SOURCE: Japan Equity Fund
September 03, 2008 11:06 ET
The Japan Equity Fund Announces Third Quarter Earnings
JERSEY CITY, NJ--(Marketwire - September 3, 2008) - 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, 2008, the third quarter of its
2008 fiscal year.
For 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 was 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.
In comparison, during the quarter ended July 31, 2007, the Fund incurred a
net investment loss of approximately U.S. $181,000 (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. $28,000 (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. $1,825,000 (equivalent
to a gain of U.S.$ 0.14 per share). As a result, net realized and
unrealized gains increased to approximately U.S. $4,912,000 (equivalent to
a gain of U.S. $0.35 per share) for the nine months ended July 31, 2007.
On July 31, 2008, the total net assets of the Fund were approximately U.S.
$105.0 million. The net asset value ("NAV") per share on that date was
U.S. $7.28, based on 14,431,605 shares outstanding. In comparison, total
net assets on July 31, 2007 were approximately U.S. $127.5 million,
equivalent to a NAV of U.S. $8.84 per share, based on 14,431,605 shares
outstanding. The Fund generated a negative investment return of 15.45% for
the nine months ended July 31, 2008, when measured against the NAV per
share of U.S. $8.61 on October 31, 2007, 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"), decreased by 14.42% in U.S.
dollar ("USD") terms.
As of July 31, 2008, the Fund had 98.16% of its net assets invested in
Japanese common stocks. The remaining net assets were represented by a
short-term USD-denominated time deposit (0.08%) and other assets less
liabilities (1.76%).
As of September 2, 2008, the Fund's net asset value per share was U.S.
$6.73, based on net assets of U.S. $97.1 million. At the same date, the
market price of the Fund's shares on the New York Stock Exchange closed at
U.S. $6.17, representing a trading discount to net asset value per share of
8.32%.
Market Review and Outlook
For the quarter ending July 31, 2008, in Japanese yen terms, the equity
part of the Fund had a negative 4.77% return while the TOPIX Index returned
a negative 4.01%.
Relative to the TOPIX, the sector allocation effect on the portfolio was a
negative 0.67%, while the stock selection effect was a negative 0.09%. Our
underweight position in electric power & gas and foods, along with our
overweight position in electrical appliances were the major factors
contributing to the negative sector selection effect. Following the
rebound from the market lows in mid-March, the Tokyo market once again
began to decline beginning in early June on concerns of a deteriorating
global economy. Our sector strategy to overweight cyclicals and underwight
defensive sectors adversly affected the portfolio.
Stock selection in iron & steel and chemicals contributed positively, while
stock selection in transportation equipment and real estate had a negative
impact. Major positive contributors during the quarter were Sumitomo Metal
Industries (iron & steel), Nisshin Seifun Group (foods) and Shin-etsu
Chemical (chemicals), while Tokyo Tatemono (real estate), Xebio (retail
trade) and Denso (transportation equipment) contributed negatively.
Sumitomo Metal Industries advanced as investors anticipated strong orders
for its seamless pipes used in drilling oil wells, following production
increases by oil producers. Nisshin Seifun rose after the producer of flour
and processed foods was expected to regain its earnings momentum with price
hikes and cost cutting efforts. Shin-etsu Chemical advanced after the
manufacturer of polyvinyl chloride and silicon wafers announced a
remarkable earnings outlook for fiscal year 2008 despite the challenging
business environment. A worsening credit situation for non-bank financial
companies and newly emerged real estate companies caused related stocks in
these sectors to drop severely. Tokyo Tatemono was not an exception in this
regard. Xebio declined as the sluggish sales trend of the sporting goods
chain continued due to weak consumer sentiment and was compounded by tough
year-on-year comparisons. Denso fell following a downward revision of its
fiscal year 2008 earnings forecasts. In addition, an announcement by
Toyota, its parent company as well as major customer, that it would be
cutting its worldwide automobile sales target had an adverse impact on its
share price.
During the three-month period from May to July 2008, the return of the
TOPIX was a negative 4.01% in Japanese yen terms. Although the market
remained resilient in May against weak earnings forecasts for the fiscal
year ending March 2009, it declined in June and July due to the fear of
stagflation, triggered by a drastic surge in crude oil prices as well as
continued write-downs and capital injections by U.S. and European financial
institutions. A severe decline in other major equity markets reminded
investors that the Japanese markets were not immune from global economic
trends. The Japanese stock market has performed better against its peers
lately, under the assumption that inflation and policy rate increase risks
were low. Although the resilience of both the Japanese economy and domestic
companies may be true to some extent, higher energy and food prices exert a
negative influence in absolute terms on the Japanese stock market, as they
affect demand in both the domestic market and in those of Japan's major
trading partners, including the United States and emerging Asian countries.
During the quarter, the best performing sectors were pulp & paper,
fishery/agriculture/forestry and pharmaceuticals. The worst performing
sectors were real estate, other financing business and securities.
Defensive sectors performed relatively well due to the concerns of a
deteriorating global economy and looming financial crisis. Within the
TOPIX Index, small capitalization stocks performed relatively well, as
large capitalization auto manufacturers and bank stocks declined. The
Japanese emerging stock exchanges including the TSE Mothers, had dismal
performance as emerging real estate companies in the index were hit hard
amid concerns of a credit crunch.
The outlook for the global equity markets remains uncertain, due to the
lingering credit crisis, fears of a U.S. recession and sky-high crude oil
prices. However, having said this, we believe that the Japanese equity
market will continue to outperform other major equity markets around the
world in the second half of 2008, as Japan is unique in many respects, some
of which may contribute to the resiliency of the Japanese markets during
these difficult times.
(1) Energy and food inflation
Energy and food inflation is painful for the Japanese people, although less
so when compared to other oil importing countries. Automobile ownership
has started to decline in Japan. The country has developed one of the most
efficient mass transit systems in the world and, as a result, the need to
commute by car to work in urban areas has essentially been negated. In
addition, younger people do not seem excited about the prospect of buying a
new car, which is a bit surprising. Those in rural areas that must depend
on automobile transportation are turning to mini-vehicles due in part to
tax incentives. Households will ultimately weather this bout with energy
and food inflation by economizing on their daily spending.
(2) Energy-efficient industries
Japan has a number of energy-efficient industries, created in response to
previous global oil crises. In regards to the government's goal of
creating a 'low-carbon society', although some basic industries have
opposed further reductions of carbon-based emissions from their already
efficient production processes, once targets have been agreed upon and set
in the political arena, companies will be forced to follow suit, as this is
the way it has worked in Japan in the past. In addition, there are a
number of opportunities for Japanese companies to help emerging countries
such as China reduce their impact on the environment, which is potentially
a much more productive means of taking on the issue of global warming.
(3) Economic and social stability remains unchanged
Economic and social stability remains unchanged, and there have not been
any excesses in borrowing, production capacity or human resources.
Following their experience in weathering the lost decade of the 1990s, both
people and businesses alike are prepared for the prospect of slow economic
growth.
(4) Weak yen
Despite the higher price of imported oil, a weaker yen is still acceptable
due to Japan's low domestic inflation rate. Amid the current situation,
most countries want to strengthen their currencies in order to reduce
imported inflation. As a result, yen carry trades (i.e. borrowing yen) are
likely to continue, particularly as a means to help finance the short-term
capital needs of Western financial institutions.
(5) Mergers and acquisitions
Corporate strategies will target overseas expansion, including mergers and
acquisitions (M&A). A good balance sheet, abundant cash flows, low-cost
financing and attractive valuations of overseas assets will accelerate the
M&A activity of Japanese companies vis-à-vis overseas companies looking to
bolster future growth. To date, cross border M&A transactions have mostly
been in favor of Japanese companies acquiring their overseas counterparts.
Specifically, in the pharmaceuticals industry, Takeda recently acquired
Millennium Pharmaceuticals, a U.S. company with a focus on cancer drugs,
and Dai-ichi Sankyo followed this up with its acquisition of Ranbaxy
Laboratories, an Indian manufacturer of generic drugs. Driving the M&A
activity in this industry has been the lack of growth in the domestic
market. In addition, we have witnessed several recent capital injections
by Japanese banks, including Mizuho's investment in Merrill Lynch and
Sumitomo Mitsui Bank's investment in Barclays, not to mention a number of
natural resource-related investments by Japanese trading firms and metal
companies in order to secure supply sources.
(6) Household financial assets
Japan currently has a huge pool of personal financial assets that remain
largely untapped with bank deposits still accounting for nearly 50% of the
combined $15 trillion worth of household financial assets. Although, in
large part, these funds may be required to finance the Japanese
government's $8 trillion debt, more productive uses of this money will be
required going forward.
Regarding sector strategy, we intend to maintain our overweight in the
machinery and automobile sectors, and underweight in public utilities and
service stocks. We will continue to overweight the beneficiaries of
infrastructure developments in emerging markets and ecology/alternative
energy investments on a global basis.
The ten largest industry classifications of the Fund's Japanese equity
investments held as of July 31, 2008 were:
Percentage of
Industry Net Assets
----------
1. Electric Appliances 15.55%
2. Banks 10.54
3. Transportation Equipment 9.99
4. Chemicals 8.03
5. Machinery 6.51
6. Wholesale Trade 6.43
7. Pharmaceutical 4.62
8. Retail Trade 4.46
9. Communication 4.09
10. Iron & Steel 3.77
The Fund's ten largest individual common stock holdings at the same date
were:
Percentage of
Industry Net Assets
----------
1. Mitsubishi UFJ Financial Group, Inc 4.49%
2. Toyota Motor Corp 4.13
3. Mitsubishi Corp 3.37
4. Mizuho Financial Group, Inc 3.31
5. East Japan Railway Co 2.78
6. Shin-Etsu Chemical Co., Ltd 2.67
7. Canon Inc 2.51
8. Takeda Pharmaceutical Co., Ltd 2.22
9. Seven &I Holdings Co., Ltd 2.14
10. Mitsubishi Electric Corp 2.07
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, 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)
------ ------- --------- ------- --------- -------
For the Nine
Months Ended
July 31, 2008 $ 376 $ 0.03 $ (19,617) $ (1.36) $ (19,241) $ (1.33)
====== ======= ========= ======= ========= =======
January 31, 2007 $ (198) $ (0.01) $ 4,676 $ 0.32 $ 4,478 $ 0.31
April 30, 2007 407 0.03 (1,589) (0.11) (1,182) (0.08)
July 31, 2007 (181) (0.02) 1,825 0.14 1,644 0.13
October 31, 2007 224 0.02 (3,438) (0.25) (3,214) (0.23)
------ ------- --------- ------- --------- -------
For the Year
Ended
October 31, 2007 $ 252 $ 0.02 $ 1,474 $ 0.10 $ 1,726 $ 0.12
====== ======= ========= ======= ========= =======
PER SHARE SELECTED QUARTERLY FINANCIAL DATA
Net Asset Market Share
QUARTER ENDED Value Price* Volume*
High Low High Low (000)
------ ------- ------ ------ -------
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
January 31, 2007 8.95 8.19 8.89 7.53 2,187
April 30, 2007 9.31 8.70 9.10 8.16 1,343
July 31, 2007 9.04 8.61 8.81 8.20 1,052
October 31, 2007 8.90 8.00 8.28 7.26 1,555
*As reported on the New York Stock Exchange