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, 2019 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, 2019. fer fundamental strength and potential for The net asset value per share (“NAV”) of the Fund improvement. The Fund performs extensive fun- decreased by 14.6% and the closing market price damental research to identify stocks that can of the Fund (on the New York Stock Exchange) de- create shareholder value. The Fund focuses on creased by 13.8% 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, 2019. 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, 2019 was $8.92, representing a discount of ket, valuation anomalies do exist and can be 12.3% to the NAV of $10.17. The net assets of the exploited through active management. There are a Fund totaled $288,108,583 on February 28, 2019. 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”), decreased by pears fully valued, unexpected deterioration in 15.2% in United States (“U.S.”) dollar terms. During earnings or a substantial loss that impairs the the fiscal year ended February 28, 2019, the Fund company’s net assets, and a stock’s diminishing outperformed the Benchmark by 0.6% 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”), decreased by 13.0% and the Nikkei Stock Performance Average Index (“Nikkei”), a price-weighted index of the 225 leading stocks on the TSE, decreased by In terms of the sector allocation strategy, an un- 7.3% in U.S. dollar terms for the year ended Febru- derweight position in the Electric Appliances ary 28, 2019. The Japanese yen (“Yen”) depreciated sector and an overweight position in the Retail by 4.5% against the U.S. dollar during the fiscal Trade sector generated the largest positive contri- year ended February 28, 2019. butions. Sector returns were eroded by underweight positions in the Information & Com- For the quarter ended February 28, 2019, the munication sector and the Pharmaceutical sector. Benchmark decreased by 3.9%, the TOPIX de- creased by 1.7%, and the Nikkei decreased by Relative performance was positively impacted 2.5% in U.S. dollar terms. The NAV of the Fund by Kitagawa Industries Co., Ltd. in the Electric Ap- decreased by 3.1% and outperformed the Bench- pliances sector, Totetsu Kogyo Co., Ltd. in the mark by 0.8%. The Fund’s share price increased Construction sector, and Pan Pacific International by 2.0% during the quarter. The Yen appreciated Holdings in the Retail Trade sector. Conversely, by 1.9% against the U.S. dollar during the quarter. relative performance was negatively impacted by


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    SIIX Corporation in the Wholesale Trade sector, economic growth persisted. Trade issues and Oiles Corporation in the Machinery sector, and fears about economic conditions in China also Cosmos Pharmaceutical Corporation in the Retail weighed on market sentiment, while a summit Trade sector. meeting between U.S. President Trump and Chi- nese leader Xi Jinping at the beginning of Market Review December 2018 failed to provide any near-term clarity. Japan’s latest earnings results failed to The Benchmark decreased by 11.4% and un- meet earlier estimates. Fewer Japanese compa- derperformed the TOPIX index, which decreased nies than expected revised their earnings 9.1% in local currency terms, for the fiscal year guidance upwards in light of the recent deteriora- ended February 28, 2019. The Japanese equity tion in global economic prospects. This drove a market declined in response to recent weak earn- continued sell-off of Japan equities by interna- ings from Japanese companies, concerns about tional investors in December 2018. slowing global economic growth, and the prospect of an escalating trade war between two The Japanese equity market rebounded from of the largest national economies following the the period from December 2018 to February 2019 U.S. government’s decision to impose tariffs on and clawed back some of the losses from the sell- Chinese goods. off in the fourth quarter of 2018. Although investors awaited the outcome of trade negotia- The Japanese equity market partially recovered tions between China and the U.S., the recovery in from the April to June 2018 period as Japanese market sentiment returned from an overly pes- companies offered relatively steady earnings simistic view of the Japanese corporate sector, growth prospects supported by stabilizing foreign aided by the U.S. Federal Reserve Board’s deci- exchange rates and cost reduction efforts. Global sion for a more accommodative stance on future political events appeared to affect the Japanese interest rate policy. Although the latest earnings equity market in June 2018 when increasingly results from Japanese companies fell below ex- hawkish comments on trade and tariffs from the pectations, this weakness seemed to have been U.S. President Trump administration fueled uncer- incorporated in the Japanese equity market al- tainty about the earnings prospects for Japanese ready given that stocks were trading close to multinational companies. historically low valuations. The Japanese equity market extended the re- covery from July to September 2018. While Outlook and Future Strategy ongoing trade disputes between the U.S., its neighboring North America Free Trade Agreement Equity markets are likely to remain very sensi- countries and China remained unresolved, news tive and volatile given the recent mix of good and on tariff increases appeared to have been partly bad news. factored in. The Japanese equity market achieved Global economic growth has continued to slow. accelerated gains towards the end of September The Fund believes it is difficult to predict whether 2018 driven by expectations that robust earnings the risk of a global recession can be avoided. prospects reported for the period from April to Japanese companies reported negative operating June 2018 would continue. profit growth of 4.1% year over year (“yoy”) for the The Japanese equity market followed the steep October to December period, demonstrating a correction in the global markets from October to material slowdown from the positive 10.9% (yoy) December 2018. Concerns about slowing global for the April to June period and positive 5.1%


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    (yoy) for the July to October period. The decline The Fund appreciates your continuing support. was not limited to export-oriented companies with high business exposure to China, but also domes- Sincerely, tic-oriented companies given rising labor and transportation costs. During recent management interviews, several cyclical companies indicated that their order momentum had declined rapidly from October to December 2018 and that they Yuichi Nomoto would take several months to utilize excess inven- President tory, especially for semiconductor related companies. Currently, the final outcome of the trade conflict between the U.S. and China is diffi- cult to determine. In addition, there is the known risk of a consumption tax hike that is expected to occur later this year in Japan. The Federal Reserve’s adoption of a more dovish monetary policy is likely to ease market concerns about a further slowdown in the U.S. economy. There also appear to be signs that the downward economic trend in China could be re- versed in the near term. In addition to the recent adjustment in China’s monetary tightening policy, the U.S. opted to postpone the increase in tariffs on Chinese goods scheduled to take effect in March 2019. There is a view that Japan’s machine tool order exports seem to have almost reached a bottom in terms of year-over-year growth, so any economic support measures should help to lift business sentiment from the current doldrums. These ex- pectations are still dependent on many uncertainties, including the outcomes of political decisions and the actual timing of a demand pick- up. But given that valuations in some cyclical sectors have already reached historically low lev- els, it is possible that the current return-reversal trend within the Japanese equity market may con- tinue for a while, as long as the currency rate remains close to its current level.


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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, 2019, 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. FUND CERTIFICATIONS In December 2018, 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/japan-smaller-capitalization.


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    JAPAN SMALLER CAPITALIZATION FUND, INC. FUND HIGHLIGHTS—FEBRUARY 28, 2019 (Unaudited) KEY STATISTICS Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $288,108,583 Net Asset Value per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.17 Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.92 Percentage Change in Net Asset Value per Share*+ . . . . . . . . . . . . . . . . . . . . . (14.6%) Percentage Change in Market Price*+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13.8%) MARKET INDICES Percentage change in market indices:* YEN U.S.$ Russell/Nomura Small Cap™ Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11.4%) (15.2%) Tokyo Price Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.1%) (13.0%) Nikkei Stock Average Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.1%) (7.3%) *From March 1, 2018 through February 28, 2019. +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 . . . . . . . . . . . . . . . . . . . . . . . . . . 18.5 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.5 Transportation and Warehousing . . . . . . . . . 3.0 Wholesale Trade . . . . . . . . . . . . . . . . . . . . . . 14.2 Electric Appliances . . . . . . . . . . . . . . . . . . . . 2.9 Construction . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Financing Business . . . . . . . . . . . . . . . . . . . . 2.7 Iron and Steel . . . . . . . . . . . . . . . . . . . . . . . . 5.6 Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Textiles and Apparel . . . . . . . . . . . . . . . . . . . 1.7 Metal Products . . . . . . . . . . . . . . . . . . . . . . . 4.3 Transportation Equipment . . . . . . . . . . . . . . . 1.7 Information and Communication . . . . . . . . . 3.7 Precision Instruments . . . . . . . . . . . . . . . . . . 0.5 Other Products . . . . . . . . . . . . . . . . . . . . . . . 3.6 TEN LARGEST EQUITY HOLDINGS BY FAIR VALUE Fair % of Security Value Net Assets SIIX Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,678,132 3.7 Ryoden Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,567,567 3.7 Saizeriya Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,181,912 3.5 Sakata Inx Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,573,927 3.0 Toenec Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,231,454 2.8 Okinawa Cellular Telephone Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,061,692 2.8 Amiyaki Tei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,814,408 2.7 Osaka Steel Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,686,781 2.7 Totetsu Kogyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,854,632 2.4 The Pack Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,313,936 2.2


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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, 2019, 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 five 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, 2019, 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 five years in the period then ended, in conformity with ac- counting principles generally accepted in the United States of America. 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, 2019, by correspondence with the custodian, brokers, or by other appropriate procedures where replies from broker were not received. 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, 2019


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    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS* FEBRUARY 28, 2019 % of Fair Net Shares Cost Value Assets JAPANESE EQUITY SECURITIES Banks Fukuoka Financial Group, Inc . . . . . . . . . . . . . . . . . . . . . . . . . 53,800 $ 1,353,055 $ 1,162,930 0.4 General banking services The Akita Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,100 3,991,297 2,926,748 1.0 General banking services The Bank of Okinawa, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,400 2,268,611 1,769,919 0.6 General banking services The Keiyo Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,300 2,537,293 1,946,172 0.7 General banking services The Musashino Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,600 2,552,120 1,747,045 0.6 General banking services The Taiko Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,600 2,136,794 1,678,718 0.6 General banking services The Yamanashi Chuo Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . 113,100 2,278,945 1,435,578 0.5 General banking services Total Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,118,115 12,667,110 4.4 Chemicals Adeka Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,100 3,660,334 3,556,453 1.2 Manufactures chemical and food products C. Uyemura & Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,200 2,140,975 2,629,336 0.9 Plating chemicals Fujikura Kasei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 985,100 5,249,632 5,429,546 1.9 Specialty coating materials and fine chemicals Koatsu Gas Kogyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 611,100 3,953,960 4,624,392 1.6 High-pressured gases and chemicals Sakata Inx Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811,500 11,406,754 8,573,927 3.0 Manufactures printing ink Sekisui Jushi Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,300 4,351,748 4,592,138 1.6 Manufactures plastics and other resin materials Shikoku Chemicals Corporation . . . . . . . . . . . . . . . . . . . . . . . 119,400 1,284,532 1,386,926 0.5 Manufactures chemical products Tenma Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337,800 5,673,605 6,182,892 2.2 Manufactures synthetic resin products T&K Toka Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,200 1,878,154 1,786,707 0.6 Manufactures specialized inks for printing applications Yushiro Chemical Industry Co., Ltd. . . . . . . . . . . . . . . . . . . . . 249,700 3,340,142 2,976,675 1.0 Manufactures metalworking fluids Total Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,939,836 41,738,992 14.5 See notes to financial statements


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    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2019 % of Fair Net Shares Cost Value Assets Construction Toenec Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,200 $ 7,448,542 $ 8,231,454 2.8 Construction of comprehensive building facilities Totetsu Kogyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,600 7,509,207 6,854,632 2.4 Operates construction-related businesses Yondenko Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,000 1,283,587 1,498,797 0.5 Construction of electrical distribution systems Yurtec Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,400 1,629,938 1,678,050 0.6 Engineering company Total Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,871,274 18,262,933 6.3 Electric Appliances Aoi Electronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,900 201,916 212,753 0.1 Manufactures electronic components Koito Manufacturing Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 28,400 1,703,740 1,641,795 0.6 Manufactures lighting equipment Mabuchi Motor Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,000 4,313,925 3,025,494 1.0 Manufactures small motors Maxell Holdings, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,700 1,153,494 991,799 0.3 Manufactures media devices, batteries and electrical appliances Nichicon Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,100 1,377,019 1,592,348 0.5 Manufactures capacitors and transformers Nissin Electric Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,200 796,500 785,896 0.3 Manufactures electric equipment Shindengen Electric Manufacturing Co., Ltd. . . . . . . . . . . . . . 4,300 142,567 163,276 0.1 Manufactures semiconductor products, electrical components, and power supplies Total Electric Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,689,161 8,413,361 2.9 Financing Business Hitachi Capital Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,600 3,493,107 3,471,551 1.2 General financial services Ricoh Leasing Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 115,300 3,992,723 3,544,906 1.2 Leasing and financial services Tokai Tokyo Financial Holdings, Inc. . . . . . . . . . . . . . . . . . . . . 166,000 715,630 716,750 0.3 Investment and financial services Total Financing Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,201,460 7,733,207 2.7 See notes to financial statements


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    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2019 % of Fair Net Shares Cost Value Assets Information and Communication NS Solutions Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,200 $ 745,493 $ 771,153 0.3 System consulting services and software development OBIC Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,700 677,493 925,592 0.3 Computer system integration Okinawa Cellular Telephone Company . . . . . . . . . . . . . . . . . . 237,900 7,253,022 8,061,692 2.8 Telecommunications Otsuka Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,600 758,213 776,553 0.3 Computer information system developer Total Information and Communication . . . . . . . . . . . . . . . . . . 9,434,221 10,534,990 3.7 Iron and Steel Chubu Steel Plate Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 223,800 1,163,071 1,255,610 0.4 Manufactures steel-related products Mory Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,600 713,187 937,007 0.3 Manufactures steel tubing products Nichia Steel Works, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,016,100 5,859,024 6,243,757 2.2 Manufactures steel-related products Osaka Steel Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458,900 8,644,692 7,686,781 2.7 Manufactures steel-related products Total Iron and Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,379,974 16,123,155 5.6 Machinery Hisaka Works, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,100 1,082,996 986,445 0.4 Manufactures heat exchangers and other machinery Miura Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,200 837,375 805,745 0.3 Manufactures boilers and related products Nippon Pillar Packing Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . 117,400 1,320,466 1,460,650 0.5 Manufactures mechanical seals Nitto Kohki Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,700 3,535,404 3,234,000 1.1 Manufactures machine tools and motor pumps Oiles Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,880 5,508,799 5,477,403 1.9 Manufactures bearing equipment Shibuya Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,800 263,602 300,862 0.1 Packing plant business Star Micronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,300 211,056 187,040 0.1 Manufactures machinery, electronic components, and precision parts Toshiba Machine Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,200 772,141 917,795 0.3 Manufactures industrial machinery and equipment Yamashin-Filter Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 53,800 144,236 340,476 0.1 Manufactures filters Total Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,676,075 13,710,416 4.8 See notes to financial statements


  • Page 11

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2019 % of Fair Net Shares Cost Value Assets Metal Products Dainichi Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,100 $ 1,477,197 $ 1,405,067 0.5 Manufactures oil heating equipment Neturen Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446,900 3,534,549 3,622,538 1.3 Manufactures steel bars and induction heating equipment NHK Spring Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,900 1,537,626 1,423,315 0.5 Manufactures automobile-related products Piolax, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,300 2,535,791 2,729,720 0.9 Manufactures automobile-related products Rinnai Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,100 4,341,172 3,301,248 1.1 Manufactures heating appliances and components Shinpo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900 13,793 20,944 0.0 Manufactures smokeless roasters Total Metal Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,440,128 12,502,832 4.3 Other Products Fuji Seal International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,400 278,076 314,434 0.1 Packaging-related materials and machinery Komatsu Wall Industry Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . 22,700 405,441 390,220 0.2 Manufactures various partitions Nishikawa Rubber Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 163,300 2,662,932 2,931,777 1.0 Manufactures rubber automobile parts Pigeon Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,900 345,075 321,957 0.1 Manufactures baby care products The Pack Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,100 6,090,382 6,313,936 2.2 Manufactures paper and chemical products Total Other Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,781,906 10,272,324 3.6 Precision Instruments Nakanishi Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,000 1,215,225 1,466,284 0.5 Manufactures dental instruments Total Precision Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,215,225 1,466,284 0.5 Real Estate Daibiru Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 1,849,420 1,702,873 0.6 Real estate leasing and building management Sanyo Housing Nagoya Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . 305,200 2,972,348 2,493,106 0.9 Designs and constructs housing Starts Corporation Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,800 1,647,505 1,672,503 0.6 Construction, leasing and management of real estate Total Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,469,273 5,868,482 2.1 See notes to financial statements


  • Page 12

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2019 % of Fair Net Shares Cost Value Assets Retail Trade ABC-Mart, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200 1,763,588 1,786,858 0.6 Retail sales of shoes AIN Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 68,375 82,406 0.0 Operates pharmacies and drug store chains Amiyaki Tei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238,500 8,865,990 7,814,408 2.7 Operates barbecue restaurant chains Cosmos Pharmaceutical Corporation . . . . . . . . . . . . . . . . . . . 12,000 2,256,424 2,197,487 0.8 Operates drug stores Create SD Holdings Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 59,500 1,565,273 1,561,207 0.5 Operates pharmacies and drug store chains Daikokutenbussan Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 171,700 7,744,369 6,103,519 2.1 Operates supermarkets Hiday Hidaka Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,026 3,781,691 4,052,911 1.4 Operates restaurant chains Izumi Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,000 2,000,822 1,771,454 0.6 Operates shopping centers, real estate business and credit card services Japan Meat Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,500 1,835,902 1,715,754 0.6 Supermarket business and operation of eating-out stores JINS Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400 718,716 709,659 0.3 Retail sales of eyewear and fashion accessories Kusuri No Aoki Holdings Co., Ltd. . . . . . . . . . . . . . . . . . . . . . 10,900 630,259 756,347 0.3 Operates drug stores NAFCO Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,600 919,001 869,688 0.3 Operates chain of home and furniture retail outlets Pan Pacific International Holdings Corporation . . . . . . . . . . . 53,500 2,215,515 3,188,869 1.1 Operates discount stores Saizeriya Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553,300 13,696,938 10,181,912 3.5 Operates restaurants San-A Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,900 7,160,493 6,300,408 2.2 Retail sales of home goods Seria Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,000 4,123,257 3,350,239 1.2 Discount retail sales Sundrug Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,300 867,718 652,002 0.2 Operates pharmacies and drug store chains Yossix Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,100 198,737 343,232 0.1 Operates restaurant chains Total Retail Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,413,068 53,438,480 18.5 See notes to financial statements


  • Page 13

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2019 % of Fair Net Shares Cost Value Assets Services EPS Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,200 $ 1,316,934 $ 1,536,646 0.5 Performs contract medical research services H.I.S. Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,100 2,464,207 2,910,108 1.0 Travel business Nihon M&A Center Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,400 633,401 792,047 0.3 Provides merger and acquisition brokerage services Nippon Air Conditioning Services Co., Ltd. . . . . . . . . . . . . . . 370,000 2,307,268 2,285,099 0.8 Provides maintenance and management of building facilities Step Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,900 1,666,679 1,988,715 0.7 Operates preparatory schools Tear Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,000 493,449 386,849 0.1 Funeral business Total Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,881,938 9,899,464 3.4 Textiles and Apparel Seiren Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294,400 4,439,782 4,907,548 1.7 Manufactures synthetic fibers and textile products Total Textiles and Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,439,782 4,907,548 1.7 Transportation and Warehousing Alps Logistics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,500 1,276,603 1,673,241 0.6 General logistics services Japan Transcity Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 454,500 1,659,353 1,811,472 0.6 General logistics services Meiko Trans Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371,100 3,751,528 3,810,937 1.3 Marine logistics services Trancom Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,200 1,221,224 1,401,580 0.5 General logistics services Total Transportation and Warehousing . . . . . . . . . . . . . . . . . . 7,908,708 8,697,230 3.0 See notes to financial statements


  • Page 14

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2019 % of Fair Net Shares Cost Value Assets Transportation Equipment Hi-Lex Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,400 $ 4,060,221 $ 3,157,007 1.1 Manufactures control cables Morita Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 45,600 806,249 746,219 0.3 Operates five business transportation segments Nippon Seiki Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,100 76,621 75,522 0.0 Manufactures transportation equipment parts Nissin Kogyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,400 935,435 864,230 0.3 Manufactures automobile brake systems Total Transportation Equipment . . . . . . . . . . . . . . . . . . . . . . . . 5,878,526 4,842,978 1.7 Utilities Keiyo Gas Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,900 1,982,222 2,104,838 0.7 Produces gas and energy products The Okinawa Electric Power Company, Incorporated . . . . . . 171,477 2,549,526 3,158,625 1.1 Produces thermal energy products Total Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,531,748 5,263,463 1.8 Wholesale Trade Ai Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,800 821,376 546,081 0.2 Information and security equipment Kanaden Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,000 2,650,247 3,373,788 1.2 Factory automation business Kohsoku Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368,800 3,477,686 3,913,120 1.4 Food and industrial packaging materials Kondotec Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000 481,521 514,794 0.2 Manufactures construction materials Matsuda Sangyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,800 3,630,434 3,819,070 1.3 Precious metals, electronic materials, and food Paltac Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,100 807,291 881,095 0.3 Cosmetics and daily necessities Ryoden Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 796,500 11,269,024 10,567,567 3.7 Purchases electronic and electrical devices SIIX Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 715,300 10,315,979 10,678,132 3.7 Parts procurement, logistics, and manufacturing of electronics Sugimoto & Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,800 2,004,028 2,428,503 0.8 Machine tools and measuring instruments Techno Associe Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406,000 4,069,535 4,151,113 1.4 Screws and nonferrous metal products Total Wholesale Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,527,121 40,873,263 14.2 TOTAL INVESTMENTS . . . . . . IN . . . . JAPANESE . . . . . . .. ... .. ... .. .. ... ..EQUITY ... .. .. . .. .. ... .. ...SECURITIES .. .. ... .. ... .. $297,797,539 _________________ $287,216,512 _________________ 99.7 _________ See notes to financial statements


  • Page 15

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 28, 2019 % of Fair Net Shares Cost Value Assets FOREIGN CURRENCY Japanese Yen Interest bearing account .......................... $ 1,058,853 $ 1,052,686 0.4 TOTAL FOREIGN CURRENCY . . . . . . . . . . . . . . . . . . . . . 1,058,853 1,052,686 0.4 TOTAL INVESTMENTS IN JAPANESE EQUITY SECURITIES AND FOREIGN CURRENCY . . . . . . . . . . ......................................................................... $298,856,392 __________________ $288,269,198 __________________ 100.1 LIABILITIES LESS OTHER ASSETS, NET . . . . . . . . . . . (160,615) (0.1) NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $288,108,583 100.0 *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, 2019. Japanese Yen JPY ¥ 111.40 = USD $1.00 See notes to financial statements


  • Page 16

    JAPAN SMALLER CAPITALIZATION FUND, INC. STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 28, 2019 ASSETS: Investments in Japanese equity securities, at fair value (cost—$297,797,539) . . . . . . . . . . . $287,216,512 Foreign currency, at fair value (cost—$1,058,853) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,052,686 Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505,867 Receivable for dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523,524 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,797 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,306 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289,379,692 LIABILITIES: Payable for investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935,212 Accrued management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,209 Accrued auditing and tax reporting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,503 Accrued directors’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,993 Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,192 Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,271,109 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 Total distributable loss* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (780,023) Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $288,108,583 Net asset value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.17 _______________________ * Effective February 28, 2019, the Fund has adopted certain disclosure requirements in Regulation S-X, which require the presentation of total, rather than the components of distributable earnings on the Statement of Assets and Liabilities and Statements of Changes in Net Assets. (See Note 6) See notes to financial statements


  • Page 17

    JAPAN SMALLER CAPITALIZATION FUND, INC. STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 28, 2019 INCOME: Dividend income (net of $700,077 withholding taxes) . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,300,691 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,812 Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,328,503 EXPENSES: Management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,003,065 Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262,644 Custodian fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259,822 Directors’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,972 Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238,206 Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,976,709 INVESTMENT INCOME—NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,351,794 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Realized gain (loss) on investments and foreign currency transactions: Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,611,746 Net realized loss on foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (52,051) Net realized gain on investments and foreign currency transactions . . . . . . . . . . . . . . . 31,559,695 Net change in unrealized depreciation on investments . . . . . . . . . . . . . . . . . . . . . . . . . . (81,444,013) Net change in unrealized depreciation on foreign currency transactions and translation (13,006,353) Net realized and unrealized loss on investments and foreign currency transactions and translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62,890,671) NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . ($60,538,877) 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, 2019 2018 FROM OPERATIONS: Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,351,794 $ 2,496,204 Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,611,746 76,301,390 Net realized gain (loss) on foreign currency transactions . . . . . . . . . . . (52,051) 100,208 Net change in unrealized appreciation (deprecation) on investments . (81,444,013) 7,628,096 Net change in unrealized appreciation (deprecation) on foreign currency transactions and translation . . . . . . . . . . . . . . . . . . . . . . . . . . (13,006,353) 21,216,611 Net increase (decrease) in net assets resulting from operations . . . . . (60,538,877) 107,742,509 FROM DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48,439,623) (53,168,550) Decrease in net assets derived from distributions to shareholders . . . (48,439,623) (53,168,550) NET ASSETS: Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397,087,083 342,513,124 End of year** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $288,108,583 $397,087,083 _______________________ * Effective February 28, 2019, the Fund has adopted certain disclosure requirements in Regulation S-X, which require the presentation of total, rather than the components of distributable earnings on the Statement of Assets and Liabilities and Statement of Changes in Net Assets (See Note 6). The presentation of the distributions in December 2017 has been pre- sented to conform to the current year presentation. In December 2017, ordinary income distributions were $15,626,142 and capital gains distributions were $37,542,408. ** In addition, the disclosure of accumulated net investment income or loss has been removed. Accumulated net invest- ment loss as of February 28, 2018 was $8,598,505. See notes to financial statements


  • Page 19

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies last available bid price. Securities and other assets, including futures contracts and re- Japan Smaller Capitalization Fund, Inc. (the lated options, that cannot be fair valued using “Fund”) is registered under the Investment one of the previously mentioned methods are Company Act of 1940, as amended (the “In- stated at fair value as determined in good vestment Company Act”), as a non-diversified, faith by or under the direction of the Board of closed-end management investment com- Directors of the Fund. pany. The Fund was incorporated in Maryland on January 25, 1990 and investment opera- (b) Foreign Currency Transactions—Trans- tions commenced on March 21, 1990. The actions denominated in Japanese Yen (“Yen”) Fund’s investment objective is to seek long- are recorded in the Fund’s records at the pre- term capital appreciation through investments vailing exchange rate at the time of the primarily in smaller capitalization Japanese eq- transaction. Asset and liability accounts that uity securities. are denominated in Yen are adjusted to reflect the current exchange rate at the end of the pe- The accompanying financial statements have riod. Transaction gains or losses resulting from been prepared in accordance with United States changes in the exchange rate during the re- (“U.S.”) generally accepted accounting princi- porting period or upon settlement of foreign ples (“GAAP”) and are stated in United States currency transactions are included in the re- dollars. The Fund is an investment company that sults of operations for the current period. follows the accounting and reporting guidance in accordance with the Financial Accounting Stan- The net assets of the Fund are presented at dards Board (“FASB”) Accounting Standards the exchange rates and fair values on Febru- Codification Topic 946 Financial Services-Invest- ary 28, 2019. The Fund does isolate that ment Companies. The following is a summary of portion of the results of operations arising as the significant accounting and reporting policies a result of changes in the foreign exchange used in 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, 2019. 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 securi- gains or losses arising from sales of portfolio ties are being valued or, if none is available, at securities and sales and maturities of short- the mean of the bid and offer price at the term securities. Net realized gains or losses close of business on such day or, if none is on foreign currency transactions arise from available, the last reported sales price. Port- sales of foreign currencies, currency gains or folio securities which are traded on stock losses realized on securities transactions be- exchanges are fair valued at the last sales tween trade and settlement date, and the price on the principal market on which secu- difference between the amounts of dividends, rities are traded or, lacking any sales, at the interest, and foreign withholding taxes


  • Page 20

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) recorded on the Fund’s books and the U.S. Collateral is provided in the form of cash, dollar equivalent of the amounts actually re- which would be invested in certain money ceived or paid. market funds. The Fund is entitled to receive all income on securities loaned, in addition to (c) Security Transactions, Investment Income a portion of the income earned as a result of and Distributions to Shareholders—Security the lending transaction. Although each secu- transactions are accounted for on the trade rity loan is fully collateralized, there are certain date. Dividend income and distributions are risks. On November 21, 2008, the Fund sus- recorded on the ex-dividend dates and interest pended its participation in the securities income is recorded on the accrual basis. Real- lending program. The Fund may resume its ized gains and losses on the sale of investments participation in the future. During the fiscal are calculated on the first in, first out basis. year ended February 28, 2019, the Fund did not earn any fees from lending fund portfolio Distributions from net investment income securities, pursuant to the securities lending and net realized capital gains are determined agreement. in accordance with Federal income tax regu- lations, which may differ from U.S. GAAP. To (d) Income Taxes—A provision for U.S. in- the extent these “book/tax” differences are come taxes has not been made since it is the permanent in nature (i.e., that they result from intention of the Fund to continue to qualify as other than timing of recognition—“tempo- a regulated investment company under the rary”), such accounts are reclassified within Internal Revenue Code and to distribute the capital accounts based on their Federal within the allowable time limit all taxable in- tax-basis treatment; temporary differences do come to its shareholders. not require reclassification. Dividends and distributions which exceed net realized capi- Under Japanese tax laws, a withholding tax tal gains for financial reporting purposes, but is imposed on dividends at a rate of 15.315% not for tax purposes, are reported as distribu- and such withholding taxes are reflected as a tions in excess of net realized capital gains. reduction of the related revenue. The with- holding tax rate of 15.315% was reduced to Pursuant to a securities lending agreement 10% upon the submission of Form 17 - Limi- with Brown Brothers Harriman & Co., the tation on Benefits Article. There is no Fund may lend securities to qualified institu- withholding tax on realized gains. tions. It is the Fund’s policy that, at origination, all loans shall be secured by collateral of at In accordance with U.S. GAAP require- least 102% of the value of U.S. securities ments regarding accounting for uncertainties loaned and 105% of the value of foreign se- in income taxes, management has analyzed curities loaned. It is the Fund’s policy that the Fund's tax positions taken or expected to collateral equivalent to at least 100% of the be taken on federal and state income tax re- fair value of securities on loan must be main- turns for all open tax years (the current and the tained at all times (when applicable). prior three tax years), and has concluded that


  • Page 21

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) no provision for income tax is required in the which provide general indemnifications. The Fund's financial statements. The Fund recog- Fund’s maximum exposure under these nizes interest and penalties, if any, related to agreements is unknown as this would involve uncertain tax positions as income tax expense future claims that may be made against the in the statement of operations. During the cur- Fund that have not yet occurred. However, rent year and for the prior three tax years, the based on experience, the Fund expects the Fund did not incur any interest or penalties. risk of loss to be remote and as such no ad- ditional accruals were recorded on the (e) Use of Estimates in Financial Statement Statement of Assets and Liabilities. Preparation—The preparation of financial statements in accordance with U.S. GAAP re- quires management to make estimates and 2. Management Agreement and assumptions that affect the reported amounts Transactions With Affiliated Persons and disclosures in the financial statements. Nomura Asset Management U.S.A. Inc. Actual results could differ from these esti- (“NAM-USA” or the “Manager”) acts as the mates. Manager of the Fund pursuant to a manage- ment agreement. Under the management (f) Concentration of Risk—A significant por- agreement, the Manager provides all office tion of the Fund’s net assets consists of space, facilities and personnel necessary to Japanese securities which involve certain perform its duties. Pursuant to such manage- considerations and risks not typically associ- ment agreement, the Manager has retained its ated with investments in the U.S. In addition parent company, Nomura Asset Management to the smaller size, and greater volatility, there Co., Ltd. (“NAM”), as Investment Adviser to is often substantially less publicly available in- the Fund. formation about Japanese issuers than there is about U.S. issuers. Future economic and As compensation for its services to the political developments in Japan could ad- Fund, the Manager receives a monthly fee at versely affect the value of securities in which the annual rate of 1.10% of the value of the the Fund is invested. Further, the Fund may Fund’s average weekly net assets not in ex- be exposed to currency devaluation and other cess of $50 million, 1.00% of the Fund’s exchange rate fluctuations. average weekly net assets in excess of $50 million but not exceeding $100 million, 0.90% (g) Indemnifications—Under the Fund’s or- of the Fund’s average weekly net assets in ex- ganizational documents, its officers and cess of $100 million but not exceeding $175 directors are indemnified against certain lia- million, 0.80% of the Fund’s average weekly bilities arising from the performance of their net assets in excess of $175 million but not duties to the Fund. Additionally, in the normal exceeding $250 million, 0.70% of the Fund’s course of business, the Fund enters into con- average weekly net assets in excess of $250 tracts that contain a variety of representations million but not exceeding $325 million, 0.60%


  • Page 22

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) of the Fund’s average weekly net assets in ex- 3. Purchases and Sales of Investments cess of $325 million but not exceeding $425 million and 0.50% of the Fund’s average Purchases and sales of investments, exclu- weekly net assets in excess of $425 million. sive of foreign currency and investments in Under the management agreement, the Fund short-term securities, for the fiscal year ended incurred fees to the Manager of $3,003,065 February 28, 2019 were $83,837,174 and for the fiscal year ended February 28, 2019. $129,682,430, respectively. Under the investment advisory agreement, NAM earned investment advisory fees of 4. Federal Income Tax $1,325,488 from the Manager, not the Fund, As of February 28, 2019, net unrealized de- for the fiscal year ended February 28, 2019. preciation on investments, exclusive of foreign At February 28, 2019, the management fee currency, for federal income tax purposes was payable to the Manager by the Fund was $14,578, 118, of which $9,912,648 related to ap- $196,209. preciated securities and $24,490,766 related to Certain officers and/or directors of the depreciated securities. The cost of investments, Fund are officers and/or directors of the Man- exclusive of foreign currency of $1,058,853, at ager. Affiliates of Nomura Holdings, Inc. (the February 28, 2019 for federal income tax pur- Manager’s indirect parent) did not earn any poses was $301,794,630. fees in commissions on the execution of port- At February 28, 2019, the components of ac- folio security transactions for the year ended cumulated earnings on a tax basis consisted of February 28, 2019. The Fund pays each Di- unrealized depreciation on investments and for- rector not affiliated with the Manager an eign currency transactions of $14,585,789, annual fee of $30,000. In addition, the Fund undistributed long-term capital gains of pays each Director not affiliated with the Man- $8,075,431, and undistributed ordinary income ager $3,000 per meeting attended, $2,000 per of $5,730,335. The differences between book telephone meeting attended, and Director basis and tax basis for unrealized appreciation expenses related to attendance at meetings. on investments and foreign currency transac- The Chairman of the Board, presently Rodney tions are attributable to the tax deferral of losses A. Buck, is paid an additional annual fee of on wash sales and the tax treatment of passive $8,000. The Chairman of the Audit Commit- foreign investment companies. tee, presently David B. Chemidlin, is paid an The Fund paid an ordinary income distribution additional annual fee of $4,000. Such fees of $8,647,504, which represents $0.3052 per and expenses for unaffiliated Directors aggre- share and a long-term capital gains distributions gated $212,972 for the fiscal year ended of $39,792,119, which represents $1.4044 per February 28, 2019. share to shareholders of record as of December 17, 2018. The distribution was paid on Decem- ber 27, 2018.


  • Page 23

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) The Fund paid an ordinary income distribution • Level 2—other significant observable in- of $18,113,858, which represents $0.6393 per puts (including quoted prices for similar share and a long-term capital gains distributions investments, interest rates, prepayment of $35,054,692, which represents $1.2372 per speeds, credit risk, etc.) share to shareholders of record as of December • Level 3—significant unobservable inputs 15, 2017. The distribution was paid on Decem- (including the Fund’s own assumptions in ber 21, 2017. determining the fair value of investments) 5. Fair Value Measurements At February 28, 2019, all of the Fund’s in- In accordance with U.S. GAAP, fair value is vestments were determined to be Level 1 defined as the price that the Fund would re- securities. ceive to sell an asset or pay to transfer a During the fiscal year ended February 28, liability in an orderly transaction between mar- 2019, the Fund did not hold any instrument ket participants at the measurement date. U.S. which used significant unobservable inputs GAAP also establishes a framework for mea- (Level 3) in determining fair value. suring fair value, and a three-level hierarchy for fair value measurements based upon the 6. Recent Accounting Pronouncements transparency of inputs to the valuation of an asset or liability. Inputs may be observable or In August 2018, the FASB issued Account- unobservable and refer broadly to the as- ing Standards Update ("ASU") 2018-13, Fair sumptions that market participants would use Value Measurement (Topic 820): Disclosure in pricing the asset or liability. Observable in- Framework - Changes to the Disclosure Re- puts reflect the assumptions market quirements for Fair Value Measurement (“ASU participants would use in pricing the asset or 2018-13”), which adds, modifies, and re- liability based on market data obtained from moves certain disclosure requirements for fair sources independent of the Fund. Unobserv- value measurements. ASU 2018-13 is effec- able inputs reflect the Fund’s own tive for the Fund on March 1, 2020. The Fund assumptions about the assumptions that mar- has early adopted certain disclosures of ASU ket participants would use in pricing the asset 2018-13 as permitted by the standard. or liability developed based on the best infor- On October 17, 2018, the SEC adopted mation available in the circumstances. Each changes to Regulation S-X to simplify the report- investment is assigned a level based upon the ing of information by registered investment observability of the inputs which are signifi- companies in financial statements. The amend- cant to the overall valuation. The three-tier ments require presentation of the total, rather hierarchy of inputs is summarized below. than the components, of distributable earnings • Level 1—quoted prices in active markets on the Statement of Assets and Liabilities and for identical investments also require presentation of the total, rather than


  • Page 24

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) the components, of distributions to sharehold- ers, if any, on the Statements of Changes in Net Assets. The amendments also removed the requirement for parenthetical disclosure of undistributed net investment income on the Statements of Changes in Net Assets. These Regulation S-X amendments are re- flected in the Fund’s financial statements for the period ended February 28, 2019. The distributions to shareholders in the Febru- ary 28, 2018, Statements of Changes in Net Assets presented herein have been reclas- sified to conform to the current year presentation. 7. Subsequent Events The Fund has evaluated subsequent events through April 26, 2019, the date as of which the financial statements are avail- able to be issued.


  • 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, 2019 2018 2017 2016 2015 Net asset value, beginning of year $14.01 _ $12.09 $10.50 _ $10.98 _ $9.85 _ Investment operations: Net investment income* . . . . . . . . . . . . . . . . 0.09 0.09 0.12 0.06 0.06 Net realized and unrealized gain (loss) on investments and foreign currency . . . . . . . . (2.22) 3.71 2.41 0.34 1.20 Total from investment operations . . . . . . . . . . (2.13) 3.80 2.53 0.40 1.26 Less Distributions: Distributions from ordinary income . . . . . . . (0.09) (0.55) (0.35) (0.17) (0.12) Distributions from capital gains . . . . . . . . . . (1.62) (1.33) (0.59) (0.71) (0.01) Total from distributions . . . . . . . . . . . . . . . . . . (1.71) (1.88) (0.94) (0.88) (0.13) Net . . . asset . . . . . value, . . . . . end . . . .of . .year . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. $10.17 _ _______ $14.01 _ _______ $12.09 ________ _$10.50 _ ______ $10.98 _____ _____ Market value, end of year . . . . . . . . . . . . . . . . $8.92 $12.48 $10.60 $8.98 $9.69 Total investment return** . . . . . . . . . . . . . . . . . (13.8%) 36.0% 24.9% 0.7% 11.2% Ratio/Supplemental Data: Net assets, end of year (000) . . . . . . . . . . . . $288,109 $397,087 $342,513 $297,550 $311,094 Ratio of expenses to average net assets . . . 1.13% 1.05% 1.09% 1.11% 1.13% Ratio of net income to average net assets . 0.67% 0.66% 0.99% 0.50% 0.62% Portfolio turnover rate . . . . . . . . . . . . . . . . . 24% 50% 20% 24% 41% _______________________ * Based on average shares outstanding. ** Based on market value per share, adjusted for reinvestment of income dividends, ordinary income distributions, 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 2018 Annual Meeting of the Shareholders of the Fund was held at the offices of NAM-USA at Worldwide Plaza, 309 West 49th Street, New York, New York on November 20, 2018. The purpose of the meeting was (1) to elect two Class III Directors to serve for a term to expire in 2021 (2) to consider a share- holder proposal requesting that the Board of Directors take action to declassify the Board of Directors and (3) to transact such other business as may properly come before the meeting or any adjournment or post- ponement thereof. At the meeting, Rodney A. Buck and David B. Chemidlin were re-elected to serve as directors of the Fund for a term expiring in 2021 and until their successors are duly elected and qualify. The results of the voting at the Annual Meeting were as follows: 1. To elect two Class III Directors: % of Shares Voted % of Shares Broker Shares Voted Outstanding Outstanding Abstained Non-Vote For Shares Withhold Authority Shares Rodney A. Buck 23,129,919 81.63% 3,675,566 12.97% - - David B. Chemidlin 23,102,662 81.54% 3,702,822 13.07% - - 2. A Shareholder proposal requesting that the Board of Directors take action to declassify the Board of Directors: % of Shares Voted % of Shares % of Shares Voted Outstanding Outstanding Abstained Outstanding Broker For Shares Against Shares Shares Non-Vote 14,063,158 49.63% 7,347,476 25.93% 156,328 0.55% -


  • Page 27

    JAPAN SMALLER CAPITALIZATION FUND, INC. SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited) 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 (71) 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 one fund in the Fund Complex E. Han Kim (72) 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 one 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 (62) Owner and President of AbidesWorks LLC (ac- Class III Director and Chairman of the Audit Committee Di- counting and business support services) since rector since: 2006 2016; Corporate Controller, Advance Maga- Director of one fund in the Fund Complex zine Publishers, Inc. (d/b/a Conde Nast) from 1995-2016. Marcia L. MacHarg (70) Partner, Debevoise & Plimpton LLP from 1987- Class I Director 2012; Of Counsel, Debevoise & Plimpton LLP Director since: 2013 since 2013; Trustee, Board of Trustees of Smith Director of one fund in the Fund Complex College 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 28

    JAPAN SMALLER CAPITALIZATION FUND, INC SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited) INTERESTED 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: Yutaka Itabashi (53)* Senior Managing Director of NAM since 2015; President and Class II Director President and Chief Executive Officer of NAM- From 2013 to March 31, 2019 U.S.A and President of Nomura Global Alpha LLC Director of one fund in the Fund Complex ("NGA") from 2013 to March 31, 2019; Managing Director of NAM from 2012-2013; Senior Managing Director of Nomura Funds Research and Technolo- gies Co., Ltd. (“NFRT”) from 2009-2012. Yuichi Nomoto (47)* President and Chief Executive Officer of NAM- President and Class II Director U.S.A and President of NGA since April 1, 2019; Since: April 1, 2019 Managing Director of NAM-U.S.A since April 2018; Director of one fund in the Fund complex Head of Client Services and Marketing of NAM- U.S.A since 2016; Executive Director of NAM-U.S.A from 2016 to April 2018; Senior Man- ager and Head of the Marketing Planning Team, NISA Project Team in Retail Client Strategy, and the Investment Trust Marketing Team of NAM from 2010 to 2016. * Mr. Itabashi and Mr. Nomoto are “interested persons” of the Fund based on their 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, 2019, the Board of Directors (or the Independent Directors of the Fund meeting as a group) held six meetings, the Audit Committee held four meetings and the Nominating Com- mittee held one meeting. The Governance and Compliance Committee met as part of each quarterly meeting 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 aggregate num- ber of meetings of the Audit and Nominating Committees held during the period for which they served.


  • Page 29

    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 (53) Senior Managing Director of NAM since 2015; President President and Class II Director and Chief Executive Officer of NAM-U.S.A and President From 2013 to March 31, 2019 Director of one fund in the Fund Complex of NGA from 2013 to March 31, 2019; Managing Director of NAM from 2012-2013; Senior Managing Director of NFRT from 2009-2012. Yuichi Nomoto (47) President and Chief Executive Officer of NAM-U.S.A and President and Class II Director President of NGA since April 1, 2019; Managing Director Since: April 1, 2019 of NAM-U.S.A since April 2018; Head of Client Services Director of one fund in the Fund complex and Marketing of NAM-U.S.A since 2016; Executive Direc- tor of NAM-U.S.A from 2016 to April 2018; Senior Manager and Head of the Marketing Planning Team, NISA Project Team in Retail Client Strategy, and the Investment Trust Marketing Team of NAM from 2010 to 2016. Zheng Liu (40) Chief Administrative Officer of NAM-U.S.A since Septem- Vice President ber 2018; Senior Manager of the Corporate Planning Vice President since: November 2018 Department of NAM from 2012-2018; Quantitative Analyst for Quantitative Research and Development Department of NAM from 2007-2012. Maria R. Premole (56) Vice President of NAM-U.S.A. Client Relationship Man- Vice President agement since 2017; Vice President and Head of Retail Vice President since: 2013 Product Management of NAM-U.S.A from 2013 to 2017; Associate of NAM-U.S.A from 2008-2013. Neil A. Daniele (58) Chief Compliance Officer of NAM-U.S.A since 2005 and Secretary and Chief Compliance Officer Managing Director of NAM-U.S.A since 2007; Chief Com- Secretary since: 2002 pliance Officer of NGA since 2008; Chief Compliance Chief Compliance Officer since: 2005 Officer of Nomura Corporate Research and Asset Man- agement Inc. and Nomura Funds Research and Technologies America, Inc. since 2009; Corporate Secre- tary of NAM-U.S.A and NGA since 2013. Amy J. Robles (41) Executive Director of NAM-U.S.A since 2015; Controller Treasurer and Treasurer of NAM-U.S.A and Treasurer of NGA since Treasurer since: 2013 2013; Vice President of NAM-U.S.A from 2009-2015. Assistant Treasurer from 2011 to 2013 Kelly S. Lee (36) Vice President of NAM-U.S.A since 2015; Fund Controller Assistant Treasurer at JP Morgan Chase & Co. from 2014- 2015; Financial Assistant Treasurer since: 2015 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.


  • Page 30

    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, 2019 as to the federal tax status of distributions received by shareholders during such fiscal year. Accordingly, the Fund designates $700,077 as foreign tax credit with the associated foreign gross income of $7,000,767. Shareholders should not use the above information to prepare their tax returns. The informa- tion necessary to complete your income tax returns will be included with your Form 1099 DIV which was sent to you separately in January 2019. 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’’). Al- though 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 in- terests 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 re- maining 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 illiq- uid securities, such a conversion could hinder the Fund’s ability to pursue its investment objectives. The Board of Directors intends to continue to review, on a quarterly basis, the trading market for the Fund’s shares.


  • Page 31

    JAPAN SMALLER CAPITALIZATION FUND, INC Board Review of the Management and Investment Advisory Agreements The Board of Directors of the Fund (the “Board”) consists of five directors, four of whom are in- dependent or non-interested directors (the “Independent Directors”). The Board considers matters relating to the Fund’s management and investment advisory agreements throughout the year. On an annual basis, the Board specifically considers whether to approve the continuance of these agreements for an additional one-year period. The specific agreements (the “Agreements”) consist of the Fund’s management agreement with Nomura Asset Management U.S.A. Inc. (the “Manager”) and the investment advisory agreement between the Manager and its parent, Nomura Asset Man- agement Co., Ltd. (the “Investment Adviser”). The Board, including the Independent Directors, most recently approved the continuance of the Agreements at a meeting held on November 20, 2018. In connection with their deliberations at that meeting and at a separate meeting of the Independent Directors held on November 13, 2018, the Independent Directors received materials that included, among other items, information pro- vided by the Manager regarding (i) the investment performance of the Fund, performance of other investment companies and performance of the Fund’s benchmark, (ii) expenses of the Fund and the management fee paid by the Fund to the Manager and the advisory fee paid by the Manager to the Investment Adviser, (iii) advisory fees charged by the Manager and the Investment Adviser to comparable accounts and (iv) the profitability of the Agreements to the Manager and the Investment Adviser. The Independent Directors were advised by, and received materials (including a detailed memorandum reviewing the applicable legal standards and factors taken into account by the Supreme Court and other relevant court decisions) from their independent counsel in considering these matters and the continuance of the Agreements. In considering the continuance of the Agreements at the meeting held on November 20, 2018, the Board, including the Independent Directors, did not identify any single factor as determinative. Matters considered by the Directors in connection with their review of the Agreements included the following: The nature, extent and quality of the services provided to the Fund under the Agreements. The Board considered the nature, extent and quality of the services provided to the Fund by the Man- ager and the Investment Adviser and the resources dedicated by the Manager and the Investment Adviser. These services included both investment advisory services and related services such as the compliance oversight provided by the Manager. Based on its review of all of the services pro- vided by the Manager and the Investment Adviser, the Board, including the Independent Directors, concluded that the nature, extent and quality of these services supported the continuance of the Agreements.


  • Page 32

    JAPAN SMALLER CAPITALIZATION FUND, INC Board Review of the Management and Investment Advisory Agreements (Continued) Investment performance. The Board considered performance information provided by the Manager regarding the Fund’s investment performance over a number of time periods, including the one-year, three-year and five-year periods ended September 30, 2018. In response to requests by the Independent Directors, the Manager provided information about the performance of the Fund compared to the Fund’s benchmark index, data on the Fund’s expense ratio and components thereof, and comparative fee, expense ratio and performance information for other funds investing primarily in Japanese securities. In connection with their review of investment performance, the Independent Directors noted that, following a series of discussions with management in 2012 and 2013 that focused on the Fund’s performance, the Investment Adviser had installed a new management team as of July 1, 2013. The Independent Directors recognized that, as contemplated at the time of the transition, the new portfolio managers had invested in a more diversified portfolio than the Fund had maintained in the past with an increased focus on value characteristics evidenced by financial measurements. The Independent Directors also noted the Fund’s comparative performance since the transition and the Fund’s performance for the one-year, three-year and five-year periods ended September 30, 2018 amongst six funds (including the Fund) identified by the Manager as having similar investment objectives. The Independent Directors discussed with the portfolio managers the relative underper- formance of the Fund compared to its peers and benchmark for the year ended September 30, 2018, as well as its comparatively stronger performance over longer time periods. Based on their review, the Independent Directors concluded that the Fund’s performance supported the continu- ance of the Agreements. The costs of the services to be provided and the profits to be realized by the Manager and its affiliates from their advisory relationships with the Fund. The Board considered the fee payable un- der the Fund’s management agreement in connection with other information provided for the Directors’ consideration. The Board considered information provided by the Manager regarding fees charged by the Manager and its affiliates to institutional accounts and other investment com- panies having investment objectives similar to the Fund’s investment objective, including Japanese retail unit trusts. The Board recognized that the nature of the services provided by the Manager and the Investment Adviser to other investment vehicles and separate accounts differed from the range of services provided to the Fund. The Manager also provided the Board with information prepared by the Manager and the In- vestment Adviser indicating the profitability of the Agreements to these respective advisers. This presentation included information regarding methodologies used to allocate expenses in consider- ing the profitability of the Agreements to the Manager and the Investment Adviser. The Independent Directors reviewed this information with the Manager to understand expense allocation methodol- ogy utilized by the Investment Adviser.


  • Page 33

    JAPAN SMALLER CAPITALIZATION FUND, INC Board Review of the Management and Investment Advisory Agreements (Continued) After reviewing the information described above, the Independent Directors concluded that the management fee proposed to be charged to the Fund was reasonable and the profitability of the Agreements to the Manager and the Investment Adviser supported the continuance of the Agree- ments. However, the Independent Directors did request the Manager to consider whether the multiple breakpoint fee structure in the Agreements could be simplified and to report its conclusions to the Board at a future meeting. Economies of scale. The Board also considered whether the Manager and the Investment Ad- viser realize economies of scale as the Fund grows larger and the extent to which any economies of scale are shared with the Fund and its shareholders. The Board noted that the management agreement contains six separate breakpoints in the management fee for net assets above $50 mil- lion, with the last breakpoint applicable to net assets in excess of $425 million. Based on an evaluation of all factors deemed relevant, including the factors described above and taking into account information received throughout the preceding year, the Board, including each of the Independent Directors, concluded that each of the Agreements should be continued through December 31, 2019.


  • Page 34

    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 to reinvest dividends and distributions in shares of or the closing price or the mean between the bid the Fund. Such shares will be acquired by the Plan and ask prices of the shares becomes higher than Agent for shareholders either through open market the net asset value, in which case the Fund will is- purchases if the Fund is trading at a discount or sue the necessary additional shares from through the issuance of authorized but unissued authorized but unissued shares. If on the last trad- shares if the Fund is trading at net asset value or a ing day immediately preceding the dividend premium. If the market price of a share on the payable date, the closing price or the mean be- payable date of a dividend or distribution is at or tween the bid and ask prices of the shares is higher above the Fund’s net asset value per share on such than the net asset value per share and if the number date, the number of shares to be issued by the of shares previously purchased on the Exchange or Fund to each shareholder receiving shares in lieu of elsewhere is insufficient to satisfy dividend invest- cash dividends or distributions will be determined ments, the Fund will issue the necessary additional by dividing the amount of the cash dividends or dis- shares from authorized but unissued shares. There tributions to which such shareholder would be will be no brokerage charges with respect to shares entitled by the greater of the net asset value per issued directly by the Fund to satisfy the dividend share on such date or 95% of the market price of a investment requirements. However, each partici- share on such date. If the market price of a share on pant will pay a pro rata share of brokerage such distribution date is below the net asset value commissions incurred with respect to the Fund’s per share, the number of shares to be issued to open market purchases of shares. In each case, the such shareholders will be determined by dividing cost per share of shares purchased for each share- such amount, less brokerage commission, by the holder’s account will be the average cost, including per share market price. brokerage commissions, of any shares purchased in the open market plus the cost of any shares is- Purchases will be made by the Plan Agent sued by the Fund. For the fiscal year ended from time to time on the New York Stock Exchange February 28, 2019, the Fund issued no new shares (the “Exchange”) or elsewhere to satisfy dividend for dividend reinvestment purposes. and distribution investment requirements under the


  • Page 35

    JAPAN SMALLER CAPITALIZATION FUND, INC. DIVIDEND REINVESTMENT PLAN (Continued) (Unaudited) Shareholders who elect to hold their shares in tions in cash. An election will be effective only for a the name of a broker or other nominee should con- dividend or distribution if it is received by the Plan tact such broker or other nominee to determine Agent not less than 10 days prior to such record whether they may participate in the Plan. To the ex- date. tent such participation is permitted, the Plan Agent will administer the Plan on the basis of the number The Plan Agent will maintain all shareholders’ of shares certified from time to time by the broker accounts in the Plan, and furnish written confirma- as representing the total amount registered in the tion of all transactions in such account, including shareholder’s name and held for the account of information needed by shareholders for tax beneficial owners who are participating in such records. Shares in the account of each Plan Plan. Shareholders that participate in the Plan hold- participant may be held by the Plan Agent in non- ing shares in a brokerage account may not be able certificated form in the name of the participant, and to transfer the shares to another broker and con- each shareholder’s proxy will include those shares tinue to participate in the Plan. Shareholders who purchased or received pursuant to the Plan. are participating in the Plan may withdraw from the Plan at any time. The automatic reinvestment of dividends will not relieve participants of any income taxes that There will be no penalty for withdrawal from may be payable (or required to be withheld) on such the Plan, and shareholders who have previously dividends. Shareholders receiving dividends or dis- withdrawn from the Plan may rejoin it at any time. tributions in the form of additional shares pursuant Changes in participation in the Plan should be to the Plan should be treated for Federal income tax made by contacting the Plan Agent if the shares are purposes as receiving a distribution in an amount held in the shareholder’s own name and must be in equal to the amount of money that the shareholders writing and should include the shareholder’s name receiving cash dividends or distributions will re- and address as they appear on the account regis- ceive and should have a cost basis in the shares tration. If the shares are held in the name of a received equal to such amount. broker or other nominee, such person should be contacted regarding changes in participation in the The Fund reserves the right to amend or Plan. Upon withdrawal from the Plan, the appropri- terminate the Plan as applied to any dividend paid ate number of full shares will be reflected in the subsequent to written notice of the change sent Fund records and a cash payment for any fractional to participants in the Plan at least 90 days before shares will be issued. The shareholder may also re- the record date for such dividend. There is no ser- quest the Plan Agent to sell part or vice charge to participants in the Plan; however, the all of the shareholder’s shares at the market price Fund reserves the right to amend the Plan to in- and remit the proceeds to the shareholder, net of clude a service charge payable by the participants. any brokerage commissions. A $2.50 fee plus $0.15 All correspondence concerning the Plan, including per share sold will be charged by the Plan Agent requests for additional information about the Plan, upon any cash withdrawal or termination. An elec- should be directed to the Trust Company, at Com- tion to withdraw from the Plan will, until such putershare Trust Company, N.A. P.O. Box 505000 election is changed, be deemed to be an election Louisville, KY 40233. by a shareholder to take all subsequent distribu-


  • Page 36

    BOARD OF DIRECTORS Rodney A. Buck David B. Chemidlin Yutaka Itabashi from 2013 to March 31, 2019 Yuichi Nomoto since April 1, 2019 E. Han Kim Marcia L. MacHarg OFFICERS Yutaka Itabashi, President from 2013 to March 31, 2019 Yuichi Nomoto, President since April 1, 2019 Zheng Liu, 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-smaller-capitalization 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, 2019 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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