Annual Financial Report

RNS Number : 6606B

Baillie Gifford Japan Trust PLC

30 October 2009

 



THE BAILLIE GIFFORD JAPAN TRUST PLC

ANNUAL FINANCIAL REPORT AND PROPOSED NEW

ARTICLES OF ASSOCIATION

Copies of the Annual Report and Financial Statements for the year ended 31 August 2009 and the proposed new Articles of Association of The Baillie Gifford Japan Trust PLC have been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:

Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS

Tel: [phone]

The Annual Report and Financial Statements for the year ended 31 August 2009 including the Notice of Annual General Meeting is also available on Baillie Gifford Japan's page of the Baillie Gifford website at:

http://www.bailiegifford.com/documents/75528_Japan_Trust%20_Annual_Report_0809.pdf 

At the Annual General Meeting to be held on 8 December 2009, it is proposed that new Articles of Association be adopted in order to take account of the implementation on 1 October 2009 of the last parts of the Companies Act 2006. More detail on the proposed changes to the Articles of Association is set out in the Directors' Report, the Notice of Annual General Meeting and the Appendix to the Notice of Annual General Meeting within the Annual Report and Financial Statements for the year ended 31 August 2009. Copies of the new Articles of Association are available for inspection at Royal London House, 22-25 Finsbury Square, London EC2A 1DX and Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 August 2009 which require to be published by DTR 4.1 is set out on the following pages. 

Baillie Gifford & Co

Company Secretaries

30 October 2009

THE BAILLIE GIFFORD JAPAN TRUST PLC

CHAIRMAN'S STATEMENT

Good stock selection in the second half of the year more than compensated for that of the first half. Further details of performance can be found in the Managers' Report below and on page 11 of the Annual Report.

Investment income increased by 21% largely reflecting higher dividends but also boosted by income from a bank bond. Income from stock lending fell and this activity has now ceased due to low returns. Expenses fell again, mainly as a result of the effect of falling net assets on the management fee. Overall revenue gain per share was 0.86p. No dividend is payable as the revenue reserve remains in deficit.

Gearing

Net gearing amounted to 15% of net assets at the start and again at the end of your Company's year. However it was reduced to 1.5% by the end of January before rising again as the Manager found more companies looking attractive during the market turmoil. Gross borrowings were reduced by ¥1.75bn to ¥3.55bn over the year in order to keep them within agreed limits because of lower market levels. With the low cost of yen loans we believe that borrowing to invest in Japanese equities is a sensible strategy.

Share Capital

The Company did not exercise its share buy back powers during the year however your Board believes that it is important that the Company retains this power and so, at the Annual General Meeting, it is seeking to renew this facility. The Company is also seeking to renew the Directors' authority to issue new shares and to reissue any shares held in treasury up to 5% of the Company's issued share capital for cash on a non-pre-emptive basis. Shares would only be issued/reissued at a premium to net asset value, thereby enhancing net asset value per share for existing shareholders. The Directors will only seek to utilise this authority if they believe that it

will be in the best interests of the Company to do so.

Benchmark

Since inception, the Company's benchmark has been based on capital return indices only, with the TOPIX used since the last change in 2003. As of 1 September 2009, it will be TOPIX (in sterling terms) total return. The change is being made to reflect the fact that Japanese companies are paying a more meaningful level of dividends, which in the past were in aggregate de minimis.

Articles of Association

The proposed changes to the Articles of Association will reflect the implementation of the last parts of the Companies Act 2006 coming into force on 1 October 2009 and, in addition, enable the Manager to use derivatives to manage the portfolio in a more efficient manner. No uncovered futures or options will be written.

Continuance Vote

Our shareholders have the right to vote annually on whether the Company should continue in business, and will again have the opportunity at the Annual General Meeting to be held on 8 December 2009. 

Last year the Company received support for its continuance from 99.8% of those voting. Your Directors are of the opinion that the fundamentals of corporate Japan remain attractive. The Board expects that the Managers will continue to take a long term view and will remain able to find many interesting investment candidates.

Given the favourable outlook, I and my fellow Directors intend to vote our own shareholdings in favour of the resolution and hope that shareholders will feel disposed to do likewise.

Board Changes

Shareholders will be aware that Malcolm Murray retired from the Company at the last AGM and I became Chairman. I would like to pay tribute to Malcolm's stewardship over the years, which has contributed to the excellent long term record of the Company.

Outlook

Banks in Japan have been affected less than those in the West by the credit crunch. Industrial production has however been hit harder. This has led to companies taking action to cut costs which they would not otherwise have done and should lead to a good recovery in profits from a depressed level. It is difficult to see what effect the change in government in Japan to the DPJ will have on investment conditions but the Board is confident that the Manager will continue to find attractive companies in which to invest.

Richard A Barfield

12 October 2009

  THE BAILLIE GIFFORD JAPAN TRUST PLC

MANAGERS' REPORT

Performance

After a year of extreme moves in every stock market around the world, the rise in net asset value per share, after deducting borrowings at fair value, of 3.2% to 185.3p, which compares to a rise of 0.8% in the TOPIX in sterling terms, seems rather pedestrian. However this was made up of a very sharp fall in the first six months of the year, when risk aversion rose and many investors were forced sellers, and a sharp recovery of 35.2% since the half-year at the end of February. Rarely have markets experienced a year of two such contrasting halves.

The yen strengthened significantly during the year, gaining 31% against sterling, as it became a currency of choice when risk aversion was high. The Company's full exposure to yen was a major positive as the yen level of markets is still significantly lower than last year. This can be seen from the top table on page 11 of the Annual Report. The largest negative effect on performance over the year as a whole was the gearing related to the yen level of the stock market. Again the contrast between the two halves of the year is marked, with the gearing hindering significantly in the first half, despite reductions in exposure during the period, whilst the increase from February in the second half was helpful. Our holding in a bank bond contributed positively as some confidence returned to credit markets since the Spring and we added to the original position at lower prices.

Overall stock selection was a significant positive. The main area which helped performance was Commerce and services, comprising 27% of the portfolio. The Retail, Electrical and electronics, and Manufacturing and machinery sectors also produced positive returns. The worst performing sectors were Financials, where some of the more weakly capitalised companies did very poorly and Chemicals and other materials where cyclical concerns weighed on share prices.

Portfolio

Many opportunities have been thrown up by the massive moves in markets during the past year and as a result we have bought a total of nineteen new holdings. The highly uncertain outlook at the beginning of the Company's year meant that gearing was reduced last Autumn, with a total of fourteen holdings sold during the year. Some of these had weak balance sheets which threatened their survival and, after selling, one holding went bankrupt and one was restructured. Sales were also made in companies where we felt that managements were not proactive enough in the downturn.

However, in February we found a significant number of attractive stock ideas and gearing was increased. As a result of these moves turnover has been higher than normal, at 24.5%. This level, although higher than the historic experience for Japan Trust, is lower than most of the other Japanese investment trusts and implies a holding period of just over four years. On pages 15 and 16 of the Annual Report there are individual notes on nine of the new holdings all of which we believe offer growth opportunities going forward that are not priced correctly by the market. At the market lows, many companies were selling at took advantage by buying a number of these companies. The long term outlook for these companies is also attractive. More recently we have bought secular growth stocks which have been overlooked in the recovery of cyclical companies, where the long term prospects look secure and where valuations are at historically low levels. Point the fashion retailer, EPS the pharma related company and Gree the social network service for mobiles, would all be examples. Overall therefore the portfolio contains more high quality secular growth companies than it did a year ago. Some quantitative analysis of the portfolio is shown on page 13 of the Annual Report.

Corporate Developments within Japan

The relative strength of the financial sector, whilst marred by the significant cross shareholdings that the banks have, has meant that the pattern of government sponsored rescues has not occurred in Japan. There have however been bankruptcies of highly indebted companies, particularly in the property sector. Some sectors, such as car manufacturers, have seen foreign competitors that they have outcompeted for decades go bust, changing the competitive landscape. The high levels of cash seen in Japanese balance sheets has been helpful in allowing companies to make long term decisions and has meant that the amount of equity fund raising has been much lower than some other developed economy markets.

In the domestic market we have seen various industries begin a long overdue consolidation process. One example would be Kirin Holdings and unlisted Suntory who are in merger discussions, reducing major beer companies from four to three in Japan and forming a single entity large enough to compete globally. The trend towards companies using the strong yen to buy overseas companies has continued, although the global crisis has slowed down investments. As confidence returns this is likely to pick up again. Share buy backs and dividends have also diminished during the period of maximum uncertainty but we expect the long term trend of improved shareholder returns to reassert itself with a recovery in profits.

Economic and Political Outlook

The Japanese economy, despite its relatively low weighting to the external sector, has proved very vulnerable to the sharp decrease in global demand experienced at the end of last year. As a result the economy contracted sharply in the last quarter of 2008 and the first of 2009. However the drastic and speedy action by companies to reduce costs and cut inventories, which exacerbated the decline, meant that the cyclical low appears to have been in February. Industrial production has risen sharply since then despite no major recovery in end demand and the economy expanded in the April to June quarter. It seems reasonable to assume that a general recovery in global demand, particularly from China, will support growth from here. However, the longer term issues of demographics and high levels of government debt remain.

The election of the new Democratic Party of Japan government at the end of August 2009 marks an end to the post-war one-party dominance of the Liberal Democratic Party. The vote signalled more disappointment with the LDP than great enthusiasm for the new government, but its aim to take policy making away from the bureaucrats, the promises to rein in wasteful spending and support families could be significant in the long term. Overall, a two party system should allow greater responsiveness to structural changes and greater accountability by politicians. The stock market has not greeted political change with any enthusiasm and it may take sensible, concrete policy decisions to engender any optimism. We are however encouraged that several of the key Cabinet members are people who served in the short lived non-LDP government in the early 1990s and which managed to pass significant electoral reform legislation.

Outlook

It is important to distinguish between the long term economic prospects for Japan and the prospects for the companies listed on the Japanese market. Several of the global leaders have enhanced their competitive position in the past year and there is much more awareness of the need to diversify away from a mature domestic market. Companies' caution over borrowings has been sensible and Japan's largest trading partner is China. This is not to diminish the longer term economic issues but to differentiate between companies and the economy. The remit of The Baillie Gifford Japan Trust is to invest in those companies with long term growth prospects and we have found plenty of choice recently. The significant size of the domestic market, still the second largest economy in the world, means that there are opportunities for well managed companies. Growth investment as a style has been out of favour in Japan for some time but we believe that the scope from here is therefore enhanced. 

Baillie Gifford & Co

12 October 2009

TWENTY LARGEST EQUITY HOLDINGS at 31 August 2009
Name	Business	2009  Value £'000	2009 % of total assets	2008 Value £'000
Accordia Golf	Golf course owner and operator	4,116	3.0	3,806
Don Quijote	Discount store operator	3,624	2.6	2,644
KDDI	Mobile telecommunications	3,485	2.5	3,220
Misumi Group	Precision machinery parts distributor	3,423	2.5	3,764
Itochu	Trading conglomerate	3,370	2.4	3,467
Keihin	Aluminium castings	3,268	2.4	1,866
Yamada Denki	Major consumer electronics retailer	3,245	2.3	2,392
Canon	Printers and copiers	3,150	2.3	4,044
Hitachi High-Technologies	Semiconductor production equipment	3,001	2.2	2,484
AIOI Insurance	Non-life insurance	2,973	2.1	2,685
Shimadzu	Environmental testing equipment	2,947	2.1	3,438
Osaka Securities Exchange	Stock and futures exchange	2,884	2.1	1,604
Mitsubishi Electric	Industrial electric conglomerate	2,810	2.0	2,897
Japan Tobacco	Tobacco manufacturer	2,808	2.0	2,580
Sysmex	Medical equipment	2,807	2.0	3,086
Asahi Glass	TV, car and construction glass	2,802	2.0	3,083
East Japan Railway	Tokyo based railway	2,719	2.0	3,921
H.I.S.	Travel agency	2,563	1.8	1,553
Shinko Plantech	Industrial plant maintenance	2,506	1.8	2,033
Sumitomo Heavy	Specialist machinery	2,498	1.8	2,176
		60,999	43.9%	56,743

  RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under the Companies Act. Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than 12 months notice, or on shorter notice in certain circumstances. The fee in respect of each quarter is 0.25% of the total net assets of the Company. The details of the management fee are as follows:

	2009 £'000		2008 £'000
Investment management fee	987		1,214
VAT recovered*	-		(157)
	987		1,057

* See note 4 below.

PRINCIPAL RISKS AND UNCERTAINTIES

The Company invests in medium to smaller sized Japanese companies and makes other investments so as to achieve its investment objective of long term capital growth. The Company borrows money when the Board and Managers have sufficient conviction that the assets funded by borrowed monies will generate a return in excess of the cost of borrowing. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests and could result in a reduction in the Company's net assets.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period. 

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Investment Manager assesses the exposure to market risk when making individual investment decisions as well as monitoring the overall level of market risk across the investment portfolio on an ongoing basis.

  (i) Currency Risk

The Company's assets, liabilities and income are principally denominated in yen. The Company's functional currency and that in which it reports its results is sterling. Consequently, movements in the yen/sterling exchange rate will affect the sterling value of those items.

The Investment Manager monitors the Company's yen exposure (and any other overseas currency exposure) and reports to the Board on a regular basis. The Investment Manager assesses the risk to the Company of the overseas currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the currency in which a company's share price is quoted is not necessarily the one in which it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the share price of the company is quoted.

Yen borrowings are used periodically to limit the Company's exposure to anticipated future changes in the yen/sterling exchange rate which might otherwise adversely affect the value of the portfolio of investments. The Company may also use forward currency contracts to limit the Company's exposure to anticipated future changes in exchange rates so that the currency risks entailed in holding the assets are mainly eliminated. During the year the Company entered into forward currency contracts the purpose of which is to transfer the currency exposure of a euro denominated investment from euro to yen.

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

At 31 August 2009	Investments £'000		Cash and deposits £'000	Forward currency contracts £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	130,486		5,696	3,308		(23,481)		(417)		115,592
Euro	3,224		-	(3,346)		-		21		(101)
Total exposure to currency risk	133,710		5,696	(38)		(23,481)		(396)		115,491
Sterling	-		87	26		-		(310)		(197)
	133,710		5,783	(12)		(23,481)		(706)		115,294

*  Includes non-monetary assets of £7,000.

At 31 August 2008	Investments £'000		Cash and deposits £'000	Forward currency contracts £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	125,898		10,166	1,933		(26,775)		120		111,342
Euro	1,851		-	(1,802)		-		-		49
Total exposure to currency risk	127,749		10,166	131		(26,775)		120		111,391
Sterling	-		345	(27)		-		(316)		2
	127,749		10,511	104		(26,775)		(196)		111,393

*  Includes non-monetary assets of £10,000.

  Currency Risk Sensitivity

At 31 August 2009, if sterling had strengthened by 10% against the yen, with all other variables held constant, total net assets and net return on ordinary activities after taxation would have decreased by £11,559,000 (2008 - £11,134,000). A 10% weakening of sterling against the yen, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts.

(ii) Interest Rate Risk

Interest rate movements may affect the level of income receivable on cash deposits and the fair value of the investment in fixed interest rate securities. They may also impact upon the market value of the Company's investments as the effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

The Board reviews on a regular basis the amount of investments in cash and the income receivable on cash deposits.

The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board.

The interest rate risk profile of the Company's interest bearing financial assets and liabilities at 31 August 2009 is shown below. The main change to the interest rate risk profile during the year was the repayment of Yen bank loans totalling ¥1,750m.

Financial assets	2009			2008
	Fair value £'000	Weighted average interest rate	Weighted average period until maturity	Fair value £'000	Weighted average interest rate	Weighted average period until maturity
Fixed rate:
Euro bond	3,224	5.27%	39 years	1,851	5.27%	40 years

The cash deposits generally comprise overnight call or short term money market deposits and earn interest at floating rates based on prevailing bank base rates.

  Financial Liabilities

The interest rate risk profile of the Company's loans at 31 August was:

	2009			2008
	Fair value £'000	Weighted average interest rate	Weighted average period until maturity	Fair value £'000	Weighted average interest rate	Weighted average period until maturity
Bank Loans
Yen denominated - fixed rate	23,481	1.9%	30 months	27,002	1.7%	34 months

Interest Rate Risk Sensitivity

An increase of 100 basis points in bond yields as at 31 August 2009 would have decreased total net assets and return on ordinary activities by £186,000 (2008 - £219,000). A decrease of 100 basis points would have had an equal but opposite effect.

(iii) Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Company's exposure to changes in market prices relates to the fixed asset investments as disclosed in note 9 of the Annual Report. 

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Manager. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index. 

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 17 and 18 of the Annual Report. In addition, a list of the 20 largest holdings together with various analyses of the portfolio by industrial sector and exchange listing are shown on pages 12 and 13 of the Annual Report.

110.7% (2008 - 111.6%) of the Company's net assets are invested in Japanese quoted equities. A 10% increase in quoted equity valuations at 31 August 2009 would have increased total net assets and net return on ordinary activities after taxation by £12,760,000 (2008 - £12,433,000). A decrease of 10% would have had an equal but opposite effect.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are in investments that are readily realisable.

The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding (see Investment Policy on pages 19 and 20 of the Annual Report).

The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's borrowing facilities are detailed in note 12 of the Annual Report.

The maturity profile of the Company's financial liabilities at 31 August was:

Financial Liabilities	2009 £'000	2008 £'000
In less than one year In more than one year, but not more than two years In more than two years, but not more than five years	6,289 11,906 6,614	2,950 5,052 14,145
In more than five years	-	5,052
	24,809	27,199

The Company repaid ¥1,750m of fixed rate loans during the year.

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. This risk is managed as follows:

·     where the Investment Manager makes an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question;

·     the Company’s listed investments are held on its behalf by Mizuho Corporate Bank, Ltd and the Bank of New York Mellon as the Company’s custodians. Bankruptcy or insolvency of the custodians may cause the Company’s rights with respect to securities held by the custodian to be delayed. The Investment Manager monitors the Company’s risk by reviewing the custodians’ internal control reports and reporting its findings to the Board;

·    investment transactions are carried out with a large number of brokers whose credit worthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company’s custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed;

·    the credit worthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the credit worthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Manager; and

·    cash is only held at banks that are regularly reviewed by the Managers.

.

Credit Risk Exposure

The exposure to credit risk at 31 August was:

	2009 £'000	2008 £'000
Fixed Interest investments	3,224	1,851
Cash and short term deposits	5,783	10,511
Debtors and prepayments	610	332
	9,617	12,694

None of the Company's financial assets are past due or impaired.

Fair value of financial assets and financial liabilities

The Directors are of the opinion that the financial assets and liabilities of the Company are stated at fair value in the balance sheet with the exception of the long term borrowings which are included in the accounts in accordance with FRS 26. The fair value of borrowings is shown below.

	2009			2008
		Book Value £'000	Fair* Value £'000	Book Value £'000	Fair* Value £'000
Fixed rate yen bank loans		23,481	23,982	27,002	26,548

* The fair value of each bank loan is calculated with reference to a Japanese government bond

 of comparable yield and maturity.

Gains and losses on forward currency contracts

The following forward currency contracts, the purpose of which is to transfer the currency exposure of a euro denominated investment from euro to yen, were open at 31 August 2009 and 31 August 2008.

At 31 August 2009
Currency sold	Currency amount sold	Currency bought	Currency amount bought	Settlement date	Fair Value £'000
Euro	(€3,800,000)	Sterling	£3,271,344	18/09/09	(75)
Sterling	(£3,244,752)	Yen	¥500,000,000	18/09/09	63
					(12)

At 31 August 2008
Currency sold	Currency amount sold	Currency bought	Currency amount bought	Settlement date	Fair Value £'000
Euro	(€2,230,000)	Sterling	£1,777,000	23/10/08	129
Sterling	(£1,804,000)	Yen	¥380,000,000	23/10/08	(25)
					104

Hedge accounting has not been adopted for these derivatives. Realised currency gains/losses are taken to the capital account and are not reflected in the revenue account unless they are of a revenue nature.

Capital Management

The Company does not have any externally imposed capital requirements. The capital of the Company is the ordinary share capital as detailed in note 13 of the Annual Report. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on pages 19 and 20 of the Annual Report, and shares may be repurchased or issued as explained on pages 25 and 26 Annual Report.

  Other Risks

Other risks faced by the Company include the following:

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to tax on capital gains. Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 842 are not breached.

Operational/Financial Risk 

Failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Manager on behalf of the Board.

Discount Volatility

The discount at which the Company's shares trade can widen. The Board monitors the level of discount and the Company has authority to buy back its own shares.

Gearing Risk

The Company may borrow money for investment purposes (sometimes known as 'gearing'). If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. 

All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities that are readily realisable.

  STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT, DIRECTORS' REMUNERATION REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed within the Directors and Management section, confirm that, to the best of their knowledge:

• the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

• the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

By Order of the Board

Richard A Barfield

12 October 2009

  INCOME STATEMENT

	For the year ended 31 August 2009				For the year ended 31 August 2008
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains/(losses) on investments	-	7,476	7,476		-	(22,157)	(22,157)
Currency losses (note 2)	-	(4,110)	(4,110)		-	(2,866)	(2,866)
Income (note 3)	2,422	-	2,422		2,195	-	2,195
Investment management fee (note 4)	(987)	-	(987)		(1,057)	-	(1,057)
Other administrative expenses	(247)	-	(247)		(247)	-	(247)
Net return before finance costs and taxation	1,188	3,366	4,554		891	(25,023)	(24,132)
Finance costs of borrowings	(503)	3	(500)		(513)	-	(513)
Net return on ordinary activities before taxation	685	3,369	4,054		378	(25,023)	(24,645)
Tax on ordinary activities	(153)	-	(153)		(132)	-	(132)
Net return on ordinary activities after taxation	532	3,369	3,901		246	(25,023)	(24,777)
Net return per ordinary share (note 6)	0.86p	5.44p	6.30p		0.40p	(40.40p)	(40.00p)

 The total column of this statement is the profit and loss account of the Company.

 All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement. 

  BALANCE SHEET

at 31 August 2009

	At 31 August 2009		At 31 August 2008
	£'000	£'000	£'000	£'000
Fixed assets Investments		133,710		127,749
Current assets
Debtors	610		332
Cash and deposits	5,783		10,511
	6,393		10,843
Creditors:  Amounts falling due within one year	(6,289)		(2,950)
Net current assets		104		7,893
Total assets less current liabilities		133,814		135,642
Creditors:  Amounts falling due after more than one year		(18,520)		(24,249)
Total net assets		115,294		111,393
Capital and reserves
Called-up share capital		3,097		3,097
Share premium		22,110		22,110
Capital redemption reserve		203		203
Capital reserve - realised		87,586		98,710
Capital reserve - unrealised		10,239		(4,254)
Revenue reserve		(7,941)		(8,473)
Shareholders' funds		115,294		111,393

Net asset value per ordinary share	185.3p	179.5p
(after deducting borrowings at fair value)
Net asset value per ordinary share (after deducting borrowings at par value)	186.2p	179.9p
Ordinary shares in issue (note 9)	61,935,000	61,935,000

  RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 August 2009

	Share capital £'000	Share premium  £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 September 2008	3,097	22,110	203	98,710	(4,254)	(8,473)	111,393
Net return on ordinary activities after taxation	-	-	-	(11,124)	14,493	532	3,901
Shareholders' funds at  31 August 2009	3,097	22,110	203	87,586	10,239	(7,941)	115,294

For the year ended 31 August 2008

	Share capital £'000	Share premium  £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 September 2007	3,097	22,110	203	93,068	26,411	(8,719)	136,170
Net return on ordinary activities after taxation	-	-	-	5,642	(30,665)	246	(24,777)
Shareholders' funds at  31 August 2008	3,097	22,110	203	98,710	(4,254)	(8,473)	111,393

CASH FLOW STATEMENT
	For the year ended 31 August 2009						For the year ended 31 August 2008
	£'000		£'000					£'000				£'000
Net cash inflow from operating activities			1,069									696
Net cash outflow from servicing of finance			(522)									(502)
Financial investment
Acquisitions of investments	(29,563)							(19,146)
Disposals of investments	31,576							30,164
Realised profit/(loss) on forward currency contract	471							(95)
Exchange differences on settlement of investment transactions	(289)							(102)
Net cash inflow from financial investment			2,195									10,821
Net cash inflow before financing			2,742									11,015
Financing
Bank loans repaid	(10,397)							(4,923)
Net cash outflow from financing			(10,397)									(4,923)
(Decrease)/increase in cash			(7,655)									6,092
Reconciliation of net cash flow to movement in net debt
(Decrease)/increase in cash in the year			(7,655)									6,092
Net cash outflow from bank loans			10,397									4,923
Exchange differences on bank loans			(7,103)									(4,753)
Exchange differences on cash			2,927									1,980
Movement in net debt in the year			(1,434)									8,242
Net debt at 1 September			(16,264)									(24,506)
Net debt at 31 August			(17,698)									(16,264)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation			4,554									(24,132)
(Gains)/losses on investments			(7,476)									22,157
Realised exchange differences			(1,656)									(2,272)
Unrealised exchange differences on bank loans			5,650									5,242
Amortisation of fixed interest book cost			8									(11)
Decrease/(increase) in accrued income			34									(37)
Decrease/(increase) in other debtors			97									(49)
Increase/(decrease) in creditors			13									(72)
Overseas tax suffered			(155)									(130)
Net cash inflow from operating activities			1,069									696

NOTES

	The financial statements for the year to 31 August 2009 have been prepared on the basis of the same accounting policies set out in the Company's Annual Financial Statements at 31 August 2008.  The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
					31 August 2009 £'000		31 August 2008 £'000
2.	Currency Losses
	Exchange differences on bank loans				(7,103)		(4,753)
	Other exchange differences				2,993		1,887
					(4,110)		(2,866)
3.	Income
	Income from investments and interest receivable				2,351		2,083
	Other income				71		112
					2,422		2,195
4.	In 2007 the European Court of Justice ruled that investment trust management fees should be exempt from VAT. HMRC accepted the Managers' repayment claims for the periods from 1990 to 1996 and from 2000 to 2007. £157,000 of VAT together with £137,000 of interest was received by the Managers on behalf of the Company in respect of these periods, which was recognised in the year to 31 August 2008.
5.	No final dividend will be declared.
6.	Net Return per Ordinary Share
		2009				2008
		Revenue	Capital	Total		Revenue	Capital	Total
	Net return on ordinary activities after taxation	0.86p	5.44p	6.30p		0.40p	(40.40p)	(40.00p)
	Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £532,000 (2008 - net revenue return of £246,000), and on 61,935,000 ordinary shares, being the number of ordinary shares in issue throughout each year.   Capital return per ordinary share is based on the net capital return for the financial year of £3,369,000 (2008 - net capital loss of £25,023,000), and on 61,935,000 ordinary shares, being the number of ordinary shares in issue throughout each year. There are no dilutive or potentially dilutive shares in issue.
7.	Bank loans of £23.5 million (¥3.55 billion) have been drawn down under yen loan facilities which are repayable between August 2010 and August 2014 (31 August 2008- £26.8 million (¥5.3 billion)).

8.	Transaction costs incurred on the purchase and sale of investments are added to the purchase costs or deducted from the sales proceeds, as appropriate. During the year, transaction costs on purchases amounted to £27,0008 - £28,000) and transaction costs on sales amounted to £27,000 (31 August 2008 - £40,000).
9.	At 31 August 2009 the Company had authority to buy back 9,284,056 shares. No shares were bought back during the year. Under the provisions of the Company's Articles of Association share buy backs are funded from the realised capital reserve.
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 9. The financial information for 2008 is derived from the statutory accounts for 2008 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2008 accounts, their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2008 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
11.	The Report and Accounts will be available on the Managers' website www.japantrustplc.com on or around
	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

END

 

 

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