avatar Japan Smaller Capitalization Fund, Inc. Finance, Insurance, And Real Estate
  • Location: New York 
  • Founded:
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    JAPAN SMALLER CAPITALIZATION FUND, INC. April 26, 2018 To Our Shareholders: We present the Annual Report of Japan Smaller Investment Strategy Capitalization Fund, Inc. (the “Fund”) for the fiscal The Fund invests in undervalued stocks that of- year ended February 28, 2018. fer fundamental strength and potential for The net asset value per share (“NAV”) of the Fund improvement. The Fund performs extensive fun- increased by 32.2% and the closing market price of damental research to identify stocks that can the Fund (on the New York Stock Exchange) in- create shareholder value. The Fund focuses on creased by 36.0% after giving effect to the companies that are leaders in certain niche mar- reinvestment of income dividends, ordinary income kets, companies with large or expanding market distributions, and long-term capital gain distribu- shares, stocks with superior shareholder distribu- tions for the fiscal year ended February 28, 2018. tion policies, and stocks that offer good growth The closing market price of the Fund on February prospects. In the Japanese small cap equity mar- 28, 2018 was $12.48, representing a discount of ket, valuation anomalies do exist and can be 10.9% to the NAV of $14.01. The net assets of the exploited through active management. There are a Fund totaled $397,087,083 on February 28, 2018. number of factors that the Fund considers when The Russell/Nomura Small Cap™ Index, the selling an investment, including a stock which ap- Fund’s benchmark (“Benchmark”), increased by pears fully valued, unexpected deterioration in 29.7% in United States (“U.S.”) dollar terms. During earnings or a substantial loss that impairs the the fiscal year ended February 28, 2018, the Fund company’s net assets, and a stock’s diminishing outperformed the Benchmark by 2.5% on a NAV potential given declining competitiveness due to a basis. The Tokyo Price Index (the “TOPIX”), a capi- change of business environment or failure of busi- talization-weighted index of all companies listed on ness strategy. the First Section of the Tokyo Stock Exchange (the “TSE”), increased by 21.1% and the Nikkei Stock Performance Average Index (“Nikkei”), a price-weighted index of the 225 leading stocks on the TSE, increased by In terms of the sector allocation strategy, under- 21.3% in U.S. dollar terms for the year ended Feb- weight positions in the Banks and Transportation ruary 28, 2018. The Japanese yen (“Yen”) Equipment sectors produced positive contribu- appreciated by 4.9% against the U.S. dollar during tions, although sector returns were eroded by the fiscal year ended February 28, 2018. overweight positions in the Iron and Steel and Warehousing sectors. For the quarter ended February 28, 2018, the Benchmark increased by 5.7%, the TOPIX in- Relative performance was positively impacted creased by 3.9%, and the Nikkei increased by by Espec Corp. in the Electric Appliances sector, 2.3% in U.S. dollar terms. The NAV of the Fund in- Seiren Co., Ltd. in the Textiles and Apparels sec- creased by 6.5% and outperformed the tor, and OBIC Co., Ltd. in the Information and Benchmark by 0.8%. The Fund’s share price in- Communication sector. Conversely, relative per- creased by 5.1% during the quarter. The Yen formance was negatively impacted by Osaka Steel appreciated by 5.1% against the U.S. dollar dur- Co., Ltd. in the Iron and Steel sector and The ing the quarter. Akita Bank, Ltd. in the Banks sector.


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    Market Review tory of Guam, caused some deterioration in broad market sentiment. The Japanese equity market The Benchmark increased by 23.4% and out- appreciated strongly from October through De- performed the TOPIX index, which increased by cember 2017, despite a temporary correction in 15.2% in local currency terms, for the fiscal year November, as solid earnings prospects for ended February 28, 2018. The Japanese equity Japan’s corporate sector and stabilizing political market posted a steep downturn at the beginning conditions supported an improvement in investor of the review period given concerns over geopo- sentiment given fewer developments concerning litical risks. The Japanese equity market later North Korea’s weapons program. recovered to a strong rally through January 2018 driven by a sustained positive outlook for corpo- Since the start of 2018, earnings prospects for rate earnings and then experienced a steep and Japanese companies continued positive momen- sudden correction in February 2018. tum and supported the equity market as the latest quarterly earnings figures were released. How- The Japanese equity market fell at the start of ever, global equity markets experienced a steep the review period as it faced risk factors such as and sudden correction during the first half of Feb- concerns about the ability of the Trump adminis- ruary 2018. A sudden increase in long-term tration to pass key legislation in the U.S. and interest rates in the U.S. on news of strong wage geopolitical risks such as North Korea's missile data triggered a hike in volatility across the global launch and increased U.S. military involvement in financial markets. At the same time, the Yen the Syria conflict. In mid-April 2017, the Japanese strengthened against the U.S. dollar during Febru- equity market rebounded after economic dialogue ary 2018 which had a negative impact on the between the U.S. and Japan resulted in no indica- near-term growth prospects of export oriented tions of negative changes to the bilateral trade Japanese stocks. policy even though the U.S. administration dis- played strong willingness to reform the tax system. From the end of April to the beginning of Outlook and Future Strategy May 2017, the Japanese equity market posted a Despite a surge in financial market volatility dur- strong rally as Emanuel Macron, a candidate that ing February 2018, the outlook for continued supports the European Union (“EU”), took the lead moderate growth in the global economy remains in the French presidential elections. unchanged. The recent uptick in market volatility Earnings results for the fiscal year ended March appears to have been triggered primarily by the 2017 and expectations for the fiscal year ending rise in U.S. bond yields in reaction to evidence of March 2018 from Japanese companies were an- stronger wage growth in January 2018 and rising nounced mid-May 2017. The sustained positive expectations for more rapid interest rate tighten- outlook for corporate earnings for the fiscal year ing under the new Federal Reserve Chairman ending March 2018 helped the Japanese equity Jerome Powell. The Fund believes in both cases market extend its gains from May to July 2017. that higher inflationary expectations are driven by positive fundamental factors, including higher From August to mid-September 2017, strong wages and resilient consumption. Therefore, the quarterly earnings results from Japanese compa- recent market turmoil may have little influence on nies supported the equity market, while the fundamental outlook. The U.S. economic geopolitical uncertainties such as North Korea’s growth is expected to remain steady, fueled by ro- threats to launch a missile towards the U.S. terri- bust consumption and partly supported by


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    President Trump’s administration’s tax cuts, as The Fund appreciates your continuing support. well as additional growth in U.S. government ex- penditure. Compared with other major central Sincerely, banks, the Bank of Japan has not stated potential changes in monetary policy, so higher interest rates driven by robust U.S. economic fundamen- tals would not necessarily be negative for the Japanese stock market. Yutaka Itabashi President The Yen’s recent strength, despite a widening Japanese and U.S. interest rate gap, is a concern. If companies start to assume a Yen-dollar rate of 105 or 100 and issue earnings guidance that is below consensus for the next fiscal year, then it could overshadow investor sentiment over the next few months. For now, the Japanese equity and currency markets are expected to remain sus- ceptible to speculation about the monetary policy outlook by major central banks. Aside from the currency outlook, corporate earnings appear likely to remain resilient. As of the beginning of March 2018, estimates for pre-tax profit growth for Japanese large cap stocks were 18.6% year over year (“yoy”) for fiscal year ended March 31, 2018 and 8.5% (yoy) for fiscal year end- ing March 31, 2019 based on an exchange rate assumption of 111 Yen-dollar rate. The estimate of the negative impact from a 5% Yen apprecia- tion against the U.S. dollar on the fiscal year ended March 31, 2018 earnings growth rate of Japanese large cap stocks is approximately two percentage points. Given the increasing local pro- duction ratio and improved profitability, there has been a steady decline in the currency sensitivity of Japanese corporate earnings. As long as the Fed- eral Reserve does not overcompensate in its interest rate normalization phase, thereby stalling the U.S. and global economy, the Fund expects the Japanese corporate sector to report sustained earnings growth even towards the next fiscal year.


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    DISCLOSURES Sources: Nomura Asset Management U.S.A. Inc., Nomura Asset Management Co., Ltd., and Bloomberg L.P. Past per- formance is not indicative of future results. There is a risk of loss. The NAV price is adjusted for reinvestment of income dividends, ordinary income distributions, and long-term capital gain distributions. The New York Stock Exchange’s closing market price is adjusted for reinvestment of income divi- dends, ordinary income distributions, and long-term capital gain distributions. The Fund’s performance does not reflect sales commissions. This material contains the current opinions of the Fund’s manager, which are subject to change without notice. This ma- terial should not be considered investment advice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for the long term. Comparisons between changes in the Fund’s net asset value or market price per share and changes in the Fund’s benchmark should be considered in light of the Fund’s investment policy and objective, the characteristics and quality of the Fund’s investments, the size of the Fund, and variations in the Yen/U.S. Dollar exchange rate. This report is for in- formational purposes only. Investment products offered are not FDIC insured, may lose value, and are not bank guaranteed. Indices are unmanaged. An index cannot be directly invested into. Certain information discussed in this report may constitute foward-looking statements within the meaning of the U.S. federal securities laws. The Fund believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions and can give no assurance that the Fund’s expectations will be achieved. Foward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. The Russell/Nomura Small Cap™ Index represents approximately 15% of the total market capitalization of the Russell/Nomura Total Market™ Index. It measures the performance of the smallest Japanese equity securities in the Russell/Nomura Total Market™ Index. As of February 28, 2018, there are 1,247 securities in the Russell/Nomura Small Cap™ Index.


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    SHAREHOLDERS ACCOUNT INFORMATION Shareholders whose accounts are held in their own name may contact the Fund’s registrar, Computershare Trust Company, N.A., at (800) 426-5523 for information concerning their accounts. PROXY VOTING A description of the policies and procedures that the Fund uses to vote proxies relating to portfolio securities is avail- able (1) without charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the website of the Securities and Exchange Commission (“SEC”) at http://www.sec.gov. Information about how the Fund voted proxies relating to secu- rities 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 SEC’s web site at http://www.sec.gov. Additional information about the Fund’s Board of Directors is available (1) without charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the website of the SEC at http://www.sec.gov in the Fund’s most recent proxy state- ment filing. AVAILABILITY OF QUARTERLY SCHEDULE OF INVESTMENTS The Fund files a schedule of portfolio holdings with the 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. FUND CERTIFICATIONS In December 2017, the Fund filed its Principal Executive Officer Certification with the New York Stock Exchange pur- suant to Section 303A.12(a) of the New York Stock Exchange Corporate Governance Listing Standards. The Fund’s Principal Executive Officer and Principal Financial Officer Certifications pursuant to Section 302 of the Sar- banes-Oxley Act of 2002 were filed with the Fund’s Form N-CSR and are available on the SEC’s web site at http://www.sec.gov. SHARE REPURCHASES Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that from time to time the Fund may repurchase shares of its common stock in the open market. 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 http://funds.nomura-asset.com.


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    JAPAN SMALLER CAPITALIZATION FUND, INC. FUND HIGHLIGHTS—FEBRUARY 28, 2018 (Unaudited) KEY STATISTICS Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $397,087,083 Net Asset Value per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14.01 Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.48 Percentage Change in Net Asset Value per Share*+ . . . . . . . . . . . . . . . . . . . . . 32.2% Percentage Change in Market Price*+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.0% MARKET INDICES Percentage change in market indices:* YEN U.S.$ Russell/Nomura Small Cap™ Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.4% 29.7% Tokyo Price Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2% 21.1% Nikkei Stock Average Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.4% 21.3% *From March 1, 2017 through February 28, 2018. +Reflects the percentage change in share price adjusted for reinvestment of income dividends, ordinary income distributions, and long-term capital gain distributions. INDUSTRY DIVERSIFICATION % of % of Net Assets Net Assets Retail Trade . . . . . . . . . . . . . . . . . . . . . . . . . . 19.2 Transportation and Warehousing . . . . . . . . . 3.9 Wholesale Trade . . . . . . . . . . . . . . . . . . . . . . 14.2 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . 11.6 Electric Appliances . . . . . . . . . . . . . . . . . . . . 2.7 Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Construction . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 Financing Business . . . . . . . . . . . . . . . . . . . . 1.8 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 Iron and Steel . . . . . . . . . . . . . . . . . . . . . . . . 4.8 Textiles and Apparel . . . . . . . . . . . . . . . . . . . 1.7 Other Products . . . . . . . . . . . . . . . . . . . . . . . 4.5 Transportation Equipment . . . . . . . . . . . . . . . 1.5 Metal Products . . . . . . . . . . . . . . . . . . . . . . . 4.4 Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Information and Communication . . . . . . . . . 4.4 Precision Instruments . . . . . . . . . . . . . . . . . . 0.9 TEN LARGEST EQUITY HOLDINGS BY FAIR VALUE Fair % of Security Value Net Assets SIIX Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,534,800 3.4 Ryoden Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,394,176 3.4 Amiyaki Tei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,907,348 3.0 Oiles Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,149,274 2.8 H.I.S. Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,914,073 2.5 Daikokutenbussan Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,504,488 2.4 Osaka Steel Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,281,360 2.4 Toenec Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,229,894 2.3 Matsuda Sangyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,526,055 2.1 Okinawa Cellular Telephone Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,217,097 2.1


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    JAPAN SMALLER CAPITALIZATION FUND, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Japan Smaller Capitalization Fund, Inc. Opinion on the Financial Statements We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Japan Smaller Capitalization Fund, Inc. (the Fund) as of February 28, 2018, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, including the related notes, and the financial highlights for each of the four years in the period then ended (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of February 28, 2018, the results of its operations, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. The financial highlights for the year ended February 28, 2014 were audited by other auditors. Those auditors expressed an unqualified opinion on those financial statements and financial highlights in their reported dated April 24, 2014. Basis for Opinion These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Com- pany Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate- ment, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal con- trol over financial reporting 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. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included exam- ining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluat- ing the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of February 28, 2018, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. /s/ RSM US LLP We have served as the auditor of one or more Nomura Asset Management U.S.A. Inc. investment companies since 2015. Boston, Massachusetts April 26, 2018


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    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS* FEBRUARY 28, 2018 % of Fair Net Shares Cost Value Assets JAPANESE EQUITY SECURITIES Banks Fukuoka Financial Group, Inc . . . . . . . . . . . . . . . . . . . . . . . . . 203,000 $ 1,141,310 $ 1,049,032 0.3 General banking services The Akita Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,700 3,528,769 3,357,690 0.8 General banking services The Bank of Okinawa, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,400 1,154,947 1,145,322 0.3 General banking services The Keiyo Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235,000 1,085,199 1,115,217 0.3 General banking services The Musashino Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,100 1,109,419 1,117,562 0.3 General banking services The Taiko Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,700 1,859,544 2,039,976 0.5 General banking services The Yamanashi Chuo Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . 429,000 1,872,515 1,762,270 0.4 General banking services Total Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,751,703 11,587,069 2.9 Chemicals Adeka Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,800 3,088,020 3,758,909 0.9 Manufactures chemical and food products C. Uyemura & Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,500 2,813,968 4,681,125 1.2 Plating chemicals Fujikura Kasei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982,500 5,146,762 6,238,242 1.6 Specialty coating materials and fine chemicals Koatsu Gas Kogyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 593,900 3,705,688 5,057,549 1.3 High-pressured gases and chemicals Sakata Inx Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481,000 7,131,308 6,396,793 1.6 Manufactures printing ink Sekisui Jushi Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,100 3,694,469 5,456,041 1.4 Manufactures plastics and other resin materials Shikoku Chemicals Corporation . . . . . . . . . . . . . . . . . . . . . . . 86,100 856,390 1,220,944 0.3 Manufactures chemical products Tenma Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341,500 5,621,221 7,026,973 1.8 Manufactures synthetic resin products T&K Toka Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,400 1,618,048 2,163,005 0.5 Manufactures specialized inks for printing applications Yushiro Chemical Industry Co., Ltd. . . . . . . . . . . . . . . . . . . . . 235,200 3,122,413 4,208,784 1.0 Manufactures metalworking fluids Total Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,798,287 46,208,365 11.6 See notes to financial statements


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    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2018 % of Fair Net Shares Cost Value Assets Construction Taihei Dengyo Kaisha, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,200 $ 391,894 $ 422,092 0.1 Construction of thermal and nuclear plant facilities Toenec Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,500 8,202,818 9,229,894 2.3 Construction of comprehensive building facilities Totetsu Kogyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,600 5,977,667 6,310,227 1.6 Operates construction-related businesses Yondenko Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,900 1,202,860 1,579,259 0.4 Construction of electrical distribution systems Yurtec Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,100 1,942,939 1,965,213 0.5 Engineering company Total Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,718,178 19,526,685 4.9 Electric Appliances Kitagawa Industries Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 290,500 3,015,732 4,075,855 1.0 Manufactures various industrial and consumer products Koito Manufacturing Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 61,700 2,427,772 4,311,043 1.1 Manufactures lighting equipment Mabuchi Motor Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,900 764,032 772,774 0.2 Manufactures small motors Maxell Holdings, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,000 1,286,345 1,554,570 0.4 Manufactures media devices, batteries and electrical appliances Total Electric Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,493,881 10,714,242 2.7 Financing Business Hitachi Capital Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,500 2,709,090 3,071,254 0.8 General financial services Ricoh Leasing Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 115,700 3,882,865 3,928,103 1.0 Leasing and financial services Total Financing Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,591,955 6,999,357 1.8 Food Japan Meat Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,000 1,645,503 1,727,925 0.5 Supermarket business and operation of eating-out stores Kameda Seika Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,900 3,953,844 4,036,642 1.0 Manufactures confectioneries Total Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,599,347 5,764,567 1.5 Information and Communication NS Solutions Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,800 2,094,569 2,542,818 0.7 System consulting services and software development OBIC Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,700 2,892,193 4,418,645 1.1 Computer system integration See notes to financial statements


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    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2018 % of Fair Net Shares Cost Value Assets Okinawa Cellular Telephone Company . . . . . . . . . . . . . . . . . . 215,800 $ 6,314,448 $ 8,217,097 2.1 Telecommunications Otsuka Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,700 1,206,649 2,122,570 0.5 Computer information system developer Total Information and Communication . . . . . . . . . . . . . . . . . . 12,507,859 17,301,130 4.4 Iron and Steel Chubu Steel Plate Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 215,100 1,024,211 1,706,679 0.4 Manufactures steel-related products Mory Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,400 546,520 1,244,342 0.3 Manufactures steel tubing products Nichia Steel Works, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,033,300 5,975,608 6,826,930 1.7 Manufactures steel-related products Osaka Steel Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455,000 8,522,912 9,281,360 2.4 Manufactures steel-related products Total Iron and Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,069,251 19,059,311 4.8 Machinery Hisaka Works, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,500 3,363,243 4,154,307 1.0 Manufactures heat exchangers and other machinery Miura Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,400 1,393,800 1,962,401 0.5 Manufactures boilers and related products Nippon Pillar Packing Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . 92,400 899,649 1,474,067 0.4 Manufactures mechanical seals Nitto Kohki Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,700 3,138,752 4,162,612 1.1 Manufactures machine tools and motor pumps Oiles Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507,380 8,882,525 11,149,274 2.8 Manufactures bearing equipment Shibuya Kogyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,900 215,939 576,081 0.1 Packing plant business Yamashin-Filter Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 78,982 641,501 0.2 Manufactures filters Total Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,972,890 24,111,243 6.1 Metal Products Dainichi Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284,900 2,083,541 2,450,207 0.6 Manufactures oil heating equipment Neturen Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381,500 2,859,357 3,857,041 1.0 Manufactures steel bars and induction heating equipment NHK Spring Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298,700 2,940,877 3,165,590 0.8 Manufactures automobile-related products Piolax, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,600 2,345,257 3,698,498 0.9 Manufactures automobile-related products Rinnai Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,800 4,278,753 4,398,293 1.1 Manufactures heating appliances and components Shinpo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800 12,441 25,913 0.0 Manufactures smokeless roasters Total Metal Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,520,226 17,595,542 4.4 See notes to financial statements


  • Page 11

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2018 % of Fair Net Shares Cost Value Assets Other Products Fuji Seal International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,800 $ 1,154,730 $ 2,031,503 0.5 Packaging-related materials and machinery Komatsu Wall Industry Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . 20,300 355,390 498,242 0.1 Manufactures various partitions Nishikawa Rubber Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 265,500 4,273,503 6,115,526 1.5 Manufactures rubber automobile parts Pigeon Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,300 2,564,604 3,443,156 0.9 Manufactures baby care products The Pack Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,300 4,381,223 5,794,181 1.5 Manufactures paper and chemical products Total Other Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,729,450 17,882,608 4.5 Precision Instruments Nakanishi Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,400 2,309,357 3,426,307 0.9 Manufactures dental instruments Total Precision Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,309,357 3,426,307 0.9 Real Estate Daibiru Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,000 1,563,796 1,890,288 0.5 Real estate leasing and building management Keihanshin Building Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 245,700 1,508,211 1,995,556 0.5 Real estate leasing and building management Sanyo Housing Nagoya Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . 277,100 2,714,972 3,212,151 0.8 Designs and constructs housing Starts Corporation Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,100 1,363,274 1,806,845 0.4 Construction, leasing and management of real estate Total Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,150,253 8,904,840 2.2 Retail Trade ABC-Mart, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,300 5,370,845 6,269,074 1.6 Retail sales of shoes AIN Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700 102,793 181,308 0.0 Operates pharmacies and drug store chains Amiyaki Tei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,100 8,741,337 11,907,348 3.0 Operates barbecue restaurant chains Cosmos Pharmaceutical Corporation . . . . . . . . . . . . . . . . . . . 25,900 5,079,568 4,926,162 1.2 Operates drug stores Create SD Holdings Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 242,400 5,420,637 6,151,788 1.6 Operates pharmacies and drug store chains Daikokutenbussan Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 193,400 8,110,353 9,504,488 2.4 Operates supermarkets Don Quijote Holdings Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . 61,400 2,339,399 3,460,858 0.9 Operates discount stores See notes to financial statements


  • Page 12

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2018 % of Fair Net Shares Cost Value Assets Hiday Hidaka Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,933 $ 2,262,739 $ 3,253,968 0.8 Operates restaurant chains Izumi Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,300 1,842,041 2,389,927 0.6 Operates shopping centers, real estate business and credit card services JINS Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,500 1,189,659 1,435,920 0.4 Retail sales of eyewear and fashion accessories Kura Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 914,389 1,217,351 0.3 Operates a sushi restaurant chain Kusuri No Aoki Holdings Co., Ltd. . . . . . . . . . . . . . . . . . . . . . 76,300 4,037,187 4,544,009 1.1 Operates drug stores NAFCO Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,900 1,074,298 1,301,642 0.3 Operates chain of home and furniture retail outlets Saint Marc Holdings Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 70,900 1,962,716 2,137,805 0.5 Operates restaurant chains Saizeriya Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,000 3,855,303 3,814,209 1.0 Operates restaurants San-A Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,300 6,553,937 7,458,992 1.9 Retail sales of home goods Seria Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,100 747,704 1,211,498 0.3 Discount retail sales Start Today Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,300 322,916 347,266 0.1 Operates retail E-commerce websites Sundrug Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,800 915,713 1,103,784 0.3 Operates pharmacies and drug store chains Yaoko Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,500 2,384,760 3,133,177 0.8 Operates and manages groceries and supermarkets Yossix Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,900 138,387 389,998 0.1 Operates restaurant chains Total Retail Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,366,681 76,140,572 19.2 See notes to financial statements


  • Page 13

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2018 % of Fair Net Shares Cost Value Assets Services EPS Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,500 $ 848,864 $ 1,378,495 0.4 Performs contract medical research services H.I.S. Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265,600 7,311,794 9,914,073 2.5 Travel business Nihon M&A Center Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,500 511,084 946,495 0.2 Provides merger and acquisition brokerage services Nippon Air Conditioning Services Co., Ltd. . . . . . . . . . . . . . . 349,100 2,082,776 2,458,843 0.6 Provides maintenance and management of building facilities Relia, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,600 1,294,636 1,607,916 0.4 Provides telemarketing services Step Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,400 1,338,676 2,282,181 0.6 Operates preparatory schools Tear Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,200 429,271 569,653 0.1 Funeral business Total Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,817,101 19,157,656 4.8 Textiles and Apparel Hogy Medical Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,200 1,244,611 1,779,845 0.4 Manufactures medical products Seiren Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,900 3,316,968 4,954,132 1.3 Manufactures synthetic fibers and textile products Total Textiles and Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,561,579 6,733,977 1.7 Transportation and Warehousing Alps Logistics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,500 1,320,904 2,120,403 0.5 General logistics services Japan Transcity Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 837,000 2,985,414 3,493,224 0.9 General logistics services Meiko Trans Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379,000 3,838,655 4,368,497 1.1 Marine logistics services Trancom Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,200 4,117,512 5,406,987 1.4 General logistics services Total Transportation and Warehousing . . . . . . . . . . . . . . . . . . 12,262,485 15,389,111 3.9 See notes to financial statements


  • Page 14

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2018 % of Fair Net Shares Cost Value Assets Transportation Equipment Hi-Lex Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,400 $ 3,444,388 $ 3,693,243 1.0 Manufactures control cables Morita Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 64,700 1,023,177 1,231,196 0.3 Operates five business transportation segments Nissin Kogyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,000 763,115 876,370 0.2 Manufactures automobile brake systems Total Transportation Equipment . . . . . . . . . . . . . . . . . . . . . . . . 5,230,680 5,800,809 1.5 Utilities Keiyo Gas Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486,000 2,465,637 2,830,537 0.7 Produces gas and energy products The Okinawa Electric Power Company, Incorporated . . . . . . 148,582 2,535,437 4,045,332 1.0 Produces thermal energy products Total Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,001,074 6,875,869 1.7 Wholesale Trade Ai Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,900 832,673 846,508 0.2 Information and security equipment Kanaden Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333,200 2,834,243 4,324,959 1.1 Factory automation business Kohsoku Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338,200 3,135,571 3,914,080 1.0 Food and industrial packaging materials Matsuda Sangyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 456,600 5,667,826 8,526,055 2.1 Precious metals, electronic materials, and food Paltac Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,300 783,566 2,149,730 0.5 Cosmetics and daily necessities Ryoden Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767,000 10,786,586 13,394,176 3.4 Purchases electronic and electrical devices SIIX Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278,600 7,544,185 13,534,800 3.4 Parts procurement, logistics, and manufacturing of electronics Sugimoto & Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,700 3,249,896 5,154,165 1.3 Machine tools and measuring instruments Techno Associe Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378,700 3,744,277 4,851,622 1.2 Screws and nonferrous metal products Total Wholesale Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,578,823 56,696,095 14.2 TOTAL INVESTMENTS . . . . . . IN . . . . JAPANESE . . . . . . .. ... .. ... .. .. ... ..EQUITY ... .. .. . .. .. ... .. ...SECURITIES .. .. ... .. ... .. $312,031,060 _________________ $395,875,355 _________________ 99.7 _________ See notes to financial statements


  • Page 15

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2018 % of Fair Net Shares Cost Value Assets FOREIGN CURRENCY Japanese Yen Interest bearing account .......................... $ 1,882,474 $ 1,888,861 0.5 TOTAL FOREIGN CURRENCY . . . . . . . . . . . . . . . . . . . . . 1,882,474 1,888,861 0.5 TOTAL INVESTMENTS IN JAPANESE EQUITY SECURITIES AND FOREIGN CURRENCY . . . . . . . . . . ......................................................................... $313,913,534 __________________ $397,764,216 __________________ 100.2 LIABILITIES LESS OTHER ASSETS, NET . . . . . . . . . . . (677,133) (0.2) NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $397,087,083 100.0 *The description following each investment is unaudited and not covered by the Report of Independent Registered Public Accounting Firm. Portfolio securities and foreign currency holdings were translated at the following exchange rate as of February 28, 2018. Japanese Yen JPY ¥ 106.625 = USD $1.00 See notes to financial statements


  • Page 16

    JAPAN SMALLER CAPITALIZATION FUND, INC. STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 28, 2018 ASSETS: Investments in Japanese equity securities, at fair value (cost—$312,031,060) . . . . . . . . . . . $395,875,355 Foreign currency, at fair value (cost—$1,882,474) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,888,861 Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,103,989 Receivable for dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398,312 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,280 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203,626 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,509,423 LIABILITIES: Payable for investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,015,489 Accrued management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248,271 Accrued directors’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,350 Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,230 Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,422,340 NET ASSETS: Capital stock (28,333,893 shares of capital stock outstanding, 100,000,000 shares authorized, par value $0.10 each) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,833,389 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286,055,217 Accumulated net realized gain on investments and foreign currency transactions . . . . . . . . 32,935,314 Net unrealized appreciation on investments and foreign currency transactions . . . . . . . . . . 83,861,668 Accumulated net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,598,505) Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $397,087,083 Net asset value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14.01 See notes to financial statements


  • Page 17

    JAPAN SMALLER CAPITALIZATION FUND, INC. STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 28, 2018 INCOME: Dividend income (net of $716,825 withholding taxes) . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,451,440 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,830 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,121 Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,499,391 EXPENSES: Management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,182,436 Custodian fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319,208 Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,495 Directors’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,525 Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,523 Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,003,187 INVESTMENT INCOME—NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,496,204 REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY: Realized gain on investments and foreign currency transactions: Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,301,390 Net realized gain on foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,208 Net realized gain on investments and foreign currency transactions . . . . . . . . . . . . . . . 76,401,598 Net change in unrealized appreciation on investments . . . . . . . . . . . . . . . . . . . . . . . . . . 7,628,096 Net change in unrealized appreciation on foreign currency transactions and translation 21,216,611 Net realized and unrealized gain on investments and foreign currency transactions and translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,246,305 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . . $107,742,509 See notes to financial statements


  • Page 18

    JAPAN SMALLER CAPITALIZATION FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS For the Year Ended For the Year Ended February 28, February 28, 2018 2017 FROM OPERATIONS: Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,496,204 $ 3,250,651 Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,301,390 14,027,703 Net realized gain (loss) on foreign currency transactions . . . . . . . . . . . 100,208 (116,869) Net change in unrealized appreciation on investments . . . . . . . . . . . . 7,628,096 50,344,095 Net change in unrealized appreciation on foreign currency transactions and translation . . . . . . . . . . . . . . . . . . . . . . . . . . 21,216,611 3,981,045 Net increase in net assets resulting from operations . . . . . . . . . . . . . . 107,742,509 71,486,625 FROM DISTRIBUTIONS TO SHAREHOLDERS: Ordinary income distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,626,142) (9,809,194) Capital gains distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,542,408) (16,714,163) Decrease in net assets derived from distributions to shareholders . . . (53,168,550) (26,523,357) NET ASSETS: Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342,513,124 297,549,856 End of year (including accumulated net investment loss of $8,598,505 and $7,079,728, respectively) . . . . . . . . . . . . . . . . . $397,087,083 $342,513,124 See notes to financial statements


  • Page 19

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies lacking any sales, at the last available bid price. Securities and other assets, including Japan Smaller Capitalization Fund, Inc. (the futures contracts and related options, that “Fund”) is registered under the Investment cannot be fair valued using one of the previ- Company Act of 1940, as amended (the “In- ously mentioned methods are stated at fair vestment Company Act”), as a non-diversified, value as determined in good faith by or under closed-end management investment company. the direction of the Board of Directors of the The Fund was incorporated in Maryland on Fund. January 25, 1990 and investment operations commenced on March 21, 1990. The Fund’s in- (b) Foreign Currency Transactions—Trans- vestment objective is to seek long-term capital actions denominated in Japanese Yen (“Yen”) appreciation through investments primarily in are recorded in the Fund’s records at the pre- smaller capitalization Japanese equity securi- vailing exchange rate at the time of the ties. transaction. Asset and liability accounts that are denominated in Yen are adjusted to reflect The accompanying financial statements the current exchange rate at the end of the pe- have been prepared in accordance with riod. Transaction gains or losses resulting from United States (“U.S.”) generally accepted ac- changes in the exchange rate during the re- counting principles (“GAAP”) and are stated in porting period or upon settlement of foreign United States dollars. The Fund is an invest- currency transactions are included in the re- ment company that follows the accounting sults of operations for the current period. and reporting guidance in accordance with the Financial Accounting Standards Board The net assets of the Fund are presented at Accounting Standards Codification Topic 946 the exchange rates and fair values on Febru- Financial Services-Investment Companies. ary 28, 2018. The Fund does isolate that The following is a summary of the significant portion of the results of operations arising as accounting and reporting policies used in a result of changes in the foreign exchange preparing the financial statements. rates on investments from the fluctuations (a) Valuation of Securities—Investments arising from changes in the market prices of traded in the over-the-counter market are fair securities held at February 28, 2018. Net real- valued at the last reported sales price as of ized gains or losses on investments include the close of business on the day the securities gains or losses arising from sales of portfolio are being valued or, if none is available, at the securities and sales and maturities of short- mean of the bid and offer price at the close of term securities. Net realized gains or losses business on such day or, if none is available, on foreign currency transactions arise from the last reported sales price. Portfolio securi- sales of foreign currencies, currency gains or ties which are traded on stock exchanges are losses realized on securities transactions be- fair valued at the last sales price on the princi- tween trade and settlement date, and the pal market on which securities are traded or, difference between the amounts of dividends,


  • Page 20

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) interest, and foreign withholding taxes collateral equivalent to at least 100% of the recorded on the Fund’s books and the U.S. fair value of securities on loan must be main- dollar equivalent of the amounts actually re- tained at all times (when applicable). ceived or paid. Collateral is provided in the form of cash, which would be invested in certain money (c) Security Transactions, Investment Income market funds. The Fund is entitled to receive and Distributions to Shareholders—Security all income on securities loaned, in addition to transactions are accounted for on the trade a portion of the income earned as a result of date. Dividend income and distributions are the lending transaction. Although each secu- recorded on the ex-dividend dates and interest rity loan is fully collateralized, there are income is recorded on the accrual basis. Real- certain risks. On November 21, 2008, the ized gains and losses on the sale of Fund suspended its participation in the secu- investments are calculated on the first in, first rities lending program. The Fund may resume out basis. its participation in the future. During the fiscal year ended February 28, 2018, the Fund did Distributions from net investment income not earn any fees from lending fund portfolio and net realized capital gains are determined securities, pursuant to the securities lending in accordance with Federal income tax regu- agreement. lations, which may differ from U.S. GAAP. To the extent these “book/tax” differences are (d) Capital Account Reclassification—For permanent in nature (i.e., that they result from the fiscal year ended February 28, 2018, the other than timing of recognition—“tempo- Fund’s accumulated net investment loss was rary”), such accounts are reclassified within decreased by $11,611,161 and the accumu- the capital accounts based on their Federal lated net realized gain on investments and tax-basis treatment; temporary differences foreign currency transactions was decreased do not require reclassification. Dividends and by $11,611,161. These adjustments were pri- distributions which exceed net realized capi- marily due to the result of the reclassification tal gains for financial reporting purposes, but of foreign currency losses and the tax treat- not for tax purposes, are reported as distrib- ment of passive foreign investment utions in excess of net realized capital gains. companies. These adjustments had no im- pact on net assets. Pursuant to a securities lending agreement with Brown Brothers Harriman & Co., the (e) Income Taxes—A provision for U.S. in- Fund may lend securities to qualified institu- come taxes has not been made since it is the tions. It is the Fund’s policy that, at origination, intention of the Fund to continue to qualify as all loans shall be secured by collateral of at a regulated investment company under the least 102% of the value of U.S. securities Internal Revenue Code and to distribute loaned and 105% of the value of foreign se- within the allowable time limit all taxable in- curities loaned. It is the Fund’s policy that come to its shareholders.


  • Page 21

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) Under Japanese tax laws, a withholding tax formation about Japanese issuers than there is imposed on dividends at a rate of 15.315% is about U.S. issuers. Future economic and and such withholding taxes are reflected as a political developments in Japan could ad- reduction of the related revenue. The with- versely affect the value of securities in which holding tax rate of 15.315% was reduced to the Fund is invested. Further, the Fund may 10% upon the submission of Form 17 - Limi- be exposed to currency devaluation and other tation on Benefits Article. There is no exchange rate fluctuations. withholding tax on realized gains. (h) Indemnifications—Under the Fund’s or- In accordance with U.S. GAAP require- ganizational documents, its officers and ments regarding accounting for uncertainties directors are indemnified against certain lia- in income taxes, management has analyzed bilities arising from the performance of their the Fund's tax positions taken or expected to duties to the Fund. Additionally, in the normal be taken on federal and state income tax re- course of business, the Fund enters into con- turns for all open tax years (the current and the tracts that contain a variety of representations prior three tax years), and has concluded that which provide general indemnifications. The no provision for income tax is required in the Fund’s maximum exposure under these Fund's financial statements. The Fund recog- agreements is unknown as this would involve nizes interest and penalties, if any, related to future claims that may be made against the uncertain tax positions as income tax expense Fund that have not yet occurred. However, in the statement of operations. During the cur- based on experience, the Fund expects the rent year and for the prior three tax years, the risk of loss to be remote and as such no ad- Fund did not incur any interest or penalties. ditional accruals were recorded on the Statement of Assets and Liabilities. (f) Use of Estimates in Financial Statement Preparation—The preparation of financial (i) Other Income—During the fiscal year statements in accordance with U.S. GAAP re- ended February 28, 2018, the Fund received quires management to make estimates and a reimbursement of $31,121 for prior years’ assumptions that affect the reported amounts overbillings from the former Custodian, State and disclosures in the financial statements. Street Corporation. Actual results could differ from these esti- mates. (g) Concentration of Risk—A significant portion of the Fund’s net assets consists of Japanese securities which involve certain considerations and risks not typically associ- ated with investments in the U.S. In addition to the smaller size, and greater volatility, there is often substantially less publicly available in-


  • Page 22

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) 2. Management Agreement and for the fiscal year ended February 28, 2018. Transactions With Affiliated Persons At February 28, 2018, the management fee payable to the Manager by the Fund was Nomura Asset Management U.S.A. Inc. $248,271. (“NAM-USA” or the “Manager”) acts as the Manager of the Fund pursuant to a manage- Certain officers and/or directors of the ment agreement. Under the management Fund are officers and/or directors of the Man- agreement, the Manager provides all office ager. Affiliates of Nomura Holdings, Inc. (the space, facilities and personnel necessary to Manager’s indirect parent) did not earn any perform its duties. Pursuant to such manage- fees in commissions on the execution of port- ment agreement, the Manager has retained its folio security transactions for the year ended parent company, Nomura Asset Management February 28, 2018. The Fund pays each Di- Co., Ltd. (“NAM”), as Investment Adviser to rector not affiliated with the Manager an the Fund. annual fee of $17,000. In addition, the Fund pays each Director not affiliated with the Man- As compensation for its services to the ager $2,000 per meeting attended, $1,000 per Fund, the Manager receives a monthly fee at telephone meeting attended, and Director the annual rate of 1.10% of the value of the expenses related to attendance at meetings. Fund’s average weekly net assets not in ex- The Chairman of the Board, presently Rodney cess of $50 million, 1.00% of the Fund’s A. Buck, is paid an additional annual fee of average weekly net assets in excess of $50 $5,000. The Chairman of the Audit Commit- million but not exceeding $100 million, 0.90% tee, presently David B. Chemidlin, is paid an of the Fund’s average weekly net assets in ex- additional annual fee of $2,000. Such fees cess of $100 million but not exceeding $175 and expenses for unaffiliated Directors aggre- million, 0.80% of the Fund’s average weekly gated $130,525 for the fiscal year ended net assets in excess of $175 million but not February 28, 2018. exceeding $250 million, 0.70% of the Fund’s average weekly net assets in excess of $250 million but not exceeding $325 million, 0.60% 3. Purchases and Sales of Investments of the Fund’s average weekly net assets in ex- Purchases and sales of investments, exclu- cess of $325 million but not exceeding $425 sive of foreign currency and investments in million and 0.50% of the Fund’s average short-term securities, for the fiscal year ended weekly net assets in excess of $425 million. February 28, 2018 were $187,847,307 and Under the management agreement, the Fund $236,655,513, respectively. incurred fees to the Manager of $3,182,436 for the fiscal year ended February 28, 2018. Under the investment advisory agreement, NAM earned investment advisory fees of $1,401,012 from the Manager, not the Fund,


  • Page 23

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) 4. Federal Income Tax 5. Fair Value Measurements As of February 28, 2018, net unrealized appre- In accordance with U.S. GAAP, fair value is ciation on investments, exclusive of foreign defined as the price that the Fund would re- currency, for federal income tax purposes was ceive to sell an asset or pay to transfer a $71,615,567, of which $72,927,809 related to liability in an orderly transaction between mar- appreciated securities and $1,312,242 related to ket participants at the measurement date. U.S. depreciated securities. The cost of investments, GAAP also establishes a framework for mea- exclusive of foreign currency of $1,882,474, at suring fair value, and a three-level hierarchy for February 28, 2018 for federal income tax pur- fair value measurements based upon the poses was $324,259,788. transparency of inputs to the valuation of an At February 28, 2018, the components of ac- asset or liability. Inputs may be observable or cumulated earnings on a tax basis consisted of unobservable and refer broadly to the assump- unrealized appreciation on investments and for- tions that market participants would use in eign currency transactions of $71,632,940, pricing the asset or liability. Observable inputs undistributed long-term capital gains of reflect the assumptions market participants $28,085,599, and undistributed ordinary income would use in pricing the asset or liability based of $8,479,938. The differences between book on market data obtained from sources inde- basis and tax basis for unrealized appreciation pendent of the Fund. Unobservable inputs on investments and foreign currency transac- reflect the Fund’s own assumptions about the tions are attributable to the tax deferral of losses assumptions that market participants would on wash sales and the tax treatment of passive use in pricing the asset or liability developed foreign investment companies. based on the best information available in the The Fund paid an ordinary income distribution circumstances. Each investment is assigned a of $18,113,858, which represents $0.6393 per level based upon the observability of the inputs share and a long-term capital gains distributions which are significant to the overall valuation. of $35,054,692, which represents $1.2372 per The three-tier hierarchy of inputs is summa- share to shareholders of record as of December rized below. 15, 2017. The distribution was paid on Decem- • Level 1—quoted prices in active markets ber 21, 2017. for identical investments The Fund paid an ordinary income distribution • Level 2—other significant observable in- of $11,418,559, which represents $0.4030 per puts (including quoted prices for similar share and a long-term capital gains distributions investments, interest rates, prepayment of $15,104,798, which represents $0.5331 per speeds, credit risk, etc.) share to shareholders of record as of December • Level 3—significant unobservable inputs 19, 2016. The distribution was paid on Decem- (including the Fund’s own assumptions in ber 23, 2016. determining the fair value of investments)


  • Page 24

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) At February 28, 2018, all of the Fund’s in- setting Assets and Liabilities” (“ASU 2013-01”) vestments were determined to be Level 1 that provides clarification about which instru- securities. ments and transactions are subject to ASU 2011-11. The adoption of ASU 2011-11 and During the fiscal year ended February 28, ASU 2013-01 was not material to the financial 2018, there were no transfers between statements. Level 1, Level 2, or Level 3 securities. During the fiscal year ended February 28, 2018, the Fund did not hold any instrument which used significant unobservable inputs (Level 3) in determining fair value. 7. Recent Accounting Pronounce- ments In December 2011, FASB issued Accounting Standards Update No. 2011-11 “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). These disclosures are intended to help investors and other financial statement users to better assess the effect or potential ef- fect of offsetting arrangements on a company’s financial position. They also improve trans- parency in the reporting of how companies mitigate credit risk, including disclosure of re- lated collateral pledged or received. In addition, ASU 2011-11 facilitates comparison between those entities that prepare their financial state- ments on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS. ASU 2011-11 requires entities to: disclose both gross and net information about both instruments and transactions eligible for offset in the financial statements; and disclose instruments and transactions subject to an agreement similar to a master netting agree- ment. ASU 2011-11 is effective for fiscal years beginning on or after January 1, 2013, and in- terim periods within those annual periods. In January 2013, FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Off-


  • Page 25

    JAPAN SMALLER CAPITALIZATION FUND, INC. FINANCIAL HIGHLIGHTS For a share of common stock outstanding throughout each year: For the Year Ended February 28, February 29, February 28, 2018 2017 2016 2015 2014 Net asset value, beginning of year $12.09 _ $10.50 $10.98 _ $9.85 _ $8.83 _ Investment operations: Net investment income* . . . . . . . . . . . . . 0.09 0.12 0.06 0.06 0.05 Net realized and unrealized gain on investments and foreign currency 3.71 2.41 0.34 1.20 1.17 Total from investment operations . . . . . . . 3.80 2.53 0.40 1.26 1.22 Less Distributions: Distributions from ordinary income . . . . (0.55) (0.35) (0.17) (0.12) (0.20) Distributions from capital gains . . . . . . . (1.33) (0.59) (0.71) (0.01) — Total from distributions . . . . . . . . . . . . . . . . (1.88) (0.94) (0.88) (0.13) (0.20) Net . . . .asset . . . . .value, . . . . . .end . . . .of . . year . . . . .. .. .. .. .. .. .. .. .. .. .. .. $14.01 _ _______ $12.09 _ _______ $10.50 ________ _$10.98 _ ______ $9.85 _____ _____ Market value, end of year . . . . . . . . . . . . . . $12.48 $10.60 $8.98 $9.69 $8.84 Total investment return** . . . . . . . . . . . . . . . 36.0% 24.9% 0.7% 11.2% 13.0% Ratio/Supplemental Data: Net assets, end of year (000) . . . . . . . . . $397,087 $342,513 $297,550 $311,094 $278,994 Ratio of expenses to average net assets 1.05% 1.09% 1.11% 1.13% 1.19% Ratio of net income to average net assets 0.66% 0.99% 0.50% 0.62% 0.53% Portfolio turnover rate . . . . . . . . . . . . . . . 50% 20% 24% 41% 101% _______________________ * Based on average shares outstanding. ** Based on market value per share, adjusted for reinvestment of income dividends, ordinary income distribu- tions, long-term capital gain distributions, and capital share transactions. Total return does not reflect sales commissions. See notes to financial statements


  • Page 26

    JAPAN SMALLER CAPITALIZATION FUND, INC. SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited) The 2017 Annual Meeting of the Shareholders of the Fund was held at the offices of NAM-USA at World- wide Plaza, 309 West 49th Street, New York, New York on November 15, 2017. The purpose of the meeting was (1) to elect one Class II Director to serve for a term to expire in 2020 and (2) to transact such other business as may properly come before the meeting or any adjournment or postponement thereof. At the meeting, Yutaka Itabashi was re-elected to serve as a director of the Fund for a term expiring in 2020 and until his successor is duly elected and qualify. The results of the voting at the Annual Meeting were as follows: 1. To elect one Class II Director: % of % of Shares Broker Shares Voted Shares Voted Non-Vote Outstanding Outstanding Abstained For Shares Withhold Authority Shares Yutaka Itabashi 24,924,273 87.97% 1,369,320 4.83% - - INDEPENDENT DIRECTORS Name, Age, Position(s) Held with the Fund, Length of Service, Other Directorships Held by Director, Number of Portfolios in Fund Complex/Outside Fund Complexes Currently Overseen by Director Principal Occupation(s) During Past 5 Years: Rodney A. Buck (70) Owner, Buck Capital Management (private in- Class III Director and Chairman of the Board vestment management firm) since 2005; Director since: 2006 Chairman of the Dartmouth-Hitchcock Health Chairman of the Board since: 2010 Care Investment Committee since 2011. Director of 1 fund in the Fund Complex E. Han Kim (71) Everett E. Berg Professor of Business Admin- Class I Director istration and Director of Mitsui Financial Director since: 2010 Research Center at Ross Business School, Director of 1 fund in the Fund Complex University of Michigan since 1980; Advisor to CEO of Taubman Asia from 2009-2016; Non- executive Chair of the Board of Korea Telecom (KT) from 2009-2014. David B. Chemidlin (61) Owner of AbidesWorks LLC since 2016; Corpo- Class III Director and Chairman of the Audit Committee rate Controller, Advance Magazine Publishers, Director since: 2006 Inc. (d/b/a Conde Nast) from 1995-2016. Director of 1 fund in the Fund Complex Marcia L. MacHarg (69) Partner, Debevoise & Plimpton LLP, 1987-2012; Class I Director Of Counsel, Debevoise & Plimpton LLP since Director since: 2013 2013; Trustee, Board of Trustees of Smith Col- Director of 1 fund in the Fund Complex lege since 2014 and Chair of the Audit Committee of the Board of Trustees since 2016; Member of the Executive Committee of the Friends of Smith College Libraries from 2013- 2015.


  • Page 27

    JAPAN SMALLER CAPITALIZATION FUND, INC SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited) INTERESTED DIRECTOR Name, Age, Position(s) Held with the Fund, Length of Service, Other Directorships Held by Director, Number of Portfolios in Fund Complex/Outside Fund Complexes Currently Overseen by Director Principal Occupation(s) During Past 5 Years: Yutaka Itabashi (52)* Senior Managing Director of NAM since 2015; President and Class II Director President and Chief Executive Officer of NAM-USA Director since: 2013 and President of Nomura Global Alpha LLC Director of 1 fund in the Fund Complex ("NGA") since 2013; Managing Director of NAM from 2012-2013; Senior Managing Director of No- mura Funds Research and Technologies Co., Ltd. from 2009-2012. * Mr. Itabashi is an “interested person” of the Fund based on his positions with NAM-USA and NAM and as defined in the Investment Company Act. Committees and Directors’ Meetings. The Board of Directors has a standing Audit Committee, a standing Nominating Committee, and a standing Governance and Compliance Committee, each of which consists of the Directors who are not “interested persons” of the Fund within the meaning of the Investment Company Act and are “independent” as defined in the New York Stock Exchange listing standards. Currently, Rodney A. Buck, David B. Chemidlin, E. Han Kim and Marcia L. MacHarg are members of these Committees. The Fund has no standing Compensation Committee. During the fiscal year ended February 28, 2018, the Board of Directors (or the Independent Directors of the Fund meeting as a group) held six meetings, the Audit Committee held three meetings and the Nominating Committee held one meeting. The Governance and Compliance Committee met as part of each quarterly meet- ing of the Board of Directors. Each incumbent director attended at least 75% of the aggregate number of meetings of the Board of Directors held during the period for which they served and, if a member, of the ag- gregate number of meetings of the Audit and Nominating Committees held during the period for which they served.


  • Page 28

    JAPAN SMALLER CAPITALIZATION FUND, INC SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited) OFFICERS OF THE FUND Name, Address*, Age, Position(s) Held with the Fund, Term of Office ** and Length of Service Principal Occupation(s) During Past 5 Years: Yutaka Itabashi (52) Senior Managing Director of NAM since 2015; President and Class II Director President and Chief Executive Officer of NAM-USA Director since: 2013 and President of NGA since 2013; Managing Direc- Director of 1 fund in the Fund Complex tor of NAM from 2012-2013; Senior Managing Director of Nomura Funds Research and Technolo- gies Co., Ltd. from 2009-2012. Takeshi Toyoshima (51) Chief Administrative Officer of NAM-USA since Vice President 2016; Head of Client Services and Marketing of Vice President since: August 2016 NAM-USA from 2015-2016; Senior Portfolio Man- ager of NAM from 2008-2015. Maria R. Premole (55) Vice President of Client Relationship Management Vice President of NAM-USA since August 2017; Vice President Vice President since: 2013 and Head of Retail Product Management of NAM- USA from 2013 to August 2017; Associate of NAM-USA from 2008-2013. Neil A. Daniele (57) Chief Compliance Officer of NAM-USA since 2005 Secretary and Chief Compliance Officer and Managing Director of NAM-USA since 2007; Secretary since: 2002 Chief Compliance Officer of NGA since 2008; Chief Chief Compliance Officer since: 2005 Compliance Officer of Nomura Corporate Re- search and Asset Management Inc. and Nomura Funds Research and Technologies America, Inc. since 2009; Corporate Secretary of NAM-USA and NGA since 2013. Amy J. Robles (40) Executive Director of NAM-USA since 2015; Con- Treasurer troller and Treasurer of NAM-USA and Treasurer of Treasurer since: 2013 NGA since 2013; Vice President of NAM-USA from Assistant Treasurer from 2011 to 2013 2009-2015. Kelly S. Lee (35) Vice President of NAM-USA since 2015; Fund Assistant Treasurer Controller at JP Morgan Chase & Co. from 2014- Assistant Treasurer since: 2015 2015; Financial Services Senior at Ernst & Young LLP from 2010-2014. ** The address of each officer listed above is Worldwide Plaza, 309 West 49th Street, New York, New York 10019. ** Elected and appointed by the Board of Directors and hold office until they resign, are removed or are otherwise disqual- ified to serve.


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    JAPAN SMALLER CAPITALIZATION FUND, INC. TAX INFORMATION (Unaudited) We are required by subchapter M of the Internal Revenue Code of 1986, as amended, to advise you within 60 days of the Fund’s fiscal year ended February 28, 2018 as to the federal tax status of distributions received by shareholders during such fiscal year. Accordingly, the Fund designates $716,825 as foreign tax credit with the associated foreign gross income of $7,168,265. Shareholders should not use the above information to prepare their tax returns. The information necessary to complete your income tax returns will be included with your Form 1099 DIV which was sent to you separately in January 2018. REVIEW OF THE FUND’S MARKET PRICE COMPARED TO NET ASSET VALUE (Unaudited) 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 market 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 the 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. In addition, on May 26, 2016, the Board of Directors approved a Discount Management Plan. Under the plan, the Fund is authorized to make open-market share repurchases on the New York Stock Exchange. Such repurchases may be made from time to time as authorized by the Board of Directors. 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 believes 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 the Directors 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 objec- tives. The Board of Directors intends to continue to review, on a quarterly basis, the trading market for the Fund’s shares.


  • Page 30

    JAPAN SMALLER CAPITALIZATION FUND, INC. DIVIDEND REINVESTMENT PLAN (Unaudited) The Dividend Reinvestment Plan (the “Plan”) is Plan. Purchases will be suspended on any day available automatically for any holder of Common when the closing price (or the mean between the Stock with shares registered in his/her own name closing bid and ask prices if there were no sales) of who wishes to purchase additional shares with in- the shares on the Exchange on the preceding trad- come dividends or long-term capital gain ing day was higher than the net asset value per distributions received on shares owned, unless share. If on the dividend payable date, purchases such shareholder elects to receive all dividends and by the Fund are insufficient to satisfy dividend or capital gain distributions in cash, paid by check and distribution investments and on the last trading day mailed to the shareholder. If a shareholder holds immediately preceding the dividend payable date shares in his/her own name, communications re- the closing price or the mean between the closing garding the Plan should be addressed to bid and ask prices of the shares is lower than or the Computershare Trust Company, N.A., (the “Plan same as the net asset value per share, the Plan Agent”), P.O. Box 505000 Louisville, KY 40233. Un- Agent will continue to purchase shares until all in- der the Plan, shareholders appoint the Plan Agent vestments by shareholders have been completed or to reinvest dividends and distributions in shares of the closing price or the mean between the bid and the Fund. Such shares will be acquired by the Plan ask prices of the shares becomes higher than the Agent for shareholders either through open market net asset value, in which case the Fund will issue purchases if the Fund is trading at a discount or the necessary additional shares from authorized but through the issuance of authorized but unissued unissued shares. If on the last trading day immedi- shares if the Fund is trading at net asset value or a ately preceding the dividend payable date, the premium. If the market price of a share on the closing price or the mean between the bid and ask payable date of a dividend or distribution is at or prices of the shares is higher than the net asset above the Fund’s net asset value per share on such value per share and if the number of shares previ- date, the number of shares to be issued by the Fund ously purchased on the Exchange or elsewhere is to each shareholder receiving shares in lieu of cash insufficient to satisfy dividend investments, the dividends or distributions will be determined by di- Fund will issue the necessary additional shares from viding the amount of the cash dividends or authorized but unissued shares. There will be no distributions to which such shareholder would be brokerage charges with respect to shares issued di- entitled by the greater of the net asset value per rectly by the Fund to satisfy the dividend investment share on such date or 95% of the market price of a requirements. However, each participant will pay a share on such date. If the market price of a share on pro rata share of brokerage commissions incurred such distribution date is below the net asset value with respect to the Fund’s open market purchases per share, the number of shares to be issued to of shares. In each case, the cost per share of shares such shareholders will be determined by dividing purchased for each shareholder’s account will be such amount, less brokerage commission, by the the average cost, including brokerage commis- per share market price. sions, of any shares purchased in the open market plus the cost of any shares issued by the Fund. For Purchases will be made by the Plan Agent the fiscal year ended February 28, 2018, the Fund from time to time on the New York Stock Exchange issued no new shares for dividend reinvestment (the “Exchange”) or elsewhere to satisfy dividend purposes. and distribution investment requirements under the


  • Page 31

    Shareholders who elect to hold their shares The Plan Agent will maintain all shareholders’ in the name of a broker or other nominee should accounts in the Plan, and furnish written confir- contact such broker or other nominee to deter- mation of all transactions in such account, mine whether they may participate in the Plan. To including information needed by shareholders for the extent such participation is permitted, the Plan tax records. Shares in the account of each Plan Agent will administer the Plan on the basis of the participant may be held by the Plan Agent in non- number of shares certified from time to time by certificated form in the name of the participant, the broker as representing the total amount regis- and each shareholder’s proxy will include those tered in the shareholder’s name and held for the shares purchased or received pursuant to the account of beneficial owners who are participat- Plan. ing in such Plan. Shareholders that participate in the Plan holding shares in a brokerage account The automatic reinvestment of dividends will may not be able to transfer the shares to another not relieve participants of any income taxes that broker and continue to participate in the Plan. may be payable (or required to be withheld) on Shareholders who are participating in the Plan such dividends. Shareholders receiving dividends may withdraw from the Plan at any time. or distributions in the form of additional shares pursuant to the Plan should be treated for Federal There will be no penalty for withdrawal from income tax purposes as receiving a distribution in the Plan, and shareholders who have previously an amount equal to the amount of money that the withdrawn from the Plan may rejoin it at any time. shareholders receiving cash dividends or distribu- Changes in participation in the Plan should be tions will receive and should have a cost basis in made by contacting the Plan Agent if the shares the shares received equal to such amount. are held in the shareholder’s own name and must be in writing and should include the shareholder’s The Fund reserves the right to amend or name and address as they appear on the account terminate the Plan as applied to any dividend paid registration. If the shares are held in the name of a subsequent to written notice of the change sent broker or other nominee, such person should be to participants in the Plan at least 90 days before contacted regarding changes in participation in the record date for such dividend. There is no ser- the Plan. Upon withdrawal from the Plan, the ap- vice charge to participants in the Plan; however, propriate number of full shares will be reflected in the Fund reserves the right to amend the Plan to the Fund records and a cash payment for any include a service charge payable by the partici- fractional shares will be issued. The shareholder pants. All correspondence concerning the Plan, may also request the Plan Agent to sell part or including requests for additional information all of the shareholder’s shares at the market price about the Plan, should be directed to the Trust and remit the proceeds to the shareholder, net of Company, at Computershare Trust Company, N.A. any brokerage commissions. A $2.50 fee plus P.O. Box 505000 Louisville, KY 40233. $0.15 per share sold 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.


  • Page 32

    BOARD OF DIRECTORS Rodney A. Buck David B. Chemidlin Yutaka Itabashi E. Han Kim Marcia L. MacHarg OFFICERS Yutaka Itabashi, President Takeshi Toyoshima, Vice President Maria R. Premole, Vice President Neil A. Daniele, Secretary and Chief Compliance Officer Amy J. Robles, Treasurer Kelly S. Lee, Assistant Treasurer MANAGER Nomura Asset Management U.S.A. Inc. Worldwide Plaza 309 West 49th Street New York, New York 10019-7316 Internet Address http://funds.nomura-asset.com JAPAN INVESTMENT ADVISER Nomura Asset Management Co., Ltd. Smaller Capitalization 1-12-1, Nihonbashi, Chuo-ku, Tokyo 103-8260, Japan DIVIDEND PAYING AGENT, TRANSFER AGENT Fund, Inc. AND REGISTRAR Computershare Trust Company, N.A. P. O. Box 505000 Louisville, KY 40233 CUSTODIAN Brown Brothers Harriman & Co. 50 Post Office Square Boston, Massachusetts 02110-1548 COUNSEL Sidley Austin LLP 787 Seventh Avenue ANNUAL REPORT New York, New York 10019 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM RSM US LLP FEBRUARY 28, 2018 80 City Square Boston, Massachusetts 02129 JAPAN SMALLER CAPITALIZATION FUND, INC. WORLDWIDE PLAZA 309 WEST 49TH STREET NEW YORK, NEW YORK 10019-7316 This Report, including the Financial Statements, is transmitted to the Shareholders of Japan Smaller Capitalization Fund, Inc. for their infor- mation. 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.


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