bank of Japan in
   order for any rally to be sustained.

-- Attractive valuations
   Valuations in the Tokyo market remain attractive, with a current
   price-to-earnings (P/E) ratio of 16.7 times estimated earnings
   and a price-to-book (P/B) ratio of at 1.1 times. The average
   dividend yield also remains attractive at 1.9%, versus the 1.2%
   yield of the 10-year Japanese Government Bond (JGB).

-- Political discounts
   Led by Prime Minister Naoto Kan, the ruling Democratic Party of
   Japan (DPJ) government is in the process of shifting its stance
   from left-of-center to the center by proposing corporate tax cuts
   and voicing the need for a consumption tax rate hike to pay for
   social security costs. The government has also called for the
   "opening" up of Japan through the country's participation in the
   Trans-Pacific Strategic Economic Partnership (TPP), a free trade
   agreement proposed by the United States. Although these are all
   steps in the right direction, sadly, Mr. Kan lacks any solid form
   of political footing given the split Diet and an ongoing power
   struggle within his own party that has forced him to seek both
   cooperation from the bureaucracy and support from the opposition.

With regard to sector strategy, we will maintain our strategy of overweighting Financials and Industrials, while underweighting defensive sectors (Utilities and Health Care) and domestic demand-related sectors (Consumer Staples). Despite concerns over emerging countries given inflationary concerns and political uncertainty, we anticipate robust growth in the global economy, owing principally to stable demand from the corporate sector in industrialized nations. Hence, we prefer cyclical stocks to defensive names. Financials continue to be in oversold territory based on current valuations.

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

January 31, 2011 were
                                                          Percentage of
       Industry                                             Net Assets
       ------------------------                           -------------
 1.    Electric Appliances                                    12.90%
 2.    Transportation Equipment                               12.81
 3.    Banks                                                   9.72
 4.    Wholesale Trade                                         6.23
 5.    Chemicals                                               5.99
 6.    Machinery                                               5.46
 7.    Land Transportation                                     4.08
 8.    Communication                                           3.71
 9.    Pharmaceutical                                          3.53
10.    Retail Trade                                            3.94

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

                                                          Percentage of
       Issue                                                Net Assets
       ------------------------------------               -------------
 1.    Mitsubishi UFJ Financial Group, Inc.                    4.88%
 2.    Toyota Motor Corp.                                      3.74
 3.    Honda Motor Co., Ltd.                                   3.25
 4.    Mitsubishi Corp.                                        2.87
 5.    Mitsui Fudosan Co., Ltd.                                2.33
 6.    NTT Corp.                                               2.16
 7.    Tokio Marine Holdings Inc.                              2.12
 8.    Asahi Glass Co., Ltd.                                   1.83
 9.    East Japan Railway Co.                                  1.83
10.    Sumitomo Electric Industries, Ltd.                      1.76


                                       Net Realized and
                                       Unrealized Gains     Net Increase
                                         (Losses) on       (Decrease) in
                                       Investments and       Net Assets
                      Net Investment       Currency        Resulting From
                       Income (Loss)     Transactions        Operations
                     ---------------- ------------------   ---------------
                      Total      Per   Total       Per     Total     Per
QUARTER ENDED         (000)     Share  (000)      Share    (000)    Share
                     -----     ------  ------     ------   ------   ------

January 31, 2011     $(232)    $(0.02) $9,226     $ 0.64   $8,994   $ 0.62
                     =====     ======  ======     ======   ======   ======

January 31, 2010     $(212)    $(0.01) $2,190     $ 0.15   $1,978   $ 0.14
April 30, 2010         397       0.02   4,982       0.35    5,379     0.37
July 31, 2010         (184)     (0.01) (6,805)     (0.47)  (6,989)   (0.48)
October 31, 2010       435       0.03   3,707       0.26    4,142     0.29
                     -----     ------  ------     ------   ------   ------
For the Year Ended
October 31, 2010     $ 436     $ 0.03  $4,074     $ 0.29   $4,510   $ 0.32
                     =====     ======  ======     ======   ======   ======


                                      Net Asset         Market      Share
QUARTER ENDED                           Value           Price*      Volume*
                                    --------------- --------------- -------
                                     High     Low    High     Low    (000)
                                    ------- ------- ------- ------- -------

January 31, 2011                    $  7.06 $  6.23 $  6.35 $  5.40   1,710

January 31, 2010                    $  6.54 $  5.73 $  5.69 $  4.74   1,548
April 30, 2010                         6.64    5.96    6.02    5.11   1,374
July 31, 2010                          6.49    5.76    5.93    4.82   1,067
October 31, 2010                       6.47    5.82    5.64    5.10   1,396

  *As reported on the New York Stock Exchange.

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