SOURCE: Japan Equity Fund

September 02, 2009 12:58 ET

The Japan Equity Fund Announces Third Quarter Earnings

JERSEY CITY, NJ--(Marketwire - September 2, 2009) - The Japan Equity Fund, Inc. (NYSE: JEQ), a closed-end management investment company, today announced its performance results for the three months ended July 31, 2009, the third quarter of its 2009 fiscal year.

For the quarter ended July 31, 2009, the Fund incurred a net investment loss of approximately U.S. $233,000 (equivalent to a loss of U.S. $0.02 per share) resulting in net investment income for the nine-month period of approximately U.S. $65,000 (equivalent to income of less than 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. $12,775,000 (equivalent to a gain of U.S. $0.88 per share). As a result, the net realized and unrealized gain were approximately U.S. $9,238,000 (equivalent to a gain of U.S. $0.64 per share) for the nine months ended July 31, 2009.

In comparison, during the quarter ended July 31, 2008, the Fund incurred a net investment loss of approximately U.S. $59,000 (equivalent to a loss of less than U.S. $0.01 per share) resulting in net investment income for the nine-month period of approximately U.S. $376,000 (equivalent to income of U.S. $0.03 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. $9,558,000 (equivalent to a loss of U.S. $0.67 per share). As a result, the net realized and unrealized loss increased to approximately U.S. $19,617,000 (equivalent to a loss of U.S. $1.36 per share) for the nine months ended July 31, 2008.

On July 31, 2009, the total net assets of the Fund were approximately U.S. $86.9 million. The net asset value ("NAV") per share on that date was U.S. $6.01, based on 14,441,200 shares outstanding. In comparison, total net assets on July 31, 2008 were approximately U.S. $105.0 million, equivalent to a NAV of U.S. $7.28 per share, based on 14,431,605 shares outstanding.

Assuming the reinvestment of the U.S. $0.042 per share dividend paid on December 30, 2008, the Fund generated an investment return of 12.04% for the nine months ended July 31, 2009, when measured against the NAV per share of U.S. $5.41 on October 31, 2008, based on 14,431,605 shares outstanding at that time. During the same period, the Fund's benchmark, the Tokyo Stock Price Index (the "TOPIX Index"), increased by 11.64% in U.S. dollar ("USD") terms.

As of July 31, 2009, the Fund had 98.07% of its net assets invested in Japanese common stocks. The remaining net assets were represented by a short-term USD-denominated time deposit (0.04%) and other assets less liabilities (1.89%).

As of September 1, 2009, the Fund's net asset value per share was U.S. $6.29, based on net assets of U.S. $90.9 million. On the same date, the market price of the Fund's shares on the New York Stock Exchange closed at U.S. $5.60, representing a trading discount to net asset value per share of 10.97%.

Market Review and Outlook

During the three-month period from May through July 2009, the return of the TOPIX Index was 13.4% in Japanese yen terms. The Tokyo market remained resilient, despite experiencing a consolidation phase between mid-June and early July. As measured by the TOPIX Index, the market rebounded 37%, from a low of 698 on March 12th to a high of 954 on June 12th, reflecting a bottoming-out of the inventory cycle and a revival of investors' risk-taking appetites, which were exemplified by the sharp rallies in the commodities market as well as emerging equity markets around the world. After the middle of June, the market inevitably entered into a 'reality check' stage, where fundamentals such as economic and profit outlooks began to be assessed with some scrutiny.

The month of July saw impressive relief rallies in equities following second quarter earnings announcements, which began in early July in the United States and followed in Japan. Corporate profits, while still poor, have generally been better than management and analyst forecasts, which were made several months ago as the influence of the dramatic declines in economic activity following the Lehman bankruptcy remained front and center. Optimism that the worst is behind us has finally gained a strong foothold.

(1) Corporate profit outlook

The recent Q1 FY2009 earnings results, though still underway, has clearly confirmed a bottoming out of earnings. As expected, corporate profits experienced a turnaround from huge 1Q 2009 losses and managed to achieve modest 2Q profits, though the year-to-year comparisons remained wretched. According to a corporate profit survey taken by the Nikkei, as of July 31, 2009, excluding financials, 616 companies, covering 68% of the total market capitalization, achieved total recurring profits of 978.3 billion yen in the April-June 2009 quarter, versus recurring losses of 1.5 trillion yen in the January-March 2009 quarter. However, despite the improving results, the figure indicates a 78% decline from the same period last year. We will have to wait until 4Q 2009 results to see a positive year-to-year comparison. Recovering profits are a result of cost cuts, the completion of inventory adjustments and strong sales in China. In addition, fiscal stimulus programs may also have provided a lift, as evidenced by healthy sales of hybrid vehicles and flat-panel TVs, that were heavily incentivized. However, demand in general, including private consumption and business capital expenditures, remains weak in Japan as well as in Europe and the United States. Top-line revenue growth will be a key to a more robust profit outlook in 2010.

(2) Political developments

Prime Minister Aso dissolved the Lower House of the Diet in late July, and the general elections were held on August 30, 2009. The opposition Democratic Party of Japan, or DPJ, experienced a landslide victory over the ruling Liberal Democratic Party (LDP), which had dominated Japanese government activity since the end of World War II with the support of bureaucrats. The DPJ manifest included (1) a 26,000 yen monthly subsidy available for each child through junior high school (15 years of age), (2) free public high school tuition, (3) free highway tolls and the elimination of gasoline taxes, and (4) farm income support through pay-outs of any difference between production costs and market prices of rice and other crops. How these policies will be financed remains a major political issue, and the manifest has drawn criticism from the LDP. The DPJ will now attempt to implement such measures by rationalizing the national budget, with cuts in public works, the use of surplus funds in special accounts and the passage of tax reforms, including the elimination of tax deductions for single-income households and those with other dependents such as children. Perhaps more significant is that the DPJ plans to station 100 lawmakers in various ministries and other government offices to garner greater control of the bureaucratic network. The DPJ's stance is ambiguous with regards to foreign policy, owing to the conflicting views held by party members (who range from socialists to nationalists), and the party has only publicly stated its support for an equal partnership between Japan and the United States as well as closer relationships with Japan's neighbors in Asia. The DPJ also targets a 30% reduction in greenhouse gas emissions between 2005 and 2020, versus the LDP's proposed target of 15%.

(3) Risk factors

Complacency is a major risk factor. Ultra-easy monetary policies and generous fiscal stimulus programs -- including scrap incentives for autos and those adopted by the world's major central banks and governments -- appear to be working well, but we have yet to see any autonomous recovery in private demand within major advanced countries. A premature normalization of monetary policies or any interest rate hikes carry with them the risk of provoking a double dip recession. On the other hand, the overheating equity markets in emerging countries such as China seem to be a shorter-term risk factor.

Due to its relatively large weighting in cyclical stocks, the Tokyo market would be a major beneficiary of any global economic recovery. As we head into a more visible economic recovery phase in late 2009 and 2010, it is reasonable to expect the Tokyo market, with the Nikkei as its proxy, to recover to the 12,000 level, where it was just prior to the Lehman bankruptcy in September 2008, sometime over a six to twelve month time horizon. With regard to sector strategy, we intend to maintain our overweight position in cyclical sectors, including technology, metal & glass and automobiles, based on attractive valuations and earnings recovery forecasts. We intend to remain underweight in public utility, telecommunication and consumption names. We will continue to guide stock selection with an emphasis on fundamental earnings power and strong corporate balance sheets.

The ten largest industry classifications of the Fund's Japanese equity
 investments held as of July 31, 2009 were:

                                          Percentage of
    Industry                               Net Assets
    ------------------------              -------------
1.  Electric Appliances                      15.50%
2.  Transportation Equipment                 11.31
3.  Banks                                     9.66
4.  Wholesale Trade                           6.26
5.  Chemicals                                 6.12
6.  Machinery                                 5.14
7.  Retail Trade                              4.29
8.  Communication                             3.68
9.  Pharmaceutical                            3.31
10. Electric Power & Gas                      3.49

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

                                          Percentage of
    Issue                                   Net Assets
    -----------------------------------   -------------
1.  Mitsubishi UFJ Financial Group, Inc       4.37%
2.  Toyota Motor Corp                         3.49
3.  Honda Motor Co., Ltd                      3.19
4.  Sony Corp                                 2.54
5.  Panasonic Corp                            2.49
6.  Mitsubishi Corp                           1.99
7.  Mitsubishi Heavy Industries Ltd           1.92
8.  The Sumitomo Trust & Banking Co., Ltd     1.85
9.  Fujitsu Ltd                               1.83
10. Sumitomo Corp                             1.79


                                     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, 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
                   ------  -------  ---------  -------  ---------  -------

For the Nine
 Months Ended July
 31, 2009          $   65  $  0.00  $   9,238  $  0.64  $   9,303  $  0.64
                   ======  =======  =========  =======  =========  =======

January 31, 2008  $  (110) $ (0.01) $ (13,753) $ (0.95) $ (13,863) $ (0.96)
April 30, 2008        545     0.04      3,694     0.26      4,239     0.30
July 31, 2008         (59)    0.00     (9,558)   (0.67)    (9,617)   (0.67)
October 31, 2008      369     0.02    (27,303)   (1.89)   (26,934)   (1.87)
                   ------  -------  ---------  -------  ---------  -------

For the Year Ended
 October 31, 2008  $  745  $  0.05  $ (46,920) $ (3.25) $ (46,175) $ (3.20)
                   ======  =======  =========  =======  =========  =======


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

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

January 31, 2008                    $  8.66 $  6.94 $  8.00 $  6.16   1,493
April 30, 2008                         7.95    7.15    7.42    6.37     985
July 31, 2008                          8.42    6.66    7.79    6.62   1,280
October 31, 2008                       7.15    4.93    6.67    4.22   1,684

  *As reported on the New York Stock Exchange.

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