The Japan Equity Fund Announces First Quarter Earnings

• Press Release
• Source: Japan Equity Fund
• On 11:21 am EST, Tuesday March 3, 2009

The Japan Equity Fund, Inc. (NYSE: JEQ), a closed-end management investment company, today announced its performance results for the three months ended January 31, 2009, the first quarter of its 2009 fiscal year.

For the quarter ended January 31, 2009, the Fund incurred a net investment loss of approximately U.S. $140,000 (equivalent to a loss of U.S. $0.01 per share). In addition, net realized and unrealized losses from investment activities and foreign currency transactions during that same three-month period were approximately U.S. $249,000 (equivalent to a loss of U.S. $0.02 per share).

In comparison, during the quarter ended January 31, 2008, the Fund incurred a net investment loss of approximately U.S. $110,000 (equivalent to a loss of U.S. $0.01 per share). In addition, net realized and unrealized losses from investment activities and foreign currency transactions during that same three-month period were approximately U.S. $13,753,000 (equivalent to a loss of U.S. $0.95 per share).

On January 31, 2009, the total net assets of the Fund were approximately U.S. $77.2 million. The net asset value ("NAV") per share on that date was U.S. $5.34, based on 14,441,200 shares outstanding. In comparison, total net assets on January 31, 2008 were approximately U.S. $110.4 million, equivalent to a NAV of U.S. $7.05 per share, based on 14,431,605 shares outstanding. The Fund generated a negative investment return of 0.45% for the three months ended January 31, 2009, when measured against the NAV per share of U.S. $5.41 on October 31, 2008, based on 14,431,605 shares outstanding at that time. During the same period, the Fund's benchmark, the Tokyo Stock Price Index (the "TOPIX Index"), decreased by 0.35% in U.S. dollar ("USD") terms.

As of January 31, 2009, the Fund had 98.05% of its net assets invested in Japanese common stocks. The remaining net assets were represented by a short-term USD-denominated time deposit (0.30%) and other assets less liabilities (1.65%).

As of March 2, 2009, the Fund's net asset value per share was U.S. $4.56, based on net assets of U.S. $65.8 million. At the same date, the market price of the Fund's shares on the New York Stock Exchange closed at U.S. $3.80, representing a trading discount to net asset value per share of 16.67%.

Market Review and Outlook

During the November 2008 to January 2009 period, in Japanese yen terms, the equity portion of the Fund fell 8.56%, while the TOPIX Index declined by 8.21%. During the period , however, the yen appreciated against the U.S. Dollar by 8.11%, partially offsetting the local currency declines of the TOPIX Index during the same period. Relative to the TOPIX Index, the sector allocation effect on the portfolio was +0.17%, while the stock selection effect was -0.52%. Our underweight position in the Securities and Commodities Futures sector and overweight in the Wholesale Trade sector were the major contributing factors of the positive sector selection effect, although these were partly offset by the negative effect derived from being underweight in the Electric Power & Gas sector. During the quarter, the continued collapse of the financial markets led financial stocks sharply lower. Commodities prices rebounded amid the plethora of fiscal stimulus packages announced by governments across the world and, as a result, Trading companies advanced.

Stock selection in Transportation Equipment and Bank names contributed positively, while stock selection in the Electrical Appliances, Land Transportation and Retail Trade sectors had a negative impact. Major positive contributors during the quarter were Resona Holdings (Banks) and Mitsubishi Heavy Industries (Machinery), while Mitsubishi Electric (Electrical Appliances), Mitsui Fudosan (Real Estate) and Denso Corp. (Transportation Equipment) contributed negatively. Resona performed particularly well, due to both its stable earnings prospects as well as the relatively small amount of equity cross-holdings on its balance sheet. Mitsubishi Heavy Industries also advanced, after Japan's leading heavy machinery producer revised its fiscal year 2008 earnings forecast upwards, due mainly to strong sales of power systems. Mitsubishi Electric declined, however, as the company's factory automation and semiconductor businesses are expected to deteriorate substantially. The deterioration of both the residential and non-residential real estate markets led shares of real estate companies, notably Mitsui Fudosan, to decline sharply. Shares of car manufactures and companies related to the automobile industry, including Denso Corp., also declined substantially, as global demand has deteriorated and as most major car manufactures -- including Toyota Motor Corporation, which forecast operating losses -- have revised down their earnings forecasts for the fiscal year ending March 2009.

During the three-month period from November 2008 to January 2009, the TOPIX Index declined by 8.21% in Japanese yen terms. Although the TOPIX Index rebounded sharply in the early part of November, from its lowest level in a quarter century (recorded in October), the benchmark once again declined amid concerns over the deepening global recession, the yen's appreciation and worsening profit outlooks. By the end of January, the TOPIX Index finished below the 800 level.

As was generally expected, the financial crisis has led to a global recession, dramatically symbolized by the carnage in the automobile industry as well as the worldwide real estate slump, while the crash in commodities prices has accelerated fears of deflation. Indeed, since October, the economic downturn has been worse than generally expected, as recessions in the U.S., Europe and Japan were quickly felt by China and other emerging countries. Once a global recession became inevitable, the attention of market participants shifted toward whether or not the fiscal and monetary stimulus measures announced by the United States, central banks and governments around the world would be enough to stimulate the global economy and stabilize the world's financial systems.

Due to Japan's overweight position in cyclical stocks, international economic developments will likely influence the Tokyo market going forward. Facing a sharp decline in demand and unfavorable foreign exchange rate movements, major manufacturing companies, including Sony, Toshiba, Hitachi and Toyota are now expected to report operating losses for the year ending March 2009.

During the quarter, stocks in the Mining, Pulp & Paper and Oil & Coal sectors were the best performers, while the worst performing sectors were Other Financials, Rubber Products and, unsurprisingly, Real Estate. A rebound in oil prices helped lead mining companies higher, while tire companies fell as the steep declines in car sales and deterioration of the global economy are likely to negatively impact their earnings. Within the TOPIX Index, small capitalization stocks performed relatively well, while large cap export-oriented companies, such as Auto and Electronics names, declined.

After a modest rally over the first three business days of the year, driven in part by hope for the new U.S. President's economic stimulus package, the Tokyo market quickly entered a correction phase, as the reality of a dismal earnings season began to sink in. The deepening global recession combined with the yen's appreciation have crushed corporate profits in export-oriented sectors such as the automotive and technology industries. In addition, the weak stock market has forced a number of write-downs of crossholding shares among banks and other companies. During January, the TOPIX Index fell 7.59%, and the market has continued to experience extremely bearish conditions as it copes with the worst recession in decades.

(1) Industrial production fell 20% sequentially in the October-December quarter of 2008, with steady acceleration in monthly declines, as production decreased by 3.1% in October, by 8.5% in November and by 9.6% in December. Faced with a sharp contraction in global demand following the Lehman Brothers bankruptcy last September, the automotive, technology and machinery sectors as well as other basic industries have engaged in drastic production cuts in order to adjust inventories. At the same time, many companies have announced job cuts, mostly among their temporary work staff, which will make households more conservative in their spending. Many economists predict a double-digit annualized decline in gross domestic product ("GDP") for the October-December 2008 quarter. All of these factors seem to indicate that Japan is experiencing its most severe economic contraction since World War II. The speed of the economic deterioration is, perhaps, comparable to or even faster than the oil shock-induced recession of 1974-75. Inventory adjustments across industries are expected to continue through April and May of this year, although the pace of production cuts is likely to be slow. One positive aspect has been the relatively prompt action taken by companies to reduce production, employment and capacity that has been enabled by the worldwide proliferation of information technology. Although this will make the economic contraction fairly deep, it will most likely be relatively short in duration.

(2) The deflationary spiral currently at work between the world's banking systems and real economies can only be stopped by government intervention. Led by the United States, governments and central banks around the globe are taking bold monetary and fiscal measures to stave off the dire economic conditions. With the prospect of a 2.0% to 2.5% annual contraction in GDP in 2008 and 2009, respectively, the monetary and fiscal policy responses by the Japanese government and central bank have been both slow and frustrating to watch. The 12 trillion yen in fiscal stimuli announced thus far has been grossly insufficient to the task of bridging the 25 trillion yen deflation gap. Although further fiscal stimulus measures are likely to be announced in the coming months, any improvement of Japan's conditions will again have to wait for a recovery in overseas economies, including those in China and the U.S.

(3) Right now, the strong yen represents something of a paradox, as the Japanese economy is experiencing the worst deflation among the world's major economies. The overvalued yen continues to be a heavy burden on the Japanese economy, due to the country's failure to reduce its dependence on its current export-oriented industrial structure through the fostering of greater domestic-driven demand. Unfortunately, what is good for Toyota also remains a positive for the Japanese economy, and vice-versa. The Bank of Japan (BoJ) and the Ministry of Finance should act decisively to ease the monetary supply and prevent any further yen appreciation by resuming a zero interest-rate policy and quantitative easing. In addition, intervention in the currency market by selling yen should also be a consideration. The monetary regime should place a priority on reflation, as a weaker yen would be a positive for global financial assets. The reason behind this is that the yen is viewed as a proxy for the risk-taking appetites of investors, and a weaker yen would theoretically signify a greater appetite for risk.

Corporate profits are expected to fall by more than 50% in the year ending March 2009. In addition, we will most likely see a bottom to the corporate profit cycle this quarter, due to the drastic production adjustments across various industries, their short-term failure to adapt to the sharp appreciation of the yen, the as-yet-to-materialize energy, raw materials, and labor cost reductions, and the significant write-downs of equity holdings. Having declined nearly 60% from its 2007 peak, and 40% since the Lehman bankruptcy, the Tokyo market is expected to bottom out at some point during the current quarter. With regards to sector strategy, we have begun reducing our overweight positions in defensive sectors such as personal consumption in anticipation of a rebound in cyclical names from their recent, heavily depressed levels.

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The ten largest industry classifications of the Fund's Japanese equity
investments held as of January 31, 2009 were:

                                                      Percentage of
     Industry                                           Net Assets
     --------                                         -------------
1.   Banks                                                11.30%
2.   Electric Appliances                                  10.83
3.   Transportation Equipment                              8.09
4.   Wholesale Trade                                       7.91
5.   Chemicals                                             7.37
6.   Retail Trade                                          7.19
7.   Communication                                         5.99
8.   Pharmaceutical                                        5.73
9.   Machinery                                             5.30
10.  Food                                                  3.54

The Fund's ten largest individual common stock holdings at the same date
were:


                                                      Percentage of
     Issue                                              Net Assets
     -----                                            -------------
1.   Mitsubishi UFJ Financial Group, Inc.                  4.28%
2.   Toyota Motor Corp.                                    3.27
3.   Mizuho Financial Group, Inc.                          2.87
4.   Seven & I Holdings Co., Ltd.                          2.85
5.   Shin-Etsu Chemical Co., Ltd.                          2.81
6.   Sumitomo Corp.                                        2.81
7.   Mitsubishi Corp.                                      2.77
8.   NTT DoCoMo, Inc.                                      2.52
9.   NTT Corp.                                             2.41
10.  Takeda Pharmaceutical Co., Ltd.                       2.33

QUARTERLY RESULTS OF OPERATIONS
-------------------------------

                                     Net Realized and      Net Increase
                                     Unrealized Gains     (Decrease) in
                                       (Losses) on          Net Assets
                 Net Investment       Investments and      Resulting From
                  Income (Loss)    Currency Transactions    Operations
                  -------------    ---------------------    ----------
                  Total     Per     Total       Per      Total       Per
QUARTER ENDED     (000)    Share    (000)      Share     (000)      Share
-------------     -----   ------  --------    ------   --------    ------

January 31, 2009  $(140)  $(0.01)    $(249)   $(0.02)     $(389)   $(0.03)
                  =====   ======  ========    ======   ========    ======

January 31, 2008  $(110)  $(0.01) $(13,753)   $(0.95)  $(13,863)   $(0.96)
April 30, 2008      545     0.04     3,694      0.26      4,239      0.30
July 31, 2008       (59)    0.00    (9,558)    (0.67)    (9,617)    (0.67)
October 31, 2008    369     0.02   (27,303)    (1.89)   (26,934)    (1.87)
                  -----   ------  --------    ------   --------    ------

For the Year Ended
October 31, 2008   $745    $0.05  $(46,920)   $(3.25)  $(46,175)   $(3.20)
                  =====   ======  ========    ======   ========    ======





PER SHARE SELECTED QUARTERLY FINANCIAL DATA
-------------------------------------------

                     Net Asset             Market             Share
QUARTER ENDED          Value               Price*            Volume*
-------------          -----               ------            -------
                    High    Low        High      Low          (000)
                   -----   -----      -----     -----         ------

January 31, 2009   $5.98   $5.06      $5.43     $4.26          1,709

January 31, 2008   $8.66   $6.94      $8.00     $6.16          1,493
April 30, 2008      7.95    7.15       7.42      6.37            985
July 31, 2008       8.42    6.66       7.79      6.62          1,280
October 31, 2008    7.15    4.93       6.67      4.22          1,684


  *As reported on the New York Stock Exchange.

 
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