Japan Smaller Capitalization Fund: A Unique CEF Trading At An 11.5% Discount

| About: Japan Smaller (JOF)
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Japan Smaller Capitalization Fund, Inc. is traded on The New York Stock Exchange under the symbol JOF. It commenced operations on March 21, 1990 and is managed by Nomura Asset Management. It is a closed end fund investing almost exclusively in small cap Japanese equities. I am loathe to recommend single country funds but in this case I must make an exception. The Japanese stock market has been in decline for many years and the stocks are just plain cheap.

As of the close of its fiscal year, on February 29, 2012, JOF was selling at an 11.5% discount from net assets and it presently sells at approximately the same discount. Last fiscal year JOF saw its Net Asset Value decline by 9.7% while its market price declined by 18.3%. JOF's benchmark, the Russell/Nomura Small Cap Index declined only 2.3%. The difference in performance can be partially accounted for by a rights offering in July 2011. The Yen appreciated 1% against the Dollar during the fiscal year.

JOF has been trimming its holdings. It now owns 81 different stocks as opposed to 137 different stocks which it had the year before. This is still very broad exposure to an industry segment which does require extremely localized knowledge. Last year was not a good year for Japan and its people as it did suffer from a devastating earthquake and tsunami.

Japan has been fighting deflation for many years and appears to now be making some progress. The Bank of Japan has announced an inflation target of +1%. Any depreciation of the Yen against the Dollar and Euro will assist Japanese exporters and increase earning.

Japan's overall price to book value ratio has ridden to 1.0 but remains the lowest among major markets. The Japanese small cap equity market is even cheaper with a price to book value ratio of just 0.84.

As of February 29, 2012, JOF had total assets of $250,732,272 and does not use leverage. JOF has accumulated capital losses of $45,461,610 with unrealized portfolio appreciation of $5,009,596. The bulk of the realized capital loss carryover expires in 2017 and 2018. Should Japan show any signs of recovery, gains will be tax free for the next 6 years.

Relevant percentage ratios for the past five years are as follows:

Market Value Return Operating Expenses Net Investment Income Portfolio Turnover
2012 (17.9%) 1.34% 0.67% 66%
2011 18.9% 1.44% 0.38% 57%
2010 41.5% 1.46% 0.23% 66%
2009 (34.4%) 1.42% 0.52% 76%
2008 (30.09%) 1.31% (0.08%) 51%

I truly know very little about Japan and even less about small cap equities in Japan. I do know that Japan has been struggling for many years and this is reflected in its stock prices. I do know that many of the firms in Japan are export oriented and will prosper if deflation is converted into mild (even very mild) inflation. It would appear that some progress is being made in this direction. I would not put all my eggs in one basket but I would most definitely purchase a little of JOF. It is a good risk at these price levels.

Disclosure: I am long JOF.