SOURCE: Japan Equity Fund

June 15, 2010 10:59 ET

The Japan Equity Fund Announces Second Quarter Earnings

JERSEY CITY, NJ--(Marketwire - June 15, 2010) - The Japan Equity Fund, Inc. (NYSE: JEQ), a closed-end management investment company, today announced its performance results for the three months ended April 30, 2010, the second quarter of its 2010 fiscal year.

For the quarter ended April 30, 2010, the Fund earned net investment income of approximately U.S. $397,000 (equivalent to income of U.S. $0.02 per share) resulting in net investment income for the six-month period of approximately U.S. $185,000 (equivalent to income 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 was approximately U.S. $4,982,000 (equivalent to a gain of U.S. $0.35 per share). As a result, the net realized and unrealized gain increased to approximately U.S. $7,172,000 (equivalent to a gain of U.S. $0.50 per share) for the six months ended April 30, 2010.

In comparison, during the quarter ended April 30, 2009, the Fund earned net investment income of approximately U.S. $438,000 (equivalent to income of U.S. $0.03 per share) resulting in net investment income for the six-month period of approximately U.S. $298,000 (equivalent to income of U.S. $0.02 per share). In addition, net realized and unrealized losses from investment activities and foreign currency transactions during that same three-month period was approximately U.S. $3,288,000 (equivalent to a loss of U.S. $0.22 per share). As a result, the net realized and unrealized loss increased to approximately U.S. $3,537,000 (equivalent to a loss of U.S. $0.24 per share) for the six months ended April 30, 2009.

On April 30, 2010, the total net assets of the Fund were approximately U.S. $93.8 million. The net asset value ("NAV") per share on that date was U.S. $6.49, based on 14,446,336 shares outstanding. In comparison, total net assets on April 30, 2009 were approximately U.S. $74.3 million, equivalent to a NAV of U.S. $5.15 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 8.59% for the six months ended April 30, 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 6.27% in U.S. dollar ("USD") terms.

As of April 30, 2010, the Fund had 98.62% of its net assets invested in Japanese common stocks. The remaining net assets were represented by a short-term USD-denominated time deposit (0.24%) and other assets less liabilities (1.14%).

As of June 14, 2010, the Fund's NAV per share was U.S. $5.91, based on net assets of U.S. $85.3 million. On the same date, the market price of the Fund's shares on the New York Stock Exchange closed at U.S. $5.16, representing a trading discount to net asset value per share of 12.69%.

Market Review and Outlook

In the six-month period from November 2009 to April 2010, the TOPIX returned 11.59% in Japanese Yen ("JPY") terms. Although the return for the period was remarkably good, the Tokyo market did not post a single-directional rally, but rather it experienced selling pressure on two separate occasions. The first occurred in November, amid a sharp appreciation in the JPY and a glut of stock offering announcements, while the second, in late January, was prompted by concerns about the U.S. economy and the sovereign debt troubles of Greece and other peripheral European countries. The stock market dipped sharply on each occasion, although it quickly digested these concerns and continued to rise, as the recoveries in corporate earnings and the Japanese economy have remained intact, thanks in part to a stabilization of the JPY/USD exchange rate.

We expect the Tokyo market to experience a bumpy ride over the next several months, as market participants will need to determine whether or not the sustainable growth demonstrated so far by Japanese companies is viable in the long term. Indeed, aggregate net income is expected to nearly double in the fiscal year ending March 2011. Our focus will, thus, shift to corporate earnings in the next fiscal year ending March 2012. However, we remain optimistic regarding the fundamentals of Japanese corporations, and below is a review of this and several other issues currently surrounding the Tokyo market:

1.Bright corporate profit outlook

Earnings announcement season kicked off in late April, and results thus far have been mostly better than expected thanks to both a recovery in demand from emerging countries and the improved profitability of Japanese companies. According to the Nikkei, the aggregate net profit of Japan-listed companies is expected to grow by more than 70% in the year ending March 2011.

2.Retail sector

Market participants' views of Japanese retail stocks have improved lately with the gradual extension of an export-driven recovery. Retailers, which have long struggled with deflationary pressure, are likely to experience a bottoming out of the declining same-store sales trend in the near future, as the Japanese people seem to be getting tired of suppressing their consumption. In addition, government cash handouts for households with children aged 15 and under are slated to commence, which will support the consumption of various goods and services, including clothing and education. At the very least, a segment of the retail sector will benefit from these subsidies.

3.Sovereign debt crisis

A logical conclusion to be drawn from the sovereign debt crisis in Europe is that any economic recovery in European countries will likely lag behind that of other nations, including Asian emerging countries, the United States and Japan. The financial burden from the Greek bailout and indications of further delays in Europe's disengagement from its monetary policy will continue to exert pressure on the euro, and that currency is likely to depreciate against both the USD and JPY going forward. Asian currencies are expected to be the strongest, followed by the USD, the JPY and the euro. A primary concern is the negative impact that a weaker euro may have on Japanese corporate profits, although it should prove less significant than a comparable decline of the USD. In the long term, the Greek sovereign debt crisis will lend momentum to calls for greater fiscal discipline in Japan, despite the fact that the country's status as one of the world's largest creditors implies that it is in no position to face a near-term debt crisis of its own.

4.Chinese credit tightening

Economic growth in China, backed by enormous fiscal stimuli after the Lehman bankruptcy, has fuelled a rapid economic recovery, at least in the Far East. There is reason to worry, at this point, about the potential negative impact of tighter credit in China and, to a lesser extent, in other emerging countries such as India and Brazil. In fact, the Chinese equity market has fallen into a correction, owing to fears of tighter credit. Although there has been a lot of froth in the property markets, the same cannot be said of the Chinese stock market, especially as the Shanghai market stands at roughly half of its October 2007 peak, and is trading at an average P/E ratio of 16. Chinese equities, having recovered quickly from the Lehman bankruptcy, are now experiencing a normal correction, one that can be attributed to the move to tighten credit. Chinese authorities, having studied Japan's mistake of fostering and then bursting bubbles in the late 1980's and early 1990's, will not induce a hard landing for the Chinese economy.

With regard to sector strategy, we remain overweight in cyclical sectors such as Materials, Industrials and Consumer Discretionary, and underweight in defensive sectors such as Utilities, Health Care and Consumer Staples. We will maintain neutral weights in Financials and Telecom, and will continue to focus on the beneficiaries of higher private consumption growth and infrastructure developments in Asia.


The ten largest industry classifications of the Fund's Japanese equity
investments held as of April 30, 2010 were:


                                           Percentage of
    Industry                                Net Assets
    -----------------------               -------------
1.  Electric Appliances                       14.86%
2.  Transportation Equipment                   9.93
3.  Banks                                      8.34
4.  Machinery                                  6.14
5.  Wholesale Trade                            5.92
6.  Chemicals                                  5.50
7.  Insurance                                  4.48
8.  Retail Trade                               4.16
9.  Communication                              3.96
10. Land Transportation                        3.83



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       3.96%
2.  Honda Motor Co., Ltd                      3.16
3.  Toyota Motor Corp                         2.72
4.  MS&AD Insurance Group Holdings, Inc       2.33
5.  Mitsubishi Corp                           2.22
6.  Sony Corp                                 1.94
7.  Mitsubishi Heavy Industries, Ltd          1.90
8.  Panasonic Corp                            1.89
9.  NTT Corp                                  1.85
10. Mitsui & Co., Ltd                         1.83



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
April 30, 2010        397     0.02      4,982     0.35      5,379     0.37
                   ------  -------  ---------  -------  ---------  -------

For the Six
 Months Ended
 April 30, 2010    $  185  $  0.01  $   7,172  $  0.50  $   7,357  $  0.51
                   ======  =======  =========  =======  =========  =======


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
April 30, 2010                         6.64    5.96    6.02    5.11   1,374
 

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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