Final Results

RNS Number:2505V
Prospect Japan Fund Ld
20 April 2007

THE PROSPECT JAPAN FUND LIMITED

PRELIMINARY PROFITS ANNOUNCEMENT

This is not the Company's Statutory Financial Statements. All figures are based
on the audited financial statements for the year from 1 January, 2006 to 31
December, 2006.

The preliminary announcement is prepared on the same basis as set out in the
previous year's annual accounts.

CHAIRMAN'S REPORT

Performance - The Japanese small cap market suffered a year of negative returns
during 2006, with Topix Small down 12.03% for the year. During this review
period, the net asset value ("NAV") per share of the Company returned -8.47% (on
a bid basis). A more detailed review of the Company's performance appears in the
Investment Adviser's Report. The shares ended the year trading at a discount of
4.9% (2005: 5.7%) to the underlying NAV per share.

Dividend - As with previous years and in line with expectation, the Company has
not earned sufficient income to pay a dividend to shareholders.

Directorate - Mr Rupert A. R. Evans is subject to annual re-election due to his
position as a Director of the Manager and, being eligible, has offered himself
for re-election. All of the other Directors are totally independent and this
provides an appropriate balance.

Due to the length of my tenure on the Board I am subject to annual re-election
and I offer myself for such re-election. My fellow Directors have met in my
absence for the purpose of considering my eligibility for re-election. They
considered that my experience, my independence of mind and the manner in which I
have filled the role of Chairman over the last 13 years has been beneficial to
the Company. They confirmed that they wish me to continue as Chairman and they
are recommending that I be re-elected as a Director at the forthcoming Annual
General Meeting.

Mr John A. Hawkins is also subject to re-election in accordance with Article 76
of the Articles of Association of the Company.

The Board has considered the proposal for the re-election of each of the
above-named Directors and recommends to shareholders that they vote in favour of
the proposals.

Continuation Vote - In accordance with the Articles of Association of the
Company, a Special Resolution that the Company be wound up was considered at the
2005 Annual General Meeting. Shareholders voted against the Special Resolution
in line with the recommendations of the Board. A further continuation vote will
be held at the Annual General Meeting in 2008.

Directors' remuneration - The Board has reviewed the level of remuneration
received and intends that Directors' fees for 2007 increase to #20,000 per annum
for the Chairman, #17,500 per annum for the Chairman of the Audit Committee and
#15,000 per annum for Directors. A Special Resolution is being put forward at
the Company's Annual General Meeting to increase the total level of Directors'
remuneration permitted under the Articles of Association.

Annual General Meeting - The Annual General Meeting of the Company is due to
take place on 23 May, 2007 at 16.00 at the Company's registered office at
Trafalgar Court, St Peter Port, Guernsey. Full details of the meeting are given
in the Company's Annual Report.

David Fitzwilliam-Lay

Chairman

INVESTMENT ADVISOR'S REPORT

For the year from 1 January, 2006 to 31 December, 2006

Market Performance (%), US$
NAV
1 Year 3 Year 5 Year
(31.12.2006)
Prospect Japan (8.47) 63.88 164.06
Fund

Topix Small (12.03) 58.49 136.88

TSE2 (19.21) 81.04 187.83

Prospect Japan Fund Limited's (the Company's") inception date was 20 December
1994. Topix Small is the capitalization-weighted index designed to measure the
stocks not included in the Topix 500 Index that are listed on the First Section
of the Tokyo Stock Exchange. TSE2 is the capitalization-weighted index of all
companies listed on the Second Section of the Tokyo Stock Exchange. As of August
2003, the benchmark of the Company changed from TSE2 to Topix Small since its
characteristics with respect to average market capitalization more closely
resemble the investment strategy pursued by the portfolio. The above performance
of the Fund is net of fees and expenses and includes reinvestment of dividends
and capital gains. Source: Prospect Asset Management, Inc. Topix Small and TSE2
Index performance includes the reinvestment of dividends. Source: Bloomberg.

Summary

After an exceptional year in 2005, the Japanese small cap market retracted
significantly in 2006. The Company's benchmark index, the Topix Small, which
represents the Topix's smallest stocks by market capitalization, fell 12.03% in
2006 (Source: Bloomberg, USD Total Return). The Company's NAV also fell by 8.86%
for the year; however, strategic holdings in JREITS, one of the best performing
sector indices of the Japanese stock market in 2006, contributed positively to
the Company's performance.

Small cap has underperformed large cap since the Livedoor scandal in January.
The valuation premium of small cap over large has narrowed to the point where
several brokers recently upgraded their view on small cap from negative to
neutral. The large cap market rally at the end of the year was fuelled by a
series of strong macro economic data released throughout the month, in
particular, the December Tankan, which indicated business confidence is at a two
year high. Despite the strong indicators, the Bank of Japan postponed a rate
hike until sometime in 2007.

JREITs which comprise a significant part of the Company's exposure have been a
bright spot for the Company. In 2006, the Tokyo Stock Exchange REIT Index had a
total return of 27.53% in USD for the year (Bloomberg). While the valuation
story is intact, it would appear this latest upward move is being driven by both
individuals searching for yield and by simple weight of money. The REIT Index
even now carries an average yield of 2.6% versus 1.7% on JGBs and 1.1% on
companies in the Topix Index (Bloomberg). December saw several REIT specific
funds launched by domestic brokers, and we expect several more given the current
picture of the 2007 pipeline.

Outlook

Macro data aside, other reasons to be sanguine for 2007, in our view, include
the following factors. On the policy front, we believe there are several
government tax reform proposals which should prove to be bullish for equities.
Among these proposals are extensions of tax breaks for capital gains and
dividends. The December macro data caused a sell off in JGBs, and we expect
going into next year asset re-allocation out of fixed income and into equities.
Many of these investors will continue to search for yield, which should continue
to underpin the REIT market.

ATSE REIT Index is a capitalization-weighted index of all Real Estate Investment
Trusts listed on the Tokyo Stock Exchange.

The Prospect Japan Fund Limited is a closed-end investment company incorporated
in Guernsey, and listed on the London Stock Exchange. The Company's investment
objective is to achieve long-term capital growth from a portfolio of securities
primarily of smaller Japanese companies listed or traded on Japanese Stock
Markets. Past performance is no indication of future results. This report does
not constitute an offer of shares of Prospect Japan Fund nor the solicitation of
an offer to buy such shares. There are risks involved with investing, including
possible loss of principal. In addition to the normal risks associated with
investing, narrowly focused investments, investments in smaller companies,
illiquid investments and investments in single countries typically exhibit
higher volatility. International investments may involve risk of capital loss
from unfavorable fluctuation in currency values, from differences in generally
accepted accounting principles or from economic or political instability in
other nations.

The Board of the Company decided that the Company should become a member of the
AIC (The Association of Investment Companies) in 2005. The AIC only accepts
valuations where the underlying assets are valued on a 'Fair' basis, which in
the case of the Company, means on a bid basis (per the AIC). While the Annual
Financial Statements for the year ending 31 December, 2005 and Interim Financial
Statements for period ended 30 June 2006 were reflected at Bid Values to comply
with new accounting standards effective from 1 January, 2005, the trading NAV
continued to be reflected at mid values. Upon the Board's approval, the
Company's administrator Northern Trust made a change to the pricing methodology
in February 2006 in the trading NAV, whereby underlying assets in the Company
are also valued using the 'last bid price.' Consequently, the Company's Net
Asset Value and performance from February 2006 reflects the change in this
pricing methodology. In addition, in newsletters from February to September
2006, as a result of the new pricing methodology, Prospect had been calculating
performance based on an un-rounded Net Asset Value. In October 2006, Prospect
made a decision to calculate performance based on a Net Asset Value rounded to
the nearest hundredth. Therefore, the monthly performance from February to
September was modified to reflect this change. The performance from October 2006
and going forward will incorporate this change. Additional information regarding
policies for calculating and reporting returns is available upon request

Prospect Asset Management Inc. is registered as an investment adviser under the
United States Investment Advisers Act of 1940, as amended, with Securities and
Exchange Commission number 801-47749.

Prospect Asset Management, Inc.

March 2007

The Preliminary Profits Announcement was approved by the Board of Directors on
18 April 2007.

INCOME STATEMENT
for the year from 1 January, 2006 to 31
December, 2006

Revenue Capital Total Revenue Capital Total
01.01.2006 01.01.2006 01.01.2006 01.01.2005 01.01.2005 01.01.2005
to to to to to to
31.12.2006 31.12.2006 31.12.2006 31.12.2005 31.12.2005 31.12.2005
In U.S. In U.S. In U.S. In U.S. In U.S. In U.S.
Dollars Dollars Dollars Dollars Dollars Dollars

(Losses) /
gains
on investments - (20,120,554) (20,120,554) - 74,794,486 74,794,486
Other gains / - 286,525 286,525 - (1,659,304) (1,659,304)
(losses)

Investment
income:
Dividends 4,508,557 - 4,508,557 1,976,420 - 1,976,420
Interest 12,868 - 12,868 15,236 - 15,236

4,521,425 (19,834,029) (15,312,604) 1,991,656 73,135,182 75,126,838

Management fee (3,442,395) - (3,442,395) (2,974,534) - (2,974,534)
Other expenses (1,898,594) - (1,898,594) (1,671,577) - (1,671,577)

(Deficit) / return on
ordinary
activities (819,564) (19,834,029) (20,653,593) (2,654,455) 73,135,182 70,480,727
before tax

Withholding (312,211) - (312,211) (138,349) - (138,349)
tax

(Deficit) / return on
ordinary
activities for (1,131,775) (19,834,029) (20,965,804) (2,792,804) 73,135,182 70,342,378
the year

(Deficit) / return per Ordinary Share -
Basic & (0.011) (0.191) (0.202) (0.027) 0.693 0.666
Diluted

The above results relate to the continuing operations of the company.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS AND RESERVES

for the year from 1 January, 2006 to 31 December, 2006

Capital Capital Capital Capital
Reserve/
Redemption Redemption Revenue Reserve/ Reserve/ Exchange
Share Reserve Reserve Reserve Realised Unrealised Differences Total
capital
In U.S. In U.S. In U.S. In U.S. In U.S. In U.S. In U.S. In U.S.
Dollars Dollars Dollars Dollars Dollars Dollars Dollars Dollars

Balances at 1 105,354 310,155 102,139,113 (12,965,499) 97,585,899 61,859,924 (250,230) 248,784,716
January, 2006

Movements during the
year
Realised gains on - - - - 44,911,547 - - 44,911,547
investments sold
Movement on
unrealised loss on
revaluation of - - - - - (65,032,101) - (65,032,101)
investments
Gain on foreign - - - - - - 286,525 286,525
exchange
Deficit on ordinary - - - (1,131,775) - - - (1,131,775)
activities
Redemption of shares (2,530) 2,530 (5,409,031) - - - - (5,409,031)

Balances at 31 102,824 312,685 96,730,082 (14,097,274) 142,497,446 (3,172,177) 36,295 222,409,881
December, 2006

for the year from 1 January, 2005 to 31 December, 2005

Balances at 1 107,063 308,446 104,906,086 (10,172,695) 53,414,871 32,174,100 1,409,074 182,146,945
January, 2005

Implementation of - - - - - (937,634) - (937,634)
FRS 26

Movements during
the year
Realised gains on - - - - 44,171,028 - - 44,171,028
investments sold
Movement on
unrealised gain on
revaluation of - - - - - 30,623,458 - 30,623,458
investments
Loss on foreign - - - - - - (1,659,304) (1,659,304)
exchange
Deficit on ordinary - - - (2,792,804) - - - (2,792,804)
activities
Redemption of (1,709) 1,709 (2,766,973) - - - - (2,766,973)
shares

Balances at 31 105,354 310,155 102,139,113 (12,965,499) 97,585,899 61,859,924 (250,230) 248,784,716
December, 2005

BALANCE SHEET
as at 31 December, 2006

31.12.2006 31.12.2005
In U.S. In U.S.
Dollars Dollars
Assets
Securities at fair value through profit 220,062,128 222,256,720
and loss

Current assets
Debtors 1,578,511 10,642,397
Bank deposits 1,933,210 17,062,149

Total Current Assets 3,511,721 27,704,546
Liabilities falling due within one year
Bank overdraft 203,529 -
Creditors 960,439 1,176,550

Net current assets 2,347,753 26,527,996

Net assets 222,409,881 248,784,716

Represented by:

SHARE CAPITAL AND RESERVES
Share capital 102,824 105,354
Redemption reserve 96,730,082 102,139,113
Capital redemption reserve 312,685 310,155
Other reserves 125,264,290 146,230,094

Shareholders' funds attributable to equity 222,409,881 248,784,716
interests

Ordinary Shares in issue 102,824,520 105,354,520

Net Asset Value per Ordinary Share 2.16 2.36

CASH FLOW STATEMENT
for the year from 1 January, 2006 to
31 December, 2006

01.01.2006 to 01.01.2005 to
31.12.2006 31.12.2005
In U.S. In U.S.
Dollars Dollars

Operating activities
Net cash outflow from operating (2,075,197) (2,634,431)
activities

Financial investment
Purchase of investments (209,418,486) (126,739,575)

Sale of investments 201,283,721 141,038,281

Net cash flow from financial (8,134,765) 14,298,706
investment

Net cash flow before financing (10,209,962) 11,664,275

Financing
Repurchase of shares (5,409,031) (2,766,973)

Net cash outflow from financing (5,409,031) (2,766,973)