avatar Japan Smaller Capitalization Fund, Inc. Finance, Insurance, And Real Estate
  • Location: New York 
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    JAPAN SMALLER CAPITALIZATION FUND, INC. April 29, 2020 To Our Shareholders: We present the Annual Report of Japan Smaller appreciated by 1.2% against the U.S. dollar dur- Capitalization Fund, Inc. (the “Fund”) for the fiscal ing the quarter. year ended February 29, 2020. Investment Strategy The net asset value per share (“NAV”) of the Fund decreased by 6.7% and the closing market price of The Fund invests in undervalued stocks that of- the Fund (on the New York Stock Exchange) de- fer fundamental strength and potential for creased by 2.6% after giving effect to the improvement. The Fund performs extensive fun- reinvestment of income dividends, ordinary income damental research to identify stocks that can distributions, and long-term capital gain distribu- create shareholder value. The Fund focuses on tions for the fiscal year ended February 29, 2020. companies that are leaders in certain niche mar- The closing market price of the Fund on February kets, companies with large or expanding market 29, 2020 was $8.03, representing a discount of shares, stocks with superior shareholder distribu- 9.3% to the NAV of $8.85. The net assets of the tion policies, and stocks that offer good growth Fund totaled $250,887,390 on February 29, 2020. prospects. In the Japanese small cap equity mar- ket, valuation anomalies do exist and can be The Russell/Nomura Small Cap™ Index, the exploited through active management. There are a Fund’s benchmark (“Benchmark”), decreased by number of factors that the Fund considers when 7.5% in United States (“U.S.”) dollar terms. During selling an investment including a stock which ap- the fiscal year ended February 29, 2020, the Fund pears fully valued, unexpected deterioration in outperformed the Benchmark by 0.8% on a NAV earnings or a substantial loss that impairs the basis. The Tokyo Price Index (the “TOPIX”), a capi- company’s net assets, and a stock’s diminishing talization-weighted index of all companies listed on potential given declining competitiveness due to a the First Section of the Tokyo Stock Exchange (the change of business environment or failure of busi- “TSE”), decreased by 3.2% and the Nikkei Stock ness strategy. Average Index (“Nikkei”), a price-weighted index of the 225 leading stocks on the TSE, increased by 1.9% in U.S. dollar terms for the year ended Febru- Performance ary 29, 2020. The Japanese yen (“Yen”) appreciated In terms of the sector allocation strategy during by 3.0% against the U.S. dollar during the fiscal fiscal year ended February 29, 2020, an over- year ended February 29, 2020. weight position in the Chemicals sector and an For the quarter ended February 29, 2020, the underweight position in the Services sector gener- Benchmark decreased by 15.0%, the TOPIX de- ated the largest positive contributions. Sector creased by 10.0%, and the Nikkei decreased by returns were eroded by an overweight position in 8.1% in U.S. dollar terms. The NAV of the Fund the Iron and Steel sector and an underweight po- decreased by 11.4% and outperformed the sition in the Electric Appliances sector. Benchmark by 3.6%. The Fund’s share price de- Relative performance was positively impacted creased by 6.6% during the quarter. The Yen by Saizeriya Co., Ltd. in the Retail Trade sector,


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    Ryoden Corporation in the Wholesale Trade sec- Chinese goods, raising new concerns about the tor, and Okinawa Cellular Telephone Company in global economic outlook. the Information and Communication sector. Con- versely, relative performance was negatively The Japanese stock market rallied strongly impacted by SIIX Corporation in the Wholesale from September to the end of 2019, despite un- Trade sector, Osaka Steel Co., Ltd. in the Iron and derlying concerns such as the U.S. and China Steel sector, and H.I.S. Co., Ltd. in the Services trade dispute and Brexit. Accommodative mone- sector. tary policies by the major central banks were expected to support a continuing recovery in Market Review global economic conditions that would enable market participants to look beyond the current The Benchmark decreased by 10.3% and un- weakness. Foreign exchange rate volatility has derperformed the TOPIX index, which decreased declined which has also helped to establish more by 6.0% in local currency terms, for the fiscal year stable business conditions for the corporate sec- ended February 29, 2020. The Japanese equity tor. International investors turned net buyers of market declined in response to a rapid reassess- Japanese stocks from October and continued to ment of near-term corporate earnings prospects increase their positions to the end of 2019. triggered by reports of an increasing number of cases of Coronavirus (COVID-19) infections Following the strong rally in the second half of worldwide, including in Japan. While the Coron- 2019, the Japanese equity market experienced a avirus spread has undermined market sentiment, sharp sell-off in January and extended downturn the impact has been even more damaging for in February 2020. Uncertainty about near-term Japanese small-cap equities, which tend to have economic prospects was heightened by the po- lower liquidity. tential impact from the outbreak of the Coronavirus in China. Japan’s real domestic prod- The Japanese stock market has remained gen- uct growth rate for the period from October to erally flat from March 2019. During a ten day December 2019 declined to -6.8% quarter over holiday period from April 27 to May 6, 2019 for the quarter annualized, significantly under the -3.8% succession of Japan’s new Emperor, market sen- consensus estimate. There was a rapid reassess- timent was undermined by announcements from ment of near-term corporate earnings prospects U.S. President Trump threatening further tariff triggered by reports of an increasing number of hikes on imports from both China and Mexico. cases of Coronavirus infections worldwide, in- Meanwhile, earnings forecasts for the fiscal year cluding in Japan, a cyclical recession, and ended March 31, 2020 issued by Japanese com- additional pressure from the consumption tax panies from late April to the middle of May 2019 hike. were generally conservative. The Japanese stock market rebounded at the Outlook and Future Strategy beginning of June 2019 after Federal Reserve Chairman Jerome Powell alluded to a potential in- Fears of a major global recession are materializ- terest rate cut and the Trump administration ing as strict restrictions on daily travel and decided not to impose new tariffs on imports from economic activity, and in some cases lock-down Mexico. Stock prices in Japan declined again in measures, are imposed across large parts of the early August 2019 after President Trump an- developed world to limit the spread of COVID-19. nounced another round of hikes in U.S. tariffs on The magnitude of the economic losses will be im-


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    possible to assess precisely while it remains un- it would not be appropriate to measure the market clear how long the containment measures will valuation based on earnings at this stage. remain in place. Central banks and governments Nonetheless, we can also demonstrate that valu- have announced monetary and fiscal stimulus ations of the Japanese stock market have policies on an unprecedented scale, partly aimed adjusted considerably over the past three months, at mitigating the risk of a credit crunch and other as the price-to-book ratio of the Russell Nomura serious damage to the economy. Japan is ex- Small Cap Index has now dipped to less than 0.9, pected to record a second successive decline in which is close to the 0.7 level recorded at the bot- gross domestic product, and a steep fall in growth tom of the global financial crisis in 2008. At this for the first half of the year will be inevitable due to point, most companies still have abundant equity the severe damage across most of the service to endure difficult times, and should not expect sector, but especially the tourism, hospitality and major losses to erode capital levels significantly. transportation related industries. Manufacturers Therefore, as the rate of new coronavirus infec- will also be severely hit, except in industries that tions declines and restrictions and lock-down benefit from special procurement needs such as measures are lifted, this under-valuation is likely to medical care and telecommuting. be corrected in the long run. Neighboring China has recently undergone an The Fund appreciates your continuing support. economic recovery with more than 90% of large- Sincerely, scale industrial firms have officially resumed business and the operating rate of major enter- prise factories has begun to increase as the official figures suggest the coronavirus outbreak has been almost contained. Local governments in China have begun to implement measures to Yuichi Nomoto stimulate consumer spending, such as incentives President for automobile purchases and coupons that can be used in local restaurants and shops. China however remains in a precarious position given the inevitable impact on exports caused by the global economic slowdown. Nevertheless, China’s Purchasing Managers’ Index rose to 52.0 in March from a record-low 35.7 in February. China also offers a case study showing how other major economies, including Japan, could follow a similar trajectory once the coronavirus pandemic has been contained. Earnings forecasts for Japanese companies for this fiscal year have not yet been revised down- ward sufficiently. Profit forecasts are likely to fluctuate widely and are now heavily dependent on the duration of the containment measures. It is likely to see substantial negative earnings growth figures reported for this fiscal year. In that sense,


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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 forward-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. Forward-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 29, 2020, there are 1,248 securities in the Russell/Nomura Small Cap™ Index.


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    CHANGE IN AUDITORS The Fund was advised on February 24, 2020 by RSM US LLP (“RSM”), its independent public accounting firm, that RSM is not independent under the Securities and Exchange Commission’s independence rules as it pertains to the Fund due to a discovery of certain non-attest services performed by a foreign affiliated firm. RSM subsequently resigned on February 27, 2020. The resignation of RSM was not the result of any disagreement with management. During the fiscal years ended Feb- ruary 28, 2019 and February 28, 2018, RSM’s audit reports contained no adverse opinion or disclaimer of opinion; nor were the reports qualified or modified as to uncertainty, audit scope, or accounting principles. Further, there were no disagreements between the Fund and RSM on accounting principles or practices, financial statement disclosure, or au- diting scope or procedure, which, if not resolved to the satisfaction of RSM, would have caused it to make reference to the disagreements in connection with their reports. On March 30, 2020, the Audit Committee of the Fund and the Board of Directors of the Fund approved the selection of Ernst & Young LLP as the independent registered public accounting firm to audit the Fund’s financial statements for its fiscal year ended February 29, 2020. 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 available (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 securities held in the Fund’s portfolio during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling toll-free 1-800-833-0018; and (2) on the 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 statement 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 2019, 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 29, 2020 (Unaudited) KEY STATISTICS Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,887,390 Net Asset Value per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.85 Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.03 Percentage Change in Net Asset Value per Share*+ . . . . . . . . . . . . . . . . . . . . . (6.7%) Percentage Change in Market Price*+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.6%) MARKET INDICES Percentage change in market indices:* YEN U.S.$ Russell/Nomura Small Cap™ Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10.3%) (7.5%) Tokyo Price Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.0%) (3.2%) Nikkei Stock Average Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.1%) 1.9% *From March 1, 2019 through February 29, 2020. +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 . . . . . . . . . . . . . . . . . . . . . . . . . . 15.3 Transportation Equipment . . . . . . . . . . . . . . . 3.3 Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.7 Transportation and Warehousing . . . . . . . . . 3.0 Wholesale Trade . . . . . . . . . . . . . . . . . . . . . . 11.1 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 Electric Appliances . . . . . . . . . . . . . . . . . . . . 2.8 Iron and Steel . . . . . . . . . . . . . . . . . . . . . . . . 5.7 Other Products . . . . . . . . . . . . . . . . . . . . . . . 2.7 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Financing Business . . . . . . . . . . . . . . . . . . . . 2.2 Information and Communication . . . . . . . . . 5.1 Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Metal Products . . . . . . . . . . . . . . . . . . . . . . . 4.9 Textiles and Apparel . . . . . . . . . . . . . . . . . . . 1.8 Construction . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Precision Instruments . . . . . . . . . . . . . . . . . . 0.8 TEN LARGEST EQUITY HOLDINGS % of Security Net Assets Ryoden Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Okinawa Cellular Telephone Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Amiyaki Tei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Osaka Steel Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 SIIX Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 Nichirei Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Hi-Lex Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 The Okinawa Electric Power Company, Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Sakata Inx Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Fujikura Kasei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0


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    JAPAN SMALLER CAPITALIZATION FUND, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Japan Smaller Capitalization Fund, Inc. Opinion on the Financial Statements We have audited the accompanying statement of assets and liabilities of Japan Smaller Capitalization Fund, Inc. (the “Fund”), including the schedule of investments, as of February 29, 2020, and the related statement of operations, state- ment of changes in net assets, the financial highlights in the year then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the finan- cial position of the Fund at February 29, 2020, the results of its operations, the changes in its net assets and its financial highlights for the year then ended, in conformity with U.S. generally accepted accounting principles. The statement of changes in net assets for the year ended February 28, 2019, and the financial highlights for each of the years in the four-year period then ended, were audited by another independent registered public accounting firm whose report, dated April 26, 2019, expressed an unqualified opinion on that statement of changes in net assets and those financial highlights. 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 audit. 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 the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and per- form the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund’s internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal con- trol over financial reporting. Accordingly, we express no such opinion. Our audit 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 procedures included confirmation of securities owned as of February 29, 2020, by correspondence with the custodian or by other appropriate auditing procedures where replies from others were not received. Our audit also included evaluating the ac- counting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion. We have served as the auditor of one or more Nomura investment companies since 2020. New York, New York April 29, 2020


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    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS* FEBRUARY 29, 2020 % of Fair Net Shares Cost Value Assets JAPANESE EQUITY SECURITIES Banks Fukuoka Financial Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 78,100 $ 1,767,670 $ 1,187,701 0.5 General banking services The Akita Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,100 4,898,881 3,057,552 1.2 General banking services The Bank of Okinawa, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,800 2,848,983 2,152,574 0.9 General banking services The Keiyo Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482,500 3,553,989 2,271,796 0.9 General banking services The Musashino Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,400 3,037,007 1,645,678 0.6 General banking services The Taiko Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,500 2,448,007 1,715,374 0.7 General banking services The Yamanashi Chuo Bank, Ltd. . . . . . . . . . . . . . . . . . . . . . . 164,000 2,646,818 1,240,942 0.5 General banking services Total Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,201,355 13,271,617 5.3 Chemicals Adeka Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328,500 4,954,538 4,324,088 1.7 Manufactures chemical and food products C. Uyemura & Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,100 2,461,188 3,137,477 1.3 Plating chemicals Fujikura Kasei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,143,000 6,095,347 4,937,616 2.0 Specialty coating materials and fine chemicals Koatsu Gas Kogyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 565,600 3,706,122 3,463,551 1.4 High-pressured gases and chemicals Sakata Inx Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613,500 7,439,384 5,357,236 2.1 Manufactures printing ink Sekisui Jushi Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,200 2,602,879 2,634,220 1.0 Manufactures plastics and other resin materials Shikoku Chemicals Corporation . . . . . . . . . . . . . . . . . . . . . . . 152,600 1,699,404 1,528,753 0.6 Manufactures chemical products Shin-Etsu Polymer Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 53,300 371,721 416,618 0.2 Manufactures electronic devices, precision moldings, and dwelling materials Soken Chemical & Engineering Co., Ltd. . . . . . . . . . . . . . . . . 49,700 587,354 529,159 0.2 Manufactures chemical products Tenma Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,800 3,039,008 2,336,171 0.9 Manufactures synthetic resin products T&K Toka Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347,800 3,301,087 2,625,270 1.0 Manufactures specialized inks for printing applications Yushiro Chemical Industry Co., Ltd. . . . . . . . . . . . . . . . . . . . . 286,700 3,871,611 3,195,722 1.3 Manufactures metalworking fluids Total Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,129,643 34,485,881 13.7 See notes to financial statements


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    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 29, 2020 % of Fair Net Shares Cost Value Assets Construction Toenec Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,300 $ 2,214,255 $ 2,493,248 1.0 Construction of comprehensive building facilities Totetsu Kogyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,800 3,266,765 3,022,776 1.2 Operates construction-related businesses Yondenko Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,800 1,197,033 1,203,922 0.5 Construction of electrical distribution systems Yurtec Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316,100 2,340,730 1,657,913 0.6 Engineering company Total Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,018,783 8,377,859 3.3 Electric Appliances AOI Electronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,600 239,112 202,382 0.1 Manufactures electronic components Koito Manufacturing Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 37,500 2,175,621 1,477,730 0.6 Manufactures lighting equipment Mabuchi Motor Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,500 5,319,131 4,139,748 1.6 Manufactures small motors Maxell Holdings, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,200 1,061,879 741,647 0.3 Manufactures media devices, batteries and electrical appliances Shindengen Electric Manufacturing Co., Ltd. . . . . . . . . . . . . . 5,800 192,637 161,223 0.1 Manufactures semiconductor products, electrical components, and power supplies Shinko Electric Industries Co., Ltd. . . . . . . . . . . . . . . . . . . . . . 34,300 277,055 376,616 0.1 Manufactures semiconductor packages Total Electric Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,265,435 7,099,346 2.8 Financing Business Hitachi Capital Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,900 2,443,024 2,680,115 1.1 General financial services Ricoh Leasing Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 73,200 2,441,583 2,515,499 1.0 Leasing and financial services Tokai Tokyo Financial Holdings, Inc. . . . . . . . . . . . . . . . . . . . . 101,200 392,082 265,860 0.1 Investment and financial services Total Financing Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,276,689 5,461,474 2.2 Food Nichirei Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,500 5,756,398 6,302,831 2.5 Produces frozen foods and provides cold storage warehousing Total Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,756,398 6,302,831 2.5 See notes to financial statements


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    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 29, 2020 % of Fair Net Shares Cost Value Assets Information and Communication NS Solutions Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,600 $ 1,113,408 $ 1,096,001 0.4 System consulting services and software development OBIC Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500 1,059,763 1,536,700 0.6 Computer system integration Okinawa Cellular Telephone Company . . . . . . . . . . . . . . . . . . 249,500 7,817,985 8,989,432 3.6 Telecommunications Otsuka Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 1,110,405 1,280,699 0.5 Computer information system developer Total Information and Communication . . . . . . . . . . . . . . . . . . 11,101,561 12,902,832 5.1 Iron and Steel Chubu Steel Plate Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 117,200 727,787 731,789 0.3 Manufactures steel-related products Mory Industries Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,500 954,419 1,055,677 0.4 Manufactures steel tubing products Nichia Steel Works, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,825,400 5,155,036 4,575,953 1.8 Manufactures steel-related products Osaka Steel Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 598,400 10,631,768 7,788,250 3.1 Manufactures steel-related products Sanyo Special Steel Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 24,300 329,651 264,118 0.1 Steel, special material, and forging businesses Total Iron and Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,798,661 14,415,787 5.7 Machinery Hisaka Works, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,200 994,296 831,343 0.3 Manufactures heat exchangers and other machinery Miura Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,900 1,218,286 1,531,446 0.6 Manufactures boilers and related products Nippon Pillar Packing Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . 131,200 1,514,189 1,541,316 0.6 Manufactures mechanical seals Nitto Kohki Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,400 4,119,690 3,558,875 1.4 Manufactures machine tools and motor pumps Oiles Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,880 5,395,825 4,025,307 1.6 Manufactures bearing equipment Shibuya Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,300 404,593 346,174 0.1 Packing plant business Star Micronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,600 740,100 635,084 0.3 Manufactures machinery, electronic components, and precision parts Takeuchi Mfg. Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 522,187 459,276 0.2 Manufactures construction machinery Toshiba Machine Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,000 802,971 1,179,363 0.5 Manufactures industrial machinery and equipment See notes to financial statements


  • Page 11

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 29, 2020 % of Fair Net Shares Cost Value Assets Yamashin-Filter Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 72,800 $ 310,243 $ 455,231 0.2 Manufactures filters Total Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,022,380 14,563,415 5.8 Metal Products Dainichi Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,100 1,435,596 1,138,168 0.5 Manufactures oil heating equipment Maruzen Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 191,461 181,490 0.1 Manufactures and sells machinery Neturen Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575,600 4,588,494 3,625,953 1.4 Manufactures steel bars and induction heating equipment Piolax, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,300 3,387,771 2,486,363 1.0 Manufactures automobile-related products Rinnai Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,100 5,604,127 4,710,855 1.9 Manufactures heating appliances and components Shinpo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,300 18,935 29,871 0.0 Manufactures smokeless roasters Total Metal Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,226,384 12,172,700 4.9 Other Products Fuji Seal International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,300 410,894 236,338 0.1 Packaging-related materials and machinery Komatsu Wall Industry Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . 28,200 508,902 492,499 0.2 Manufactures various partitions Nishikawa Rubber Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 207,600 3,398,576 3,208,914 1.3 Manufactures rubber automobile parts Pigeon Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,800 418,705 331,789 0.1 Manufactures baby care products The Pack Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,400 2,455,882 2,516,637 1.0 Manufactures paper and chemical products Total Other Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,192,959 6,786,177 2.7 Precision Instruments Nakanishi Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,800 2,014,794 1,908,363 0.8 Manufactures dental instruments Total Precision Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,014,794 1,908,363 0.8 Real Estate Avantia Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383,600 3,628,825 2,718,076 1.1 Designs and constructs housing Daibiru Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,700 1,256,651 1,365,414 0.5 Real estate leasing and building management Starts Corporation Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,100 1,365,786 1,174,695 0.5 Construction, leasing and management of real estate Total Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,251,262 5,258,185 2.1 See notes to financial statements


  • Page 12

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 29, 2020 % of Fair Net Shares Cost Value Assets Retail Trade ABC-Mart, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,300 $ 1,617,326 $ 1,498,617 0.6 Retail sales of shoes AIN Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300 74,598 75,038 0.0 Operates pharmacies and drug store chains Amiyaki Tei Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299,800 10,829,811 8,486,083 3.4 Operates barbecue restaurant chains Cosmos Pharmaceutical Corporation . . . . . . . . . . . . . . . . . . . 7,800 1,565,851 1,690,523 0.7 Operates drug store chains Create SD Holdings Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 77,800 1,975,598 1,758,875 0.7 Operates pharmacies and drug store chains Daikokutenbussan Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 161,900 7,467,169 4,560,247 1.8 Operates supermarkets Hiday Hidaka Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 506 392 0.0 Operates restaurant chains Izumi Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,400 4,530,345 2,724,409 1.1 Operates shopping centers, real estate and credit card services JM Holdings Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,700 2,781,704 3,095,503 1.2 Supermarket business and operation of eating-out stores Kusuri No Aoki Holdings Co., Ltd. . . . . . . . . . . . . . . . . . . . . . 46,600 2,898,751 2,845,012 1.1 Operates drug stores NAFCO Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,300 771,843 562,506 0.2 Operates a chain of home and furniture retail outlets Pan Pacific International Holdings Corporation . . . . . . . . . . . 73,500 962,663 1,215,651 0.5 Operates discount stores San-A Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,200 3,858,765 3,121,715 1.3 Retail sales of home goods Seria Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,800 6,288,440 4,910,174 2.0 Discount retail sales Sundrug Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,800 978,838 774,247 0.3 Operates pharmacies and drug store chains Yossix Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,500 1,203,521 1,110,975 0.4 Operates restaurant chains Total Retail Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,805,729 38,429,967 15.3 See notes to financial statements


  • Page 13

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 29, 2020 % of Fair Net Shares Cost Value Assets Services EPS Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,100 $ 1,391,365 $ 979,256 0.4 Performs contract medical research services H.I.S. Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,600 2,447,787 1,489,552 0.6 Travel business Kanamoto Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,200 1,494,027 1,241,957 0.5 Construction related business Nihon M&A Center Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,500 1,078,499 1,380,510 0.6 Provides merger and acquisition brokerage services Nippon Air Conditioning Services Co., Ltd. . . . . . . . . . . . . . . 356,900 2,293,168 2,274,678 0.9 Provides maintenance and management of building facilities Nishio Rent All Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,100 2,932,898 2,506,576 1.0 Leasing of construction and facility work equipment Sprix, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,900 1,158,127 591,839 0.2 Educational service business Step Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,000 1,707,890 2,075,390 0.8 Operates preparatory schools Tear Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,900 591,990 412,884 0.2 Funeral business Total Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,095,751 12,952,642 5.2 Textiles and Apparel Seiren Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351,000 5,309,520 4,506,619 1.8 Manufactures synthetic fibers and textile products Total Textiles and Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,309,520 4,506,619 1.8 Transportation and Warehousing Alps Logistics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,800 1,683,714 1,926,916 0.8 General logistics services Japan Transcity Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 130,600 549,541 519,476 0.2 General logistics services Meiko Trans Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345,700 3,471,083 3,517,599 1.4 Marine logistics services SG Holdings Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,900 1,434,760 1,297,213 0.5 Delivery, logistics, real estate, and other business Trancom Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800 233,801 241,839 0.1 General logistics services Total Transportation and Warehousing . . . . . . . . . . . . . . . . . . 7,372,899 7,503,043 3.0 See notes to financial statements


  • Page 14

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 29, 2020 % of Fair Net Shares Cost Value Assets Transportation Equipment Hi-Lex Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414,800 $ 8,197,076 $ 6,269,675 2.5 Manufactures control cables Morita Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 64,600 1,131,599 1,006,303 0.4 Operates five business transportation segments Nichirin Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,700 401,657 409,203 0.2 Manufactures hoses for automobiles Nippon Seiki Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,500 116,106 85,681 0.0 Manufactures transportation equipment parts Tokai Rika Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,900 531,202 404,850 0.2 Manufactures automobile parts Total Transportation Equipment . . . . . . . . . . . . . . . . . . . . . . . . 10,377,640 8,175,712 3.3 Utilities Keiyo Gas Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,900 1,275,614 1,408,749 0.6 Produces gas and energy products The Okinawa Electric Power Company, Incorporated . . . . . . 336,177 5,297,028 5,768,543 2.3 Produces thermal energy products Total Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,572,642 7,177,292 2.9 Wholesale Trade Ai Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,700 789,192 447,181 0.2 Information and security equipment Elematec Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,500 154,924 157,440 0.1 Electric materials, components, and mechanical parts Kanaden Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,100 2,488,410 2,631,400 1.1 Factory automation business Kohsoku Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,500 3,260,958 3,310,351 1.3 Food and industrial packaging materials Matsuda Sangyo Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,300 1,580,671 1,544,066 0.6 Precious metals, electronic materials, and food Paltac Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,300 1,246,077 1,069,525 0.4 Cosmetics and daily necessities Ryoden Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748,200 10,654,383 10,381,573 4.1 Purchases electronic and electrical devices SIIX Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 636,500 10,288,001 7,118,343 2.8 Parts procurement, logistics, and manufacturing of electronics Sugimoto & Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,600 1,253,361 1,238,202 0.5 Machine tools and measuring instruments Total Wholesale Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,715,977 27,898,081 11.1 TOTAL INVESTMENTS . . . . . . IN . . . . JAPANESE . . . . . . .. ... .. ... .. .. ... ..EQUITY ... .. .. . .. .. ... .. ...SECURITIES .. .. ... .. ... .. $290,506,462 _________________ $249,649,823 _________________ 99.5 _________ See notes to financial statements


  • Page 15

    JAPAN SMALLER CAPITALIZATION FUND, INC. SCHEDULE OF INVESTMENTS*—(Continued) FEBRUARY 29, 2020 % of Fair Net Shares Cost Value Assets FOREIGN CURRENCY Japanese Yen Interest bearing account .......................... $ 959,257 $ 974,666 0.4 TOTAL FOREIGN CURRENCY . . . . . . . . . . . . . . . . . . . . . 959,257 974,666 0.4 TOTAL INVESTMENTS IN JAPANESE EQUITY SECURITIES AND FOREIGN CURRENCY . . . . . . . . . . ......................................................................... $291,465,719 __________________ $250,624,489 __________________ 99.9 OTHER ASSETS LESS LIABILITIES, NET . . . . . . . . . . . 262,901 0.1 NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,887,390 100.0 *The description following each investment is unaudited and not covered by the Report of Independent Registered Public Accounting Firm. Equity securities and foreign currency holdings were translated at the following exchange rate as of February 29, 2020. Japanese Yen ¥ 108.105 = United States Dollar $1.00


  • Page 16

    JAPAN SMALLER CAPITALIZATION FUND, INC. STATEMENT OF ASSETS AND LIABILITIES FEBRUARY 29, 2020 ASSETS: Investments in Japanese equity securities, at fair value (cost—$290,506,462) . . . . . . . . . . . $249,649,823 Foreign currency, at fair value (cost—$959,257) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 974,666 Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,266 Receivable for dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505,776 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,706 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,127 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,290,364 LIABILITIES: Payable for investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,076 Accrued management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,596 Accrued audit and tax fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,411 Accrued legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,149 Accrued directors’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,023 Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,719 Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,974 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,001,216) Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,887,390 Net asset value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.85 See notes to financial statements


  • Page 17

    JAPAN SMALLER CAPITALIZATION FUND, INC. STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 29, 2020 INCOME: Dividend income (net of $727,211 withholding taxes) . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,544,883 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,251 Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,553,134 EXPENSES: Management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,586,111 Custodian fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,533 Directors’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,125 Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,002 Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,922 Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,441,693 INVESTMENT INCOME—NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,111,441 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Realized gain on investments and foreign currency transactions: Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,898,938 Net realized gain on foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,590 Net realized gain on investments and foreign currency transactions . . . . . . . . . . . . . . . 10,953,528 Net change in unrealized depreciation on investments . . . . . . . . . . . . . . . . . . . . . . . . . . (39,549,755) Net change in unrealized appreciation on foreign currency transactions and translation 9,304,342 Net realized and unrealized loss on investments and foreign currency transactions and translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,291,885) NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . ($16,180,444) 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 29, February 28, 2020 2019 FROM OPERATIONS: Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,111,441 $ 2,351,794 Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,898,938 31,611,746 Net realized gain (loss) on foreign currency transactions . . . . . . . . . . . 54,590 (52,051) Net change in unrealized depreciation on investments . . . . . . . . . . . . (39,549,755) (81,444,013) Net change in unrealized appreciation (depreciation) on foreign currency transactions and translation . . . . . . . . . . . . . . . . . . . . . . . . . . 9,304,342 (13,006,353) Net decrease in net assets resulting from operations . . . . . . . . . . . . . . (16,180,444) (60,538,877) FROM DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,040,749) (48,439,623) Decrease in net assets derived from distributions to shareholders . . . (21,040,749) (48,439,623) NET ASSETS: Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,108,583 397,087,083 End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,887,390 $288,108,583 See notes to financial statements


  • Page 19

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies sales price. Portfolio securities which are traded on stock exchanges are fair valued Japan Smaller Capitalization Fund, Inc. at the last sales price on the principal mar- (the “Fund”) is registered under the Invest- ment Company Act of 1940, as amended (the ket on which securities are traded or, “Investment Company Act”), as a non-diver- lacking any sales, at the last available bid sified, closed-end management investment price. Securities and other assets, includ- company. The Fund was incorporated in ing futures contracts and related options, Maryland on January 25, 1990 and invest- that cannot be fair valued using one of the ment operations commenced on March 21, previously mentioned methods are stated 1990. The Fund’s investment objective is to at fair value as determined in good faith by seek long-term capital appreciation through or under the direction of the Board of Direc- investments primarily in smaller capitalization tors of the Fund. Japanese equity securities. (b) Foreign Currency Transactions— Transactions denominated in Japanese yen The accompanying financial statements (“Yen”) are recorded in the Fund’s records at have been prepared in accordance with the prevailing exchange rate at the time of United States (“U.S.”) generally accepted ac- the transaction. Asset and liability accounts counting principles (“GAAP”) and are stated in that are denominated in Yen are adjusted to United States dollars. The Fund is an invest- reflect the current exchange rate at the end ment company that follows the accounting of the period. Transaction gains or losses re- and reporting guidance in accordance with the sulting from changes in the exchange rate Financial Accounting Standards Board during the reporting period or upon settle- (“FASB”) Accounting Standards Codification ment of foreign currency transactions are Topic 946 Financial Services-Investment Com- included in the results of operations for the panies. The following is a summary of the current period. significant accounting and reporting policies used in preparing the financial statements. The net assets of the Fund are presented (a) Valuation of Securities—Investments at the exchange rates and fair values on traded in the over-the-counter market are February 29, 2020. The Fund does isolate fair valued at the last reported sales price that portion of the results of operations aris- as of the close of business on the day the ing as a result of changes in the foreign securities are being valued or, if none is exchange rates on investments from the available, at the mean of the bid and offer fluctuations arising from changes in the price at the close of business on such day market prices of securities held at February or, if none is available, the last reported 29, 2020. Net realized gains or losses on in-


  • Page 20

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) vestments include gains or losses arising purposes, are reported as distributions in from sales of portfolio securities and sales excess of net realized capital gains. and maturities of short-term securities. Net realized gains or losses on foreign currency Pursuant to a securities lending agree- transactions arise from sales of foreign cur- ment with Brown Brothers Harriman & Co., rencies, currency gains or losses realized the Fund may lend securities to qualified in- on securities transactions between trade stitutions. It is the Fund’s policy that, at and settlement date, and the difference be- origination, all loans shall be secured by tween the amounts of dividends, interest, collateral of at least 102% of the value of and foreign withholding taxes recorded on U.S. securities loaned and 105% of the the Fund’s books and the U.S. dollar equiv- value of foreign securities loaned. It is the alent of the amounts actually received or Fund’s policy that collateral equivalent to at paid. least 100% of the fair value of securities on loan must be maintained at all times (when (c) Security Transactions, Investment Income applicable). Collateral is provided in the and Distributions to Shareholders—Security form of cash, which would be invested in transactions are accounted for on the trade certain money market funds. The Fund is date. Dividend income and distributions are entitled to receive all income on securities recorded on the ex-dividend dates and interest loaned, in addition to a portion of the in- income is recorded on the accrual basis. Real- come earned as a result of the lending ized gains and losses on the sale of investments transaction. Although each security loan is are calculated on the first in, first out basis. fully collateralized, there are certain risks. On November 21, 2008, the Fund sus- Distributions from net investment income pended its participation in the securities and net realized capital gains are deter- lending program. The Fund may resume its mined in accordance with Federal income participation in the future. During the fiscal tax regulations, which may differ from U.S. year ended February 29, 2020, the Fund did GAAP. To the extent these “book/tax” differ- not earn any fees from lending fund portfo- ences are permanent in nature (i.e., that lio securities, pursuant to the securities they result from other than timing of recog- lending agreement. nition—“temporary”), such accounts are reclassified within the capital accounts (d) Income Taxes—A provision for U.S. in- based on their Federal tax-basis treatment; come taxes has not been made since it is temporary differences do not require reclas- the intention of the Fund to continue to sification. Dividends and distributions which qualify as a regulated investment company exceed net realized capital gains for finan- under the Internal Revenue Code and to cial reporting purposes, but not for tax distribute within the allowable time limit all


  • Page 21

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) taxable income to its shareholders. (f) Concentration of Risk—A significant portion of the Fund’s net assets consists of Under Japanese tax laws, a withholding Japanese securities which involve certain tax is imposed on dividends at a rate of considerations and risks not typically asso- 15.315% and such withholding taxes are re- ciated with investments in the U.S. In flected as a reduction of the related addition to the smaller size, and greater revenue. The withholding tax rate of volatility, there is often substantially less 15.315% was reduced to 10% upon the publicly available information about Japan- submission of Form 17 - Limitation on Ben- ese issuers than there is about U.S. issuers. efits Article. There is no withholding tax on Future economic and political develop- realized gains. ments in Japan could adversely affect the In accordance with U.S. GAAP require- value of securities in which the Fund is in- ments regarding accounting for uncertainties vested. Further, the Fund may be exposed in income taxes, management has analyzed to currency devaluation and other exchange the Fund's tax positions taken or expected rate fluctuations. to be taken on federal and state income tax returns for all open tax years (the current and (g) Indemnifications—Under the Fund’s the prior three tax years), and has concluded organizational documents, its officers and that no provision for income tax is required in directors are indemnified against certain lia- the Fund's financial statements. The Fund bilities arising from the performance of their recognizes interest and penalties, if any, re- duties to the Fund. Additionally, in the nor- lated to uncertain tax positions as income mal course of business, the Fund enters tax expense in the statement of operations. into contracts that contain a variety of rep- During the current year and for the prior resentations which provide general three tax years, the Fund did not incur any indemnifications. The Fund’s maximum ex- interest or penalties. posure under these agreements is unknown as this would involve future claims that may (e) Use of Estimates in Financial State- be made against the Fund that have not yet ment Preparation—The preparation of occurred. However, based on experience, financial statements in accordance with the Fund expects the risk of loss to be re- U.S. GAAP requires management to make mote and as such no additional accruals estimates and assumptions that affect the were recorded on the Statement of Assets reported amounts and disclosures in the fi- and Liabilities. nancial statements. Actual results could differ from these estimates.


  • Page 22

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) 2. Management Agreement and ary 29, 2020. Under the investment advisory Transactions With Affiliated Persons agreement, NAM earned investment advi- Nomura Asset Management U.S.A. Inc. sory fees of $1,149,405 from the Manager, (“NAM-USA” or the “Manager”) acts as the not the Fund, for the fiscal year ended Feb- Manager of the Fund pursuant to a manage- ruary 29, 2020. At February 29, 2020, the ment agreement. Under the management management fee payable to the Manager by agreement, the Manager provides all office the Fund was $200,596. space, facilities and personnel necessary to Certain officers and/or directors of the perform its duties. Pursuant to such man- Fund are officers and/or directors of the agement agreement, the Manager has Manager. Affiliates of Nomura Holdings, Inc. retained its parent company, Nomura Asset (the Manager’s indirect parent) did not earn Management Co., Ltd. (“NAM”), as Invest- any fees in commissions on the execution ment Adviser to the Fund. of portfolio security transactions for the year ended February 29, 2020. The Fund pays As compensation for its services to the each Director not affiliated with the Man- Fund, the Manager receives a monthly fee ager an annual fee of $30,000. In addition, at the annual rate of 1.10% of the value of the Fund pays each Director not affiliated the Fund’s average weekly net assets not in with the Manager $3,000 per meeting at- excess of $50 million, 1.00% of the Fund’s tended, $2,000 per telephone meeting average weekly net assets in excess of $50 attended, and Director expenses related to million but not exceeding $100 million, attendance at meetings. The Chairman of 0.90% of the Fund’s average weekly net as- the Board, presently Rodney A. Buck, is sets in excess of $100 million but not paid an additional annual fee of $8,000. The exceeding $175 million, 0.80% of the Chairman of the Audit Committee, presently Fund’s average weekly net assets in excess David B. Chemidlin, is paid an additional of $175 million but not exceeding $250 mil- annual fee of $4,000. Such fees and ex- lion, 0.70% of the Fund’s average weekly penses for unaffiliated Directors aggregated net assets in excess of $250 million but not $218,125 for the fiscal year ended February exceeding $325 million, 0.60% of the 29, 2020. Fund’s average weekly net assets in excess of $325 million but not exceeding $425 mil- lion and 0.50% of the Fund’s average 3. Purchases and Sales of Investments weekly net assets in excess of $425 million. Purchases and sales of investments, ex- Under the management agreement, the clusive of foreign currency and investments Fund incurred fees to the Manager of in short-term securities, for the fiscal year $2,586,111 for the fiscal year ended Febru- ended February 29, 2020 were $84,300,151


  • Page 23

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) and $102,490,166, respectively. butions of $39,792,119, which represents $1.4044 per share to shareholders of record 4. Federal Income Tax as of December 17, 2018. The distribution As of February 29, 2020, net unrealized de- was paid on December 27, 2018. preciation on investments, exclusive of foreign currency, for federal income tax purposes was 5. Fair Value Measurements $43,270,855, of which $11,882,276 related to In accordance with U.S. GAAP, fair value appreciated securities and $55,153,131 re- is defined as the price that the Fund would lated to depreciated securities. The cost of receive to sell an asset or pay to transfer a li- investments, exclusive of foreign currency of ability in an orderly transaction between $959,257, at February 29, 2020 for federal in- market participants at the measurement come tax purposes was $292,920,678. date. U.S. GAAP also establishes a frame- At February 29, 2020, the components of work for measuring fair value, and a accumulated earnings on a tax basis con- three-level hierarchy for fair value measure- sisted of unrealized depreciation on ments based upon the transparency of investments and foreign currency transactions inputs to the valuation of an asset or liability. of $43,248,501, late year loss deferral of Inputs may be observable or unobservable $870,027, undistributed long-term capital and refer broadly to the assumptions that gains of $6,117,312, and undistributed ordi- market participants would use in pricing the nary income of $0. The differences between asset or liability. Observable inputs reflect book basis and tax basis for unrealized appre- the assumptions market participants would ciation on investments and foreign currency use in pricing the asset or liability based on transactions are attributable to the tax deferral market data obtained from sources indepen- of losses on wash sales and the tax treatment dent of the Fund. Unobservable inputs of passive foreign investment companies. reflect the Fund’s own assumptions about The Fund paid an ordinary income distribu- the assumptions that market participants tion of $11,225,889, which represents $0.3962 would use in pricing the asset or liability de- per share and a long-term capital gains distri- veloped based on the best information butions of $9,814,860, which represents available in the circumstances. Each invest- $0.3464 per share to shareholders of record ment is assigned a level based upon the as of December 18, 2019. The distribution observability of the inputs which are signifi- was paid on December 27, 2019. cant to the overall valuation. The three-tier hierarchy of inputs is summarized below. The Fund paid an ordinary income distribu- tion of $8,647,504, which represents $0.3052 • Level 1—quoted prices in active mar- per share and a long-term capital gains distri- kets for identical investments


  • Page 24

    JAPAN SMALLER CAPITALIZATION FUND, INC. NOTES TO FINANCIAL STATEMENTS—(Continued) • Level 2—other significant observable inputs (including quoted prices for simi- lar investments, interest rates, prepayment speeds, credit risk, etc.) • Level 3—significant unobservable in- puts (including the Fund’s own assumptions in determining the fair value of investments) At February 29, 2020, all of the Fund’s in- vestments were determined to be Level 1 securities. During the fiscal year ended February 29, 2020, the Fund did not hold any instrument which used significant unobservable inputs (Level 3) in determining fair value. 6. Subsequent Events The Fund has evaluated subsequent events through April 29, 2020, the date as of which the financial statements are available to be issued. The post year-end coronavirus outbreak is impacting the global economy and the market environment. The final impact of the coronavirus outbreak is hard to predict. Go- ing forward, any such impact could adversely affect the fund’s performance.


  • Page 25

    JAPAN SMALLER CAPITALIZATION FUND, INC. FINANCIAL HIGHLIGHTS For a share of common stock outstanding throughout each year: For the Year Ended February 29, February 28, February 29, 2020 2019 2018 2017 2016 Net asset value, beginning of year $10.17 _ $14.01 $12.09 _ $10.50 _ $10.98 _ Investment operations: Net investment income (1) . . . . . . . . . . . . . . 0.11 0.09 0.09 0.12 0.06 Net realized and unrealized gain (loss) on investments and foreign currency . . . . . . . . (0.69) (2.22) 3.71 2.41 0.34 Total from investment operations . . . . . . . . . . (0.58) (2.13) 3.80 2.53 0.40 Less Distributions: Distributions from ordinary income . . . . . . . (0.27) (0.09) (0.55) (0.35) (0.17) Distributions from capital gains . . . . . . . . . . (0.47) (1.62) (1.33) (0.59) (0.71) Total from distributions . . . . . . . . . . . . . . . . . . (0.74) (1.71) (1.88) (0.94) (0.88) Net . . . asset . . . . . value, . . . . . end . . . .of . .year . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. _$8.85_ ______ $10.17 _ _______ $14.01 ________ _$12.09 _ ______ $10.50 _____ _____ Market value, end of year . . . . . . . . . . . . . . . . $8.03 $8.92 $12.48 $10.60 $8.98 Total investment return (2) . . . . . . . . . . . . . . . . (2.6%) (13.8%) 36.0% 24.9% 0.7% Ratio/Supplemental Data: Net assets, end of year (000) . . . . . . . . . . . . $250,887 $288,109 $397,087 $342,513 $297,550 Ratio of expenses to average net assets . . . 1.21% 1.13% 1.05% 1.09% 1.11% Ratio of net income to average net assets . 1.09% 0.67% 0.66% 0.99% 0.50% Portfolio turnover rate . . . . . . . . . . . . . . . . . 30% 24% 50% 20% 24% _______________________ (1) Based on average shares outstanding. (2) 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 2019 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 26, 2019. The purpose of the meeting was (1) to elect two Directors to serve for a term to expire in 2020 (2) to transact such other busi- ness as may properly come before the meeting or any adjournment or postponement thereof. At the meeting, E. Han Kim and Marcia L. MacHarg were re-elected to serve as Directors of the Fund for a term expiring in 2020 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 Directors: % of Shares Voted % of Shares Broker Shares Voted Outstanding Outstanding Abstained Non-Vote For Shares Withhold Authority Shares E. Han Kim 20,978,627 74.04% 1,890,123 6.67% - - Marcia L. MacHarg 20,971,598 74.02% 1,897,152 6.70% - -


  • 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 (72) Owner, Buck Capital Management (private in- 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 (73) Everett E. Berg Professor of Business Admin- Director istration at Ross Business School, University Director since: 2010 of Michigan since 1980; Director of Mitsui Fi- Director of one fund in the Fund Complex nancial Research Center from 1990-2020; Advisor to CEO of Taubman Asia from 2009- 2016. David B. Chemidlin (63) Owner and President of AbidesWorks LLC (ac- Director and Chairman of the Audit Committee counting and business support services) since Director 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 (71) Partner, Debevoise & Plimpton LLP from 1987- 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; Trustee and Chair of the Audit committee of the American University in Bul- garia from May 2019 to April 2020.


  • 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: Yuichi Nomoto (47)* President and Chief Executive Officer of NAM- President and Director U.S.A and President of Nomura Global Alpha LLC Since: April 1, 2019 (“NGA”) since April 1, 2019; Managing Director of Director of one fund in the Fund complex NAM-U.S.A since April 2018; Head of Client Ser- vices and Marketing of NAM-U.S.A since 2016; Executive Director of NAM-U.S.A from 2016 to 2018; Senior Manager and Head of the Marketing Planning Team, NISA Project Team in Retail Client Strategy, and Head of Investment Trust Marketing of NAM from 2010 to 2016. Yutaka Itabashi (54)* Senior Managing Director of NAM since 2015; Pres- President and Director ident and Chief Executive Officer of NAM-U.S.A and From 2013 to March 31, 2019 President of NGA from 2013 to March 31, 2019; Director of one fund in the Fund Complex Managing Director of NAM from 2012-2013; Senior Managing Director of Nomura Funds Research and Technologies Co., Ltd. (“NFRT”) from 2009-2012. * Mr. Nomoto and Mr. Itabashi 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 29, 2020, the Board of Directors (or the Independent Directors of the Fund meeting as a group) held six meetings, the Audit Committee held three meetings and the Nominating Committee held one meeting. The Governance and Compliance Committee met as part of each quarterly meet- ing of the Board of Directors. Each incumbent director attended at least 75% of the aggregate number of meetings of the Board of Directors held during the period for which they served and, if a member, of the ag- gregate number of meetings of the Audit and Nominating Committees held during the period for which they served.


  • Page 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: Yuichi Nomoto (47) President and Chief Executive Officer of NAM-U.S.A President and Director and President of NGA since April 1, 2019; Managing Since: April 1, 2019 Director of NAM-U.S.A since April 2018; Head of Client Director of one fund in the Fund complex Services and Marketing of NAM-U.S.A since 2016; Ex- ecutive Director of NAM-U.S.A from 2016 to 2018; Senior Manager and Head of the Marketing Planning Team, NISA Project Team in Retail Client Strategy, and Head of Investment Trust Marketing of NAM from 2010 to 2016. Yutaka Itabashi (54) Senior Managing Director of NAM since 2015; Presi- President and Director dent and Chief Executive Officer of NAM-U.S.A and From 2013 to March 31, 2019 President of NGA from 2013 to March 31, 2019; Man- Director of one fund in the Fund Complex aging Director of NAM from 2012-2013; Senior Managing Director of NFRT from 2009-2012. Zheng Liu (41) Chief Administrative Officer of NAM-U.S.A since 2018; Vice President Senior Manager of the Corporate Planning Department Vice President since: 2018 of NAM from 2012-2018; Quantitative Analyst for Quantitative Research and Development Department of NAM from 2007-2012. Maria R. Premole (57) Vice President of NAM-U.S.A since 2013; Associate of Vice President NAM-U.S.A from 2008-2013. Vice President since: 2013 Neil A. Daniele (59) Chief Compliance Officer of NAM-U.S.A since 2005 Secretary and Chief Compliance Officer and Managing Director of NAM-U.S.A since 2007; Secretary since: 2002 Chief Compliance Officer of NGA since 2008; Chief Chief Compliance Officer since: 2005 Compliance Officer of Nomura Corporate Research and Asset Management Inc. and Nomura Funds Re- search and Technologies America, Inc. since 2009; Corporate Secretary of NAM-U.S.A and NGA since 2013. Amy J. Robles (42) Executive Director of NAM-U.S.A since 2015; Con- Treasurer troller and Treasurer of NAM-U.S.A and Treasurer of Treasurer since: 2013 NGA since 2013; Vice President of NAM-U.S.A from Assistant Treasurer from 2011 to 2013 2009-2015. Kelly S. Lee (37) Vice President of NAM-U.S.A since 2015; Fund Con- Assistant Treasurer troller at JP Morgan Chase & Co. from 2014- 2015; Assistant Treasurer since: 2015 Financial Services Senior at Ernst & Young LLP from 2010-2014. ** The address of each officer listed above is Worldwide Plaza, 309 West 49th Street, New York, New York 10019. ** Elected and appointed by the Board of Directors and hold office until they resign, are removed or are otherwise disqual- ified to serve.


  • 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 29, 2020 as to the federal tax status of distributions received by shareholders during such fiscal year. Accordingly, the Fund designates $727,211 as foreign tax credit with the associated foreign gross income of $7,272,094. 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 2020. 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 26, 2019. In connection with their deliberations at that meeting and at a separate meeting of the Independent Directors held on November 18, 2019, 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 comparative small-cap funds, and performance of the Fund’s benchmark, (ii) the past three fiscal year financial highlights and 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) management fees charged by the Manager to comparable closed-end funds with Asia Equity strategies, (iv) the most current financial statements and profitability of the Manager and the Investment Adviser and (v) responses to questionnaires from the Manager and the Investment Adviser concerning the ser- vices they provide to the Fund and other matters. The Independent Directors were advised by, and received materials (including a detailed memorandum reviewing the applicable legal standards and factors to be taken into account in considering the renewal of investment management agreements, as set forth by the Supreme Court and other relevant court decisions) from their independent coun- sel in considering these matters and the continuance of the Agreements. In considering the continuance of the Agreements at the meeting held on November 26, 2019, 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, five-year, and ten-year periods ended September 30, 2019. The Manager pro- vided 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 closed-end funds investing primarily in Asian 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, 2019 amongst six funds (including the Fund) identified by the Manager as having similar investment objectives. 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. After reviewing the information described above including investment performance and fee structures of comparative funds, 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 Agreements.


  • Page 33

    JAPAN SMALLER CAPITALIZATION FUND, INC Board Review of the Management and Investment Advisory Agreements (Continued) 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, 2020.


  • 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 29, 2020, 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 Yuichi Nomoto since April 1, 2019 Yutaka Itabashi from 2013 to March 31, 2019 E. Han Kim Marcia L. MacHarg OFFICERS Yuichi Nomoto, President since April 1, 2019 Yutaka Itabashi, President from 2013 to March 31, 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 JAPAN Nomura Asset Management U.S.A. Inc. Worldwide Plaza Smaller Capitalization 309 West 49th Street New York, New York 10019-7316 Internet Address http://funds.nomura-asset.com/japan-smaller-capitalization Fund, Inc. INVESTMENT ADVISER Nomura Asset Management Co., Ltd. 1-12-1, Nihonbashi, Chuo-ku, Tokyo 103-8260, Japan DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR Computershare Trust Company, N.A. P. O. Box 505000 ANNUAL REPORT Louisville, KY 40233 CUSTODIAN Brown Brothers Harriman & Co. FEBRUARY 29, 2020 50 Post Office Square Boston, Massachusetts 02110-1548 COUNSEL Beginning with reports for the period ending August 31, 2021, as Sidley Austin LLP permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the shareholder reports will no 787 Seventh Avenue longer be sent by mail, unless you specifically request paper New York, New York 10019 copies of the reports. Instead, the reports will be made available on the Fund’s website http://funds.nomura-asset.com/japan- INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM smaller-capitalization, and you will be notified by mail each time a report is posted and provided with a website link to access the re- Ernst & Young LLP port. 5 Times Square If you already elected to receive shareholder reports electronically, New York, New York 10036 you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other JAPAN SMALLER CAPITALIZATION FUND, INC. communications from the Fund electronically anytime by contact- ing your financial intermediary or if you are a direct investor, by WORLDWIDE PLAZA calling 1-800-426-5523. 309 WEST 49TH STREET You may elect to receive all future reports in paper free of charge. NEW YORK, NEW YORK 10019-7316 If you invest through a financial intermediary, you can contact your financial intermediary to require that you continue to receive paper copies of your shareholder reports. If you invest directly with the This Report, including the Financial Statements, is transmitted to the Fund, you can call 1-800-426-5523 to let the Fund know you wish Shareholders of Japan Smaller Capitalization Fund, Inc. for their infor- to continue receiving paper copies of your shareholder reports. 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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