Business & Finance
Business and Finance
Business and Finance
Tue, December 30, 2008
Mon, December 29, 2008 Japan Equity Fund: The Japan Equity Fund Announces Fourth Quarter Earnings
JERSEY CITY, NJ--(Marketwire - December 29, 2008) - The Japan Equity Fund, Inc. (
For the quarter ended October 31, 2008, the Fund earned net investment income of approximately U.S. $369,000 (equivalent to income of U.S. $0.02 per share) resulting in net investment income for the year ended October 31, 2008 of approximately U.S. $745,000 (equivalent to income of U.S. $0.05 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. $27,303,000 (equivalent to a loss of U.S. $1.89 per share). As a result, net realized and unrealized loss increased to approximately U.S. $46,920,000 (equivalent to a loss of U.S. $3.25 per share) for the year ended October 31, 2008.
In comparison, during the quarter ended October 31, 2007, the Fund earned net investment income of approximately U.S. $224,000 (equivalent to income of U.S. $0.02 per share), resulting in net investment income for the year ended October 31, 2007 of approximately U.S. $252,000 (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 were approximately U.S. $3,438,000 (equivalent to a loss of U.S.$ 0.25 per share). As a result, net realized and unrealized gains decreased to approximately U.S. $1,474,000 (equivalent to a gain of U.S. $0.10 per share) for the year ended October 31, 2007.
On October 31, 2008, the total net assets of the Fund were approximately U.S. $78.1 million. The net asset value ("NAV") per share on that date was U.S. $5.41, based on 14,431,605 shares outstanding. In comparison, total net assets on October 31, 2007 were approximately U.S. $124.3 million, equivalent to a NAV of U.S. $8.61 per share, based on 14,431,605 shares outstanding. The Fund generated a negative investment return of 37.17% for the year ended October 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 36.77% in U.S. dollar ("USD") terms.
As of October 31, 2008, the Fund had 97.40% of its net assets invested in Japanese common stocks. The remaining net assets were represented by a short-term USD-denominated time deposit (0.18%) and other assets less liabilities (2.42%).
As of December 26, 2008, the Fund's net asset value per share was U.S. $5.70, based on net assets of U.S. $82.3 million. At the same date, the market price of the Fund's shares on the New York Stock Exchange closed at U.S. $4.78, representing a trading discount to net asset value per share of 16.14%.
Market Review and Outlook
For the year ended October 31, 2008, the total return of the TOPIX Index (in Japanese yen terms) was -45.5%. During the year, the financial crisis has expanded in terms of scope and scale. We have observed several historic events in the financial sector including, but not restricted to, the crisis of U.S. bond insurers in January, the near bailout of a U.S. brokerage firm in March, a bailout plan for two U.S. government-sponsored financial entities and the leading insurance company as well as the collapse of a large U.S. brokerage firm in September. In support of the financial system, governments and central banks around the world announced a series of policy actions including policy rate cuts, liquidity support measures, deposit guarantees and capital injections into the financial system. As the financial crisis intensified, the slowdown of the global economy became almost inevitable. In October, the International Monetary Fund (IMF) significantly lowered its global Gross Domestic Product (GDP) forecasts for 2009 as developed nations entered into recession. It seems that market failures will certainly lead to more government interventions in free market economies. After bailing out financial heavyweights, major governments around the world will enact more aggressive fiscal policies to boost sputtering economies. Although inflation has been a concern for many nations as crude oil prices hit historically high levels in July, we have seen a reversal in commodity prices over the last couple of months. Lower energy and food prices have reduced inflationary pressure, enabling central banks around the world to reduce interest rates. For the Japanese economy, lower commodity prices will support corporate profits and households' real incomes to some extent.
The Tokyo equity market finished the Fund's fiscal year on a weak note, with the only exception being the short-term reversal in mid-March to the end of May. In late October, the TOPIX Index fell below the 750 level, its lowest point in approximately a quarter century. The Tokyo market underperformed other major equity markets in local terms for the year ended October 31, 2008 due to the sharp yen appreciation and the fact that the Japanese market remains a cyclical play in global markets. The profit outlook for major exporters, including automobile and electronics companies, is likely to deteriorate not only in 2008 but also in 2009 on weak global demand and negative foreign exchange movements. Turning to developments on the domestic economic and political fronts, investors have suffered from a lack of progress in structural reforms necessary to boost the domestic economy over the last few years. Even during the global economic expansion of the last few years, the consumer side of the economy remained stagnant in Japan; this is partly due to a lack of household income growth but mainly attributable to the constant domestic political chaos. We have seen the resignation of Prime Minister Abe and Prime Minister Fukuda in the last two years and there is growing speculation that current Prime Minister Aso will not last much longer as a Lower House election is scheduled to take place by the spring of next year.
One encouraging sign is that merger & acquisition ("M&A") activities by Japanese companies have been accelerating. Announcements by Japanese firms of M&A activities targeting foreign companies include: 1) Mitsubishi UFJ Financial Group Inc. (MUFG) investing U.S.$ 9 billion in preferred shares of Morgan Stanley, 2) Takeda Pharmaceutical acquiring Millennium Pharmaceutical with U.S.$ 7.7 billion cash, 3) Tokyo Marine HD getting set to acquire Philadelphia Consolidated HD with U.S.$ 4.5 billion cash and 4) Ricoh announcing that it will purchase major U.S. office equipment marketer IKON Office Solutions for U.S.$ 1.6 billion. Although it is too early to determine whether these efforts to expand overseas will be successful, the M&A activities by Japanese corporations were partly in response to pressure from shareholders to put their cash hordes to work. After years of balance sheet restructuring efforts and economic expansion, many Japanese firms are now net cash positive, meaning cash on their balance sheet exceeds debt. In addition to the increased M&A activities, dividends as well as share buy backs are increasing in an attempt to enhance shareholders' equity.
Looking at the equity market developments from a sector level, defensive sectors such as electric power & gas, pharmaceutical and foods performed relatively well, while the maritime transportation, nonferrous metals and machinery sectors were among the worst performers. The collapse of the financial market and deteriorating global economy led cyclical companies including shipping and machinery companies to decline severely. On the other hand, defensive names, including those in the utility and food sectors remained resilient despite the extremely volatile market and correction of crude oil prices.
The Japanese yen strengthened against the U.S. dollar and other currencies, as the financial crisis worsened and de-leveraging continued. The Japanese yen fell below Y100/U.S.$ in mid-March, on the heels of a near bailout of a U.S. brokerage firm and again in October when the global economy experienced a severe downturn. Indeed, the Japanese yen has been regarded as a safe haven during the current uncertain economic outlook. During the last twelve months ended October 2008, the yen appreciated 14.7% against the U.S. dollar, 25.1% against the Euro and 34% against the British pound. This appreciation has detracted from the Fund's U.S. dollar based return.
Looking toward next year and beyond, we are constructive on the market for the following reasons:
1. Global economic recovery in the second half of 2009
Ultra-easy monetary policies, lower energy and food prices, completion of de-leveraging and active fiscal policies indicate probable economic recoveries in advanced countries starting in the April-June quarter at the earliest. The consensus view is that there will be no meaningful economic recovery in 2009.
2. Japanese government policy responses
The government announced a fiscal stimulus package worth 5 trillion yen, including 2 trillion yen in personal tax cuts, 0.5 trillion yen to fund highway toll cuts, small enterprise tax cuts and loan guarantees, as well as housing tax credits. The government announced several support measures with regard to the stock market, including the creation of a 10 trillion yen fund to inject capital primarily into the smaller banks, resumption of equity purchases from banks by the Bank Share-holding Purchase Corporation (BSPC) and the Bank of Japan (BoJ), extension of a 10% preferential tax rate on equity capital and income gains, and restrictions on short selling, including a ban on naked short selling and reporting requirements on short positions.
3. Extremely undervalued equities
Forced liquidations pushed world equity markets and the Japanese market in particular, to extremely oversold levels:
TOPIX valuation as of November 7, 2008 (TOPIX Index level: 909.30)
P/E ratio 14.7X P/B ratio 1.01X Dividend yield 2.54%
The above valuation includes a discount equal to a 27% profit decline for the current fiscal year. Although the earnings outlook is uncertain due to the global recession and yen appreciation, the low price/book ratio and high dividend yield are expected to support the market.
Regarding sector strategy, we increased our weight in the companies related to domestic demand such as food, retail, construction and housing by reducing export oriented names in the machinery, automobile and metal sectors. We will maintain our overweight position in technology and chemicals due to attractive valuations, and underweight positions in the service and public utility sectors. We will focus on domestic demand-related companies with strong balance sheets.
The ten largest industry classifications of the Fund's Japanese equity investments held as of October 31, 2008 were:
Percentage of Industry Net Assets -------- ------------- 1. Electric Appliances 13.05% 2. Banks 9.97 3. Transportation Equipment 9.52 4. Chemicals 7.54 5. Retail Trade 7.23 6. Pharmaceutical 5.60 7. Machinery 5.14 8. Communication 5.10 9. Wholesale Trade 5.03 10. Land Transportation 4.34
The Fund's ten largest individual common stock holdings at the same date were:
Percentage of Issue Net Assets ----- ------------- 1. Toyota Motor Corp. 4.93% 2. Mitsubishi UFJ Financial Group, Inc. 4.26 3. East Japan Railway Co. 3.21 4. Shin-Etsu Chemical Co., Ltd. 3.04 5. Takeda Pharmaceutical Co., Ltd. 2.79 6. Seven & I Holdings Co., Ltd. 2.62 7. Mitsubishi Corp. 2.55 8. Canon Inc. 2.44 9. Mizuho Financial Group, Inc. 2.33 10. NTT DoCoMo, Inc. 2.28 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) 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) ======= ======= ========== ======= ========== ======= 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 October 31, 2008 7.15 4.93 6.67 4.22 1,684 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.
