Semi Annual Report by Investment Company Form N CSRS

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-05992

JAPAN SMALLER CAPITALIZATION FUND, INC.

(Exact name of registrant as specified in charter)

Worldwide Plaza

309 West 49th Street

New York, NY 10019

(Address of principal executive offices)

Nomura Asset Management U.S.A. Inc.

Worldwide Plaza

309 West 49th Street

New York, NY 10019

(Name and address of agent for service)

Registrant's telephone number, including area code: 1-800-833-0018

Date of fiscal year end: February 28, 2025

Date of reporting period: August 31, 2024

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

Item 1. Report to Stockholders.

JAPAN

Smaller Capitalization Fund, Inc.

SEMI-ANNUAL REPORT

AUGUST 31, 2024

JAPAN SMALLER CAPITALIZATION FUND, INC.

October 28, 2024

To Our Shareholders:

We present the Semi-Annual Report of Japan Smaller Capitalization Fund, Inc. (the ''Fund'') for the six months ended August 31, 2024.

The net asset value (''NAV'') per share of the Fund increased by 5.0% and the closing market price of the Fund (on the New York Stock Exchange) increased by 2.7% for the six months ended August 31, 2024. The closing market price of the Fund on August 31, 2024 was $8.03, representing a discount of 19.5% to the NAV of $9.97. The net assets of the Fund totaled $282,390,966 on August 31, 2024.

The Russell/Nomura Small Cap™ Index, the Fund's benchmark (''Benchmark''), increased by 5.8% in United States (''U.S.'') dollar terms. During the six months ended August 31, 2024, the Fund underperformed the Benchmark by 0.8% on a NAV basis. The Tokyo Price Index (the ''TOPIX''), a free-float adjusted market capitalization-weighted index covering an extensive proportion of the Japanese stock market, increased by 4.2% and the Nikkei Stock Average Index (''Nikkei''), a price-weighted index of the 225 leading stocks on the TSE, increased by 1.4% in U.S. dollar terms for the six months ended August 31, 2024. The Japanese yen (''Yen'') appreciated by 2.7% against the U.S. dollar during the six months ended August 31, 2024.

For the quarter ended August 31, 2024, the Benchmark increased by 7.8%, the TOPIX increased by 5.4%, and the Nikkei increased by 8.2% in U.S. dollar terms. The NAV of the Fund increased by 5.0% and underperformed the Benchmark by 2.8%. The closing market price of the Fund increased by 3.0% and the Yen appreciated by 7.2% against the U.S. dollar during the quarter ended August 31, 2024.

Investment Strategy

The Fund aims to invest in undervalued stocks that offer fundamental strength and potential for improvement. The Fund's Investment Adviser performs extensive fundamental research to identify companies that have not received much attention from the market despite their excellent business strategies, companies where management has shown signs of change due to internal reforms, and companies where capital efficiency is projected to improve due to changes in their attitude toward shareholder returns. The Fund seeks to focus on companies that are leaders in certain niche markets, with large or expanding market shares, and that offer idiosyncratic business growth prospects.

Performance

In terms of sector allocation during the six months ended August 31, 2024, an overweight position in the Electricity & Gas sector and an underweight position in the Machinery sector generated the largest contributions to performance, although sector returns were eroded by an underweight position in the Nonferrous Metals sector and an overweight position in the Transportation Equipment sector.

At the stock selection level, large contributors to performance included Shikoku Electric Power Co., Inc. in the Electric Power & Gas sector, Sakata Inx Corp. in the Chemicals sector, and SBI Sumishin Net Bank, Ltd. in the Banks sector. Conversely, large detractors included Macnica Holdings, Inc. in the Wholesale Trade sector, Tryt Inc. in the Services sector, and Kyoei Steel Ltd. in the Iron & Steel sector.

Market Review

The Benchmark increased by 3.10% and outperformed relative to the TOPIX, which appreciated by 1.50% in local currency terms over the six-month review period ended August 31, 2024 on a total return basis. The performance of the Japanese stock market has been highly variable over the past two quarters. While there were notable positive factors that indicated resilience and potential for recovery, the market has also faced significant challenges, including the cooling of market excitement in some key industry sectors, rising yields, and higher volatility. This has created a complex landscape for investors.

The Japanese equity market continued its upward trend in March 2024. However, excitement around semiconductor stocks, particularly those for AI development, faded mid-month, leading to a temporary correction. Rising long-term U.S. Treasury yields due to persistent inflation also weighed on high-valuation stocks, dampening hopes for aggressive interest rate cuts. Despite these challenges, global equity markets remained resilient, and the Japanese market recovered quickly.

In April, the Japanese equity market saw a slight correction after a significant rally in the first three months of the year. Many global markets faced intense selling pressure from persistent inflation data, which dashed hopes for an early rate cut from the Federal Reserve. The 10-year U.S. government bond yield surged to a five-month high of 4.7%, undermining equity valuations. Statistics indicated a gradual softening of U.S. economic activity, raising concerns about stagflation due to slowing momentum, stubborn inflation, and rising labor costs. Prices of key commodities like oil and base metals further compounded these fears.

Lacking fresh catalysts, the Japanese equity market was largely directionless in May but closed 1.16% higher after a 0.91% decline in April. During the earnings season for the fiscal year ending March 2024, investors focused on results and management guidance. Earnings proved resilient, with growth rates in the mid-teens, but the usual conservative guidance suggested potential declines in the mid-single-digits, providing little cheer to investor sentiment. However, there were signs of positive changes in management attitudes toward enhancing shareholder value, with record-high share buybacks and an unprecedented pace of announcements.

In June, the market edged 1.45% higher, although conditions remained weak, and the index was under water for most of the month. A last-minute rally lifted it into positive territory. Without fresh catalysts, investor enthusiasm softened, and international fund flows turned into net outflows for five consecutive weeks. Management guidance for the fiscal year to March 2025 expected a mid-single-digit decline in corporate earnings, dampening sentiment among investors hoping for continued positive momentum.

In July, the market declined by 0.54% after a 1.45% gain the previous month. Monthly returns masked increased intra-month volatility, with the market advancing nearly 5% before dropping to -4%, resulting in a drawdown of almost 9%. Global equity markets worsened after the third week, coinciding with a decline in the performance of the "Magnificent Seven" tech stocks and a rally in small-cap stocks. The abrupt rotation from leaders to laggards appeared linked to U.S. sanctions on semiconductor exports to China, a failed assassination attempt on Donald Trump, and political drama surrounding President Biden's withdrawal from the election campaign.

While August performance data suggested an uneventful month, with the Japanese market declining by 2.90% as the Yen appreciated by 2.5%, this masked unprecedented intra-month volatility. Japan's stock market suffered a brutal 20% correction in the first three days, with losses deepening daily. This rapid sell-off was not solely due to fundamental changes; signs of weakness in the U.S. job market and other indicators of a softening economy contributed to an excessive market reaction. The unwinding of speculative positions likely added to the volatility, as many investors combined short Yen positions with long Japanese equities. The Yen's continuous depreciation offset the impressive rally for international investors, leading many to adopt a "short Yen, long equity" strategy, which unsettled them further.

Outlook and Future Strategy

It remains highly uncertain whether the global economy can realize a soft landing, but if the economy shows signs of a slowdown in the coming months, the Federal Reserve has indicated its willingness to lower interest rates. A rate cut would reduce borrowing costs, potentially helping to mitigate the pace of any economic slowdown.

We uphold our view that Japan's economy is on the cusp of a structural recovery, driven by wage and price increases. As such, Japan's trajectory is tied less directly to the fate of the Western economies. Amid a deepening labor shortage, Japanese companies are likely to offer sustained wage growth to secure the necessary workforce. While the stronger Yen should contribute to the lowering of import prices, we believe the driving force behind inflation in Japan is shifting from higher goods prices to rising domestic service costs.

Equity market valuations have quickly adjusted following the steep sell-off in early August, with the current price-to-earnings ratio (PER) for the TOPIX index around 14, which is in line with its historical range. Although we anticipate higher market volatility to continue in the near term, we remain cautiously optimistic. Firstly, corporate earnings forecasts remain robust. Many export-oriented manufacturers had conservatively set their forecasts at an exchange rate of around 145 Yen to the dollar at the beginning of their fiscal year in April, projecting flat to slightly increased profits.

Therefore, despite the Yen's recent surge, we can expect these companies to meet or even exceed their initial projections. Secondly, ongoing improvements in corporate governance are bringing Japan's undervalued equities back into the spotlight as attractive targets for foreign acquisitions. While the outcome of the recent takeover proposal for a major Japanese convenience store chain remains uncertain, the unwinding of cross-shareholdings and the abolition of takeover defense measures, which previously hampered foreign acquisitions, are progressing rapidly among major established Japanese corporations.

The year-to-date underperformance of small-cap stocks can be attributed to several factors. The main obstacle has been the long established weak Yen trend, which has favored large export-oriented companies. At the same time, a sluggish domestic economy, where real household income growth has remained negative, is creating headwinds for small-cap stocks with a high ratio of domestic sales. Following the Bank of Japan's decision to raise interest rates at the end of July, coupled with a willingness to consider further hikes depending on economic conditions, we have witnessed a shift in foreign exchange trends this month. This could in turn lead to increased investor interest in small-cap stocks. Furthermore, there are emerging signs that wage growth is beginning to outpace inflation in certain months, offering a more optimistic outlook for domestic consumption. Among the domestic growth stocks that have significantly underperformed, we believe we have identified stocks that are undervalued relative to their growth potential, and we intend to pursue investments in these opportunities.

On the other hand, there are ongoing efforts to improve the capital efficiency of Japanese companies, prompted by requests from the Tokyo Stock Exchange. One example of progress has been the pace of share buybacks this year, which reached a record high of 8.9 trillion Yen for the period from January to August. While there may be continued market volatility due to speculation around monetary policies in Japan and the U.S., as well as uncertainty regarding the U.S. economic outlook, stock prices of companies that are enhancing shareholder returns through measures such as share buybacks are expected to remain stable. Therefore, we will continue to invest in undervalued stocks that are committed to improving capital efficiency.

We will continue our efforts to add companies that are undervalued relative to their growth prospects through bottom-up analysis of corporate fundamentals. We will select stocks from a wide range of industries, particularly companies that have not received much attention from the market despite their outstanding business strategies, companies where management has shown signs of positive change due to internal reforms, and companies where capital efficiency is expected to improve due to changes in their attitude toward shareholder returns.

The Fund appreciates your continuing support.

JAPAN SMALLER CAPITALIZATION FUND, INC.

PERFORMANCE (Unaudited)

ANNUALIZED RETURNS AS OF AUGUST 31, 2024^(a)

Performance of a $10,000 Investment (as of August 31, 2024)

The graph shows the change in value of a hypothetical investment of $10,000 in the Fund for the period indicated. For comparison, the same investment is shown in the indicated index. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares.

JAPAN SMALLER CAPITALIZATION FUND, INC.

FUND HIGHLIGHTS-AUGUST 31, 2024 (Unaudited)

KEY STATISTICS

MARKET INDICES

INDUSTRY DIVERSIFICATION

TEN LARGEST HOLDINGS

JAPAN SMALLER CAPITALIZATION FUND, INC.

SCHEDULE OF INVESTMENTS

AUGUST 31, 2024

(Unaudited)

JAPAN SMALLER CAPITALIZATION FUND, INC.

SCHEDULE OF INVESTMENTS - (Continued)

AUGUST 31, 2024

(Unaudited)

JAPAN SMALLER CAPITALIZATION FUND, INC.

SCHEDULE OF INVESTMENTS - (Continued)

AUGUST 31, 2024

(Unaudited)

JAPAN SMALLER CAPITALIZATION FUND, INC.

SCHEDULE OF INVESTMENTS - (Continued)

AUGUST 31, 2024

(Unaudited)

JAPAN SMALLER CAPITALIZATION FUND, INC.

SCHEDULE OF INVESTMENTS - (Continued)

AUGUST 31, 2024

(Unaudited)

See notes to financial statements

JAPAN SMALLER CAPITALIZATION FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES

AUGUST 31, 2024
(Unaudited)

JAPAN SMALLER CAPITALIZATION FUND, INC.

STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED AUGUST 31, 2024
(Unaudited)

JAPAN SMALLER CAPITALIZATION FUND, INC.

STATEMENTS OF CHANGES IN NET ASSETS

JAPAN SMALLER CAPITALIZATION FUND, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

Japan Smaller Capitalization Fund, Inc. (the ''Fund'') is registered under the Investment Company Act of 1940, as amended (the ''Investment Company Act''), as a closed-end management investment company. The Fund operates as diversified as defined under the Investment Company Act. The Fund was incorporated in Maryland on January 25, 1990 and investment operations commenced on March 21, 1990. The Fund's investment objective is to seek long-term capital appreciation through investments primarily in smaller capitalization Japanese equity securities.

The accompanying financial statements have been prepared in accordance with United States (''U.S.'') generally accepted accounting principles (''GAAP'') and are stated in U.S. dollars. The Fund is an investment company that follows the accounting and reporting guidance in accordance with the Financial Accounting Standards Board (''FASB'') Accounting Standards Codification Topic 946 Financial Services - Investment Companies. The following is a summary of the significant accounting and reporting policies used in preparing the financial statements.

(a) Valuation of Securities - Investments traded in the over-the-counter market are fair valued at the last reported sales price as of the close of business on the day the securities are being valued or, if none is available, at the most recent quoted bid price or, if none is available, the last reported sales price. Portfolio securities which are traded on stock exchanges are fair valued at the last sales price on the principal market on which securities are traded or, lacking any sales, at the last available bid price. Securities and other assets, including futures contracts and related options, that cannot be fair valued using one of the previously mentioned methods are stated at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund.

(b) Foreign Currency Transactions - Transactions denominated in Japanese yen (''Yen'') are recorded in the Fund's records at the prevailing exchange rate at the time of the transaction. Asset and liability accounts that are denominated in Yen are adjusted to reflect the current exchange rate at the end of the period. Transaction gains or losses resulting from changes in the exchange rate during the reporting period or upon settlement of foreign currency transactions are included in the results of operations for the current period.

JAPAN SMALLER CAPITALIZATION FUND, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued) (Unaudited)

(c) Security Transactions, Investment Income and Distributions to Shareholders - Security transactions are accounted for on the trade date. Dividend income and distributions are recorded on the ex-dividend dates and interest income is recorded on the accrual basis. Realized gains and losses on the sale of investments are calculated on the first in, first out basis.

Distributions from net investment income and net realized capital gains are determined in accordance with Federal income tax regulations, which may differ from U.S. GAAP. To the extent these ''book/tax'' differences are permanent in nature (i.e., that they result from other than timing of recognition - ''temporary''), such accounts are reclassified within the capital accounts based on their Federal tax-basis treatment; temporary differences do not require reclassification.

(d) Income Taxes - A provision for U.S. income taxes has not been made since it is the intention of the Fund to continue to qualify as a regulated investment company under the Internal Revenue Code and to distribute within the allowable time limit all taxable income to its shareholders.

Under Japanese tax laws, a withholding tax is imposed on dividends at a rate of 15.315% and such withholding taxes are reflected as a reduction of the related revenue. The withholding tax rate of 15.315% was reduced to 10% upon the submission of Form 17- Limitation on Benefits Article. There is no withholding tax on realized gains.

In accordance with U.S. GAAP requirements regarding accounting for uncertainties in income taxes, management has analyzed the Fund's tax positions taken or expected to be taken on federal and state income tax returns for all open tax years (the current and the prior three tax years), and has concluded that no provision for income tax is required in the Fund's financial statements. The Fund recognizes interest and penalties, if any, related to uncertain tax positions as income tax expense in the statement of operations. During the current year and for the prior three tax years, the Fund did not incur any interest or penalties.

(e) Use of Estimates in Financial Statement Preparation - The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates.

JAPAN SMALLER CAPITALIZATION FUND, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued) (Unaudited)

(f) Concentration of Risk - A significant portion of the Fund's net assets consists of Japanese securities which involve certain considerations and risks not typically associated with investments in the U.S. In addition to the smaller size, and greater volatility, there is often substantially less publicly available information about Japanese issuers than there is about U.S. issuers. Future economic and political developments in Japan could adversely affect the value of securities in which the Fund is invested. Further, the Fund may be exposed to currency devaluation and other exchange rate fluctuations.

(g) Indemnifications - Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising from the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representations which provide general indemnifications. The Fund's maximum exposure under these agreements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote and as such no additional accruals were recorded on the Statement of Assets and Liabilities.

Nomura Asset Management U.S.A. Inc. (''NAM-U.S.A.'' or the ''Manager'') acts as the Manager of the Fund pursuant to a management agreement. Under the management agreement, the Manager provides all office space, facilities and personnel necessary to perform its duties. Pursuant to such management agreement, the Manager has retained its parent company, Nomura Asset Management Co., Ltd. (''NAM'' or the ''Investment Adviser''), as Investment Adviser to the Fund.

JAPAN SMALLER CAPITALIZATION FUND, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued) (Unaudited)

As of February 29, 2024, net unrealized appreciation on investments, exclusive of foreign currency, for federal income tax purposes was $14,705,008, of which $58,054,443 related to appreciated securities and $43,349,435 related to depreciated securities. The cost of investments, exclusive of foreign currency of $1,836,354 at February 29, 2024 for federal income tax purposes was $250,939,219.

At February 29, 2024, the components of accumulated earnings on a tax basis consisted of unrealized appreciation on investments and foreign currency transactions of $14,685,829, undistributed ordinary income of $4,250,211, and a capital loss carryforward of $38,641,620. The differences between book basis and tax basis for unrealized appreciation on investments and foreign currency transactions are attributable to the tax deferral of losses on wash sales and the tax treatment of passive foreign investment companies.

At February 29, 2024, for federal tax purposes, the Fund has a long-term capital loss carryforward of $38,641,620 available to offset future capital gains.

The Fund paid an ordinary income distribution of $7,522,649, which represents $0.2655 per share, to shareholders of record as of December 19, 2023. The distribution was paid on December 27, 2023.

The Fund paid an ordinary income distribution of $1,306,192, which represents $0.0461 per share, to shareholders of record as of December 20, 2022. The distribution was paid on December 28, 2022.

In accordance with U.S. GAAP, fair value is defined as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a frame work for measuring fair value, and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund's own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Each investment is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below.

JAPAN SMALLER CAPITALIZATION FUND, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued) (Unaudited)

The Fund has evaluated subsequent events through October 28, 2024, the date as of which the financial statements were available to be issued, and has determined that there were no subsequent events that require recognition or disclosure in the financial statements.

JAPAN SMALLER CAPITALIZATION FUND, INC.

FINANCIAL HIGHLIGHTS

For a share of common stock outstanding throughout each period:

See notes to financial statements

BOARD OF DIRECTORS

Rodney A. Buck

David B. Chemidlin

Marcia L. MacHarg

Yuichi Nomoto

Paige P. Ouimet

OFFICERS

Yuichi Nomoto, President

Shinichi Masuda, Vice President

Michael Morrongiello, Vice President

Maria R. Premole, Vice President

Neil A. Daniele, Secretary and Chief Compliance Officer

Thomas Perugini, Treasurer from May 2024

Amy J. Robles, Treasurer to May 2024

Yi She, Assistant Treasurer

MANAGER

Nomura Asset Management U.S.A. Inc.

Worldwide Plaza

309 West 49^th Street

New York, New York 10019-7316

INTERNET ADDRESS

http://www.nomura-asset.com/investment-solutions/funds/closed-end-funds/jof

INVESTMENT ADVISER

Nomura Asset Management Co., Ltd.

2-2-1, Toyosu, Koto-ku,

Tokyo 135-0061, Japan

DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR

Computershare Trust Company, N.A.

P.O. Box 505000

Louisville, KY 40233

CUSTODIAN AND FUND ADMINISTRATOR

Brown Brothers Harriman & Co.

50 Post Office Square

Boston, Massachusetts 02110-1548

COUNSEL

Sidley Austin LLP

787 Seventh Avenue

New York, New York 10019

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Ernst & Young LLP

One Manhattan West

New York, New York 10001

JAPAN SMALLER CAPITALIZATION FUND, INC.

WORLDWIDE PLAZA

309 WEST 49TH STREET

NEW YORK, NEW YORK 10019-7316

This Report, including the Financial Statements, is transmitted to the Shareholders of Japan Smaller Capitalization Fund, Inc. for their information. 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.