UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-5992
JAPAN SMALLER CAPITALIZATION FUND, INC.
2 World Financial Center, Building B, New York, N.Y. 10281
Nomura Asset Management U.S.A. Inc.
2 World Financial Center, Building B, New York, N.Y. 10281
Registrant's telephone number, including area code: (800) 833-0018
Date of fiscal year end: February 28
Date of reporting period: February 28, 2005
ITEM 1. REPORT TO SHAREHOLDERS
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JAPAN SMALLER CAPITALIZATION FUND, INC.
April 25, 2005
To Our Shareholders:
We present the Annual Report of Japan Smaller Capitalization Fund, Inc.
(the "Fund") for the fiscal year ended February 28, 2005.
The Net Asset Value per share ("NAV") of the Fund increased by 23.3% for
the year. The closing market price of the Fund on February 28, 2005, on the
New York Stock Exchange was $12.20 representing a premium of 5.3% to the NAV
of $11.59. The net assets of the Fund amounted to $183,717,446 on February 28,
2005.
The Fund's benchmark--the Russell/Nomura Small Cap(TM) Index--increased
by 29.2% in United States (U.S.) dollar terms*. The Nikkei JASDAQ Average
Index (the "OTC Index"), a price-weighted index of the quotations of OTC
registered stocks, increased by 29.4%, and the Index of the Japan Securities
Dealers Association Quotation System (the "JASDAQ Index"), a
capitalization-weighted index of all Japanese stocks traded over the counter,
increased by 34.8%, in U.S. dollar terms, during the same period. The TOPIX,
consisting of all companies listed on the First Section of the Tokyo Stock
Exchange (the "TSE"), increased by 13.9% and the Nikkei Average Index, a
price-weighted index of the 225 leading stocks on the TSE, increased by 11.3%
in U.S. dollar terms for the year ended February 28, 2005. The Japanese yen
("Yen") appreciated by 4.5% against the U.S. dollar during the year.
During the year ended February 28, 2005, the Fund underperformed the
Russell/Nomura Small Cap(TM) Index, the OTC Index, and the JASDAQ Index by
5.9%, 6.1%, and 11.5%, respectively. Small capitalization stocks appreciated
strongly and outperformed the broad market by a considerable margin over the
12-month review period. The exposure to electronics-related companies
detracted from the relative performance in the first half. These stocks
under-performed due to the uncertain supply-demand outlook. In the second half
of the year, some small capitalization stocks surged higher. These gains came
irrespective of company fundamentals, which in many cases indicated poor
profitability; but nevertheless many shares were driven higher by speculation
surrounding M&A prospects and liquidation values. The Fund believes this to be
the principal factor that has caused the portfolio to lag behind the
benchmark. Given that stock prices tend to converge towards their fundamental
fair value over the medium-to-long term, the Fund expects stock selection to
again contribute to the Fund's long-term capital appreciation.
*Effective August 31, 2004, the Russell/Nomura Small Cap(TM) Index,
replaced the Nikkei JASDAQ Average Index as the Fund's benchmark because the
manager believes the Russell/Nomura Small Cap(TM) Index is more representative
of the securities in which the Fund invests and better represents the Fund's
objectives. The Russell/Nomura Small Cap(TM) Index represents approximately
15% of the total market capitalization of the Russell/Nomura Total Market(TM)
Index. It measures the performance of the smallest Japanese equity securities
in the Russell/Nomura Total Market(TM) Index. Currently there are 1,299
securities in the Russell/Nomura Small Cap(TM) Index.
The Portfolio
Equity holdings represented 97.5% of the Funds net assets at February
28, 2005. The Fund was diversified into 108 issues, of which 68 were TSE First
Section stocks, 11 were TSE Second Section stocks, 23 were JASDAQ stocks and 6
were other smaller capitalization stocks, comprising 62.9%, 10.1%, 19.8% and
4.7%, respectively, of net assets on February 28, 2005.
Market Review:
The Russell/Nomura Small Cap(TM) Index and the OTC Index achieved
substantial gains during the
year ended February 28, 2005, of 23.4% and 23.5%, respectively, in local
currency terms. Meanwhile, the broad Japanese stock market (TOPIX) appreciated
by 8.8% and underperformed smaller capitalization stocks.
In March and the beginning of April, the overall Japanese stock market
was able to extend its rally based on the view that the Japanese economy was
on course for a steady expansion. Although some events had a negative impact
globally, such as the major terrorist attacks in Spain, favorable domestic
macroeconomic data outweighed the negative news. Small capitalization stocks
outperformed the broad market by a considerable margin because of their lower
sensitivity to many of the international troubles that had overshadowed the
main market.
Consolidation took hold across the entire Japanese stock market through
mid-May based on concerns about the possible impact of an eventual interest
rate increase from the Federal Reserve. Apprehension over rising oil prices
and the regional impact of austerity measures to rein in the breakneck growth
of China's economy also undermined investor sentiment. Nevertheless, the
Japanese stock market was able to make up for the early losses toward the end
of June, helped by favorable macroeconomic figures. The rising U.S. stock
market and the easing of crude oil prices provided further support for the
broad Japanese stock market.
In July, the Japanese stock market retreated, erasing most of the gains
earned in June as a result of profit-taking activity. This decline extended
through to the middle of August due to discouraging April-June real gross
domestic product ("GDP") data (preliminary estimates). Disappointing economic
data from the U.S., such as real GDP and employment figures, also damaged
investor sentiment in Japan.
Despite a favorable set of Tankan survey results issued right at the
beginning of October, the Japanese stock market failed to respond to this
positive news. Instead, share prices reacted to a series of macroeconomic
announcements that revealed disappointing results. Meanwhile, the impact of
rising oil prices, and a slide in the U.S. stock markets through July and
August together exacerbated the negative turn in investor sentiment.
Japanese stock markets weakened for much of the period between October
to December amid a succession of disappointing macroeconomic figures and a
steep decline in the value of the U.S. dollar against the Yen and other major
currencies. However, from the second week of December to the February
year-end, the market was able to regain momentum, supported by a pause in the
U.S. dollar's decrease and a continued reversal of oil prices. The recent
underperformance of Japanese stocks compared with other major markets also
allowed relative valuation factors to lend further support.
During January and February, small capitalization stocks outperformed
Japanese large capitalization stocks.
In January, individual investors became net buyers of Japanese stocks
for the first time in six months. Investors seemed to gravitate towards the
smaller stocks and this enabled the Russell/Nomura Small Cap(TM) Index to
outperform the broad Japanese stock market. Meanwhile, the broad Japanese
market traded within a very narrow range throughout the month. Concerns over
earnings downgrades, the decline in the U.S. stock market, and another rise in
oil prices together put investors in a cautious mood.
Japanese stocks climbed steadily throughout February and the market
broke out of the trading range that had contained it for several months,
eventually reaching its highest level since July 2004. Encouraging
macroeconomic figures and advances in the U.S. stock market together lent some
support to both the large and small capitalization sectors of the Tokyo stock
market.
Outlook and Future Strategy
According to the latest GDP data for the October-December quarter of
2004, down 0.5% on an annualized basis, quarter-on-quarter the Japanese
economy is now experiencing a moderate slowdown on a quarterly base
comparison. The slowdown is attributable to export weakness, together with
stagnant household earnings growth and a recent trend towards inventory
adjustment in the technology sector. Consequently, the Fund has revised its
real GDP forecast for fiscal year ("FY") 2004 down to 1.6% year-on-year
(y-o-y) from the
previous 2% estimate. However, this will have no impact on the FY 2005 growth
forecast, which remains at 1%.
For several reasons, the Fund now believes the Japanese economy is about
to begin the process of bottoming out. The Organization for Economic
Co-Operation and Development leading indicator, which is a strong predictor of
Japan's export performance has now leveled off as anticipated, while domestic
employment continues to increase and the unemployment rate has declined to a
three-year low of 4.5%. Industrial production figures for January were also
strong. Taken together, these indicators are consistent with the outlook for a
recovery in the second half of the year. Policy changes could be a risk factor
however, especially if the government goes ahead with its fiscal consolidation
aims involving a full repeal of the tax breaks that were implemented back in
1999. Although the real impact of such a move would be limited in the
short-term, the increased tax burden would surely have an impact on consumer
sentiment.
Corporate earnings are expected to grow by 6% or 7% in FY 2005. Although
the Fund took the view last month that the Yen could appreciate, the currency
has remained steady and is now around the level that Japanese companies
assumed in their forecasts. As long as these circumstances persist, Japanese
stocks seem likely to remain resilient within a relatively narrow range. The
overall market will still need to see signs of an economic recovery and a
broad improvement in earnings before it can break out of this range on the
upside. Compared with other major markets, Japan has continued to lag behind,
but some catch up potential is evident under the right macroeconomic
conditions given the market's reasonable valuations.
The Fund will consider the above market conditions when making stock
selection decisions. Meanwhile, the broad emphasis will remain on stocks that
can demonstrate relatively steady earnings growth from the long-term
perspective.
We appreciate your continuing support of your Fund.
Sincerely,
[GRAPHIC OMITTED]
Yasushi Suzuki 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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CHANGE IN AUDITORS
During November 2004, PricewaterhouseCoopers LLP ("PwC") resigned as the
independent registered public accountant of the Fund because PwC has been
appointed to provide non-audit services to certain affiliates of the Fund's
Manager, which could be viewed as inconsistent with auditor independence with
respect to the Fund. The resignation of PwC was not the result of any
disagreement with management. Based on the recommendation of the Audit
Committee of the Fund, the Board of Directors voted to appoint Ernst & Young
LLP as the independent registered public accountant for the Fund's fiscal year
ended February 28, 2005. During the two most recent fiscal years, PwC's audit
reports contained no adverse opinion or disclaimer of opinion; nor were the
reports qualified or modified as to uncertainty, audit scope, or accounting
principles. Further, there were no disagreements between the Fund and PwC on
accounting principles, financial statement disclosure, or audit scope, which
if not resolved to the satisfaction of PwC would have caused it to make
reference to the disagreements in connection with their reports.
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INDEPENDENT DIRECTOR
The Fund's Board of Directors has determined that Fund Director, Mr.
John F. Wallace, qualifies as a "non-interested" person under the Investment
Company Act of 1940. On November 18, 2004, based on the recommendation of the
Fund's Nominating Committee, the Board of Directors, including all of the
Independent Directors, determined that Mr. Wallace qualifies as an Independent
Director of the Fund.
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PROXY VOTING
A description of the policies and procedures that the Fund uses to vote
proxies relating to portfolio securities is available (1) without charge, upon
request, by calling toll-free 1-800-833-0018; and (2) on the Securities and
Exchange Commission's web site at http://www.sec.gov. Information about how
the Fund voted proxies relating to securities held in the Fund's portfolio
during the most recent 12-month period ended June 30 is available (1) without
charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the
Securities and Exchange Commission's web site at http://www.sec.gov.
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AVAILABILITY OF QUARTERLY SCHEDULE OF INVESTMENTS
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third quarters of
each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's
Web site at http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Information on
the operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
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FUND CERTIFICATION
In October, 2004, the Fund filed its Chief Executive Officer
Certification with the New York Stock Exchange pursuant to Section 303A. 12(a)
of the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were
filed with the Fund's Form N-CSR and are available on the Securities and
Exchange Commission's Web site at http://www.sec.gov.
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INTERNET WEBSITE
Nomura Asset Management U.S.A. Inc. has established an Internet website
which highlights its history, investment philosophy and process and products,
which include the Fund. The Internet web address is www.nomura.com. We invite
you to view the Internet website.
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JAPAN SMALLER CAPITALIZATION FUND, INC.
FUND HIGHLIGHTS -- FEBRUARY 28, 2005
KEY STATISTICS
Net Assets ........................................... $183,717,446
Net Asset Value per Share ............................ $11.59
Closing NYSE Market Price ............................ $12.20
Percentage Change in Net Asset Value per Share*+ ..... 23.3%
Percentage Change in NYSE Market Price*+ ............. 13.1%
MARKET INDICES
Percentage change in market indices:*
YEN U.S.$
---- -----
Russell/Nomura Small Cap(TM) Index ................... 23.4% 29.2%
OTC .................................................. 23.5% 29.4%
JASDAQ ............................................... 28.8% 34.8%
TOPIX ................................................ 8.8% 13.9%
Nikkei Average ....................................... 6.3% 11.3%
*From March 1, 2004 through February 28, 2005.
+Reflects the percentage change in share price.
ASSET ALLOCATION
Japanese Equities
TSE First Section Stocks .......................... 62.9%
TSE Second Section Stocks ......................... 10.1%
JASDAQ Stocks ..................................... 19.8%
Other Smaller Capitalization Stocks ............... 4.7%
Cash and Cash Equivalents ............................ 1.2%
---------------
Total Investments .................................. 98.7%
Other Assets less Liabilities, Net ................... 1.3%
---------------
Net Assets ..................................... 100.0%
===============
INDUSTRY DIVERSIFICATION
% of % of
Net Assets Net Assets
---------- ----------
Miscellaneous Manufacturing ...................... 13.8 Wholesale .................................. 3.4
Services ......................................... 12.1 Real Estate and Warehouse .................. 2.9
Banks and Finance ................................ 10.4 Iron and Steel ............................. 2.6
Electronics ...................................... 9.2 Information and Software ................... 2.3
Retail ........................................... 9.0 Restaurants ................................ 1.3
Automotive Equipment and Parts.................... 7.6 Electric ................................... 1.1
Machinery and Machine Tools ...................... 7.2 Oil and Gas ................................ 1.0
Chemicals and Pharmaceuticals .................... 6.2 Telecommunications ......................... 0.9
Food Manufacturing ............................... 5.7 Textiles and Apparel ....................... 0.8
TEN LARGEST EQUITY HOLDINGS BY MARKET VALUE
Market % of
Security Value Net Assets
-------- ----- ----------
Hisamitsu Pharmaceutical & Co., Inc ........... $3,879,810 2.1
C. Uyemura & Co., Ltd ......................... 3,743,710 2.0
Dowa Mining Co., Ltd .......................... 3,687,439 2.0
Musashi Seimitsu Industry Co., Ltd ............ 3,681,315 2.0
Nissin Steel Co., Ltd ......................... 3,557,771 2.0
Meganesuper Co., Ltd .......................... 3,398,233 1.9
Mani, Inc ..................................... 3,372,962 1.8
Ricoh Leasing Co., Ltd ........................ 3,268,223 1.8
Recrm Research Co., Ltd ....................... 3,183,649 1.7
Ushio Inc ..................................... 3,103,081 1.7
JAPAN SMALLER CAPITALIZATION FUND, INC.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and Board of Directors of
Japan Smaller Capitalization Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Japan
Smaller Capitalization Fund, Inc. (the "Fund"), including the schedule of
investments, as of February 28, 2005, and the related statements of
operations, changes in net assets and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended February 29,
2004 and the financial highlights for each of the four years in the period
then ended were audited by other auditors whose report, dated April 21, 2004,
expressed an unqualified opinion on that statement and those financial
highlights.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of material
misstatement. We were not engaged to perform an audit of the Fund's internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly we express no such opinion. An audit also
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund at February 28, 2005, the results of its operations, the changes in its
net assets and the financial highlights for the year then ended, in conformity
with U.S. generally accepted accounting principles.
Ernst & Young LLP
New York, New York
April 1, 2005
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SCHEDULE OF INVESTMENTS*
FEBRUARY 28, 2005
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
EQUITY SECURITIES
Automotive Equipment and Parts
Calsonic Kansei Corporation......................... 97,000 $ 680,596 $ 600,585 0.3
Radiators, mufflers and air conditioning systems
F.C.C. Co., Ltd..................................... 15,000 508,914 582,259 0.3
Clutches and facings
Futaba Industrial Co., Ltd.......................... 142,200 2,430,899 2,682,222 1.5
Mufflers and exhaust manifolds
Musashi Seimitsu Industry Co., Ltd 130,200 1,225,159 3,681,315 2.0
Ball joints, camshafts and gears
Nippon Piston Ring Co., Ltd......................... 382,000 734,073 929,966 0.5
Internal combustion engine parts
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS* -- Continued
FEBRUARY 28, 2005
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
Nissin Kogyo Co., Ltd............................... 51,000 $ 1,134,500 $ 1,852,590 1.0
Brake systems
Nittan Valve Co., Ltd............................... 312,000 1,970,426 2,383,323 1.3
Engine valves
U-Shin, Ltd......................................... 161,000 1,168,084 1,299,296 0.7
Door locks -------------- ----------------- ---------
Total Automotive Equipment and Parts................ 9,852,651 14,011,556 7.6
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Banks and Finance
The Bank of Fukuoka, Ltd............................ 300,000 1,538,430 1,817,223 1.0
Deposits, loans and exchange transactions
The Hiroshima Bank, Ltd............................. 405,000 1,797,490 2,092,251 1.1
General banking services
The Hyakugo Bank, Ltd............................... 250,000 1,414,555 1,603,010 0.9
General banking services
IBJ Leasing Company, Limited........................ 97,000 1,625,162 1,855,676 1.0
Leases general machinery, aircrafts and computer
Kansai Urban Banking Corporation.................... 949,000 1,676,640 2,246,638 1.2
General banking services
Matsui Securities Co., Ltd.......................... 37,000 1,193,066 1,340,490 0.7
Online investing services
Okasan Holdings, Inc................................ 221,000 1,455,508 1,376,815 0.8
Financial services
Ricoh Leasing Co., Ltd.............................. 122,000 2,833,867 3,268,223 1.8
Credit sales and leasing
Sanyo Shinpan Finance Co., Ltd...................... 45,700 2,525,722 3,096,746 1.7
Consumer financing
Yamanashi Chuo Bank, Ltd............................ 70,000 406,460 431,399 0.2
Commercial banking services
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Total Banks and Finance............................. 16,466,900 19,128,471 10.4
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Chemicals and Pharmaceuticals
Arisawa Manufacturing Co., Ltd...................... 45,900 1,580,803 1,742,119 1.0
Glassfibers and insulating resins
Asahi Denka Co., Ltd................................ 35,000 346,539 375,713 0.2
Resin, insulators and processed fat/oil products
C. Uyemura & Co., Ltd............................... 124,000 2,031,269 3,743,710 2.0
Chemicals
Hisamistu Pharmaceutical Co., Ltd................... 184,000 3,317,009 3,879,810 2.1
Pharmaceutical products
Shizuokagas Co., Ltd.+.............................. 396,000 1,147,819 1,673,801 0.9
Natural gas supplier
-------------- ----------------- ---------
Total Chemicals and Pharmaceuticals................. 8,423,439 11,415,153 6.2
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See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS* -- Continued
FEBRUARY 28, 2005
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
Electric
Mirai Industry Co., Ltd. ........................... 257,300 $ 2,521,290 $ 1,972,876 1.1
Plastic molded electric materials
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Total Electric...................................... 2,521,290 1,972,876 1.1
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Electronics
Chiyoda Integre Co., Ltd. .......................... 129,520 1,595,801 2,824,153 1.5
Electronic components
Cosel Co., Ltd...................................... 76,500 1,986,521 2,162,985 1.2
Electrical machinery
Dainippon Screen Mfg. Co., Ltd...................... 408,000 1,915,127 2,713,874 1.5
Electronic components
Fuji Electric Industry Co., Ltd..................... 32,200 341,183 277,759 0.2
Electronic parts
Fukuda Denshi Co. .................................. 24,000 580,773 947,716 0.5
Medical electronic equipment
Kuroda Electric Co., Ltd............................ 121,400 738,396 2,833,268 1.5
Materials and components
Meiko Electronics Co., Ltd.......................... 78,400 1,940,390 2,231,734 1.2
Printed circuit boards
Shinko Electric Industries Co., Ltd................. 44,500 1,162,430 1,569,560 0.9
Semiconductor packages
Sumisho Electronics Co., Ltd........................ 71,200 923,917 801,840 0.4
Office systems
Toshiba Tec Corp. .................................. 124,000 510,228 594,240 0.3
Electronic equipment manufacturing
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Total Electronics................................... 11,694,766 16,957,129 9.2
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Food Manufacturing
Arcs Co., Ltd....................................... 37,928 221,186 498,024 0.3
Supermarket chain
Ariake Japan Co., Ltd............................... 50,083 1,021,687 1,197,653 0.6
Natural seasonings
Kakiyasu Honten Co., Ltd. .......................... 48,600 412,548 682,873 0.4
Processed meat products, fresh meats, and side dishes
Nippon Flour Mills Co., Ltd. ....................... 247,000 1,112,425 1,212,096 0.7
Flour and grain
Ozeki Co., Ltd...................................... 84,000 2,650,539 2,415,297 1.3
Supermarket chain
Plenus Co., Ltd..................................... 91,160 2,508,952 2,616,804 1.4
Japanese lunch-boxes
Q'sai Co., Ltd. .................................... 56,000 344,872 523,851 0.3
Frozen and processed foods and juice drinks
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS* -- Continued
FEBRUARY 28, 2005
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
Sansei Foods Co., Ltd............................... 56,700 $ 1,186,202 $ 1,296,109 0.7
Candy products
-------------- ----------------- ---------
Total Food Manufacturing............................ 9,458,411 10,442,707 5.7
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Information and Software
Argo Graphics Inc................................... 74,500 961,158 2,420,616 1.3
Computer aided design software
Kyowa Expo Corporation.............................. 199,000 1,692,735 1,777,620 1.0
Designs, constructs, maintains communication
and electrical facilities
-------------- ----------------- ---------
Total Information and Software...................... 2,653,893 4,198,236 2.3
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Iron and Steel
Mitsubishi Steel Mfg. Co., Ltd. .................... 660,000 942,060 1,151,292 0.6
Steel producers
Nisshin Steel Co., Ltd.............................. 1,280,000 2,762,378 3,557,771 2.0
Steel producers
-------------- ----------------- ---------
Total Iron and Steel................................ 3,704,438 4,709,063 2.6
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Machinery and Machine Tools
CKD Corporation..................................... 75,000 429,945 549,192 0.2
Pneumatic equipment and control devices
Hitachi Construction Machinery Co., Ltd............. 154,000 1,872,105 2,250,923 1.2
Construction machinery
Makino Milling Machine Co., Ltd. ................... 232,000 1,259,864 1,403,096 0.8
Industrial machinery
Nachi-Fujikoshi Corp. .............................. 750,000 2,163,291 2,659,702 1.4
Machine tools
Organo Corporation.................................. 57,000 303,728 289,548 0.2
Water treatment equipment
Shimadzu Corporation................................ 378,000 2,011,779 2,481,718 1.4
Precison tools and equipment
Tsubaki Nakashima Co., Ltd.......................... 141,500 1,755,612 1,912,254 1.0
Bearing balls, blowers and precision ball screws
Yamazen Corporation................................. 505,000 1,541,458 1,776,345 1.0
Machinery and tools
-------------- ----------------- ---------
Total Machinery and Machine Tools................... 11,337,782 13,322,778 7.2
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Miscellaneous Manufacturing
Central Glass Co., Ltd. ............................ 200,000 1,075,656 1,324,579 0.7
Glass products
Daio Paper Corporation.............................. 90,000 886,901 787,559 0.4
Paper, pulp, and paperboard
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS* -- Continued
FEBRUARY 28, 2005
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
Dowa Mining Co., Ltd................................ 499,000 $ 3,153,372 $ $ 3,687,439 2.0
Produces various metal-related products
Dynic Corporation+.................................. 194,000 629,387 728,883 0.4
Bookbinding cloth
JSP Corporation..................................... 57,200 634,406 734,085 0.4
Polystyrene products
Kansai Paint Co., Ltd. ............................. 412,000 2,564,442 2,566,732 1.4
Wide range of paints
Kitagawa Industries Co., Ltd. ...................... 26,400 380,394 455,456 0.3
Metal products and fasteners
Mani, Inc........................................... 79,800 1,378,387 3,372,962 1.8
Medical goods and equipment
Mizuno Corporation.................................. 184,000 670,619 846,504 0.5
Sporting goods
Nichiha Corporation................................. 22,600 191,147 340,944 0.2
Ceramic exterior walls and fiber boards
Nippon Kodoshi Corp................................. 188,000 2,839,396 1,616,294 0.9
Paper for electric insulation
Riso Kagaku Corporation............................. 34,600 1,343,087 1,442,565 0.7
Printing and copying machines
Sanei-International Co., Ltd. ...................... 44,000 1,597,898 1,248,287 0.7
Fashion apparel
Secom Techno Service Co., Ltd....................... 34,000 911,961 1,303,494 0.7
Security systems, provides maintenance service
SK Kaken Co., Ltd. ................................. 54,500 1,291,387 1,849,140 1.0
Paints
Ushio Inc........................................... 152,000 2,707,890 3,103,081 1.7
Lamps and optical equipment
-------------- ----------------- ---------
Total Miscellaneous Manufacturing................... 22,256,330 25,408,004 13.8
-------------- ----------------- ---------
Oil and Gas
Cosmo Oil Company, Ltd.. ........................... 547,000 1,609,652 1,840,197 1.0
-------------- ----------------- ---------
Domestic crude oil refiner
Real Estate and Warehouse
Daibiru Corporation................................. 267,000 1,883,922 2,077,960 1.2
Leases office buildings, apartments and hotels
Recrm Research Co., Ltd............................. 2,001 2,710,362 3,183,649 1.7
Building management
-------------- ----------------- ---------
Total Real Estate and Warehouse..................... 4,594,284 5,261,609 2.9
-------------- ----------------- ---------
Restaurants
Saint Marc Co., Ltd. ............................... 49,100 1,652,643 2,103,580 1.2
Restaurants and bakery shop chain
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS* -- Continued
FEBRUARY 28, 2005
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
Y's Table Corporation +............................. 62 $ 276,038 $ 250,769 0.1
Operates a variety of restaurants
-------------- ----------------- ---------
Total Restaurants................................... 1,928,681 2,354,349 1.3
-------------- ----------------- ---------
Retail
Cawachi Limited..................................... 46,300 1,377,127 2,081,248 1.0
Drug store chain
Kitamura Co., Ltd................................... 109,200 915,588 1,067,561 0.6
Household electric products
Meganesuper Co., Ltd. .............................. 182,760 2,597,236 3,398,231 1.9
Eye glasses chain
Ryohin Keikaku Co., Ltd............................. 52,500 2,679,180 2,737,336 1.5
Knitwears, food and household items
Seijo Corporation................................... 81,700 1,310,115 1,448,651 0.8
Chain drug store
Shimachu Co., Ltd. ................................. 59,000 1,464,576 1,439,162 0.8
Furniture and home goods
USS Co., Ltd. ...................................... 3,990 95,333 313,586 0.2
Automobile auction
Village Vanguard Co., Ltd.+......................... 229 1,751,520 2,304,596 1.2
Books, cd's, videos and office supplies
Xebio Co., Ltd...................................... 60,400 1,664,697 1,771,448 1.0
Sporting goods
-------------- ----------------- ---------
Total Retail........................................ 13,855,372 16,561,819 9.0
-------------- ----------------- ---------
Services
Alps Logistics Co., Ltd............................. 89,000 625,430 2,111,228 1.2
Transportation
Daiwa Logistics Co., Ltd. .......................... 31,000 234,815 264,437 0.1
Transports housing materials and building steel frames
Fullcast Co., Ltd................................... 848 870,164 2,145,704 1.2
Human resources
Hitachi Transport System, Ltd....................... 98,000 739,446 924,254 0.5
Freight truck and marine transportation
Maeda Road Construction Co., Ltd.................... 118,000 837,722 962,457 0.5
Constructs highways, runways, and harbor facilities
Nissin Healthcare Food Service Co., Ltd............. 21,100 251,266 354,919 0.2
Nursing home caterer
Obayashi Corporation................................ 322,000 1,622,900 2,046,159 1.1
General contractor
Okinawa Cellular Telephone Company.................. 385 1,783,218 1,605,166 0.9
Cellular and car phone services
Sumikin Bussan Corp................................. 500,000 1,241,471 1,313,078 0.7
General trading firm
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS* -- Continued
FEBRUARY 28, 2005
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
Sumisho Auto Leasing Corporation.................... 28,400 $ 1,075,773 $ 1,238,511 0.7
Auto leasing and maintenance
TIS Inc............................................. 42,200 1,475,153 1,783,697 1.0
Integrated system service
TKC Corporation..................................... 16,100 265,018 284,394 0.1
Consulting services
Toei Animation Co., Ltd............................. 30,300 1,542,853 1,283,615 0.7
Animated cartoon movies production
Tohokushinsha Film Corporation...................... 79,800 1,254,729 2,030,661 1.1
Produces tv programs, movies and commercial films
Watabe Wedding Corporation.......................... 77,500 1,918,531 1,641,587 0.9
Wedding services
Yusen Air & Sea Service Co., Ltd.................... 54,600 1,731,103 2,239,785 1.2
Domestic and international air freight forwarding
-------------- ----------------- ---------
Total Services...................................... 17,469,592 22,229,652 12.1
-------------- ----------------- ---------
Telecommunications
Daimei Telecom Engineering Corp..................... 187,000 1,583,474 1,613,073 0.9
Telecommunication wire installations
-------------- ----------------- ---------
Total Telecommunications............................ 1,583,474 1,613,073 0.9
-------------- ----------------- ---------
Textiles and Apparel
Workman Co., Ltd.................................... 68,000 1,229,140 1,456,654 0.8
Uniforms
-------------- ----------------- ---------
Total Textiles and Apparel.......................... 1,229,140 1,456,654 0.8
-------------- ----------------- ---------
Wholesale
Kondotec, Inc....................................... 205,500 1,400,365 1,867,197 1.0
Construction materials
Nippon Care Supply Co., Ltd......................... 206 833,190 852,945 0.5
Medical equipment
Takihyo Co., Ltd.................................... 245,000 1,435,607 1,420,664 0.8
Apparel, accessories and interior products
Toba, Inc........................................... 15,000 142,260 273,877 0.2
Trading company for control systems
Toshin Denki Co., Ltd............................... 62,600 789,850 1,169,981 0.6
Lighting equipment and electrical engineering materials
Trusco Nakayama Corporation......................... 34,700 558,065 598,316 0.3
Industrial machinery
-------------- ----------------- ---------
Total Wholesale..................................... 5,159,337 6,182,980 3.4
-------------- ----------------- ---------
TOTAL INVESTMENTS IN EQUITY SECURITIES.............. 145,799,432 179,066,306 97.5
-------------- ----------------- ---------
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS* -- Continued
FEBRUARY 28, 2005
% of
Principal Market Net
Amount Cost Value Assets
------ ---- ----- ------
INVESTMENTS IN FOREIGN CURRENCY
Hong Kong Shanghai Bank-Tokyo
Non-interest bearing account.................. JPY238,416,996 $ 2,273,934 $ 2,285,110 1.2
-------------- ----------------- ---------
TOTAL INVESTMENTS IN FOREIGN CURRENCY............... 2,273,934 2,285,110 1.2
-------------- ----------------- ---------
TOTAL INVESTMENTS................................... $ 148,073,366 181,351,416 98.7
-------------- ----------------- ---------
OTHER ASSETS LESS LIABILITIES, NET.................. 2,366,030 1.3
----------------- ---------
NET ASSETS.......................................... $ 183,717,446 100.0
----------------- ---------
* The description following each investment is unaudited and not covered by
the Report of Independent Registered Public Accounting Firm.
+ Non-income producing security.
Portfolio securities and foreign currency holdings were translated
at the following exchange rate as of February 28, 2005.
Japanese Yen JPY (Y) 104.34 = $1.00
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 2005
ASSETS:
Investments in securities, at market value (cost--$145,799,432)............... $ 179,066,306
Investments in foreign currency, at market value (cost--$2,273,934)........... 2,285,110
Receivable for investments sold.............................................. 5,364,517
Receivable for dividends and interest, net of withholding taxes.............. 119,022
Cash or cash equivalents..................................................... 4,842
--------------------
Total Assets........................................................... 186,839,797
--------------------
LIABILITIES:
Payable for investments purchased............................................ 2,738,982
Accrued management fee....................................................... 129,133
Other accrued expenses....................................................... 254,236
--------------------
Total Liabilities...................................................... 3,122,351
--------------------
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.............................................................. 166,191,275
Accumulated net realized loss on investments and foreign currency transactions (17,359,231)
Unrealized net appreciation on investments and foreign exchange.............. 33,300,764
--------------------
Net Assets............................................................. $ 183,717,446
--------------------
Net asset value per share.................................................... $11.59
=======
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 2005
INCOME:
Dividend income (less $122,105 withholding taxes)............................ $ 1,660,845
Interest income.............................................................. 5,908
-------------
Total Income........................................................... $ 1,666,753
------------------
EXPENSES:
Management fee............................................................... 1,680,234
Custodian fees............................................................... 337,475
Legal fees................................................................... 308,197
Directors' fees and expenses................................................. 90,400
Auditing and tax reporting fees.............................................. 78,281
Shareholder reports.......................................................... 45,987
Annual meeting expenses...................................................... 35,543
Registration fees............................................................ 29,097
Transfer agency fees......................................................... 21,715
Miscellaneous fees........................................................... 9,855
Insurance fees............................................................... 5,976
-------------
Total Expenses......................................................... 2,642,760
------------------
INVESTMENT LOSS--NET.......................................................... (976,007)
------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Realized gain (loss) on investments and foreign currency transactions:
Net realized gain on investments............................................. 21,234,835
Net realized gain on foreign exchange........................................ 110,168
------------------
Net realized gain on investments and foreign exchange........................ 21,345,003
Change in net unrealized appreciation (depreciation) on translation of foreign currency
and other assets and liabilities denominated in foreign currency.......... (208,841)
Change in net unrealized appreciation (depreciation) on investments.......... 14,545,414
------------------
Net realized and unrealized gain on investments and foreign exchange......... 35,681,576
------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......................... $ 34,705,569
==================
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended
February 28, 2005 February 29, 2004
----------------- -----------------
FROM INVESTMENT ACTIVITIES:
Net investment income (loss).............................................. $ ( 976,007) $ ( 499,221)
Net realized gain (loss) on investments................................... 21,234,834 (5,808,231)
Net realized gain (loss) on foreign exchange.............................. 110,168 (1,558,350)
Change in net unrealized appreciation (depreciation) on investments
and foreign exchange................................................... 14,336,574 65,948,080
------------------- -------------------
Net Increase in net assets resulting from operations...................... 34,705,569 58,082,278
------------------- -------------------
NET ASSETS:
Beginning of year......................................................... 149,011,877 90,929,599
------------------- -------------------
End of year............................................................... $ 183,717,446 $ 149,011,877
=================== ===================
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS
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 following is a
summary of significant accounting policies followed by the Fund. In the
opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have been
included.
(a) Valuation of Securities--Investments traded in the over-the-counter
market are valued at the last reported sales price as of 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 year. 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 year. The Fund does not isolate that portion of the
change in unrealized appreciation (depreciation) included in the statement of
operations arising as a result of changes in Japanese Yen rates at February
28, 2005 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 exdividend 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.
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 fi-
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
nancial 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 7% (7% effective 1/1/04 to 3/31/08) 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,
2005, the Fund's accumulated net realized loss was increased by $110,168 and
paid in capital was decreased by $865,839, with an offsetting decrease in
accumulated net investment loss of $976,007. This adjustment was primarily the
result of the reclassification of foreign currency gains and 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 ofthe 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.
(h) Indemnifications--Under the Fund's organizational documents its
officers and directors are indemnified against certain liabilities arising
from the performance of their duties to the Fund. Additionally, in the normal
course of business, the Fund enters into contracts that contain a variety of
representations which provide general indemnifications. The Fund's maximum
exposure under these agreements is unknown as this would involve future claims
that may be made against the Fund that have not yet occurred. However, based
on experience, the Fund expects the risk of loss to be remote.
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
exceeding $175 million, and .80% of the Fund's average weekly net assets in
excess of
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
$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 million
but not in excess of $100 million, .40% of the Fund's average weekly net
assets in excess of $100 million but not exceeding $175 million, and .35% of
the Fund's average weekly net assets in excess of $175 million. Under the
Management Agreement, the Fund accrued fees to the Manager of $1,680,234 for
the year ended February 28, 2005. Under the Investment Advisory Agreement, the
Manager informed the Fund that the Investment Adviser earned fees of $753,257
for the year ended February 28, 2005. At February 28, 2005, the fee payable to
the Manager, by the Fund, was $129,133.
Certain officers and/or directors of the Fund are officers and/or
directors of the Manager. Affiliates of Nomura Holdings, Inc. (the Manager's
indirect parent) earned no commissions on the execution of portfolio security
transactions for the year ended February 28, 2005. The Fund pays each Director
not affiliated with the Manager an annual fee of $10,000 plus $1,000 per
meeting attended, together with such Director's actual expenses related to
attendance at meetings. Such fees and expenses for unaffiliated Directors
aggregated $90,400 for the year ended February 28, 2005.
3. Purchases and Sales of Investments
Purchases and sales of investments, exclusive of investments in foreign
currencies and short-term securities, for the year ended February 28, 2005
were $144,988,182 and $148,168,188, respectively.
As of February 28, 2005, net unrealized appreciation on investments,
exclusive of investments in foreign currency and short-term securities, for
Federal income tax purposes was $33,266,874 of which $36,860,830 related to
appreciated securities and $3,593,956 related to depreciated securities. The
aggregate cost of investments, exclusive of investments in foreign currencies
of $2,273,934, at February 28, 2005 for Federal income tax purposes was
$145,799,432. The Fund has a capital loss carryforward as of February 28, 2005
of approximately $17,359,231, of which $1,448,965 expires February 28, 2010,
$6,143,866 which expires February 28, 2011 and $9,766,401 which expires
February 29, 2012. During the current fiscal year, the Fund utilized
$21,234,835 of capital loss carryforwards to offset current year gains.
JAPAN SMALLER CAPITALIZATION FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for a share of common stock outstanding throughout the year.
For the Year Ended
--------------------------------------
February 28, February 29,
------------ ------------
2005 2004
---- ----
Net asset value, beginning of year.................. $9.40 $5.74
Net investment loss *............................. (0.06) (0.03)
Net realized and unrealized gain (loss)
on investments and foreign currency............. 2.25 3.69
---- ----
Total from investment operations.................. 2.19 3.66
Distributions to shareholders from:
Net realized capital gains........................ - -
Net investment income............................. - -
----- -----
Total distributions................................. 0.00 0.00
Net asset value, end of year........................ $11.59 $9.40
===== =====
Market value, end of year........................... $12.20 $10.79
Total investment return+............................ 13.1% 69.1%
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000)................ $183,717 $149,012
Operating expenses................................ 1.54% 1.47%
Net investment loss............................... (0.57%) (0.41%)
Portfolio turnover................................ 86% 28%
For the Year Ended
-------------------------------------------------
February 28,
-------------------------------------------------
2003 2002 2001
---- ---- ----
Net asset value, beginning of year.................. $5.86 $7.59 $16.39
Net investment loss *............................. (0.05) (0.06) (0.09)
Net realized and unrealized gain (loss)
on investments and foreign currency............. (0.07) (1.59) (7.89)
----- ----- ------
Total from investment operations.................. (0.12) (1.65) (7.98)
Distributions to shareholders from:
Net realized capital gains........................ - (0.08) (0.82)
Net investment income............................. - - -
----- ----- -----
Total distributions................................. (0.00) (0.08) (0.82)
Net asset value, end of year........................ $5.74 $5.86 $7.59
===== ========= =========
Market value, end of year........................... $6.38 $5.53 $6.89
Total investment return+............................ 15.4% (18.6%) (31.1%)
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000)................ $90,930 $92,815 $120,275
Operating expenses................................ 1.63% 1.58% 1.33%
Net investment loss............................... (0.75%) (0.84%) (0.76%)
Portfolio turnover................................ 28% 38% 78%
+ 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 average shares outstanding.
JAPAN SMALLER CAPITALIZATION FUND, INC.
Supplemental Shareholder Information (Unaudited)
The 2004 Annual Meeting of the Shareholders of the Fund was held at the
Fund's offices, Two World Financial Center, Building B, New York, N.Y. on
August 18, 2004. The purpose of the meeting was to elect two Directors to
serve as Class I Directors, each to serve for a term to expire in 2007; to
ratify the appointment of PricewaterhouseCoopers LLP as the Fund's independent
registered public accounting firm for the fiscal year ending February 28,
2005; to amend the Fund's principal investment policy concerning investment in
smaller capitalization companies in Japan; and to transact such other business
as may properly come before the Meeting or any adjournment thereof.
The balance of the Fund's current Directors consists of two Class II
Directors, Yasushi Suzuki and Chor Weng Tan, and two Class III Directors,
William K. Grollman and Arthur R. Taylor, none of whom was a nominee for
election at the Annual Meeting and all of whom continued in office after the
Meeting.
At the Meeting, the following persons were elected by the shareholders
to serve as Class I Directors of the Fund: William G. Barker, Jr., and John F.
Wallace. PricewaterhouseCoopers LLP was ratified as the Fund's independent
registered public accounting firm and the Fund's principal investment policy
was amended.
The results of the voting at the Annual Meeting are as follows:
1. To elect the Fund's Class I Directors:
% of % of
Shares Voted outstanding Shares Voted outstanding
For Shares Withhold Authority Shares
----------------- ------------- -------------------- -------------
William G. Barker, Jr ....................... 12,199,313 77.0 78,077 0.5
John F. Wallace............................... 12,212,819 77.1 64,571 0.4
2. To ratify the appointment of PricewaterhouseCoopers LLP as the Fund's
independent registered public accounting firm for the fiscal year ending
February 28, 2005.
FOR 12,192,584.0670
AGAINST 23,722.3710
ABSTAIN 61,084.0000
2. To amend the Fund's principal investment policy concerning investment in
smaller capitalization companies in Japan.
FOR 10,778,229.1010
AGAINST 1,419,752.5160
ABSTAIN 79,408.8210
JAPAN SMALLER CAPITALIZATION FUND, INC.
INFORMATION PERTAINING TO THE BOARD OF DIRECTORS (Unaudited)
Certain biographical and other information relating to the Director who is an "interested person," as defined in the Investment
Company Act of 1940 ("Investment Company Act"), of the Fund is set forth below:
Term of
Position(s) Office and
Name, Address and Age Held with the Length of Principal Occupation(s)
of Director Fund Time Served* During Past Five Years
------------------------------ ----------------- -------------------- -----------------------------------
Yasushi Suzuki (51)*** President President President of the Fund since May
Two World Financial and Class II and Director 2003; President and Director of
Center, Building B Director since 2003 Nomura Asset Management U.S.A.
New York, New York Inc. ("NAM-U.S.A.") since May
10281 2003; Management Executive of
Nomura Asset Management Co.,
Ltd. ("NAM") from 1999 to April
2003.
Other
Number of Public
Funds in the Directorships
Name, Address and Age Fund Complex Held by the
of Director Overseen** Director
------------------------------ -------------------- ------------------
Yasushi Suzuki (51)*** 2 registered None
Two World Financial investment
Center, Building B companies
New York, New York consisting of
10281 2 portfolios
----------------
* Each Director serves for a three year term. Class II Directors serve
until the 2005 annual shareholders meeting.
** In addition to the Fund, the "Fund Complex" includes Korea Equity Fund,
Inc.
*** Mr. Suzuki is a director and President of Korea Equitty Fund, Inc. for
which NAM-U.S.A. acts as manager and for which NAM acts as investment
adviser. Mr. Suzuki is an "interested person," as defined in the
Investment Company Act, of the Fund based on his positions as President
of the Fund, and as President and Director of NAM-U.S.A. and former
Management Executive, Senior Officer and Director of NAM.
JAPAN SMALLER CAPITALIZATION FUND, INC.
INFORMATION PERTAINING TO THE BOARD OF DIRECTORS (Continued) (Unaudited)
Certain biographical and other information relating to each Director who is not an "interested person," as defined in the
Investment Company Act of 1940 ("Investment Company Act"), of the Fund is set forth below:
Term of
Position(s) Office and
Name, Address and Age Held with the Length of Principal Occupation(s)
of Director Fund Time Served During Past Five Years
------------------------------ ----------------- -------------------- -----------------------------------
William G. Barker, Jr. (72) Class I Director Retired.
111 Parsonage Road Director since 1993
Greenwich, Connecticut
06830
William K. Grollman (62) Class III Director President since 1981 and co-
SmartPros Ltd. Director since 2004 founder of SmartPros Ltd.
12 Skyline Drive (continuing education profes-
Hawthorne, New York sional); former Partner and
10532 National Director of BDO Seid-
man accounting firm.
Chor Weng Tan (68) Class II Director Retired since 2004; Managing Di-
76 Echo Bay Drive Director since 1993 rector for Education, The
New Rochelle, American Society of Mechanical
New York 10805 Engineers from 1991 to 2004.
Arthur R. Taylor (69) Class III Director Retired since 2002; President of
3731 Devonshire Road Director since 1993 Muhlenberg College from 1992 to
Allentown, Pennsylvania 2002.
18103
John F. Wallace (76)*** Class I Director Retired since 2000; Vice Presi-
17 Rhoda Street Director since 1993 dent of the Fund from 1997 to
West Hempstead, 2000 and Secretary and Treasurer
New York 11552 of the Fund from 1993 to 1997;
Senior Vice President of NAM-
U.S.A. from 1981 to 2000,
Secretary from 1976 to 2000,
Treasurer from 1984 to 2000 and
Director from 1986 to 2000.
Other
Number of Public
Funds in the Directorships
Name, Address and Age Fund Complex Held by the
of Director Overseen** Director
------------------------------ --------------------- ------------------
William G. Barker, Jr. (72) 2 registered None
111 Parsonage Road investment
Greenwich, Connecticut companies
06830 consisting of
2 portfolios
William K. Grollman (62) 2 registered SmartPros
SmartPros Ltd. investment Ltd.
12 Skyline Drive companies
Hawthorne, New York consisting of
10532 2 portfolios
Chor Weng Tan (68) 2 registered None
76 Echo Bay Drive investment
New Rochelle, companies
New York 10805 consisting of
2 portfolios
Arthur R. Taylor (69) 2 registered None
3731 Devonshire Road investment
Allentown, Pennsylvania companies
18103 consisting of
2 portfolios
John F. Wallace (76)*** 2 registered None
17 Rhoda Street investment
West Hempstead, companies
New York 11552 consisting of
2 portfolios
---------
* Each Director serves for a three year term. Class I Directors serve
until the 2007 annual shareholders meeting. Class II Directors serve
until the 2005 annual shareholders meeting. Class III Directors serve
until the 2006 annual shareholders meeting.
** In addition to the Fund, the "Fund Complex" includes Korea Equity Fund,
Inc. Each Director is a director of Korea Equity Fund, Inc. for which
NAM-U.S.A. acts as manager and NAM acts as investment adviser, and each
is a member of the Audit and Nominating Committees of Korea Equity Fund,
Inc. and a member of the Audit and Nominating Committees of the Fund.
*** Mr. Wallace became a non-interested Director on November 18, 2004.
JAPAN SMALLER CAPITALIZATION FUND, INC.
INFORMATION PERTAINING TO THE OFFICERS OF THE FUND (Unaudited)
Certain biographical and other information relating to the officers of the Fund is set forth below:
Name, Address* and Age Position(s) Held with Term of Office** and Principal Occupation(s)
of Director the Fund Length of Time Served During Past Five Years
------------------------------ ----------------------- ----------------------- ------------------------------------------------
Yasushi Suzuki (51) President and President since 2003 President and Director of NAM-U.S.A. since
Class II Director May 2003; Management Executive of NAM
from 1998 to April 2003.
Kiyoharu Ikeda (50) Vice President Vice President since Senior Vice President and Director of NAM-
2004 U.S.A. since June 2004; Senior Manager of
Compliance & Inspection Department for NAM
from 2002 to 2004; Director of Compliance and
Client Services for AXA Rosenberg Investment
Management Ltd. from 1999 to 2002; General
Manager of Marketing for Rosenberg Nomura
Asset Management Ltd. from 1997 to 1999.
Kenneth L. Munt (58) Vice President Vice President since Senior Vice President and Secretary of NAM-
2001 U.S.A. since 1999; Senior Vice President of
Human Resources for Middlesex Mutual Assur-
ance Company from 1996 to 1999.
Rita Chopra-Brathwaite Treasurer Treasurer since 2002 Vice President of NAM-U.S.A. since 2001; As-
(36) sistant Vice President of NAM-U.S.A. from 1999
to 2000; Senior Accounting Manager from 1997
to 1998.
Neil Daniele (44) Secretary Secretary since 2002 Senior Vice President of NAM-U.S.A. since
2002; Vice President and Compliance Officer of
Munich Re Capital Management Corp. from
2001 to 2002; Vice President of AIG Global
Investment Group, Inc. from 2000 to 2001;
Compliance Officer of AIG Global Investment
Corp. from 1996 to 2000.
---------
* The address of each officer listed above is Two World Financial Center,
Building B, New York, New York 10281.
** Elected by and serves at the pleasure of the Board of Directors.
JAPAN SMALLER CAPITALIZATION FUND, INC.
REVIEW OF THE FUND'S MARKET PRICE COMPARED TO NET ASSET VALUE
Shares of closed-end investment companies, including funds focusing on a
single country, have at various times traded at both premiums and discounts to
their net asset value ("NAV"). Although the shares of the Fund have traded at
such a premium, they also have traded at a discount from NAV.
Since the Fund was established, the Board of Directors on a quarterly
basis has reviewed the trading price of the Fund's shares. The purpose of such
review has been to determine whether a discount exists and, if so, whether it
would be in shareholders' overall best interests for the Fund to conduct share
repurchases, make an issuer tender offer for shares or consider another means
of possibly reducing the discount. For example, the Board of Directors has
also considered whether it would be in the best interests of the Fund to
convert to an open-end fund or to an interval fund, which is a form of
investment company that makes periodic share repurchases at prices based on
NAV.
To date, the Board of Directors has not authorized open-market share
repurchases or a tender offer for shares of the Fund. The Board of Directors
also has not felt that it would be in the best interests of the Fund or its
shareholders to convert to an open-end fund or an interval fund. As a "country
fund", emphasizing a smaller capitalization segment of the market, the Fund's
NAV is more volatile than might be the case for a fund with a broader
investment focus. The Board of Directors believe that converting the Fund to
either an open-end or interval fund would subject the Fund to redemptions or
repurchases at times when liquidation of portfolio securities could
disadvantage remaining shareholders, and they believe that the recent
volatility of the financial markets in Japan supports their view.
Additionally, since an open-end fund has a limited ability to invest in
illiquid securities, such a conversion could hinder the Fund's ability to
pursue its investment objectives. The Board of Directors intend to continue to
review, on a quarterly basis, the trading market for the Fund's shares.
JAPAN SMALLER CAPITALIZATION FUND, INC.
DIVIDEND REINVESTMENT PLAN
The Dividend Reinvestment Plan (the "Plan") is available automatically
for any holder of Common Stock with shares registered in his/her own name who
wishes to purchase additional shares with income dividends or capital gains
distributions received on shares owned, unless such shareholder elects to
receive all dividends and capital gain distributions in cash, paid by check
and mailed to the shareholder. If a shareholder holds shares in his/her own
name, communications regarding the Plan should be addressed to the Plan Agent,
Equiserve Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021.
Under the Plan, shareholders appoint the Plan Agent to reinvest dividends and
distributions in shares of the Fund. Such shares will be acquired by the Plan
Agent for shareholders either through open market purchases if the Fund is
trading at a discount or through the issuance of authorized but unissued
shares if the Fund is trading at net asset value or a premium. If the market
price of a share on the payable date of a dividend or distribution is at or
above the Fund's net asset value per share on such date, the number of shares
to be issued by the Fund to each shareholder receiving shares in lieu of cash
dividends or distributions will be determined by dividing the amount of the
cash dividends or distributions to which such shareholder would be entitled by
the greater of the net asset value per share on such date or 95% of the market
price of a share on such date. If the market price of a share on such
distribution date is below the net asset value per share, the number of shares
to be issued to such shareholders will be determined by dividing such amount,
less brokerage commission, by the per share market price.
Purchases will be made by the Plan Agent from time to time on the New
York Stock Exchange (the "Exchange") or elsewhere to satisfy dividend and
distribution investment requirements under the Plan. Purchases will be
suspended on any day when the closing price (or the mean between the closing
bid and ask prices if there were no sales) of the shares on the Exchange on
the preceding trading day was higher than the net asset value per share. If on
the dividend payable date, purchases by the Fund are insufficient to satisfy
dividend or distribution investments and on the last trading day immediately
preceding the dividend payable date the closing price or the mean between the
closing bid and ask prices of the shares is lower than or the same as the net
asset value per share, the Plan Agent will continue to purchase shares until
all investments by shareholders have been completed or the closing price or
the mean between the bid and ask prices of the shares becomes higher than the
net asset value, in which case the Fund will issue the necessary additional
shares from authorized but unissued shares. If on the last trading day
immediately preceding the dividend payable date, the closing price or the mean
between the bid and ask prices of the shares is higher than the net asset
value per share and if the number of shares previously purchased on the
Exchange or elsewhere is insufficient to satisfy dividend investments, the
Fund will issue the necessary additional shares from authorized but unissued
shares. There will be no brokerage charges with respect to shares issued
directly by the Fund to satisfy the dividend investment requirements. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Fund's open market purchases of shares. In each case, the
cost per share of shares purchased for each shareholder's account will be the
average cost, including brokerage commissions, of any shares purchased in the
open market plus the cost of any shares issued by the Fund. For the fiscal
year ended February 28, 2005, the Fund did not issue any new shares for
dividend reinvestment purposes.
Shareholders who elect to hold their shares in the name of a broker or
other nominee should contact such broker or other nominee to determine whether
they may participate in the Plan. To the extent such participation is
permitted, the Plan Agent will administer the Plan on the basis of the number
of shares certified from time to time by the broker as representing the total
amount registered in the shareholder's name and held for the account of
beneficial owners who are participating in such Plan. Shareholders that
participate in the Plan holding shares in a brokerage account may not be able
to transfer the shares to another broker and continue to participate in the
Plan. Shareholders who are participating in the Plan may withdraw from the
Plan at any time. There will be no penalty for withdrawal from the Plan, and
shareholders who have previously withdrawn from the Plan may rejoin it at any
time. Changes in participation in the Plan should be made by contacting the
Plan Agent if the shares are held in the shareholder's own name and must be in
writing and should include the shareholder's name and address as they appear
on the account registration. If the shares are held in the name of a broker or
other nominee, such person should be contacted regarding changes in
participation in the Plan. Upon withdrawal from the Plan, the Plan Agent will
deliver to the shareholder a certificate or certificates for the appropriate
number of full shares and a cash payment for any fractional shares. In lieu of
receiving a certificate, the shareholder may request the Plan Agent to sell
part or all of the shareholder's shares at the market price and remit the
proceeds to the shareholder, net of any brokerage commissions. A $2.50 fee
will be charged by the Plan Agent upon any cash withdrawal or termination. An
election to withdraw from the Plan will, until such election is changed, be
deemed to be an election by a shareholder to take all subsequent distributions
in cash. An election will be effective only for a dividend or distribution if
it is received by the Plan Agent not less than 10 days prior to such record
date.
The Plan Agent will maintain all shareholders' accounts in the Plan, and
furnish written confirmation of all transactions in such account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant may be held by the Plan Agent in non-certificated form
in the name of the participant, and each shareholder's proxy will include
those shares purchased or received pursuant to the Plan.
The automatic reinvestment of dividends will not relieve participants of
any income taxes that may be payable (or required to be withheld) on such
dividends. Shareholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan should be treated for Federal income
tax purposes as receiving a distribution in an amount equal to the amount of
money that the shareholders receiving cash dividends or distributions will
receive and should have a cost basis in the shares received equal to such
amount.
The Fund reserves the right to amend or terminate the Plan as applied to
any dividend paid subsequent to written notice of the change sent to
participants in the Plan at least 90 days before the record date for such
dividend. There is no service charge to participants in the Plan; however, the
Fund reserves the right to amend the Plan to include a service charge payable
by the participants. All correspondence concerning the Plan, including
requests for additional information about the Plan, should be directed to the
Plan Agent.
BOARD OF DIRECTORS
William G. Barker, Jr.
William K. Grollman
Yasushi Suzuki
Chor Weng Tan
Arthur R. Taylor
John F. Wallace
OFFICERS
Yasushi Suzuki, President
Kiyoharu Ikeda, Vice President
Kenneth L. Munt, Vice President
Rita Chopra-Brathwaite, Treasurer
Neil A. Daniele, Secretary
MANAGER
Nomura Asset Management U.S.A. Inc.
Two World Financial Center, Building B
New York, New York 10281
Internet Address
www.nomura.com
INVESTMENT ADVISER
Nomura Asset Management Co., Ltd.
1-12,1-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
Boston, Massachusetts 02109
COUNSEL
Sidley Austin Brown & Wood LLP
787 Seventh Avenue
New York, New York 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
5 Times Square
New York, New York 10036
JAPAN SMALLER CAPITALIZATION FUND, INC.
TWO WORLD FINANCIAL CENTER, BUILDING B
NEW YORK, NEW YORK 10281
------------------------------------------------------------------------------
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.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
JAPAN
Smaller Capitalization
Fund, Inc.
ANNUAL REPORT
February 28, 2005
------------------------------------------------------------------------------
------------------------------------------------------------------------------
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ITEM 2. CODE OF ETHICS
------------------------------------------------------------------------------
(a) As of February 28, 2005, the Registrant had adopted a code of ethics
that applies to the Registrant's Principal Executive Officer, Principal
Financial Officer, Principal Accounting Officer or Controller, or
persons performing similar functions, regardless of whether these
individuals are employed by the Registrant or a third party.
(b) There were no amendments during the fiscal year ended February 28, 2005
to a provision of the code of ethics that applies to the Registrant's
Principal Executive Officer, Principal Financial Officer, Principal
Accounting Officer, or persons performing similar functions, and that
relates to any element of the code of ethics definition enumerated in
paragraph (b) of Item 2 of Form N-CSR.
(c) Not applicable.
(d) Not applicable.
(e) A copy of the Registrant's code of ethics is attached as an exhibit.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
------------------------------------------------------------------------------
The Registrant's Board of Directors has determined that William K. Grollman, a
member of the Registrant's Audit Committee, is an "audit committee financial
expert" and "independent," as such terms are defined in this Item. This
designation will not increase the designee's duties, obligations or liability
as compared to his duties, obligations and liability as a member of the Audit
Committee and of the Board; nor will it reduce the responsibility of the other
Audit Committee members.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------------------------------------------
PricewaterhouseCoopers LLP ("PwC") resigned as the Accountant to the
Registrant in November 2004 because PwC had been appointed to provide
non-audit services to certain affiliates of Nomura Asset Management U.S.A.
Inc. ("NAM-USA"), the Registrant's manager, that could be viewed as
inconsistent with auditor independence with respect to the Registrant. The
Registrant's Board of Directors appointed Ernst & Young LLP ("E&Y") as the
Accountant to the Registrant for the Registrant's fiscal year ended 2/28/05.
(a) Audit Fees for the Registrant were $64,000* and $49,000** for the
fiscal years ended 2/28/05 and 2/29/04, respectively.
(b) Audit-Related Fees for the Registrant were $9,000** and $9,000**
for the fiscal years ended 2/28/05 and 2/29/04, respectively. These amounts
represent procedures performed in connection with the review of the
Registrant's semi-annual reports.
In addition, there were no Audit-Related Fees billed in the fiscal years ended
2/28/05 and 2/29/04 for assurance and related services by the Accountant to
the Registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by or
under common control with the investment adviser that provides ongoing
services to the Registrant ("service affiliates"), that were reasonably
related to the performance of the annual audit of the service affiliates.
Accordingly, there were no such fees that required pre-approval by the Audit
Committee for the fiscal years ended 2/29/04 and 2/28/03, respectively.
(c) Tax Fees for the Registrant were $7,500** and $7,500** for the fiscal
years ended 2/28/05 and 2/29/04, respectively. These amounts represent
aggregate fees paid for tax compliance, tax advice and tax planning services,
which include (the filing and amendment of federal, state and local income tax
returns, timely RIC qualification review and tax distribution and analysis
planning) rendered by the Accountant to the Registrant.
There were no fees billed for tax services by the Accountant to service
affiliates for the fiscal years ended 2/28/05 and 2/29/04, respectively, that
required pre-approval by the Audit Committee.
* Fees paid to E&Y
** Fees paid to PwC
(d) There were no All Other Fees for the Registrant for the fiscal years ended
2/28/05 and 2/29/04, respectively.
2
There were no fees billed for all other non-audit services rendered by the
Accountant to service affiliates for the fiscal years ended 2/29/05 and
2/28/04, respectively, that required pre-approval by the Audit Committee.
(e) (1) The Charter for the Audit Committee of the Registrant requires the
Audit Committee (a) to preapprove all auditing services to be provided to the
Registrant by the Registrant's independent accountants; (b) to preapprove all
non-audit services, including tax services, to be provided to the Registrant
by the Registrant's independent accountants in accordance with the Securities
Exchange Act of 1934, as amended (the "1934 Act"); provided, however, that the
preapproval requirement with respect to the provision of non-audit services to
the Registrant by the Registrant's independent accountants may be waived by
the Audit Committee under the circumstances described in the 1934 Act; and (c)
to preapprove non-audit services to be provided to the Registrant's investment
adviser (and any entity controlling, controlled by or under common control
with the investment adviser that provides ongoing services to the Registrant)
if the engagement relates directly to the operations and financial reporting
of the Registrant.
(f) N/A
(g) Non-audit fees billed by the Accountant for services rendered to the
Registrant and NAM-USA and any entity controlling, controlled by, or under
common control with NAM-USA that provides ongoing services to the Registrant
were $259,700 and $363,375 for the fiscal years ended 3/31/04 and 3/31/03,
respectively.*** These amounts represent aggregate fees paid for tax compliance,
tax advice and tax planning services and non-audit related services rendered
by the Accountant to service affiliates. Non-audit fees billed by E&Y for
services rendered to the Registrant and NAM-USA and any entity controlling,
controlled by, or under common control with NAM-USA that provides ongoing
services to the Registrant were $1.4 million for the fiscal year ended
3/31/04.*** This amount represents aggregate fees paid for tax-related services
and non-audit related services rendered by E&Y to service affiliates.
*** Amounts provided are the most recent available.
(h) Yes. The Registrant's Audit Committee has considered whether the provision
of non-audit services that were rendered to Service Affiliates which were not
pre-approved (not requiring pre-approval) is compatible with maintaining the
Auditor's independence. All services provided by the Accountant to the
Registrant or to Service Affiliates which were required to be pre-approved
were pre-approved as required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
------------------------------------------------------------------------------
(a) The Registrant's Board of Directors has a standing Audit Committee,
which consists of the Directors who are not "interested persons" of the
Registrant within the meaning of the Investment Company Act of 1940, as
amended. Currently, Messrs. William G. Barker, William K. Grollman, Chor
Weng Tan , Arthur R. Taylor and John F. Wallace are members of the Audit
Committee.
(b) Not applicable.
3
ITEM 6. SCHEDULE OF INVESTMENTS
------------------------------------------------------------------------------
The Registrant's investments in securities of unaffiliated issuers as of
2/28/05 are included in the report to shareholders filed under Item 1 of this
Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
------------------------------------------------------------------------------
The Registrant has delegated proxy voting responsibilities to its investment
adviser, subject to the Board of Directors' general oversight. The investment
adviser has adopted its own Policy and Process on Corporate Governance and
Proxy Voting for this purpose. The Policy and Process is set forth below.
Policy and Process on Corporate Governance and Proxy Voting
NOMURA ASSET MANAGEMENT
NOMURA ASSET MANAGEMENT CO., LTD.
NOMURA ASSET MANAGEMENT U.S.A. INC.
NOMURA ASSET MANAGEMENT U.K. LIMITED
NOMURA ASSET MANAGEMENT SINGAPORE LIMITED
NOMURA ASSET MANAGEMENT HONG KONG LIMITED
August 2004
I. Basic Policy for Proxy Voting
---------------------------------
This Proxy Voting Policy has been adopted by Nomura Asset Management Co., Ltd.
("NAM") and its investment advisory subsidiaries (listed on Schedule 1). These
companies are hereinafter collectively referred to as "Nomura Asset
Management". The overall objective of Nomura Asset Management is to increase
the value of its clients' investments. We recognize that the power to
influence management through voting rights is an effective way to achieve such
an objective. Nomura Asset Management believes the right to vote proxies is an
important financial asset that must be managed with the same care and
diligence as any other client asset. We exercise proxy voting decisions solely
in the best interests of our clients and will acquire a company's equity
securities only because we believe them to be good investment. We will not
acquire equity securities simply to obtain control of an issuer.
II. Organizational Structure for Proxy Voting Process
------------------------------------------------------
The Proxy Voting Committee is primarily responsible for making final
determinations on proxy voting for Nomura Asset Management. The day-to-day
operational activities relating to proxy voting are performed at each of the
departments within Nomura Asset Management.
Notwithstanding the foregoing, proxy voting shall be instructed through NAM's
overseas affiliates, which owe a primary responsibility for proxy voting under
the investment advisory agreements entered into with their clients.
4
1. Proxy Voting Committee
The Proxy Voting Committee develops the firm's positions on specific voting
issues, creates proxy voting guidelines (the "Proxy Voting Guidelines"), and
has oversight responsibility over the proxy voting process. From time to time,
it shall have direct decision-making input on a company's specific proxy
voting matters, as more fully described in Section V of this Policy. NAM's
Board of Directors appoints the Chairman of the Proxy Voting Committee, who,
in turn, appoints the other members of the Committee. The Proxy Voting
Committee may be held whenever necessary.
2. Fund Operation Department
Regarding accounts for which NAM serves as manager, its Fund Operation
Department has the primary responsibility for handling proxy voting
instructions. The Department also provides necessary support to NAM's overseas
affiliates with respect to their accounts.
For a Japanese issuer, the Fund Operation Department classifies the proxy
materials received from the custodian depending upon whether (i) it is a
company on the Watch List (as defined in Section VIII below), (ii) its proxy
agenda includes any extraordinary items (defined as an item not considered a
"routine agenda" item. See Note 1, Section III) and (iii) its audit opinion
attached to the company's financial statement is qualified. If a company meets
one or more of the foregoing conditions, the company's proxy materials shall
be forwarded to NAM's Corporate Research Department for its review. If none of
these conditions apply to a company, the Fund Operation Department shall
instruct the custodian to vote for the agenda. For agendas that have been
forwarded to the Corporate Research Department, the Fund Operation Department
shall instruct the custodian to vote in accordance with the determinations
made by the Corporate Research Department, or when necessary, by the Proxy
Voting Committee.
For a non-Japanese issuer, our Fund Operation Department, after receiving the
proxy materials from the custodian, shall forward such materials to the
Corporate Research Department. If proxy materials are available through other
information sources, the Corporate Research Department may rely upon the
information from such sources. The Fund Operation Department shall instruct
the custodian to vote in accordance with the determinations made by the
Corporate Research Department based on the recommendations made by overseas
affiliates, or when necessary, determinations made by the Proxy Voting
Committee.
Records of proxy voting instructions shall be maintained.
3. Operations Departments at Overseas Affiliates
The operations department of each overseas affiliate ("Overseas Operations
Department") generally handles proxy voting instructions in accordance with
the investment advisory agreements entered into with its client. The Overseas
Operations Department shall also provide necessary support to NAM or other
overseas affiliates with respect to the accounts of NAM or other overseas
affiliates.
The Overseas Operations Department, after receiving the proxy materials from
the custodian, shall forward as necessary such materials to NAM or other
relevant overseas affiliates. If proxy
5
materials are available through other information sources, NAM or other
relevant overseas affiliates may rely upon the information from such sources.
After having the agenda reviewed by NAM or other relevant overseas affiliates,
the Overseas Operations Department shall instruct the custodian to vote.
Records of proxy voting instructions shall be maintained.
4. Corporate Research Department
NAM's Corporate Research Department, through the support it provides to the
Proxy Voting Committee, plays an important role in the review of proxy
materials.
For Japanese issuers, the Corporate Research Department is responsible for
preparing, reviewing and maintaining the Watch List. The Corporate Research
Department reviews proxy materials received from the Fund Operation Department
and informs of their determinations on proxy voting. When the Corporate
Research Department believes further review is necessary, it requests the
Proxy Voting Committee to deliberate on the specific agenda item in question.
The Corporate Research Department shall keep the minutes of the Proxy Voting
Committee meeting, and will inform the Fund Administration Department of the
Proxy Voting Committee's determinations in a timely manner.
The Corporate Research Department also reviews the proxy materials received
from NAM's overseas affiliates.
For non-Japanese issuers whose equity securities are held in Japanese
investment trust portfolios and NAM's institutional accounts, the Corporate
Research Department, after receiving the proxy materials from the Fund
Operation Department, shall forward such materials to the relevant overseas
affiliates. Recommendations of the overseas affiliates are then delivered to
the Corporate Research Department. The General Manager of the Corporate
Research Department is responsible for the final determinations on proxy
voting, or when necessary, may refer specific agenda items to the Proxy Voting
Committee.
The Corporate Research Department also provides its determinations on proxy
voting to overseas affiliates that manage Japanese equity accounts.
5. Investment Department at Overseas Affiliate
The investment department of each overseas affiliate ("Overseas Investment
Department") handles proxy voting for non-Japanese issuers whose equity
securities are held in NAM's Japanese investment trust portfolios and
institutional accounts. The Overseas Investment Department is responsible for
providing recommendations for proxy voting for the issuers in its region,
i.e., Nomura Asset Management U.S.A. Inc. is responsible for North and South
American equity proxy voting recommendations, Nomura Asset Management U.K.
Limited is responsible for European equity proxy voting recommendations, and
Nomura Asset Management Singapore Limited is responsible for Asian equity
proxy voting recommendations. When necessary, other Overseas Investment
Departments may provide to the relevant Overseas Investment Department their
recommendations about a certain issuer even if the issuer is not in its
region. In addition, the Overseas Investment Department may utilize third
party proxy voting service providers (e.g., Institutional Shareholder Services
(ISS)) to formulate their recommendations. These recommendations are delivered
to NAM's Corporate Research Department.
6
The Overseas Investment Departments also provide proxy voting recommendations
to other overseas affiliates managing non-Japanese equity accounts. For such
accounts, the Overseas Operations Department sends voting information to the
relevant overseas affiliate and instructs the custodian as recommended. The
relevant overseas affiliate shall determine the proxy voting through the
process described above.
III. Proxy Voting Process for Japanese Equities
------------------------------------------------
Nomura Asset Management carries out the following proxy voting process for
Japanese equities:
1. Corporate Research Department prepares, reviews and maintains the Watch
List.
2. Fund Operation Department classifies the proxy materials received from
the custodian into companies: 1) which are on the Watch List, 2) their
proxy agenda includes any extraordinary items (defined as an item not
considered to be a "routine agenda" item. See Note 1.), and 3) their
audit opinion attached to their financial statement is qualified.
3. If none of the conditions stated above applies to a company, the Fund
Operation Department then instructs the custodian to vote for the
agenda.
4. When the Fund Operation Department finds that (i) the company is on the
Watch List, (ii) the proxy agenda includes any extraordinary item, or
(iii) its audit opinion attached to the company's financial statement is
qualified, the proxy material is then forwarded to Corporate Research
Department for its review.
5. The Corporate Research Department reviews the agenda and if it finds any
problems within the agenda, details are sent to the Proxy Voting
Committee for deliberation. When the Corporate Research Department
determines that no problems exist, it informs the Fund Operation
Department of its determinations on proxy voting.
6. The Proxy Voting Committee closely reviews the agenda in accordance with
the Proxy Voting Guidelines. When the Proxy Voting Committee finds
specific agenda items that would not be in the clients' best interests,
the Proxy Voting Committee shall determine whether to vote against or to
abstain from voting on the specific agenda items. The Proxy Voting
Committee's determinations shall be notified to the Fund Operation
Department .
7. Agendas reviewed by the Proxy Voting Committee shall be reported to
NAM's Management Committee or Board of Directors.
8. For Japanese issuers whose equity securities are held in overseas
affiliates' accounts, the Overseas Operations Department receives the
proxy materials from the custodian, and instructs the custodian in
accordance with the determinations on proxy voting made by NAM's
Corporate Research Department.
Note 1. "Routine agenda" items are as follows:
1. Appropriation of profit
7
2. Election of directors (uncontested elections only)
3. Election of statutory auditors
4. Payment of lump sum bonus to retiring directors
5. Payment of lump sum bonus to retiring statutory auditors
Notwithstanding the foregoing, any shareholder proposal is not to be
considered a routine proposal.
IV. Proxy Voting Process for Non-Japanese Equities
---------------------------------------------------
Nomura Asset Management carries out the following proxy voting process for
non-Japanese equities:
1. For institutional client accounts, for which cash flows are infrequent,
Nomura Asset Management shall instruct, in principal, proxy voting with
respect to each issuer of equity securities held in its institutional
accounts; provided the Company is authorized to do so by the client.
2. For Japanese investment trusts or other open-ended investment vehicles,
for which cash-flows are frequent, Nomura Asset Management shall
instruct proxy voting on each proxy voting matter; provided, however,
that a proxy vote shall not be instructed if the exercise of a proxy
imposes any restriction on disposal of the securities. Nomura Asset
Management, in instructing proxy voting, considers costs and benefits
associated therewith.
3. NAM's Corporate Research Department, in accordance with the Proxy Voting
Guidelines, prepares, reviews and maintains the Watch List or list of
companies that potentially have problems in terms of the clients' best
interests.
4. NAM's Fund Operation Department, after receiving proxy materials from
the custodian, shall forward such materials to the Corporate Research
Department. If proxy materials are available through other information
sources, they may rely upon information from such sources.
5. If the custodian has not sent proxy materials, the Corporate Research
Department may seek information through other informational sources such
as third party information vendors.
6. The Corporate Research Department shall forward the proxy materials to
the relevant overseas affiliates. The proxy materials that are available
through other information sources may be used in lieu of their
hardcopies.
7. Each overseas affiliate sends its proxy voting recommendations to the
Corporate Research Department. The overseas affiliates may utilize third
party proxy voting service providers to formulate their recommendations.
8. Corporate Research Department, after reviewing the proxy voting
recommendations from the overseas affiliates, shall inform the Fund
Operation Department of its determinations.
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The Fund Operation Department shall instruct the custodian to vote in
accordance therewith. When necessary, the Corporate Research Department
may refer specific agenda items to the Proxy Voting Committee for its
review. The Proxy Voting Committee closely reviews the agenda in
accordance with the Proxy Voting Guidelines. If the Proxy Voting
Committee believes the agenda referred to is not in our clients' best
interests, it shall determine either to vote against or to abstain from
voting on such agenda items. The determinations of the Proxy Voting
Committee shall be reported to Fund Operation Department. Agendas
reviewed by the Proxy Voting Committee shall be reported to NAM's
Management Committee or Board of Directors.
9. For non-Japanese issuers whose equity securities are held in overseas
affiliate's accounts, the Overseas Operations Department receives the
proxy materials from the custodian, and instructs the custodian in
accordance with the proxy voting recommendations made by the Overseas
Investment Department of other relevant overseas affiliates. The
Overseas Investment Department shall provide its recommendations through
the process described above.
V. Proxy Voting Guidelines
---------------------------
Nomura Asset Management closely examines company voting agendas under the
cases listed below. If it believes that specific agenda items are not in our
clients' best interests, Nomura Asset Management shall decide either to vote
against or to abstain from voting on such agenda items.
1. If it is publicly announced that the issuer violated the law or
otherwise engaged in conduct that severely harmed social interests, then
Nomura Asset Management would vote for shareholder social or political
proposals; but only if they enhanced investment value.
2. If the issuer's audit opinion is qualified (for Japanese equity
securities).
3. If the issuer's disclosure is inadequate and is deemed particularly
harmful to investor interests.
4. If the issuer continuously reports poor business results and its
management's efforts for improvement are found to be inadequate.
5. If the issuer plans a substantial change in its financial or business
strategy and such plans might potentially cause harm to the interests of
shareholders or the issuer's long-term business development.
Notwithstanding the foregoing, Nomura Asset Management may vote for such
a plan if justified based on considerations of reasonable business
judgment.
6. If the issuer's board of directors or statutory auditors do not provide
an adequate level of internal control and are likely to harm shareholder
interest.
7. If extraordinary agenda items, such as amendments to articles of
incorporation are proposed which are likely to harm shareholder value.
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8. For a shareholder proposal, the Proxy Voting Committee makes the final
determination based upon whether the proposal would contribute to higher
shareholder value.
VI. Conflicts of Interest
--------------------------
Due to the nature of Nomura Asset Management's business and its large size, it
is possible that material conflicts of interest will arise in voting of
proxies of public companies (for example, Nomura Asset Management may have a
business relationship with an issuer whose securities are held in client
portfolios).
When such a material conflict arises, Nomura Asset Management shall vote in
accordance with recommendations made by a third party proxy voting service
vendors (e.g., ISS). A material conflict of interest will occur if Nomura
Asset Management is required to vote on behalf of its client for a certain
issuer with a close business relationship generating revenue of more than 1
percent of the total revenue of Nomura Asset Management and such proxy voting
is for the purpose of providing an unjust enrichment to the director, officer,
or other affiliate of this issuer. If the revenue from a business relationship
with this issuer is more than 0.5 percent of the total revenue of Nomura Asset
Management, Nomura Asset Management shall closely examine the agenda to see
whether there is any potential conflict of interest.
VII. Positions on Special Matters
----------------------------------
Corporate Governance
--------------------
o Election of Directors
Nomura Asset Management votes for candidates that best serve our
clients' best interests. Nomura Asset Management votes, in principal,
for proposals calling for a board consisting of directors who are
independent of the company, subject to the skills and experience of the
candidates. We vote against proposals that stagger the board, if it does
material harm to shareholder's interest.
o Mergers, Acquisitions and Other Corporate Restructurings Nomura Asset
Management views all proposals on a case-by-case basis by examining the
financial impact on our clients.
o Anti-takeover Measures
Nomura Asset Management will vote, in principal, against proposals that
make it more difficult for a company to be acquired by another company.
We believe that anti-takeover measures may depress the company's market
value.
Shareholder Rights Protection Plans (Poison Pills): Shareholder rights
protection plans, commonly known as poison pills, often involve issuing
stock purchase rights or warrants to shareholders. These rights or
warrants are usually not exercisable unless a hostile takeover offer is
tendered or a potential acquirer of the company purchases a specific
percentage of the shares. Typically, the plan will allow the rights
holders to purchase shares from, or sell shares to, the company at very
favorable prices. This increases the costs to the potential acquirer,
thus making the takeover less attractive.
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Nomura Asset Management recognizes that there are arguments in favor and
against shareholder rights protection plans (i.e., "Poison Pills"). We
vote, in principal, against proposals that ask shareholders to approve
such plans. Nomura Asset Management will assess shareholder rights
protection plans on a case-by-case basis, generally supporting plans
designed to protect shareholder value rather than to insulating the
board and management.
Supermajority Provisions: Supermajority voting requires the vote of more
than a simple majority (typically 66.7% to 80% of the vote) to approve a
decision or transaction. Supermajority voting can limit the ability of
shareholders to effect change by essentially giving veto power to a
large minority shareholder or group of minority shareholders. As a
result, Nomura Asset Management will vote against proposals to impose
supermajority requirements, while voting in favor of proposals that
remove supermajority voting requirements.
Capital Structure Changes
-------------------------
o Increases in Authorized Common Stocks
Companies may request increases in authorized stocks for a variety of
legitimate business purposes. For example, the additional shares may be
used to raise new investment capital for acquisitions, stock splits,
recapitalization or debt restructurings. Nomura Asset Management votes
for these proposals in the absence of unusual circumstances. Otherwise,
proposals will be voted on a case-by-case basis.
o "Blank Check" Preferred Stocks
Nomura Asset Management will carefully scrutinize proposals to authorize
preferred stocks whose voting, conversion, dividend and distribution,
and other rights are determined by the company's board of directors when
the stocks are issued ("Blank Check Preferred Stock). We recognize that
Blank Check Preferred Stocks can be used for legitimate financing
purposes, but also could be used to thwart hostile but desirable
takeovers without shareholder approval. To protect our clients, but
still give financial flexibility to management, Nomura Asset Management
will vote for the authorization of, or an increase in, Blank Check
Preferred Stock in cases where the company expressly states that the
stock will not be used as an anti-takeover defense or carry superior
voting rights. All other Blank Check Preferred Stock proposals will be
handled on a case-by-case basis.
Management Compensation
-----------------------
Nomura Asset Management votes for reasonable compensation of executives,
particularly equity-based compensation plans that are linked to the interests
of the company's long-term shareholders. We vote against plans that are
inconsistent or inequitable with the company's overall financial condition or
that would substantially dilute the interests of our clients.
Corporate and Social Responsibility
-----------------------------------
Nomura Asset Management believes it is management's responsibility to handle
ordinary business matters. Rather than arbitrarily impose a judgment on such
matters, we will
11
typically abstain from voting on proposals concerning corporate and social
policy issues. However, Nomura Asset Management may decide to vote on such
issues on a case-by-case basis recognizing that corporate and social
responsibility issues sometimes do impact the risk-adjusted financial return
of our investments.
VIII. The Watch List
---------------------
Instructing the exercise of proxy voting appropriately and effectively is
often made difficult by the large number of proxies and information to be
processed. In order to facilitate the proxy voting process, Nomura Asset
Management shall screen its investments based on certain predetermined
criteria to create a list of companies that requires increased review (the
"Watch List"). Separate Watch Lists are created for Japanese and non-Japanese
issuers.
1. Watch List Criteria for Japanese Companies
A Japanese company shall be placed on the Watch List if:
a. it is publicly announced that the company violated the law and/or
if it was determined that the company's conduct severely harms
social interests;
b. the company's disclosure is determined to be inadequate, or its
financial strategy and/or business operations are deemed to pose a
severe threat to shareholders' interests and to the company's
future business developments, or it is deemed that its internal
control program is inadequate and is likely to harm shareholder
interests;
c. it meets one or more of the following conditions:
i. the company has an accumulated deficit in the most
recent accounting period;
ii. the company has reported losses or has paid no
dividend for the past three accounting periods;
iii. the company has reported losses or has paid no
dividend for the past five accounting periods;
d. it meets all of the following conditions:
i. the company's PBR(Price/Book Value Ratio) is below 1.0;
ii. the company's ROE is below 5 percent;
iii. the company's shareholder's equity exceed 50 percent
of its total assets;
iv. the company' s net financial assets exceed 30 percent
of its total sales;
v. the company's net financial assets exceed 30 percent
of its total assets;
vi. (The term "net financial asset" shall equal cash and
investment securities less bonds and bank loans)
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Companies shall be excluded if they have been listed
in the last three years, or if they can demonstrate
reasonable investment plans for their surplus
financial assets.
e. it meets one of the following conditions:
i. For a company listed on the First Section of either of
Tokyo, Osaka, or Nagoya Stock Exchanges, its annual
investment return has belonged to the worst quartile
of its TSE 33 industry sector during the past three
years.
ii. For a company listed on the Second Section of either
of Tokyo, Osaka, or Nagoya Stock Exchanges, its annual
investment return has belonged to the worst quartile
of its TSE 33 industry sector during the past three
years.
iii. For a company traded on an OTC market, its annual
investment return has belonged to the worst quartile
of the entire OTC stocks during the past three years.
f. when Nomura Asset Management holds more than five percent of all
the outstanding shares of a certain issuer.
2. Watch List Criteria for non-Japanese Issuers
A non-Japanese company shall be placed on the Watch List if:
a. it meets one or more of the following conditions:
i. investment return has been below the sector index
return (i.e., an index based upon the MSCI's 10
sectors) by 40 percent for the past three years, and
if the company has reported losses (computed on
earnings per share basis) for the past three
accounting periods. If sector classification
information is not available for a certain company,
the company is compared with the MSCI country index
to which the issuer belongs;
ii. investment return has been below the sector return
index (i.e., an index based upon the MSCI's 10
sectors) by 70 percent for the past three years. If
sector classification information is not available for
a certain company, the company is compared with the
MSCI country index to which the issuer belongs;
iii. Nomura Asset Management holds more than one percent of
all the outstanding shares of a certain issuer.
b. The Corporate Research Department shall produce and send the
Watch List to the overseas affiliates and other relevant
departments. Each overseas affiliate reviews the company on the
Watch List, in accordance with the Proxy Voting Guidelines, and
may remove a company from the Watch List if it reasonably
believes that its inclusion on the list is not warranted. The
overseas affiliate, when necessary, may add a company to the
Watch List.
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c. General Managers of the Corporate Research Department are
responsible for making the final determinations regarding the
deletion or addition of certain companies to and from the Watch
List. The Corporate Research Department shall maintain records of
their determinations.
d. The Watch List generally shall be up-dated on a semi-annual basis.
Screening criteria shall be reviewed when necessary, and any
changes to the criteria must be approved by the Proxy Voting
Committee.
Nomura Asset Management
Policy and Process on Corporate Governance and Proxy Voting
Schedule 1
Nomura Asset Management Co., Ltd.
Nomura Asset Management Hong Kong Limited
Nomura Asset Management Singapore Limited
Nomura Asset Management U.K. Limited
Nomura Asset Management U.S.A. Inc.
ITEM 8. PORTFILIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
------------------------------------------------------------------------------
(a) Not applicable
(b) Not applicable
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
------------------------------------------------------------------------------
(a) Not applicable
(b) Not applicable
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------------------------
The principal purpose of the Registrant's Nominating Committee is to select
and nominate the Directors of the Registrant. It evaluates candidates'
qualifications for Board membership and, with respect to nominees for
positions as independent directors, their independence from the Registrant's
manager and its affiliates and other principal service providers.
The Nominating Committee will consider potential director candidates
recommended by Registrant shareholders provided that the proposed candidates
satisfy the director qualification requirements provided in the Nominating
Committee's Charter; are not "interested persons" of the Registrant or the
Registrant's investment adviser within the meaning of the Investment Company
Act; and are "independent" as defined in the New York Stock Exchange listing
standards. The Committee has determined that potential director candidates
recommended by Registrant shareholders must satisfy the Securities and
Exchange Commission's ("SEC")
14
nominee requirements found in Regulation 14A of the Securities and Exchange
Act of 1934, as amended ("1934 Act"). Shareholders recommending potential
director candidates must substantiate compliance with certain requirements at
the time of submitting their proposed director candidate to the attention of
the Registrant's Secretary.
The Nominating Committee identifies prospective candidates from any reasonable
source and has the ability to engage third-party services for the
identification and evaluation of potential nominees. The Committee meets
annually to identify and evaluate nominees for Director and makes its
recommendations to the Board. In identifying and evaluating a potential
nominee to serve as an independent Director of the Registrant, the Nominating
Committee will consider, among other factors: (i) whether the individual has
any material relationships that could create any appearance of impropriety
with respect to or a lack of independence from NAM-U.S.A. or any of its
affiliates; (ii) whether the individual has the integrity, independence of
mind and personal qualities to fulfill the fiduciary duties of an independent
Director of the Registrant and to protect the interests of Registrant
shareholders; (iii) the individual's corporate or other business experience in
significant positions which demonstrate sound business judgment; (iv) whether
the individual has financial and accounting experience; (v) the individual's
ability to and attend at least four regular meetings a year and (vi) whether
the individual can add to the balance of experience of the present independent
Directors. The standard of the Nominating Committee is to treat all equally
qualified nominees in the same manner.
ITEM 11. CONTROLS AND PROCEDURES
------------------------------------------------------------------------------
The Registrant's Principal Executive Officer and Principal Financial Officer
have evaluated the Registrant's disclosure controls and procedures within 90
days of the filing of this report and have concluded that they are effective
in providing reasonable assurance that the information required to be
disclosed by the Registrant in its reports or statements filed under the 1934
Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
There were no changes in the Registrant's internal control over financial
reporting that occurred during the second fiscal quarter of the period covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS
------------------------------------------------------------------------------
(a) (1) Code of Ethics for Principal Executive and Senior Financial Officers.
(a) (2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940
are attached hereto as an exhibit.
(a) (3) Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 are furnished herewith as an exhibit.
15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Japan Smaller Capitalization Fund, Inc.
By: /s/ Yasushi Suzuki
------------------------------
Yasushi Suzuki, President
(Principal Executive Officer)
Date: May 9, 2005
-------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Rita Chopra-Brathwaite
-------------------------------
Rita Chopra-Brathwaite, Treasurer
(Principal Financial Officer)
Date: May 9, 2005
-------------------------------
16