JAPAN
Smaller Capitalization
Fund, Inc.
SEMI-ANNUAL REPORT
AUGUST 31, 2002
October 25, 2002
JAPAN SMALLER CAPITALIZATION FUND, INC.
To Our Shareholders:
We present the Semi-Annual Report of the Japan Smaller Capitalization Fund,
Inc. (the "Fund") for the six months ended August 31, 2002. The Net Asset Value
per share ("NAV") of the Fund increased by 21.8% during the six months. The
closing market price of the Fund on August 31, 2002, on the New York Stock
Exchange was $7.29 representing a premium of 2.1% to the NAV of $7.14. The net
assets of the Fund amounted to $113,114,771 on August 31, 2002.
The TOPIX, consisting of all companies listed on the Tokyo Stock Exchange
(the "TSE") First Section, increased by 4.8% and the Nikkei Average Index (a
price-weighted index of 225 leading stocks on the TSE) increased by 2.5%, in
United States ("U.S.") dollar terms, during the six months ended August 31,
2002. The Nikkei OTC Average Index (the "OTC Index"), a price-weighted index of
the quotations of the OTC registered stocks, and the Index of the Japan
Securities Dealers Association Quotation System (the "JASDAQ Index"), a
capitalization-weighted index of all OTC stocks, increased by 16.0% and 11.4%,
respectively, in U.S. dollar terms, during the same period. The Japanese yen
(the "Yen") appreciated by 11.4% against the U.S. dollar during the six months.
The Fund outperformed the OTC Index and the JASDAQ Index by 5.9
percentage points and 10.4 percentage points, respectively, during the six
months ended August 31, 2002. The overweight position and effective stock
selection in the Consumption sector overweighed some negative results from the
overweight position in the Electronics sector.
The NAV of the Fund decreased by 6.7%; for the quarter ended August 31,
2002. During the same period, the TOPIX, the Nikkei Average Index, the OTC Index
and the JASDAQ Index declined by 12.1%, 14.5%, 5.0% and 7.5% respectively, in
U.S. dollar terms. The Yen appreciated by 4.3% during the same period. The Fund
underperformed the OTC Index by 1.7 percent-
age points and outperformed the JASDAQ Index by 0.8 percentage points. While
the overweight position and stock selection in the Consumption sector worked
positively, the overweight position in the Electronics sector and stock
selection results in the Information/System sector had negative effects on the
relative performance.
The Portfolio
The Fund's equity exposure decreased from 99.3% at February 28, 2002 to
99.0% at August 31, 2002. The Fund was diversified into 91 issues, of which 63
issues were OTC stocks, 19 were other smaller capitalization stocks and 9 were
TSE First Section stocks, comprising 64.7%, 23.6% and 10.7% respectively, of
net assets on August 31, 2002.
Japanese Economy and Stock
Market Outlook
The OTC Index achieved a modest gain of 2.8% in local currency terms for
the six months ended August 31, 2002.
In mid-February 2002, the Japanese OTC stock market entered a strong
recovery phase in tandem with an explosive rebound in the TOPIX, which was
triggered by the tightening of short selling regulations in Japan and was
later helped by an unexpectedly strong recovery in U.S. economic growth.
External factors raised hopes of a turnaround in Japan's industrial production
cycle and better prospects for Japanese exporters. Signs that worldwide
semiconductor and personal computer sales were starting to bottom out also
provided some support.
The Japanese OTC stock market maintained its upward momentum until early
June, driven mainly by expectations of a cyclical turnaround in the economy,
based on improvements in industrial production and lower inventory levels.
Corporate financial results were released from mid-April through late May.
Although the historical results were poor, projections for fiscal year 2002
indicated a strong rebound in earnings among certain sectors. The OTC Index
recorded an eleven-month high in early June, reflecting these improvements in
fundamentals.
However, positive momentum later gave way to deteriorating investor
sentiment caused by the weakness of the U.S. stock market, owing to concerns
about the sustainability of the U.S. economic recovery and the dollar's
depreciation against the Yen to the 120 Yen to one U.S. dollar level. Although
the domestic economic factors indicated a cyclical turnaround, investors began
to focus on the unfavorable currency trend and the likely impact that a U.S.
economic slowdown would have on the nascent export-driven recovery in Japan.
In July and August, the weakness in the U.S. stock markets, the result of
growing investor skepticism following a series of accounting fraud allegations
against major American companies, further aggravated sentiment in the Japanese
stock market. Cautious business projections issued by some of the leading
technology companies, reflecting the recent slow down in the global technology
markets also undermined investor sentiment. In fact, leading U.S. and Asian
semiconductor manufacturers have announced reductions in capital expenditures,
which has pulled the prices of Japanese semiconductor production equipment
stocks down further.
Although Prime Minister Koizumi's reform plans have been proceeding
gradually, with modest progress in postal service privatization and road
corporation reforms, the market remained indifferent given their lack of any
immediate impact on the economy. The Japanese OTC stock market entered another
downturn in June that has continued through the end of August and has erased
most of the gains made earlier in the year.
Outlook and Future Strategy
Latest Gross Domestic Product ("GDP") figures, showing a 1.9% annualized
quarter-on-quarter growth rate, confirmed that a cyclical recovery was underway
in the second quarter, led mostly by net exports. As exports made the dominant
contribution to GDP, the lackluster U.S. economic outlook has cast a shadow
over the domestic economy as well. Exacerbating this deteriorating outlook for
the economy, industrial production for July recorded a second consecutive
decline on a month-on-month basis, while inventory levels increased slightly.
Hence, recent evidence indicates that the Japanese economy seems to be
stalling. However, the Fund never expected the path to recovery to be
straightforward, since the completion of inventory adjustment has been the
leading force. Although we have not discarded our moderate recovery
expectations, the macro-economic environment is likely to weigh on the stock
market in the absence of any support from the Japanese government.
The basic fundamentals surrounding the Japanese OTC stock market have not
changed drastically, but the psychological framework has deteriorated
substantially. Accounting scandals in the U.S. have given way to concerns
about earnings expectations, and corporate scandals involving a number of
leading Japanese industry sectors have undermined confidence in corporate
management in general. To complicate matters further, changes in the tax
schedule in Japan for capital gains for individual investors are so complex
that the authorities are failing to attract more retail investors to the
stock market. Furthermore, the question of whether the U.S. will initiate a
war against Iraq continues to weigh heavily on the world financial markets.
Consequently, we do not expect any immediately supportive developments
for the stock market, although valuation levels have become even more
attractive, as the prospective price earnings ratio of the Japanese OTC stock
market has shrunk to around 17 times and the price book ratio has fallen to
less than 1.3 times. We still believe the Japanese stock market offers some
upside potential from the current depressed level once confidence in the
earnings recovery is restored. Therefore, taking too pessimistic a view on the
stock market from the current level is just as risky as being too optimistic.
For the stock market to rise beyond a mere temporary rebound from the current
depressed level, the economy needs to escape the current deflationary
environment.
The continuing severe correction in the stock market might offer further
opportunities for re-balancing the Funds at the individual stock level. The
market correction is now creating opportunities for bottom fishing, so we will
continue in our efforts to identify stocks that are over-sold compared with
their fundamentals.
Effective October 1, 2002, the Nikkei OTC Index has been re-named the
Nikkei JASDAQ Stock Price Average. Future shareholders reports will use that
name. This change has no impact on the management of the Fund.
We appreciate your continuing support of your Fund.
Sincerely,
Kazuhiko Hama
President
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SHAREHOLDERS ACCOUNT INFORMATION
Shareholders whose accounts are held in their own name may contact the
Fund's transfer agent, Equiserve Trust Company, N.A. at (800) 426-5523 for
information concerning their accounts.
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INTERNET WEBSITE
NAM-U.S.A. has established an Internet website which highlights its
history, investment philosophy and process and products, which includes the
Fund. The Internet web address is www.nomura-asset.com. We invite you to view
the Internet website.
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JAPAN SMALLER CAPITALIZATION FUND, INC.
FUND HIGHLIGHTS-AUGUST 31, 2002
(Unaudited)
KEY STATISTICS
Net Assets .............................................. $113,114,771
Net Asset Value per Share ............................... $7.14
Closing NYSE Market Price ............................... $7.29
Percentage Change in Net Asset Value per Share*+ ........ 21.8%
Percentage Change in NYSE Market Price*+................. 31.8%
MARKET INDICES
Percentage change in market indices:*
YEN U.S.
--- ----
TOPIX ................................................... (7.1%) 4.8
Nikkei Average .......................................... (9.1%) 2.5%
JASDAO .................................................. (1.2%) 11.4%
Nikkei OTC Average ...................................... 2.8% 16.0%
*From March 1, 2002 through August 31, 2002.
+Reflects the percentage change in share price
ASSET ALLOCATION
Japanese Equities
OTC Stocks ........................................... 64.7%
Other Smaller Capitalization Stocks .................. 23.6
TSE First Section Stocks ............................. 10.7
Cash and Cash Equivalents ............................... 1.0
------
Total Investments ...................................... 100.0
Liabilities in Excess of Other Assets, Net .............. 0.0
------
Net Assets ........................................... 100.0%
======
INDUSTRY DIVERSIFICATION % of % of
Net Assets Net Assets
---------- ----------
Retail ............................. 20.6 Electric ........................... 3.6
Chemicals and Pharmaceuticals ...... 12.5 Banks and Finance .................. 3.4
Electronics ........................ 9.4 Restaurants ........................ 3.4
Information and Software ........... 9.1 Machinery and Machine Tools ........ 2.8
Miscellaneous Manufacturing......... 8.6 Automotive Equipment and Parts ..... 2.2
Services ........................... 8.3 Real Estate and Warehouse .......... 2.1
Food Manufacturing ................. 6.4 Textiles and Apparel ............... 1.3
Wholesale .......................... 4.7 Telecommunications ................. 0.6
TEN LARGEST EQUITY HOLDINGS BY MARKET VALUE
Market % of
Security Value Net Assets
-------- ------ ----------
Chiyoda Co., Ltd. .......................................... $4,410,064 3.9
T & K Toka Co., Ltd. ....................................... 3,621,437 3.2
Cawachi Limited............................................. 3,402,518 3.0
Yahoo Japan Corp. .......................................... 3,182,756 2.8
Plenus Co., Ltd. ........................................... 3,085,252 2.7
Toys R Us-Japan, Ltd........................................ 2,791,100 2.5
UMC Japan .................................................. 2,767,145 2.5
Sanyo Electric Credit Co., Ltd. ............................ 2,732,455 2.4
Kuroda Electric Co., Ltd. .................................. 2,730,392 2.4
Tow Co., Ltd. .............................................. 2,492,401 2.2
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS
August 31, 2002
(Unaudited)
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
EQUITY SECURITIES
Automotive Equipment and Parts
Exedy Corporation .................................. 172,400 $1,702,398 $1,101,769 1.0
Automobile clutches
Nippon Cable Systems Inc. .......................... 115,000 1,054,173 1,031,238 0.9
Control cables
SPK Corporation .................................... 45,600 590,497 378,192 0.3
Replacement parts ---------- ---------- ------
Total Automotive Equipment and Parts ............... 3,347,068 2,511,199 2.2
---------- ---------- ------
Banks and Finance
Aiful Corporation .................................. 17,050 1,440,881 1,119,774 1.0
Consumer loans
Sanyo Electric Credit Co., Ltd. .................... 106,400 3,582,788 2,732,455 2.4
Finance ---------- ---------- ------
Total Banks and Finance ............................ 5,023,669 3,852,229 3.4
---------- ---------- ------
Chemicals and Pharmaceuticals
Arisawa Manufacturing Co., Ltd. .................... 71,700 1,212,386 1,388,540 1.2
Glassfibers and insulating resins
C. Uyemura & Co., Ltd. ............................. 133,000 2,625,313 2,407,696 2.1
Chemicals
FP Corporation 22,500 956,479 545,615 0.5
Polystyrene and other synthetic resin foodware
Konishi Co., Ltd. .................................. 127,800 1,423,557 1,162,161 1.0
Adhesives and construction sealants
Mandom Corporation ................................. 78,000 1,090,432 1,503,979 1.3
Cosmetic products
Matsumoto Yushi-Seiyaku Co., Ltd. .................. 86,000 1,607,793 1,129,626 1.0
Analgesic anti-inflammatory agents
Milbon Co., Ltd. ................................... 50,100 1,668,844 1,645,182 1.5
Hair-care products for beauty salons
Shizuokagas Co., Ltd. .............................. 238,000 709,479 749,480 0.7
Natural gas supplier
T & K Toka Co., Ltd. ............................... 126,500 3,521,332 3,621,437 3.2
Ink for printing ---------- ---------- ------
Total Chemicals and Pharmaceuticals 14,815,615 14,153,716 12.5
---------- ---------- ------
Electric
Citizen Electronics Co., Ltd 21,700 1,267,964 1,609,708 1.4
Electric parts
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS-Continued
August 31, 2002
(Unaudited)
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
Eneserve Corporation ................................................ 28,000 $ 688,269 $1,148,150 1.0
Electric generation system for supermarkets
Mirai Industry Co., Ltd. ............................................ 201,000 2,316,532 1,353,934 1.2
Plastic molded electric materials --------- ---------- -----
Total Electric ...................................................... 4,272,765 4,111,792 3.6
---------- ---------- -----
Electronics
Chiyoda Integre Co., Ltd. ........................................... 81,500 977,660 1,191,980 1.0
Electronic components
Cosel Co., Ltd. ..................................................... 59,000 1,698,071 1,018,398 0.9
Electrical machinery
Digital Electronics Corp. ........................................... 55,000 1,221,737 842,841 0.8
Electronic components
Fuji Electric Industry Co., Ltd. .................................... 93,000 993,449 383,699 0.3
Electronic parts
Fukuda Denshi Co. ................................................... 39,000 961,762 889,909 0.8
Medical electronic equipment
Kuroda Electric Co., Ltd. ........................................... 119,000 1,756,571 2,730,392 2.4
Material and components
Miyota Co., Ltd. .................................................... 44,000 706,365 270,450 0.2
Watches, quartz oscillators and electronic image equipment
Nagano Keiki Co., Ltd. .............................................. 53,890 988,924 544,504 0.5
Measuring instruments
Roland Corporation .................................................. 3,400 88,779 32,493 0.0
Electronic keyboard for musical instruments
UMC Japan+ .......................................................... 1,580 3,421,715 2,767,145 2.5
Semiconductor memory chips ----------- ---------- -----
Total Electronics ................................................... 12,815,033 10,671,811 9.4
----------- ---------- -----
Food Manufacturing
Ariake Japan Co., Ltd. .............................................. 32,300 739,366 1,055,227 0.9
Natural seasonings
Iwatsuka Confectionery Co., Ltd. .................................... 39,100 384,367 325,929 0.3
Rice crackers
Kaklyasu Honten Co., Ltd. ........................................... 62,000 674,732 777,839 0.7
Processed meat products, fresh meats, and side dishes
Origin Toshu Co., Ltd. .............................................. 39,600 587,625 753,555 0.7
Delicatessen items and lunch boxes
Ozeki Co., Ltd. ..................................................... 12,000 1,132,929 373,848 0.3
Supermarket chain
Plenus Co., Ltd. .................................................... 78,800 2,275,644 3,085,252 2.7
Japanese lunch-boxes
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS-Continued
AUGUST 31, 2002
(Unaudited)
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
Raise Co., Ltd. .................................................. 114,000 $1,606,660 $844,693 0.8
----------- ---------- -----
Supermarket chain
Total Food Manufacturing ......................................... 7,401,323 7,216,343 6.4
----------- ---------- -----
Information and Software
Argo Graphics Inc. ............................................... 36,000 896,182 591,083 0.5
Computer aided design software
CAC Corp. ........................................................ 147,000 2,325,072 1,113,965 1.0
Information technology services
Celartem Technology Inc.+ ........................................ 93 368,928 767,398 0.7
Software development
Fuji Soft ABC Inc. ............................................... 13,300 836,138 404,269 0.4
Computer systems development
Fujitsu Broad Solution & Consulting Inc. ......................... 44,500 1,794,921 348,836 0.3
Business application software
Konami Computer Entertainment Tokyo, Inc. ........................ 133,760 1,556,516 1,880,850 1.7
Video games software
Trend Micro Inc. ................................................. 19,500 1,488,481 508,988 0.4
Computer software, anti-virus server
Works Applications Co., Ltd.+ .................................... 114 1,348,540 1,478,213 1.3
Software development
Yahoo Japan Corp.+ ............................................... 126 11,237,066 3,182,756 2.8
Internet services ---------- --------- ----
Total Information and Software ................................... 21,851,844 10,276,358 9.1
---------- --------- ----
Machinery and Machine Tools
Disco Corp. ...................................................... 15,500 1,151,460 673,431 0.6
Dicing saws for semiconductors
Suruga Seiki Co., Ltd. ........................................... 20,000 540,974 119,564 0.1
Industrial mechanical equipment
THK Co., Ltd. .................................................... 78,700 3,419,652 1,268,318 1.1
Linear motion systems for industrial machines
Yushin Precision Equipment Co., Ltd. ............................. 44,800 2,096,872 1,135,419 1.0
Injection molding related machinery ---------- --------- ----
Total Machinery and Machine Tools ................................ 7,208,958 3,196,732 2.8
---------- --------- ----
Miscellaneous Manufacturing
Central Glass Co., Ltd. .......................................... 336,000 1,759,202 1,754,052 1.5
Glass products
Eidai Kako Co., Ltd. ............................................. 144,000 1,085,863 454,679 0.4
Synthetic resin processed products
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS-Continued
August 31, 2002
(Unaudited)
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
Fuji Seal, Inc. .................................................. 19,700 $542,645 $854,250 0.8
Packing materials
Fujimi Inc. ...................................................... 64,700 1,951,159 1,389,172 1.2
Polishing materials for silicone wafers
Hoden Seimitsu Kako Kenkyusho Co., Ltd. .......................... 62,000 1,015,688 417,632 0.4
Aluminum extruding molds
Mani, Inc. ....................................................... 7,000 126,984 113,165 0.1
Medical goods and equipment
Nichiha Corporation............................................... 194,600 1,739,791 1,835,154 1.6
Ceramic exterior walls and fiberboards
Nippon Kodoshi Corp. ............................................. 180,000 2,785,484 1,197,322 1.1
Paper for electric insulation
Suruga Co., Ltd. ................................................. 67,800 1,009,472 1,427,188 1.3
Daily necessities, novelties and promotional items
Tomy Co., Ltd. ................................................... 24,100 511,456 273,741 0.2
Toys ---------- --------- ----
Total Miscellaneous Manufacturing................................. 12,527,744 9,716,355 8.6
---------- --------- ----
Real Estate and Warehouse
Nippon Kanzai Co., Ltd. .......................................... 96,580 1,303,227 1,675,197 1.5
Comprehensive building maintenance
Recrm Research Co., Ltd.+ ........................................ 945 1,172,070 684,293 0.6
Building management ---------- --------- ----
Total Real Estate and Warehouse................................... 2,475,297 2,359,490 2.1
---------- --------- ----
Restaurants
Saint Marc Co., Ltd. ............................................. 34,700 961,983 1,086,886 1.0
Restaurants and bakery shop chain
Saizeriya Co., Ltd. .............................................. 78,260 1,995,846 1,393,676 1.2
Italian restaurant chain
Watami Food Service Co., Ltd. .................................... 147,350 2,379,921 1,370,957 1.2
Restaurant chain ---------- --------- ----
Total Restaurants................................................. 5,337,750 3,851,519 3.4
---------- --------- ----
Retail
Cwachi Limited.................................................... 44,900 2,491,417 3,402,518 3.0
Drug store chain
Chiyoda Co., Ltd. ................................................ 468,900 3,159,376 4,410,064 3.9
Specialty store chain
Himaraya Co., Ltd. ............................................... 200 2,504 446 0.0
Sporting goods
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS-Continued
August 31, 2002
(Unaudited)
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
Kyoto Kimono Yuzen Co., Ltd. ..................................... 577 $2,014,182 $1,749,000 1.6
Japanese traditional kimonos
Nissen Co., Ltd. ................................................. 54,300 438,483 1,005,852 0.9
Mail-order business
Nitori Co., Ltd. ................................................. 28,200 1,069,315 1,172,972 1.0
Home furnishings
Otsuka Kagu, Ltd. ................................................ 46,800 3,224,588 1,363,432 1.2
Furniture
Prime Network Inc. ............................................... 440 1,037,807 1,248,516 1.1
TV shopping business
Toys R Us-Japan, Ltd. ............................................ 143,500 3,983,570 2,791,100 2.5
Toy chain stores
Uoriki Co., Ltd. ................................................. 113,600 1,914,960 2,046,933 1.8
Fresh fish and sushi stores
USS Co., Ltd. .................................................... 50,000 1,147,997 2,180,777 1.9
Automobile auction
Yamada Denki Co., Ltd. ........................................... 27,100 2,053,113 1,939,544 1.7
Consumer electronics ---------- --------- ----
Total Retail...................................................... 22,537,312 23,311,154 20.6
---------- --------- ----
Services
Arrk Corporation.................................................. 11,000 376,840 435,313 0.4
Product testing
Bellsystem 24, Inc. .............................................. 3,100 1,015,540 666,905 0.6
Telemarketing
Future System Consulting Corporation.............................. 192 1,081,561 855,202 0.7
Information system and consulting services
Nichii Gakkan Company............................................. 29,600 1,434,734 1,669,852 1.5
Hospital administration services
Sodexho Japan Co., Ltd. .......................................... 157,000 3,331,323 1,117,038 1.0
Nursing home caterer
Toei Animation Co., Ltd. ......................................... 12,000 634,388 702,227 0.6
Animated cartoon movies production
Tow Co., Ltd. .................................................... 214,500 1,653,845 2,492,401 2.2
Entertainment
Weathernews Inc. ................................................. 147,300 1,816,185 1,467,233 1.3
Custom weather forecasting services ---------- --------- ----
Total Services.................................................... 11,344,416 9,406,171 8.3
---------- --------- ----
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS-Continued
August 31, 2002
(Unaudited)
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
Telecommunications
Nippon Antenna Co., Ltd. ......................................... 57,000 $ 945,374 $ 499,137 0.5
Communication related equipment
Yozan Inc.+....................................................... 279 1,138,532 121,922 0.1
---------- --------- ----
Mobile telecommunication equipment
Total Telecommunications.......................................... 2,083,906 621,059 0.6
---------- --------- ----
Textiles and Apparel
United Arrows Limited............................................. 53,800 972,762 1,494,885 1.3
---------- --------- ----
Casual clothes
Wholesale
ArcLand Sakamoto Co., Ltd. ....................................... 125,400 1,502,668 1,647,152 1.5
Home appliances
C Two-Network Co., Ltd. .......................................... 22,000 844,123 681,682 0.6
Processed foods
Hakudo Co., Ltd. ................................................. 115,000 555,909 455,100 0.4
Metal products
Hakuto Co., Ltd. ................................................. 181,300 2,815,163 2,124,949 1.9
Electric parts
Shinwa Co., Ltd. ................................................. 11 105 94 0.0
Industrial machinery
Toba, Inc. ....................................................... 67,000 1,015,393 375,717 0.3
Trading company for control systems ------------ ----------- ------
Total Wholesale................................................... 6,733,361 5,284,694 4.7
------------ ----------- ------
TOTAL INVESTMENTS IN EQUITY SECURITIES............................ 140,748,823 112,035,507 99.0
------------ ----------- ------
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS-Continued
August 31, 2002
(Unaudited)
% of
Principal Market Net
Amount Cost Value Assets
------ ---- ----- ------
INVESTMENTS IN SHORT-TERM SECURITIES
Wachovia Grand Cayman interest bearing call
account 1.81% due 9/3/02....................... $1,100,000 $ 1,100,000 $1,100,000 1.0
----------- ---------- -----
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES....... 1,100,000 1,100,000 1.0
----------- ---------- -----
INVESTMENTS IN FOREIGN CURRENCY
Hong Kong Shanghai Bank-Tokyo
Non-interest bearing account................... JPY 888,675 7,511 7,483 0.0
------------ ---------- -----
TOTAL INVESTMENTS IN FOREIGN CURRENCY............ 7,511 7,483 0.0
------------ ---------- -----
TOTAL INVESTMENTS................................ 141,856,334 113,142,990 100.0
------------ ---------- -----
LIABILITIES IN EXCESS OF OTHER ASSETS, NET....... (30,247) (28,219) 0.0
------------ ---------- -----
NET ASSETS....................................... $141,826,087 $113,114,771 100.0
============ ============ =====
+Non-income producing security.
Portfolio securities and foreign currency holdings were translated
at the following exchange rate as of August 31, 2002.
Japanese Yen JPY (Yen)118.76 = $1.00
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2002
(Unaudited)
ASSETS:
Investments in securities, at market value (cost-$140,748,822)........................... $112,035,507
Investments in short-term securities, at market value (cost-$1,100,000).................. 1,100,000
Investments in foreign currency, at market value (cost-$7,511)........................... 7,483
Cash..................................................................................... 14,780
Receivable for dividends and interest, net of withholding taxes.......................... 127,442
Prepaid expenses......................................................................... 16,636
------------
Total Assets................................................................... 113,301,848
------------
LIABILITIES:
Accrued management fee................................................................... 94,535
Other accrued expenses................................................................... 92,542
------------
Total Liabilities.............................................................. 187,077
------------
NET ASSETS:
Capital stock (par value of 15,846,384 shares of capital stock outstanding, authorized
100,000,000, par value $0.10 each)..................................................... 1,584,638
Paid-in capital.......................................................................... 168,353,585
Accumulated net realized loss on investments and foreign currency transactions........... (27,745,012)
Unrealized net depreciation on investments and foreign exchange.......................... (28,711,316)
Accumulated net investment loss.......................................................... (367,124)
------------
Net Assets..................................................................... $113,114,771
------------
Net asset value per share................................................................ $7.14
============
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 31, 2002
(Unaudited)
INCOME:
Dividend income (less $94,745 withholding taxes)...................... $536,886
Interest income....................................................... 7,835
-------
Total Income.................................................... $544,721
------------
EXPENSES:
Management fee........................................................ 582,215
Custodian fees........................................................ 92,000
Legal fees............................................................ 37,720
Registration fees..................................................... 33,545
Auditing and tax reporting fees....................................... 25,944
Shareholder reports................................................... 22,632
Directors' fees and expenses.......................................... 20,240
Annual meeting expenses............................................... 11,592
Transfer agency fees.................................................. 10,120
Miscellaneous......................................................... 4,968
Insurance............................................................. 1,104
-------
Total Expenses.................................................. 842,080
------------
INVESTMENT LOSS-NET................................................... (297,359)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Realized gain/loss on investments and foreign currency transactions:
Net realized loss on investments...................................... (2,583,541)
Net realized gain on foreign exchange................................. 47,817
------------
Net realized loss on investments and foreign exchange................. (2,535,724)
Change in net unrealized depreciation on translation of foreign currency
and other assets and liabilities denominated in foreign currency.... 16,354,102
Change in net unrealized depreciation on investments.................. 6,778,283
------------
Net realized and unrealized gain on investments and foreign exchange.. 20,596,661
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $20,299,302
============
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Six For the Year
Months Ended Ended
August 31, 2002 February 28, 2002
(Unaudited) (Audited)
----------- ---------
FROM INVESTMENT ACTIVITIES:
Net investment loss.................................................... $(297,359) $(912,515)
Net realized loss on investments....................................... (2,583,541) (14,623,705)
Net realized gain/(loss) on foreign exchange........................... 47,817 (7,707,669)
Change in net unrealized appreciation/(depreciation) on investments
and foreign exchange................................................. 23,132,385 (2,947,753)
------------- ------------
Increase/(decrease) in net assets derived from investment activities
and net increase/(decrease) in net assets............................ 20,299,302 (26,191,642)
------------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Long Term Capital Gains ($0.00 and $0.08 per share, respectively)...... 0 (1,267,704)
------------- ------------
Decrease in net assets derived from distributions to shareholders...... 0 (1,267,704)
------------- ------------
Net increase (decrease) in net assets.................................. 20,299,302 (27,459,346)
------------- ------------
NET ASSETS:
Beginning of period.................................................... 92,815,469 120,274,815
------------- ------------
End of period (including accumulated net investment losses of
$367,124 and $69,765 respectively)................................... $113,114,771 $92,815,469
============= ============
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 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 issued to its
shareholders of record as of the close of business on October 25, 1999
nontransferable Rights to subscribe for up to an aggregate of 3,804,940 shares
of Common Stock of the Fund at a rate of one share of Common Stock for three
Rights held ("Primary Subscription"). The Fund had the ability to increase the
number of shares subscribed for in this offering by up to 25% of the Primary
Subscription, or an additional 951,235 shares, to honor record date
shareholder requests to purchase more shares. During November 1999, the Fund
issued a total of 4,458,565 shares of Common Stock on exercise of such Rights
at the subscription price of $11.99 per share, compared to a net asset value
per share of $16.20 and a market value per share of $12.6875. Additionally, a
sales load of 3.75% was charged to each share issued. Right offering costs of
approximately $546,000 and the sales load were charged directly against the
proceeds of the Rights Offering. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of Securities-Investments traded in the over-the-counter
market are valued at the last reported sales price as of the 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 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. Short-term debt securities which mature in 60 days
or less are valued at amortized cost if their original maturity at the date of
purchase was 60 days or less, or by amortizing their value on the 61st day
prior to maturity if their term to maturity at the date of purchase exceeded
60 days. Securities and other assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund.
(b) Foreign Currency Transactions - Transactions denominated in Japanese
yen are recorded in the Fund's records at the current prevailing rate at the
time of the transaction. Asset and liability accounts that are denominated in
Yen are adjusted to reflect the current exchange rate at the end of the
period. Transaction gains or losses resulting from changes in the exchange
rate during the reporting period or upon settlement of foreign currency
transactions are included in operations for the current period.
The net assets of the Fund are presented at the exchange rate and market
values at the end of the period. The Fund isolates that portion of the change
in unrealized appreciation (depreciation) included in the statement of
operations arising as a result of changes in Yen rates at August 31, 2002 on
investments and other assets and liabilities. Net realized foreign exchange
gains or losses includes gains or losses arising from sales of portfolio
securities, sales and maturities of short-term securities, currency gains or
losses realized between the trade and settlement dates on securities
transactions, 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.
(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 date and
interest income is recorded on the accrual basis. Realized gains and losses on
the sale of investments are calculated on the identified cost basis.
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -Continued
Distributions from net investment income and net realized gains are
determined in accordance with Federal income tax regulations, which may differ
from generally accepted accounting principles. 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 gains for financial reporting purposes, but not for tax
purposes, are reported as distributions in excess of net realized gains.
(d) Income Taxes - A provision for United States income taxes has not
been made since it is the intention of the Fund 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.
Under Japanese tax laws, a withholding tax is imposed on dividends at a
rate of 15% and on interest at a rate of 10% and such withholding taxes are
reflected as a reduction of the related revenue. There is no withholding tax
on realized gains.
(e) Capital Account Reclassification - For the year ended February 28,
2002, the Fund's accumulated net realized loss was decreased by $205,936 and
paid in capital was decreased by $1,111,592, with an offsetting decrease in
accumulated net investment gross of $905,656. This adjustment was primarily
the result of the reclassification of foreign currency gains and
reclassification of the net operating loss.
(f) Use of Estimates in Financial Statement Preparation - The preparation
of financial statements in accordance with generally accepted accounting
principles 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 United States. 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.
2. Management Agreement and
Transactions With Affiliated Persons
Nomura Asset Management U.S.A. Inc. (the "Manager") acts as the manager
of the Fund pursuant to a management agreement. Under the 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. (the
"Investment Adviser"), to act as investment adviser for 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,
..90% of the Fund's average weekly net assets in excess of $100 million but not
in excess of $175 million and .80% of the Fund's average weekly net assets in
excess of $175 million. For services performed under the Investment Advisory
Agreement, the Investment Adviser receives a monthly fee from the Manager at
the annual rate of .50% of the Fund's average weekly net assets not in excess
of $50 million, .45% of the Fund's average weekly net assets in excess of $50
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)-Continued
million but not in excess of $100 million, .40% of the Fund's average weekly
net assets in excess of $100 million but not in excess of $175 million and
..35% of the Fund's average weekly net assets in excess of $175 million. Under
the Management Agreement, the Fund paid or accrued fees to the Manager of
$582,215 for the six months ended August 31, 2002. Under the Investment
Advisory Agreement, the Manager informed the Fund that the Investment Adviser
earned fees of $262,999 for the six months ended August 31, 2002. At August
31, 2002, the fee payable to the Manager, by the Fund, was $94,535.
Certain Officers and/or Directors of the Fund are officers and/or
directors of the Manager. The Nomura Securities International Co., Ltd. (the
Manager's indirect parent) and affiliates earned $2,571 in commissions on the
execution of portfolio security transactions for the six months ended August
31, 2002. The Fund pays each Director not affiliated with the Manager an
annual fee of $5,000 plus $500 per meeting attended, together with such
Director's actual expenses related to attendance at meetings. Such fees and
expenses for unaffiliated Directors aggregated $20,240 for the six months
ended August 31, 2002.
3. Purchases and Sales of Investments
Purchases and sales of investments, exclusive of investments in foreign
currencies and short-term securities, for the six months ended August 31, 2002
were $13,516,549 and $14,174,508, respectively.
As of August 31, 2002, net unrealized depreciation on investments
exclusive of investments in foreign currency and short-term securities for
Federal income tax purposes was $28,713,316 of which $12,362,982 related to
appreciated securities and $41,076,298 related to depreciated securities. The
aggregate cost of investments, exclusive of investments in foreign currencies
and short-term securities of $1,107,511 at August 31, 2002 for Federal income
tax purposes was $140,748,823. In accordance with U.S. Treasury regulations,
the Fund elected to defer $69,765 of net realized foreign currency losses and
$1,372,594 of net realized capital losses arising after October 31, 2001. Such
losses are treated for tax purposes as arising on March 1, 2002. The Fund has
a capital loss carryforward as of February 28, 2002 of approximately
$22,683,799 which expires February 28, 2010.
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS-Continued
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for a share of common stock outstanding throughout the period.
For the Year Ended
For the Six -----------------------------------------------
Months ended February 28 February 29 February 28
August 31, 2002 --------------- ------------ --------------
(Unaudited) 2002 2001 2000 1999 1998
----------- ---- ---- ---- ---- ----
Net asset value, beginning of period.......... $5.86 $7.59 $16.39 $5.86 $4.85 $6.44
---------- -------- --------- --------- -------- --------
Rights Offering costs*........................ -- -- -- (0.16) -- --
---------- -------- --------- --------- -------- --------
Net investment loss......................... (0.02) (0.06) (0.09) (0.11)@ (0.04) (0.06)
Net realized and unrealized gain (loss)
on investments and foreign currency....... 1.30 (1.59) (7.89) 11.99@ 1.06 (1.45)
---------- -------- --------- --------- -------- --------
Total from investment operations............ 1.28 (1.65) (7.98) 11.88@ 1.02 (1.51)
Distributions to shareholders from:
Net realized capital gains.................. -- (0.08) (0.82) -- -- --
Net investment income....................... -- -- -- -- (0.01) (0.08)
---------- -------- --------- --------- -------- --------
Total distributions........................... 0.00 (0.08) (0.82) 0.00 (0.01) (0.08)
Decrease in net asset value due to shares
issued through Rights Offering*............. -- -- -- (1.19) -- --
---------- -------- --------- --------- -------- --------
Net asset value, end of period................ $7.14 $5.86 $7.59 $16.39 $5.86 $4.85
========== ======== ========= ========= ======== ========
Market value, end of period................... $7.29 $5.53 $6.89 $11.00 $6.25 $5.75
Total investment return+...................... 31.8% (18.6%) (31.1%) 76.0% 8.8% (8.5%)
Net asset value total return++................ 21.8% (21.7%) (49.1%) 179.7% 20.9% (23.4%)
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000).......... $113,115 $92,815 $120,275 $259,766 $66,740 $55,246
Operating expenses.......................... 1.51%+ 1.58% 1.33% 1.33% 1.80% 1.71%
Net investment loss......................... (0.54%)+ (0.84%) (0.76%) (0.88%) (0.82%) (1.0%)
Portfolio turnover............................ 12% 38% 78% 50% 35% 29%
+Based on market value per share, adjusted for reinvestment of income dividends and long term capital gain distributions, and
capital share transactions. Total return does not reflect sales commissions.
++Based on net asset value per share, adjusted for reinvestment of income dividends and long term capital gain distributions, and
capital share transactions. Total return does not reflect sales commissions.
* Decrease is due to Rights Offering (see note 1).
+ Annualized.
@ Based on average shares outstanding.
BOARD OF DIRECTORS
William G. Barker, Jr.
Kazuhiko Hama
Chor Weng Tan
Arthur R. Taylor
John F. Wallace
OFFICERS
Kazuhiko Hama, President
Keisuke Haruguchi, Vice President
Kenneth L. Munt, Vice President and Secretary
David G. Stoeffel, Vice President
Rita Chopra-Brathwaite, Treasurer
MANAGER
Nomura Asset Management U.S.A. Inc.
180 Maiden Lane
New York, New York 10038-4936
Internet Address
www.nomura-asset.com
INVESTMENT ADVISOR
Nomura Asset Management Co., Ltd.
1-14-2-Chome Nihonbashi, Chuo-ku,
Tokyo 103-8260, Japan
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
Equiserve Trust Company, N.A.
P.O. Box 43011
Providence, RI 02940-3011
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Canton, Massachusetts 02021
COUNSEL
Sidley Austin Brown & Wood LLP
787 Seventh Avenue
New York, New York 10019
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036-2798
JAPAN SMALLER CAPITALIZATION FUND, INC.
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4936
-------------------------------------------------------------------------------
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.
The accompanying Financial Statements, including the Schedule of Investments,
have not been examined by the Fund's independent accountants,
PricewaterhouseCoopers LLP, and accordingly, they express no opinion thereon.