PROSPECT JAPAN FUND LD - Annual Financial Report

THE PROSPECT JAPAN FUND LIMITED

ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

The financial information set out in this announcement does not constitute the Company's statutory accounts for the year ended 31 December, 2015. All figures are based on the Audited Financial Statements for the year ended
31 December, 2015, approved by the Board of Directors on 21 April, 2016.

CHAIRMAN’S REPORT

for the year ended 31 December, 2015

Your Company has had a satisfactory year with improved performance on 2014, achieving a gain, in Dollar terms, of 19.13% as against the MSCI Japan Small Cap Index increase of 15.74%. The Yen:Dollar exchange rate at
31 December, 2015 was virtually unchanged from a year earlier.

As a general observation on the Japanese market, the Topix Index increased 8.84% over the year, recording the fourth consecutive annual increase, reaching an eight year high in August just prior to the announcement of the change in the way that the renminbi exchange rate is determined, raising concerns about the state of the Chinese economy which worried foreign investors and indeed has affected your own Company. The market improved in October with the successful listing of the Japan Post group; this greatly boosted domestic sentiment with the Government Pension Investment Fund increasing their equity weightings as have other similar organisations.

The corporate sector continues to flourish under the Abe administration, with profits for the year to 31 March, 2015 at record levels and with strong growth for the half year, despite slower growth in China. Reform is continuing, with the Japanese Corporate Governance Code being brought in, share buy backs running at the highest level for nearly ten years, dividends generally rising, continued pressure to improve returns on equity and with activism having some success in this regard.

Your Investment Advisor has had some considerable success with the holdings in Prospect Co convertible bonds and other holdings which are explained in more detail in their report, as are also the details of underperformance, where there has been some disappointment. In December, the Company acquired Stock Acquisition Rights in Prospect Co which provide the Company with options to convert into the ordinary shares of Prospect Co when certain conditions are met, as per the exercise agreement approved by Shareholders in February 2016. The Board believes that this will offer the Company and its Shareholders an attractive opportunity in the due course of time.

The Board believes that the opportunities in Japan will continue as the Government is determined to achieve its inflation targets and implement reforms and which should be reflected in the performance. The Board is supportive of the strategy and approach of your Investment Advisors.

John Hawkins
Chairman
21 April, 2016

INVESTMENT ADVISOR'S REPORT

for the year ended 31 December, 2015

Market Performance (%), US$ Net Asset Value (“NAV”)

1 Year 3 Year 5 Year

Prospect Japan Fund (3.19)/19.13* 35.64 53.93

MSCI Japan Small Cap Index 15.74 46.38 46.74

The Prospect Japan Fund Limited inception date is 20 December, 1994. 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.) Although the Company is not managed to a benchmark, it measures its performance against the MSCI Japan Small Cap Index (Total Return) for comparison purposes only. The MSCI Developed Markets Small Cap Indices offer an exhaustive representation of this size segment by targeting companies that are in the Investable Market Index but not in the Standard Index in a particular developed market. The indices include Value and Growth style indices and industry indices based on the Global Industry Classification Standard (GICS®). (Source: Bloomberg)

*Refers to performance based on published NAV. Further information is in Note 17.

Summary

The Prospect Japan Fund Limited’s (the “Company”) published NAV performance increased 19.13% in 2015 (the performance based on valuations produced in accordance with International Financial Reporting Standards (“IFRS”) decreased by 3.19%, see the “Results and Dividend” section of the Directors’ Report for further information) outperforming the MSCI Japan Small Cap Index return of 15.74%. The broader Japanese market was affected strongly by external factors during the year, most notably the Chinese equity rout in August and speculation around the timing of the US interest rate lift-off. Domestically, the adoption of a new corporate governance code was much in focus, along with a string of activism testing its seriousness.

Following the passage of a controversial security bill that sparked large protest demonstrations and sharp drops in the administration’s approval ratings, Prime Minister Abe reverted to campaign mode, announcing “stage two” of Abenomics, along with a fresh quiver of his infamous arrows. The new arsenal, focused on raising Japan’s GDP to a post-war high of ¥600 trillion through productivity improvements and higher utilisation of the nation’s women, increased support for child and elderly care, along with revitalisation of regional economies, was notable for its lack of a monetary policy dimension.

In defiance of market expectations, the Bank of Japan (“BoJ”) left its core stimulus policy unchanged throughout 2015, announcing only small adjustments in mid-December to bond acquisition maturities, ETF purchases and
J-REIT issue limits. At year-end, 48% of economists surveyed by Bloomberg expected no further expansion of monetary stimulus in the foreseeable future, while 50% see an expansion by April 2016.

Company holdings with strong weightings towards Banks (28.66%) and Real Estate (11.26%) are direct beneficiaries of the continued support for fiscal and monetary stimulus by the Abe administration and BoJ. Consolidation in the regional bank space continues apace, with four mergers announced during the year. Support for asset inflation and domestic consumption can be seen through additional government spending, announced exceptions for food and beverages from the 2017 consumption tax increase, and repeated assurances that the BoJ is ready to take bolder action in pursuit of its inflation target. Real Estate prices are supported by an expectation of stable near to mid-term low government bond yields via BoJ purchases. Direct engagement with company management bore fruit during the year, as long-term pressure resulted in dividend increases and share buy-backs at holding Tri-Stage Inc (2178).

The recovery in the Tokyo office market continues, with Miki Shoji reporting that the average office vacancy in Tokyo’s Central Business District has fallen 144 basis points through year-end to 4.03%. This marks its lowest reading since August, 2008. Average rents rose 4.4% YoY, down slightly from the 4.6% improvement in 2014, and 22.7% below the 2008 highs.

While the Company did not have direct exposure to J-REITs at year-end, they serve as a bellwether for the overall Japanese real estate market, and the BoJ’s commitment to asset reflation via direct purchase of investment units. In 2015, the BoJ purchased a total of ¥92.1 billion in J-REIT units, above the annual target of ¥90 billion, bringing total purchases to date to ¥270.3 billion. The annual purchase allocation for 2016 remains unchanged at ¥90 billion.

OUTPERFORMANCE

The largest contributors to 2015 performance were Prospect Co. (3528), Tri-Stage Inc (2178) and Daito Bank (8563). Prospect Co. saw strong share performance in the early months of 2015, following the ¥3 billion convertible bond issuance to the Company in November 2014 and an announcement of a tender offer bid for control of Yutaka Shoji (8747), a commodity futures trader. The bulk of the Company’s holdings in Prospect Co. during the year resulted from exercise of convertible bonds at ¥60 per share. The average sale price following conversion was ¥81 per share.

The Company acquired 1,440 stock acquisition rights (“SARs”) in Prospect Co. for a total cost of ¥288 million (US$2,391,431) in December 2015. Each SAR gives the Company the right to acquire 100,000 ordinary shares in Prospect Co. at a price of ¥54 per share. The SARs are exercisable until 20 December, 2020.

Prospect Co. is listed on the Tokyo Stock Exchange with a market capitalisation of ¥7,840 million
(US$65.1 million). It owns and operates a number of Japanese based businesses in sectors such as real estate, construction, investment management and solar power generation. Through its investment management business it owns Prospect Asset Management Inc., the investment advisor of the Company. Therefore, the exercise of the SARs by the Company will constitute a related party transaction. The Company sent a circular to shareholders seeking approval to exercise the SARs in a pre-determined manner pursuant to an exercise agreement with Prospect Co., and such approval was granted at the EGM on 24 February, 2016.

Tri-Stage, a marketing consultant service provider, gained strongly following the company’s announcement in April that it planned to expand its board by increasing the number of outside directors by two (five internal, three external). Tri-Stage also announced a new mid-term business plan, featuring a policy of 100% dividend payout ratio for the next three years. The changes at Tri-Stage are a direct response to long-term engagement between the Company and management, including proposals put forth regarding increased dividend payout and outside director board membership. Shares rallied again following the October agreement to buy back all 996,000 shares (22% of total outstanding shares) held by the Company. In early 2015, the Company extended a short term loan to Link Up KK, a privately held Japanese telephone marketing company, which was used to acquire an equity stake in Tri-Stage. In October 2015 the Link Up Loan went into default. Nomura, which held the collateral account, temporarily blocked the Company from taking possession of the collateral shares in Tri-Stage. The Company’s lawyers commenced action against Nomura to enforce its rights to the collateral, and towards year-end, gained possession of the shares.

Daito Bank, a Fukushima based regional bank, performed strongly throughout the year, reaching eight-year highs towards year-end following first half of the year results ahead of guidance and a large upward revision to full year estimates including a 50% increase in dividends. Sentiment was also bolstered by six instances of bank consolidation over the past 12 months. Daito Bank, the second largest bank in the Fukushima prefecture, could benefit from the ongoing consolidation trend in the sector.

The Tokyo District Court advised the results of the case involving the Toho (9602) Tender Offer Bid of Toho Real Estate in March 2015, with the court ordering the price raised 13.6% to ¥835 per share. While an improvement, the price is still a significant discount to the fair value of Toho Real Estate when adjusted for unrealised gains on its real estate holdings. The Company appealed the ruling. On 30 March, 2016 the Company announced that the Tokyo High Court had ruled that the tender offer price amounted to fair value which therefore reversed the previous decision of the lower court and eliminated the award of ¥100 per share. The Company has filed an appeal to this ruling.

UNDERPERFORMANCE

Underperformance was led by Shaklee Global Group (8205), a seller of nutrition and personal care products, with a high percentage of overseas sales which fell sharply during the year, following weaker than expected revenues from Asia and higher operating and capital expenditure costs resulting in large downward revision to initial full year forecasts.

Outlook for the company 2016

The outlook for 2016 remains positive, with ongoing BoJ easing, a sustained weaker Yen, and expectations for increased corporate capital spending providing tailwinds for the economy. We continue to see high probability of outperformance from regional banks due to sector consolidation, and from asset rich companies due to demand from real estate developers and J-REITs for sources of additional property acquisitions. Gains for the Company are expected from stock picking among companies with undervalued real estate portfolios, and active engagement with management to maximise shareholder returns. The Company believes that activism plays a key role in unlocking value in Japanese companies.

Top 10 Holdings

31 December, 2015

Symbol	Security	% of Total Assets
8563	DAITO BANK LTD/THE	24.30
2178	TRI-STAGE INC	10.56
3001	KATAKURA INDUSTRIES CO LTD	9.25
8205	SHAKLEE GLOBAL GROUP INC	8.94
9313	MARUHACHI WAREHOUSE CO LTD	7.38
1921	TOMOE CORP	6.55
8562	FUKUSHIMA BANK LTD	4.36
9082	DAIWA MATOR TRANSPORTATION CO LTD	4.12
7404	SHOWA AIRCRAFT INDUSTRY CO LTD	3.95
9324	YASUDA LOGISTICS CORPORATION	3.22

Prospect Asset Management, Inc.

21 April, 2016

PORTFOLIO OF INVESTMENTS

as at 31 December, 2015

Number of Securities		Fair Value in U.S. Dollars		Percentage of Net Asset Value
	Investments
	Listed investments

	Advertising
669,600	Tri-stage Inc	13,232,982		10.56


		13,232,982		10.56

	Banks
17,632,000	The Daito Bank	30,453,010		24.30
6,856,000	Fukushima Bank Ltd	5,465,216		4.36

		35,918,226		28.66


	Diversified Financial Services
165,000	Maruhachi Securities Co Ltd	228,805		0.18


		228,805		0.18


	Engineering and Construction
2,714,900	Tomoe Corp	8,205,792		6.55


		8,205,792		6.55


	Machinery
484,900	Showa Aircraft Industry Co Ltd	4,948,452		3.95


		4,948,452		3.95


	Real Estate
1,073,000	Katakura Industries Co Ltd	11,591,572		9.25
295,000	Prospect Co Ltd	127,377		0.10


		11,718,949		9.35


	Retail
912,000	Shaklee Global Group Inc	11,200,266		8.94


		11,200,266		8.94


	REITs
7,898,895	Prospect Epicure J-REIT Value Fund*#	-		-

		-		-


	Storage/warehousing
2,246,000	Maruhachi Warehouse Co Ltd	9,250,320		7.38
535,595	Yasuda Logistics Corp	4,029,304		3.22

		13,279,624		10.60


	Transportation
1,152,000	Daiwa Motor Transportation Co Ltd	5,165,490		4.12


		5,165,490		4.12



	Total listed investments	103,898,586		82.91
	Unlisted investments
	Corporate bonds
315,700,000	Takefuji Corp		127,526	0.10


			127,526	0.10


	Real Estate
1,440	Prospect Co Ltd Stock Acquisition Rights*		2,391,431	1.91


			2,391,431	1.91


	Total unlisted investments		2,518,957	2.01



	Total investments		106,417,543	84.92

	Net current assets		18,879,436	15.08


	NET ASSETS		125,296,979	100.00

# Currently in liquidation.

* Prospect Co Ltd is classed as a related party as it is the parent company of the Company’s manager, PAM(CI).

STRATEGIC REPORT

The Board has prepared this report on a voluntary basis in accordance with the new UK regulations governing the Directors’ duty to prepare a strategic report.

Company Structure

The Company carries on business, and is registered, as a Guernsey-based closed-ended investment company. The Company is listed on the London Stock Exchange.

Role and Composition of the Board

The Board is the Company’s governing body; it sets the Company’s strategy and is collectively responsible to shareholders for its long term success. The Board is responsible for appointing and subsequently monitoring the activities of the Manager and other service providers to ensure that the investment objectives of the Company continue to be met. The Board also ensures that the Manager adheres to the investment restrictions set by the Board and acts within the parameters set by it in respect of any gearing. It also identifies, monitors and manages the key risks facing the Company.

The Board

The Board comprises three non-executive directors. All members of the Board other than Rupert Evans are independent of the Manager. None of the Directors has a contract of service with the Company.

The Chairman of the Board is John Hawkins. Biographies for Mr Hawkins and all other Directors can be found in the General Information section. In considering the independence of the Chairman, the Board has taken note of the provisions of the AIC Code relating to independence and has determined that Mr Hawkins is an Independent Director. As the Chairman is an Independent Director, no appointment of a senior Independent Director has been made. The Company has no employees and therefore there is no requirement for a chief executive.

The Board meets on at least four occasions each year, at which time the Directors review the investment management of the Company’s assets and all other significant matters so as to ensure that the Directors maintain overall control and supervision of the Company’s affairs. The Board is responsible for the appointment and monitoring of all service providers to the Company.

Dialogue with Shareholders

The Investment Advisor and the Financial Advisor and Broker maintain a regular dialogue with institutional shareholders, feedback from which is reported to the Board. In addition, Board members and representatives of the Manager are available to answer shareholders' questions at the Annual General Meeting. The Company Secretary is available to deal with general shareholders' queries at any time during the year.

Investment Management

The Company’s investment portfolio is managed by Prospect Asset Management (Channel Islands) Limited (“PAMCI”, or the “Manager”) whose parent company is Prospect Co., Ltd (Kabushiki Kaisha Prospect (“KKP”), a Japanese Company). The Manager implements the investment strategy, managing the Company’s assets in line with appropriate restrictions placed on it by the Board, including limits on the type and relative size of holdings which may be held in the portfolio and on the use of gearing, hedging, cash, derivatives and other financial instruments. In the opinion of the Board, the continuing appointment of the Manager on the terms agreed is in the best interests of the Shareholders as a result of its performance and results.

Please refer to Note 4 for details of the management agreement between the Manager and the Company.

Investment Objective

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. The aim will be to achieve a long-term capital return on the Company’s portfolio and dividend income will be a secondary consideration in making investment decisions. Although the Company is not managed to a benchmark, it measures its performance against the MSCI Japan Small Cap Index (Total Return) for comparison purposes only.

Investment Strategy

The Board has delegated management of the Company’s portfolio to the Investment Advisor. The Investment Advisor manages the portfolio with the aim of helping the Company to achieve its investment objective. Details of the Investment Advisor’s strategy, and other factors that have affected performance during the year, are set out in the Investment Advisor’s Report.

Investment Policy

The Company’s investment policy is that it will invest mainly in shares, but may also invest in equity related instruments such as convertible bonds or warrants issued by smaller Japanese companies and debt instruments.

It is the intention of the Directors that investments in unlisted securities which are not registered for trading on or quoted on any of the Japanese Stock Markets should only be made where either a listing or an alternative form of realising the investment can be expected within a reasonable period of time. Within these parameters, the assets of the Company may be used to provide venture or start-up capital (but no investment will carry unlimited liability). The balance of the assets of the Company not invested in securities will normally be invested in short-term debt securities and money market instruments or placed on deposit.

The assets of the Company will be denominated principally in Japanese Yen. It is not the present intention of the Directors to hedge the currency exposure of the Company, but the Directors reserve the right to do so in the future if they consider this to be desirable.

It is intended that the principal investment objective and policies of the Company as set out above will remain in force until determined by the Directors and any material change in the policies will only be made with shareholder approval.

Gearing

The Company may use gearing from time to time amounting to not more than 20% of the Company’s net asset value. Although the Company does not have a borrowing facility at the present time, it has utilised modest levels of gearing in the past and the use of gearing within this limit in the future will be subject to prior approval of the Board.

Investment Philosophy and Process

The Company invests in companies with undervalued assets where it believes it can be a catalyst for positive change. The Company engages with management to enact this change for the benefit of all shareholders. The Company believes the current government’s desire to consolidate certain industries and to improve corporate governance, offer support to this engaged shareholder strategy.

The Company’s research and execution expertise enables the Company to identify and act upon the best opportunities.

Investment Restrictions and Spread of Investment Risk

It is the intention to observe the investment restrictions necessary to maintain a listing for the Company as an investment company on the London Stock Exchange and for the Company to be able to obtain certification as a reporting fund if subject to the applicable United Kingdom taxation legislation (and subject to other conditions of that legislation). For these purposes and for other policy considerations, the Company will not:

(a) invest in securities carrying unlimited liability; or

(b) deal short in securities; or

(d) invest in any commodities, land or interests in land; or

(e) invest or lend more than 25% of its assets at the time the investment is made in securities of any one company or single issuer (other than obligations of the Japanese Government or its agencies or of the US Government or its agencies); or

(f) invest more than 10% of its assets at the time the investment is made in closed-end investment funds which are listed on the Official List maintained by the Financial Conduct Authority (except to the extent that those investment funds have stated investment policies to invest no more than 15% of their total assets in other investment funds which are listed on the Official List) and the Company will not invest more than 15% of its assets at the time the investment is made in such funds; or

(g) invest in more than 5% of its assets at the time the investment is made in units of unit trusts or shares or other forms of participation in managed open-ended investment vehicles; or

(h) commit its assets in the purchase of foreign exchange contracts or financial futures contracts or put or call options or in the purchase of securities on margin other than in connection with or for the purpose of hedging transactions effected on behalf of the Company; or

(i) enter into borrowings in excess of 20% of net assets at the time the borrowings are drawn down.

Performance

An outline of performance, market background, investment activity and portfolio strategy during the year under review, as well as outlook, is provided in the Chairman’s Statement and the Investment Advisor’s Report.

Key performance indicators (“KPI’s”)

At each quarterly Board meeting, the Board consider a number of performance measures to assess the Company’s success in achieving its objectives. Below are the main KPI’s which have been identified by the Board for determining the progress of the Company:

· Net asset value;

· Share price;

· Discount/premium of share price to NAV; and

· Ongoing charges, which are set out in the Directors’ Report.

A record of these measures is disclosed in the General Information section.

Principal Risks and Uncertainties

The Board is responsible for the Company’s system of internal controls and for reviewing its effectiveness. The Board is satisfied that by using the Company’s risk matrix in establishing the Company’s system of internal controls, while monitoring the Company’s investment objective and policy, that the Board has carried out a robust assessment of the principal risks and uncertainties facing the Company. The principal risks and uncertainties which have been identified and the steps which are taken by the Board to mitigate them are as follows:

(i) Investment objective and strategy

The Company’s strategy may not be successful in achieving its investment objective if the Investment Advisor fails to comply with the Company’s investment policy. The Board reviews reports from the Investment Advisor at the quarterly Board Meetings, with a focus on adherence to the investment policy. The Administrator is responsible for ensuring that all transactions are in accordance with the investment restrictions.

(ii) Investment risk

To achieve the objective of delivering long-term performance, the Company invests in Japanese growth as well as cyclical companies with strong management teams that possess a clear vision and focus on profitability and shareholders’ interests. The investment process is driven by proprietary fundamental research identifying companies with below average valuations and above average earnings growth and return on equity.

The Company also invests in companies that have undervalued assets where it identifies a realistic catalyst for positive change. This represents an enhancement of the overall investment process reflecting what the Manager believes are exciting new opportunities in the Japanese equity market. The Manager believes that these types of companies compliment the Company’s overall stock picking expertise, enabling the Company to identify the best opportunities for long term capital appreciation in Japan caused by ongoing consolidation.

Risk management is an integral part of the investment management process. Core to the process is that risks taken are not incidental but are fully understood and accounted for. In-depth proprietary fundamental research provides the Manager with a deep understanding of each stock in the Company’s portfolio and the associated risks. The Board considers the risks facing the Company on an on-going basis. All Board meetings are also attended by the Manager, either in person or by telephone, where reports on portfolio performance and strategy are provided.

Portfolio performance will be dependent on the performance of Japanese equities and such stocks will be influenced by the general health of the country.

(iii) Financial risks

The financial risks, including market, credit and liquidity risk faced by the Company are set out in Note 13 of the Financial Statements. These risks and the controls in place to reduce the risks are reviewed at the quarterly Board Meetings.

(iv) Foreign exchange risk

The movement of exchange rates may have an unfavourable or favourable impact on returns as the majority of the Company’s assets are denominated in Yen, rather than US Dollar, the reporting currency of the Company. Although not currently undertaken, the Directors reserve the right to hedge the Company’s currency exposure.

(v) Ordinary shares

The market value of the shares in the Company may not reflect the underlying Net Asset Value and may trade at a discount to it. The Board actively monitors the discount of the Company and, where appropriate, may implement share buybacks to help reduce the discount and/or discount volatility.

(vi) Borrowing

The Investment Policy restricts the Company from entering into borrowings in excess of 20% of net assets at the time the borrowings are drawn down. Whilst such borrowings may enhance the return on the shares where the underlying Company performance is positive, the opposite is also true and any borrowing will enhance the negative performance of the Company.

(vii) Third party service providers

The Company has no employees and the Board comprises three non-executive directors. The Company is reliant on the Manager, the Investment Advisor and the Secretary, Registrar and Administrator to perform its executive function. The most significant of these third party service providers is the Manager to whom the management of the Company’s investments has been delegated. Failure by any of these third party service providers to perform the services in accordance with the terms of the relevant service contracts represents a risk to the operations of the Company and the performance of the Company.

Termination of the Investment Management Contract by the Manager or loss of key staff by the Manager could materially affect the ability of the Company to operate and detract from the performance of the Company until a suitable replacement could be found.

The Board has segregated the duties of investment management, accounting and custody. Each of the contracts with third party service providers has been entered into after full and proper consideration of the quality and cost of the services provided and the control systems in place. The Board reviews the performance of the Investment Advisor and the Manager on a regular basis,

The Directors seek to mitigate and manage these risks through continual review, policy-setting and enforcement of contractual obligations and will update the risk assessment matrix to reflect any changes in the control environment. Further details on the Company’s internal controls are given in the Directors’ Report.

Viability Statement

In accordance with provision C.2.2 of the UK Corporate Governance Code, published by the Financial Reporting Council in September 2014 (the “Code”), the Directors have assessed the prospects of the Company over the three year period to 31 December, 2018. As the Company is required to put a continuation vote to shareholders every three years, the next one occurring in 2017, the Directors consider that this is an appropriate period of assessment of the viability of the Company for the purpose of giving assurance to shareholders, assuming that the continuation vote is passed, given the current share price discount to NAV.

In its assessment of the viability of the Company, the Directors have considered each of the Company’s principal risks and uncertainties detailed above and in particular the impact of a significant fall in regional equity markets on the value of the Company’s investment portfolio. The Directors consider that a 30% fall in the value in the Company’s portfolio would be significant but would have little impact on the Company’s ability to continue in operation over the next three years. In reaching this conclusion, the Directors considered the Company’s income and expenditure projections, the fact that the Company has no gearing and that the Company’s investments comprise readily realisable securities which can be expected to be sold to meet funding requirements if necessary, assuming market liquidity continues.

Based on the Company’s processes for monitoring operating costs (cash burn vs. available resources), share price discount, the Manager’s compliance with the investment objective, asset allocation, the portfolio risk profile, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period to 31 December, 2018.

Future Developments

The future performance of the Company depends upon the success of the Company’s investment strategy in the light of economic factors and market developments. Further comments on the outlook for the Company for the next twelve months are set out in both the Chairman’s Statement and in the Investment Advisor’s Report.

John Hawkins
Chairman

Richard Battey
Director
21 April, 2016

DIRECTORS’ REPORT

The Directors present their Annual Report and the Audited Financial Statements of The Prospect Japan Fund Limited (the “Company”) for the year ended 31 December, 2015.

The Company's Business

The Company was registered under the laws of Guernsey on 18 November, 1994 as a Limited Company with a premium listing on the London Stock Exchange. It is a close-ended investment company established to achieve long-term capital growth from an actively managed portfolio of securities primarily of smaller Japanese companies listed or traded on Japanese Stock Markets. The Company is a FATCA compliant organisation with FATCA entity classification FFI and GIIN L0Q9R3.99999.SL.831.

Results and Dividend

The results for the year are set out in the Statement of Comprehensive Income.

Whilst over the last three year period the Company’s return was 35.64% (2014: 36.90%) compared with 46.38% (2014: 31.71%) for the MSCI Japan Small Cap Index, the last year’s performance based on valuations produced in accordance with International Financial Reporting Standards (“IFRS”) was -3.19% (2014: 9.21%) compared with MSCI Japan Small Cap Index performance of 15.74% (2014: 0.12%) (19.13% (2014: 10.85%) based on published NAV). For further details of the differences between published NAV and IFRS adjusted NAV please see Note 17.

The bulk of the Company’s holdings in Prospect Co. during the year resulted from the execution of convertible bonds at ¥60 per share. The average sale price following conversion was ¥81 per share, resulting in a gain of an average of ¥21 per share. However, as at 31 December, 2014, the NAV had been uplifted by US$26 million to the published NAV at year end by an IFRS adjustment to the fair value of corporate bonds and embedded derivative, and therefore for the purposes of these Audited Financial Statements prepared under IFRS, the sale resulted in an accounting loss of US$25 million.

The Directors do not recommend the payment of a dividend for the year (2014: Nil).

Performance

The Board considers that Prospect Asset Management (Channel Islands) Limited, the Manager to the Company, is managing the Company's investments in a manner that is most likely to achieve the objective of long term capital appreciation for its shareholders.

Statement of Directors' Responsibilities and Declarations

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable Guernsey Law and International Financial Reporting Standards (“IFRS”) as adopted by the European Union. The Directors are required to prepare Financial Statements for each financial year which give a true and fair view of the state of the affairs of the Company and of the total return of the Company for that year and in accordance with the applicable laws. The Directors are responsible for ensuring that the Annual Report includes information required by the Rules of the UK Listing Authority. The Directors are also responsible for ensuring that the Company complies with the provisions of the Listing Rules and the Disclosure Rules and Transparency Rules of the UK Listing Authority. With regard to corporate governance the Company is required to disclose how it has applied the principles and complied with the provisions of the Corporate Governance code applicable to the Company. In preparing those Financial Statements the Directors are required to:

- select suitable accounting policies and then apply them consistently;

- make judgements and estimates that are reasonable;

- state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and

- prepare the Financial Statements on a going concern basis unless it is inappropriate to presume that the company will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position and performance of the Company and to enable them to ensure that the Financial Statements have been properly prepared in accordance with The Companies (Guernsey) Law and IFRS. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud, error and non-compliance with law or regulations.

The Directors confirm that they have complied with the above requirements in preparing the Financial Statements.

The Directors confirm that to the best of their knowledge

(a) The Annual Financial Statements have been prepared in accordance with IFRS as adopted by the European Union and give a true and fair view of the financial position and performance of the Company as at and for the year ended 31 December, 2015.

(b) The Chairman’s, Investment Advisor’s, Strategic and Directors’ Reports include a fair review of the development and performance of the Company business and the position of the Company together with a description of the principal risks and uncertainties facing the Company.

Directors' Statement

So far as each of the Directors is aware, there is no relevant audit information of which the Company's auditor is unaware, and each Director has taken all the steps he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company's auditor is aware of that information. In the opinion of the Board, the Annual Report and Financial Statements taken as a whole, are fair, balanced and understandable and provide the information necessary to assess the Company’s performance, business model and strategy.

Ongoing Charges

Ongoing charges are the recurring expenses incurred by the fund excluding one-off expenses. Ongoing charges for the years ended 31 December, 2015 and 31 December, 2014 have been prepared in accordance with the AIC’s recommended methodology. The ongoing charges for the year ended 31 December, 2015 was 2.20% (31 December, 2014: 2.28%). No performance fees were charged during the year.

Corporate Governance

The Board is committed to high standards of corporate governance and has implemented a framework for corporate governance which it considers to be appropriate for an investment company in order to comply with the principles of the UK Corporate Governance Code (September 2014) (the “Code”) issued by the Financial Reporting Council (“FRC”). The Company is also required to comply with the Code of Corporate Governance (the “GFSC Code”) issued by the Guernsey Financial Services Commission.

The FRC issued a revised Code in 2014, for reporting periods beginning on or after 1 October, 2014. The AIC updated the AIC Code of Corporate Governance (the “AIC Code”) (including the Guernsey edition) and its Guide to Corporate Governance (the “AIC Guide”) to reflect the relevant changes to the FRC document in February 2015. The Board has adopted the revised code.

The UK Listing Authority requires all UK premium listed companies to disclose how they have complied with the provisions of the UK Code. This Corporate Governance Statement, together with the Going Concern Statement, Viability Statement and the Statement of Directors’ Responsibilities set out in the Strategic Report and in this report, indicates how the Company has complied with the principles of good governance of the UK Code and its requirements on Internal Control.

The Company is a member of the Association of Investment Companies (the “AIC”) and by complying with the AIC Code is deemed to comply with both the UK Code and the GFSC Code.

The Board has considered the principles and recommendations of the AIC Code, by reference to the guidance notes provided by the AIC Guide, and consider that reporting against these will provide appropriate information to shareholders. To ensure ongoing compliance with these principles the Board reviews a report from the Corporate Secretary at each quarterly meeting, identifying how the Company is in compliance and identifying any changes that might be necessary.

The AIC Code and the AIC Guide are available on the AIC’s website, www.theaic.co.uk. The UK Code is available in the Financial Reporting Council’s website, www.frc.org.uk.

Throughout the year ended 31 December, 2015, the Company has complied with the recommendations of the AIC Code and thus the relevant provisions of the UK Code, except as set out below.

The UK Code includes provisions relating to:

• the role of the Chief Executive

• Executive Directors’ remuneration

• the need for an internal audit function

• the whistle blowing policy

• Senior Independent Director

• Remuneration Committee

For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to the position of the Company as it is an externally managed investment company. The Company has therefore not reported further in respect of these provisions. The Directors are all non-executive and the Company does not have employees, hence no Chief Executive or whistle-blowing policy is required for the Company. The key service-providers all have whistleblowing policies in place. The Board is satisfied that any relevant issues can be properly considered by the Board.

Details of compliance with the AIC Code are noted below and in the succeeding sections. There have been no other instances of non-compliance, other than those noted above.

Directors Attendance at Meetings

The number and attendance at the formal Board, Audit Committee and Management Engagement Committee meetings during the year was as follows;

	Board Meetings		Management Engagement Committee Meetings		Ad Hoc Committee Meetings		Audit Committee Meetings
	Held	Attended	Held	Attended	Held	Attended	Held	Attended
Rupert Evans	4	4	N/A	N/A	3	1	N/A	N/A
John Hawkins	4	4	-	-	3	3	3	3
Richard Battey	4	4	-	-	3	3	3	3

Re-election

In accordance with the Company’s Articles of Association, all newly appointed Directors stand for election by the shareholders at the next Annual General Meeting (“AGM”) following their appointment. The Directors retire by rotation and offer themselves for re-election every three years. Directors who have served on the Board for more than nine years are subject to annual re-election. Mr Rupert Evans is considered a non-independent Director due to being a Director of the Manager. Non-independent Directors are subject to annual re-election. At the AGM on 10 August, 2015, Rupert Evans, John Hawkins and Richard Battey retired as Directors, and being eligible, Rupert Evans, John Hawkins and Richard Battey offered themselves for re-election. Rupert Evans, John Hawkins and Richard Battey were re-elected as Directors of the Company.

The Chairman has served on the Board for over nine years and under the AIC Code may not be considered to be independent of the Company. The Board however, takes the view that the length of tenure does not necessarily determine the independence of the Board and experience can add significantly to the Board’s strength. It has therefore determined that in performing his role as Director, the Chairman remains wholly independent.

Board Performance

The AIC Code requires external evaluation of Board performance every three years.

The Board, Audit Committee, Management Engagement Committee and Nominations Committee undertake an evaluation of their own performance and that of individual Directors on an annual basis. In order to review their effectiveness, the Board and its Committees carry out a process of formal self-appraisal. The Board and Committees consider how they function as a whole and also review the individual performance of its members. This process is conducted by the respective Chairman reviewing each members’ performance, contribution and commitment to the Company. Each Board member provides proof of ongoing training and maintenance of continuing professional development requirements.

The Board considers it has a breadth of experience relevant to the Company, and the Directors believe that any changes to the Board’s composition can be managed without undue disruption. An induction programme has been prepared for any future Director appointments.

Supply of Information

The quarterly board meetings are the principal source of regular information for the Board enabling it to determine policy and to monitor performance and compliance. The Manager attends each Board meeting either in person or by telephone thus enabling the Board to fully discuss and review the Company’s operation and performance. Each Director has direct access to the Company Secretary, and may, at the expense of the Company, seek independent professional advice on any matter that concerns them in the furtherance of their duties.

Committees of the Board

The Board has established Nomination, Audit and Management and Engagement Committees and approved their Terms of Reference, copies of which can be obtained from the Administrator.

Nomination Committee

The Board as a whole fulfils the function of a Nomination Committee. Whilst the independent Directors take the lead in the appointment of new Directors, any proposal for a new Director will be discussed and approved by the entire Board.

The Board has also given careful consideration to the recommendations of the Davies Report on “Women on Boards”. As recommended in the Davies Report, the Board has reviewed its composition and believes that the current appointments provide an appropriate range of skills, experience and diversity. The Board will take into account the recommendations of the Davies Report as part of its succession planning over future years.

Audit Committee

An audit committee has been appointed comprising the Independent Directors. The Audit Committee operates within clearly defined terms of reference which have been approved by the Board and provides a forum through which the Company’s external Auditors report to the Board. The Board is satisfied that the Audit Committee contains members with sufficient recent and relevant financial reporting experience.

The Audit Committee has considered the requirement for an annual internal audit of the Company. On the basis that the Company is an investment company with no employees, the Audit Committee believes that an internal audit function is not necessary for the Company.

The table above sets out the number of Audit Committee Meetings held during the year ended
31 December, 2015 and the number of such meetings attended by each Committee member.

The Audit Committee Report detailing responsibilities and activities is presented in the Audit Committee Report.

Management and Engagement Committee

The Management and Engagement Committee comprises the Independent Directors. The Management and Engagement Committee operates within clearly defined terms of reference which have been approved by the Board.

The purpose of this Committee is to review the performance of the Investment Advisor, Manager and the third party service providers to the Company. As the Board has evaluated their performance during the course of their regular meetings and found it satisfactory, the Board conclude that the continuing appointment of the parties on the terms agreed would be in the best interests of the Company’s shareholders as a whole. At the date of this report the Board continues to be of the same opinion. The Management Engagement Committee did not need to meet during the year.

Directors’ Remuneration

The level of Directors’ fees is determined by the whole Board on an annual basis and therefore a separate Remuneration Committee has not been appointed. When considering the level of Directors’ remuneration the Board considers the industry standard and the level of work that is undertaken.

During the year ended 31 December, 2015, the Directors were entitled to receive an annual fee of £25,000 (2014: £20,000), the Chairman of the Audit Committee £27,500 (2014: £22,500) and the Chairman of the Board £30,000 (2014: £25,000).

Going Concern

In accordance with the Company’s Articles, the Board is required every three years to include in the business to be considered by shareholders at the Annual General Meeting a Special Resolution that the Company should be wound up. The last such resolution was tabled at the eighteenth Annual General Meeting held in 2014. The Shareholders voted against the resolution, and in favour of the continuation of the Company. Based on this vote and the fact that the assets of the Company consist mainly of securities that are readily realisable, whilst the Directors acknowledge that the liquidity of these assets needs to be managed, the Directors believe that the Company has adequate financial resources to meet its liabilities as they fall due in the foreseeable future and at least twelve months from the date of this report, and that it is appropriate for the Financial Statements to be prepared on a going concern basis. Factors regarding the going concern basis are also discussed in Note 1 of the Financial Statements.

Internal Control

The Board is ultimately responsible for establishing and maintaining the Company’s system of internal financial and operating control and for maintaining and reviewing its effectiveness. The Company’s risk matrix continues to be the core element of the Company’s risk management process in establishing the Company’s system of internal financial and reporting control. The risk matrix is prepared and maintained by the Board which initially identifies the risks facing the Company and then collectively assesses the likelihood of each risk, the impact of those risks and the strength of the controls operating over each risk. The system of internal financial and operating control is designed to manage rather than to eliminate the risk of failure to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against misstatement and loss.

These controls aim to ensure that assets of the Company are safeguarded, proper accounting records are maintained and the financial information for publication is reliable. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company.

This process has been in place for the year under review and up to the date of approval of this Annual Report and Audited Financial Statements and is reviewed by the Board and is in accordance with the AIC Code and Internal Controls: Revised Guidance for Directors on the Combined Code.

The AIC Code requires Directors to conduct at least annually a review of the Company’s system of internal financial and operating control, covering all controls, including financial, operational, compliance and risk management. The Board has evaluated the systems of internal controls of the Company. In particular, it has prepared a process for identifying and evaluating the significant risks affecting the Company and the policies by which these risks are managed.

The Board has delegated the day to day responsibilities for the management of the Company’s investment portfolio, the provision of depositary services and administration, registrar and corporate secretarial functions including the independent calculation of the Company’s NAV and the production of the Annual Report and Financial Statements which are independently audited.

Formal contractual agreements have been put in place between the Company and providers of these services. Even though the Board has delegated responsibility for these functions, it retains accountability for these functions and is responsible for the systems of internal control. At each quarterly Board meeting, compliance reports are provided by the Administrator, Company Secretary and Portfolio Manager. The Board also receives confirmation from the Administrator of its accreditation under its Service Organisation Controls 1 report.

The Company’s risk exposure and the effectiveness of its risk management and internal control systems are reviewed by the Audit Committee at its quarterly meetings and annually by the Board.

The Board believes that the Company has adequate and effective systems in place to identify, mitigate and manage the risks to which it is exposed.

Directors' and Other Interests

No Directors holding office at 31 December, 2015, or their associates, had any beneficial interest in the Company's Shares (2014: None). There has been no change in this position between the end of the year and the date of this report.

Rupert Evans is a Director of the Manager and a former partner in the firm of the Guernsey legal advisors, Mourant Ozannes. John Hawkins and Richard Battey are Directors of a range of funds.

Substantial Shareholdings

As at 12 April, 2016, the Company has been notified of the following interests in the share capital of the Company exceeding 5% of the issued share capital:

	Number of shares	Percentage of issued share capital
Lazard Asset Management	22,041,625	23.84%
1607 Capital Partners	18,588,887	20.11%
CG Asset Management	14,247,936	15.41%
Wells Capital Management	4,684,888	5.07%

There have been no other notifications of significant changes to the substantial shareholdings at 21 April, 2016.

The percentage of ordinary shares shown above represents the ownership of voting rights at the year end, before weighting for votes in Directors.

It is the responsibility of the shareholders to notify the Company of any change to their shareholdings when it reaches 5% of shares in issue and any change which moves up or down through any whole percentage figures above 5%.

Share buybacks

As approved at the AGM on 10 August, 2015, the Company may purchase, subject to various terms as set out in the Articles, a maximum of 13,858,645 Ordinary Shares under the Company’s discount control mechanism. During the year to 31 December, 2015, the Company did not purchase any shares (2014: 2,426,000 shares) as detailed in Note 9 of the Financial Statements.

Auditors

The Auditors, Ernst & Young LLP have indicated their willingness to continue in office and offer themselves for re-appointment at the forthcoming AGM.

John Hawkins Richard Battey

Chairman Director

21 April, 2016

DISCLOSURE OF DIRECTORSHIPS IN PUBLIC COMPANIES LISTED ON RECOGNISED STOCK EXCHANGES

for the year ended 31 December, 2015

The following summarises the Directors’ directorships in other public companies

Directorships		Stock Exchange
Company Name

Richard Battey
AcenciA Debt Strategies Limited		London
Juridica Investments Limited		London
Princess Private Equity Holding Limited		London
Better Capital PCC Limited		London
NB Global Floating Rate Income Fund Limited		London
Pershing Square Holdings Limited		Euronext

Rupert Evans
El Oro Limited		Channel Islands
Oryx International Growth Fund Limited		London
The Red Fort Partnership Limited		Channel Islands
Stonehage Fleming Global Property Fund PCC Limited		Channel Islands
FF&P Ventures Funds PCC Limited		Channel Islands
Master Capital Fund Limited		Irish

John Hawkins
Low Carbon Accelerator Limited		London
Aberdeen Greater China Fund, Inc.		New York
Advance Developing Markets Fund Limited		London

AUDIT COMMITTEE REPORT

Below, we present the Audit Committee (the “Committee”) Report for 2015, setting out the Committee’s structure and composition, principal duties and key activities during the year. As in previous years, the Committee has reviewed the Company's financial reporting, the independence and effectiveness of the independent auditor and the internal control and risk management systems of service providers.

A member of the Committee will continue to be available at each AGM to respond to any shareholder questions on the activities of the Committee.

Role and responsibilities

The function of the Audit Committee (the “Committee”) is to ensure that the Company maintains the highest standards of integrity of its financial reporting and internal control.

The responsibilities of the Committee are:

· To review and make recommendations on the appointment of the Company’s Auditors, the scope of the audit, the audit fee, their independence and objectivity and any questions of the resignation or dismissal of the Auditors;

· To discuss with the Auditors the nature and scope of the audit and to keep under review such scope and its cost-effectiveness;

· To receive and review a Report from the Company’s Auditors and to discuss any matters arising from the audit and recommendations made by them;

· To review the Company’s half-year and Annual Report and Financial Statements and any other financial information published by the Company, in each case before issue or publication, prior to submission to the Board, having particular regard to:

• the accounting policies and whether they continue to be appropriate for the business;

• any changes in accounting policies or practices and whether they are appropriate for the business;

• any important areas where judgement must be exercised e.g. valuation of unquoted investments;

• any significant adjustments arising from the audit;

• the going concern assumption; and

• other legal, UK Listing Authority or recognised investment exchange requirements.

· To advise the Board on whether the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy.

· To ensure that the internal control systems of the service providers are adequate. To receive reports from the Company’s service providers covering internal control systems, internal audit functions and procedures supported either by SSAE 16, ISAE 3402 or AAF Reports. In light of the above, to review the Company’s statement on internal controls prior to endorsement by the Board;

· To monitor the Company’s procedures for ensuring compliance with statutory, regulatory and other financial reporting requirements i.e. the Guernsey Financial Services Commission and the London Stock Exchange (which includes the UK Listing Authority);

· To review significant transactions outside the Company’s normal business (e.g. Company share buy backs); and

· To consider any other topics referred to it by the Board.

The Audit Committee’s full terms of reference can be obtained by contacting the Administrator.

Membership

The members of the Committee are Richard Battey (Chairman) and John Hawkins. Full biographical details of each member can be found in the General Information section. All members attended the formal Audit Committee meetings held during the year. In addition a number of ad hoc meetings were held with the Auditors to discuss financial reporting matters.

Significant issues related to the financial statements

The Committee’s review of the interim and annual financial statements focused on the following areas:

· The Committee has concentrated on the investment issues of existence and title in respect of the Company’s portfolio holdings as a whole and more specifically the valuation of its unlisted holdings. 98% by value of the investments are quoted investments and are held in a designated account at the Custodian. The remaining investments are unlisted and dealt with in more detail below.

Key activities and significant risks

The investment manager has built a concentrated portfolio of small and medium sized enterprises and the Committee appreciates that there are significant risks inherent in that investment policy compared with a wider spread in larger quoted companies. There is also a material exposure to property at the year-end given an 11.26% direct exposure to property companies (2014: 7%).

The Company holds two unlisted investments. Following advice from the Investment Manager and per requirements under IFRS, the Committee considers the valuation of these investments in detail. For further details on the Investment policies and the valuation of unlisted investments, please see Note 14 of the Financial Statements.

The Manager and Administrator confirmed to the Committee that they were not aware of any material misstatements including matters relating to presentation. The Committee advised the Board that this Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable.

Following a review of the presentations and reports from the Administrator and after consulting where necessary with the external Auditor, the Committee is satisfied that the Financial Statements appropriately address the critical judgements and key estimates (both in respect to the amounts reported and the disclosures). The Committee is also satisfied that the significant assumptions used for determining the value of assets have been appropriately scrutinised, challenged and are sufficiently robust. Further details on the significant assumptions used for determining the value of assets can be found in Note 14 of the Financial Statements.

Risk Management

After consultation with the Manager and external Auditor, the Audit Committee continues to consider the risks faced by the Company and its service providers and the process for managing them. Risk management procedures for the Company, as set out in the Company’s risk assessment matrix, were reviewed and approved by the Audit Committee at each Quarterly Board Meeting.

The Committee reviews and examines externally prepared assessments of the control environment in place at the Manager and the Administrator, with the Manager and Administrator providing a SOC1 report covering internal control systems and procedures supported either by SSAE 16, ISAE 3402 or AAF Reports, on an annual basis and a bi-annual basis respectively. No significant failings or weaknesses were identified in these reports by the Committee. There were no changes in risk management or internal control systems during the year.

The Committee has considered the requirement for an annual internal audit of the Company. On the basis that the Company is an investment company with no employees, the Audit Committee believes that an internal audit function is not necessary for the Company.

External Audit

Independence, Objectivity and Fees

The independence and objectivity of the independent auditor is regularly reviewed by the Audit Committee which also reviews the terms under which the independent auditor is appointed to perform non-audit services. The Audit Committee has established pre-approval policies and procedures for the engagement of the independent auditor to provide audit and non-audit services.

These are that the independent auditors may not provide a service which:

· places them in a position to audit their own work;

· creates a mutuality of interest;

· results in the independent auditor developing close relationships with service providers of the Company;

· results in the independent auditor functioning as a manager or employee of the Company; or

· puts the independent auditor in the role of advocate of the Company.

The Audit Committee considered reports from the independent auditor on their procedures to identify and mitigate any threats to independence and concluded that the procedures were sufficient to identify any threats to independence.

The following table summarises the remuneration paid to Ernst & Young LLP for audit and non-audit services provided to the Company during the years ended 31 December, 2015 and 31 December, 2014:

Ernst & Young LLP	01.01.2015 to 31.12.2015 in GB Pounds	01.01.2014 to 31.12.2014 in GB Pounds
Annual audit	41,550	38,000
Auditor’s interim review	14,000	13,750
Tax compliance - FATCA	-	3,000
	55,550	54,750

In line with the policies and procedures above, the Audit Committee does not consider that the provision of these non-audit services to be a threat to the objectivity and independence of the independent auditor.

Ernst & Young LLP has been the Company’s independent auditor since 28 June, 2001. The Audit Committee has examined the scope and results of the external audit, its cost effectiveness and the independence and objectivity of the independent auditor, with particular regard to non-audit fees, and considers Ernst & Young LLP, as independent auditor, to be independent of the Company.

Performance and effectiveness

During the year, when considering the effectiveness of the independent auditor, the Audit Committee has taken into account the following factors:

· the audit plan presented to them;

· the audit findings report including variations from the original plan;

· changes in audit personnel;

· the independent auditor’s own internal procedures to identify threats to independence; and

· feedback from both the Manager and Administrator.

The Audit Committee reviewed the audit plan and the audit findings report of the independent auditor and concluded that the audit plan sufficiently identified audit risks and that the audit findings report indicated that the audit risks were sufficiently addressed and that there were no significant variations from the audit plan.

Reappointment

Consequent to the review discussed above, the Audit Committee has recommended to the Board that a resolution be put to the 2016 AGM for the reappointment of Ernst & Young LLP as independent auditor. The Board has accepted this recommendation.

Fraud, Bribery and Corruption

The Audit Committee continues to monitor the fraud, bribery and corruption policies of the Company. The Board receives a confirmation from all service providers that there have been no instances of fraud or bribery.

As the Company has no employees, the Committee does not consider that a whistle-blowing policy is required. However, the Directors have satisfied themselves that the Company’s service providers have appropriate whistle-blowing policies and procedures and seek regular confirmation from the service providers that nothing has arisen under those policies and procedures which should be brought to the attention of the Board.

Richard Battey

Chairman, Audit Committee

21 April, 2016

INDEPENDENT AUDITOR’S REPORT

TO THE MEMBERS OF THE PROSPECT JAPAN FUND LIMITED

Our opinion on the financial statements

In our opinion:

The Prospect Japan Fund Limited’s (the “Company”) financial statements (the “financial statements”) give a true and fair view of the state of the Company’s affairs as at 31 December 2015 and of its loss for the year then ended;
the financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRSs”);
the financial statements have been prepared in accordance with the requirements of the Companies (Guernsey) Law 2008.

What we have audited

The Prospect Japan Fund Limited’s financial statements comprise:

· Statement of comprehensive income for the year ended 31 December 2015;

· Statement of financial position as at 31 December 2015;

· Statement of changes in equity for the year ended 31 December 2015;

· Statement of cash flows for the year ended 31 December 2015; and

· Related notes 1 to 18 to the financial statements

The financial reporting framework that has been applied in their preparation is applicable law and IFRS.

Overview of our audit approach

Risk of material misstatement	· Valuation of unquoted investments
Audit scope	· We performed an audit of the complete financial statements of the Company for the year ended 31 December 2015.
Materiality	· Overall materiality of US$1.25 million which represents 1% of total equity.

Our assessment of risk of material misstatement

We identified the risk of material misstatement described below as that which had the greatest effect on our overall audit strategy, the allocation of resources in the audit and the direction of the efforts of the audit team. In addressing this risk, we have performed the procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any opinion on this individual area.

Risk	Our response to the risk	What we concluded to the Audit Committee
Valuation of unquoted investments (US$2,518,957 PY comparative US$56,008,526) Refer to the Audit Committee Report; Accounting policies in Note 1; and Note 14 of the Financial Statements 95% of the carrying value of unquoted investments relates to the Company’s holding in Stock Acquisition Rights (“SARs”) issued by Prospect Co. Ltd. The remainder (US$128k) relates to a long-term holding in Takefuji Corp. The Prospect Co. Ltd SARs were valued using the Black-Scholes-Merton model. The valuation is highly subjective with a high level of judgement and estimation linked to the determination of the values with limited market information available. Therefore there is a risk of an inappropriate valuation model being applied, together with the risk of inappropriate inputs to the model/calculation being selected.	· We documented our understanding of the processes, policies and methodologies used by management for valuing investments held by the Company and performed walkthrough tests to confirm our understanding of the systems and controls implemented. · We carried out substantive investment valuation procedures on the unquoted investments held by the Company with a carrying amount in excess of our testing threshold of US$940k. · These substantive procedures comprised mainly of agreeing the valuation per the financial statements back to the model used by management, testing the inputs to the model back to independent sources and evaluating whether all key terms of the SARs had been considered in the application of the model. · We engaged our own internal valuation experts to o assist us to determine whether the methodologies used to value investments were in accordance with methods usually used by market participants for these types of investments; and o use their knowledge of the market to assess and corroborate management's market related judgements and valuation inputs (including risk free interest rates, volatility rate, dilution impact and restrictions on exercising the SARs) by, reference to our experts’ knowledge of comparable transactions, and independently compiled databases/indices.	During the audit process, we discussed with the Audit Committee that there was insufficient evidence to support the initial valuation estimate of the SARs based on our view of the estimated future volatility of the Prospect Co. Ltd share price and the fact the model applied had not taken into consideration the dilution impact of the future exercise of the SARs. Management revised the model resulting in an adjustment to the SARs valuation to the current carrying amount of US$2.4 million which we concluded was not materially misstated.

The scope of our audit

Tailoring the scope

Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope which enable us to form an opinion on the financial statements under International Standards on Auditing (UK and Ireland).

Our application of materiality

We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.

Materiality

This is the magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the Company to be US$1.25 million (2014: US$1.29 million), which is 1% (2014: 1%) of total equity. This provided a basis for determining the nature, timing and extent of risk assessment procedures, identifying and assessing the risk of material misstatement and determining the nature, timing and extent of further audit procedures.

It was considered inappropriate to determine materiality based on Company profit before tax as the primary focus of the Company is the overall performance of investments held which includes a significant asset revaluation component. In addition, profit is not a key metric reported upon by the Company, with the ability to make dividend payments not limited by the profitability of the Company in any particular period.

We believe that total equity provides us with an appropriate basis for audit materiality as net asset value is a key published performance measure and is a key metric used by management in assessing and reporting on the overall performance of the Company.

During the course of our audit, we reassessed initial materiality and noted no factors leading us to amend materiality levels from those originally determined at the audit planning stage.

Performance materiality

This refers to the application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Company’s overall control environment, our judgement was that performance materiality was 75% (2014: 75%) of our planning materiality, namely US$940k (2014: US$968k). We have set performance materiality at this percentage due to investment strategy remaining consistent with our previous experience and limited identification of audit findings in previous periods.

Reporting threshold

An amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of US$63k (2014: US$65k), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Respective responsibilities of directors and auditor

As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report is made solely to the Company’s members, as a body, in accordance with Section 262 of the Companies (Guernsey) Law 2008. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Matters on which we are required to report by exception

ISAs (UK and Ireland) reporting	We are required to report to you if, in our opinion, financial and non-financial information in the annual report is: · materially inconsistent with the information in the audited financial statements; or · apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Company acquired in the course of performing our audit; or · otherwise misleading. In particular, we are required to report whether we have identified any inconsistencies between our knowledge acquired in the course of performing the audit and the directors’ statement that they consider the annual report and accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the entity’s performance, business model and strategy; and whether the annual report appropriately addresses those matters that we communicated to the audit committee that we consider should have been disclosed.	We have no exceptions to report.
Companies (Guernsey) Law 2008 reporting	We are required to report to you if, in our opinion: · proper accounting records have not been kept; or · the financial statements are not in agreement with the accounting records; or · we have not received all the information and explanations we require for our audit.	We have no exceptions to report.
Listing Rules review requirements	We are required to review: · The directors’ statement in relation to going concern and longer-term viability, set out in the Strategic Report and Directors’ Report; and · the part of the Corporate Governance Statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.	We have no exceptions to report.

Statement on the Directors’ Assessment of the Principal Risks that Would Threaten the Solvency or Liquidity of the Entity

ISAs (UK and Ireland) reporting

We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to:

·              the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;

·              the disclosures in the annual report that describe those risks and explain how they are being managed or mitigated;

·              the directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and

·              the directors’ explanation in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

We have nothing material to add or to draw attention to.

Christopher James Matthews, FCA

for and on behalf of Ernst & Young LLP

Guernsey, Channel Islands

21 April 2016

Notes:

1. The maintenance and integrity of the Company website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

2. Legislation in the Guernsey governing the preparation and dissemination of group financial statements may differ from legislation in other jurisdictions.

STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December, 2015

		Revenue 01.01.2015 to 31.12.2015	Capital 01.01.2015 to 31.12.2015	Total 01.01.2015 to 31.12.2015	Revenue 01.01.2014 to 31.12.2014	Capital 01.01.2014 to 31.12.2014	Total 01.01.2014 to 31.12.2014


Notes		In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars

	Investment income	1,334,322	-	1,334,322	1,104,378	-	1,104,378
	Interest income	108,112	-	108,112	23,738	-	23,738
	Foreign exchange movements	471,537	(247,561)	223,976	1,275,048	(4,364,984)	(3,089,936)
6	(Loss)/gain on financial assets at fair value through profit or loss	-	(2,189,023)	(2,189,023)	-	16,037,689	16,037,689


	Total income	1,913,971	(2,436,584)	(522,613)	2,403,164	11,672,705	14,075,869


4	Management fee	(1,744,965)	-	(1,744,965)	(1,827,971)	-	(1,827,971)
5	Other expenses	(1,128,764)	-	(1,128,764)	(1,147,024)	-	(1,147,024)
	Transaction costs	-	(230,445)	(230,445)	-	(397,717)	(397,717)


	Total expenses	(2,873,729)	(230,445)	(3,104,174)	(2,974,995)	(397,717)	(3,372,712)



	(Loss)/gain for the year before tax	(959,758)	(2,667,029)	(3,626,787)	(571,831)	11,274,988	10,703,157

3	Withholding tax	(499,671)	-	(499,671)	(227,663)	-	(227,663)


	(Loss)/gain for the year after tax	(1,459,429)	(2,667,029)	(4,126,458)	(799,494)	11,274,988	10,475,494



	(Loss)/gain for the year	(1,459,429)	(2,667,029)	(4,126,458)	(799,494)	11,274,988	10,475,494


2	(Loss)/gain per Ordinary Share -
	Basic & Diluted (in Cents)	(1.58)	(2.88)	(4.46)	(0.85)	12.06	11.21

The “Total” column of this statement represents the Company’s Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary ‘Revenue’ and ‘Capital’ columns are both prepared under guidance published by the Association of Investment Companies. There was no comprehensive income other than the (loss)/gain for the year.

All items in the above statement derive from continuing operations.

The notes form an integral part of the Financial Statements.

STATEMENT OF FINANCIAL POSITION

as at 31 December, 2015

		31.12.2015	31.12.2014
Notes		In U.S. Dollars	In U.S. Dollars
	Non-current assets
6	Financial assets at fair value through profit or loss	106,417,543	124,002,050

	Current assets
7	Receivables	399,051	749,055
	Cash and cash equivalents	19,009,538	5,404,636


	Total current assets	19,408,589	6,153,691
	Current liabilities
8	Payables	529,153	732,304


	Net current assets	18,879,436	5,421,387


	Net assets	125,296,979	129,423,437



	Equity
9	Stated capital	92,452	92,452
9	Redemption reserve	85,533,077	85,533,077
9	Capital redemption reserve	323,057	323,057
	Other reserves	39,348,393	43,474,851


	Total equity	125,296,979	129,423,437



	Ordinary Shares in issue	92,452,602	92,452,602


2	Net Asset Value per Ordinary Share (in cents)	135.53	139.99

The Financial Statements were approved by the Board of Directors on 21 April, 2016 and signed on its behalf by:

John Hawkins

Chairman

Richard Battey

Director

The notes form an integral part of the Financial Statements.

STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December, 2015

	Share Capital Account	Capital Redemption Reserve	Redemption Reserve	Revenue Reserve	Capital Reserve/ Realised	Capital Reserve/ Unrealised	Capital Reserve/ Exchange Differences	Total


	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars
Balances at 1 January, 2015	92,452	323,057	85,533,077	(14,905,590)	53,873,130	9,116,533	(4,609,222)	129,423,437

Total comprehensive income/(expense) for the period
(Loss)/gain for the period after tax	-	-	-	(1,459,429)	13,522,675	(15,942,143)	(247,561)	(4,126,458)


Balances at 31 December, 2015	92,452	323,057	85,533,077	(16,365,019)	67,395,805	(6,825,610)	(4,856,783)	125,296,979


	Share Capital Account	Capital Redemption Reserve	Redemption Reserve	Revenue Reserve	Capital Reserve/ Realised	Capital Reserve/ Unrealised	Capital Reserve/ Exchange Differences	Total


	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars
Balances at 1 January, 2014	94,878	320,631	88,197,203	(14,106,096)	49,738,831	(2,389,140)	(244,238)	121,612,069

Total comprehensive income/(expense) for the period
(Loss)/gain for the period after tax	-	-	-	(799,494)	4,134,299	11,505,673	(4,364,984)	10,475,494
Capital activities
Repurchase of shares	(2,426)	2,426	(2,664,126)	-	-	-	-	(2,664,126)


Balances at 31 December, 2014	92,452	323,057	85,533,077	(14,905,590)	53,873,130	9,116,533	(4,609,222)	129,423,437

The notes form an integral part of the Financial Statements.

STATEMENT OF CASH FLOWS

for the year ended 31 December, 2015

			01.01.2015 to 31.12.2015	01.01.2014 to 31.12.2014

Notes			In U.S. Dollars	In U.S. Dollars

		Cash flows from operating activities
10		Net cash (outflow)/inflow from operating activities	(2,917,932)	965,387
		Interest received	108,112	23,738
		Dividends received	1,253,596	1,280,553


		Net cash (outflow)/inflow from operating activities	(1,556,224)	2,269,678



		Cash flows from investing activities
		Purchase of investments	(70,769,961)	(105,284,182)


		Sale of investments	86,178,648	94,138,526



		Net cash inflow/(outflow) from investing activities	15,408,687	(11,145,656)



		Net cash inflow/(outflow) before financing activities	13,852,463	(8,875,978)

		Cash flows from financing activities

9		Repurchase of shares	-	(2,664,126)


		Net cash outflow from financing activities	-	(2,664,126)



		Increase/(decrease) in cash and cash equivalents	13,852,463	(11,540,104)



		Reconciliation of net cash flow to
		movement in net funds

		Net cash inflow/(outflow)	13,852,463	(11,540,104)

		Effects of foreign exchange rate changes	(247,561)	(4,364,984)

		Cash and cash equivalents at beginning of the year	5,404,636	21,309,724



		Cash and cash equivalents at end of the year	19,009,538	5,404,636

	Supplemental disclosure of non-cash financing activities:
	In specie purchase of Tri-Stage shares		(13,198,993)	-
	In specie purchase in Prospect Co. Ltd Shares		(25,456,088)	-
	In specie sale of Linkup KK Loan		13,198,993	-
	In specie sale of Prospect Co. Ltd Bond		25,456,088	-

The notes form an integral part of the Financial Statements.

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December, 2015

Note 1 Principal Accounting Policies

The following accounting policies have been applied consistently in dealing with items which are considered to be material in relation to the Company's Financial Statements:

Basis of preparation

The Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and are in compliance with The Companies (Guernsey) Law, 2008. The Financial Statements have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss.

Presentation of information

Where presentational guidance set out in the Statement of Recommended Practice (“SORP”) for Investment Companies issued by the Association of Investment Companies (“AIC”) in November 2014 is consistent with the requirements of IFRS, the Directors have sought to prepare the Financial Statements on a basis compliant with the SORP. Supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented within the Statement of Comprehensive Income.

Standards, amendments and interpretations effective during the year

The following amendments were applicable for the first time this year but had no impact on the financial position or performance of the Company.

- IFRS 8 (Amendments) – Operating Segments (effective 1 July, 2014)

- IFRS 13 (Amendments) – Fair Value Measurement (effective 1 July, 2014)

- IAS 24 (Amendments) – Related Party Disclosures (effective 1 July, 2014)

Interpretations which are relevant to the Financial Statements are discussed below. The remaining interpretations are not considered to be applicable to the Financial Statements.

IFRS 13, Fair Value Measurement

The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (or IAS 39, as applicable).

Standards, amendments and interpretations issued but not yet effective

- IFRS 9 Financial Instruments – (effective 1 January, 2018)

- IFRS 10 (Amendments) - Consolidated Financial Statements (effective 1 January, 2016)

- IFRS 12 (Amendments) - Disclosure of Interests in Other Entities (effective 1 January, 2016)

- IAS 1 (Amendments) – Disclosure Initiative (effective 1 January, 2016)

- IAS 27 (Amendments) - Separate Financial Statements (effective 1 January, 2016)

- IAS 28 (Amendments) – Investments in Associates and Joint Ventures (effective 1 January, 2016)

- IAS 34 – Interim Financial Reporting (Disclosure of information elsewhere in the interim accounts) (Annual improvements process)

Investment Entities, Applying the Consolidation Exception

Narrow-scope amendments to IFRS 10, IFRS 12 and IAS 28 introduce clarifications to the requirements when accounting for investment entities. The amendments also provide relief in particular circumstances, which will reduce the costs of applying the Standards.

IFRS 9, Financial Instruments

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before 1 February, 2015. The adoption of IFRS 9 will not have an effect on the classification and measurement of the Company’s financial assets, or financial liabilities.

There are no other standards, amendments or interpretations that are not yet effective that would be expected to have a material impact on the Company.

The Board anticipate that the adoption of these standards and interpretations in a future period, once they are effective, will not have a material impact on the Financial Statements of the Company.

Assessment as investment entity

Entities that meet the definition of an investment entity within IFRS 10 are required to measure their subsidiaries, at fair value through profit or loss rather than consolidate them. The criteria which define an investment entity are, as follows:

· An entity that obtains funds from one or more investors for the purpose of providing those investors with investment services;

· An entity that commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both; and

· An entity that measures and evaluates the performance of substantially all of its investments on a fair value basis.

The Company meets the criteria as follows:

The Company provides investment management services and has a number of investors who pool their funds to gain access to these services and investment opportunities that they might not have had access to individually. The Company, being listed on the London Stock Exchange, obtains funding from a diverse group of external shareholders. The Company’s objective is consistent with that of an investment entity. The Company has the intention to realise the constituents of each of its investment classes.

The Company measures and evaluates the performance of substantially all of its investments on a fair value basis. The fair value method is used to represent the Company’s performance in its communication to the market. In addition, the Company reports fair value information internally to Directors, who use fair value as a significant measurement attribute to evaluate the performance of its investments and to make investment decisions for mature investments.

The Board has also concluded that the Company meets the additional characteristics of an investment entity, in that it has more than one investment; the investments are predominantly in the form of equities and similar securities; it has more than one investor and its investors are not related parties.

Significant accounting judgements and estimates

The preparation of the Financial Statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense and disclosure of contingent assets. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.

Going concern

In accordance with the Company’s Articles, the Board is required every three years to include in the business to be considered by shareholders at the Annual General Meeting a Special Resolution that the Company should be wound up. This resolution requires 75% of votes in favour for it to be passed. The next such resolution will be tabled at the Annual General Meeting to be held in 2017. The last such resolution was tabled at the eighteenth Annual General Meeting held in 2014. The Shareholders voted against the resolution, and in favour of the continuation of the Company. Based on this vote and the fact that the assets of the Company consist mainly of securities that are readily realisable, whilst the Directors acknowledge that the liquidity of these assets needs to be managed, the Directors believe that the Company has adequate financial resources to meet its liabilities as they fall due in the foreseeable future and at least twelve months from the date of this report, and that it is appropriate for the Financial Statements to be prepared on a going concern basis.

Share Capital

The Company holds a continuation vote every three years, however as there is only one class of share in issue they continue to be presented as equity in accordance with IAS 32 – “Financial Instruments: Disclosure and presentation”.

Fair value of securities not quoted in an active market

In the process of applying the Company’s accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the financial statements:

The Company carries its investments at fair value, with changes in value being recognised in the Statement of Comprehensive Income. In cases of unlisted investments where prices of investments are not quoted in an active market, estimates are based on available traded prices, comparisons with the valuations of comparable instruments or by using valuation techniques, such as the Black Scholes model. The carrying amounts of the instruments approximate fair value.

The Investment Manager exercises judgement on the valuation of unlisted investments. Further details on the valuation techniques applied to level 3 investments can be found in Note 14 of the Financial Statements.

Financial instruments

Financial assets and financial liabilities are recognised in the Company's Statement of Financial Position when the Company becomes a party to the contractual provisions of the instrument. Financial assets and liabilities, other than those shown at fair value through profit or loss, are measured at amortised cost using the effective interest rate method.

Derivatives

The Stock Acquisition Rights are treated as a derivative and as such is recognised at fair value on the date on which they are entered into and subsequently re-measured at their fair value. Fair value is determined by utilising appropriate valuation techniques, namely the Black-Scholes-Merton model. The gain or loss on re-measurement to fair value is recognised immediately through profit or loss in the Statement of Comprehensive Income within net gain/loss on financial assets at fair value through profit or loss in the period in which they arise.

Financial assets at fair value through profit or loss (“investments”)

All “regular way” purchases and sales of investments are recognised on the trade date, that is the date on which the Company commits to purchase or sell the investment). "Regular way" purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place.

All of the Company's investments are recorded at fair value through profit or loss at the time of acquisition. Investments are initially recognised at fair value, normally being the cost incurred in their acquisition. Any transaction costs are expensed in the Statement of Comprehensive Income. After initial recognition, investments are measured at fair value. Gains and losses arising from changes in fair value are presented in the Statement of Comprehensive Income in the period in which they arise.

Investments are designated at fair value through profit or loss at inception because they are managed and their performance evaluated on a fair value basis and information thereon is evaluated by the management of the Company on a fair value basis.

Other financial instruments

For other financial instruments, including other receivables and other payables, the carrying amounts as shown in the Statement of Financial Position approximate to fair values due to the short term nature of these financial instruments.

Fair value

The Company’s investments consist of equity and equity-related investments in smaller companies in Japan and unlisted stock acquisition right and corporate bonds.

Listed investments held at the statement of financial position date are valued at bid prices quoted on the principal stock exchange on which the investments are traded. Gains and losses arising from changes in fair value are presented in the Statement of Comprehensive Income in the period in which they arise.

Unlisted investments are valued at the Directors' estimate of their fair value in accordance with the requirements of IFRS 13 'Fair Value Measurement’. The Directors’ estimates are based on available price data, comparisons with the valuations of comparable corporate bonds or by using appropriate valuation techniques, such as the Black Scholes Merton model.

Derecognition of financial instruments

A financial asset is derecognised when the Company has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

A financial liability is derecognised when the obligation under the liability is discharged or cancelled.

Income

Income arising on the investments is recognised when the right to receive it has been met and is recorded gross of withholding tax. Bank interest is accounted for on an accruals basis.

Expenses

Expenses are accounted for on an accruals basis. Expenses incurred on the acquisition of investments at fair value through profit or loss are charged to the Statement of Comprehensive Income in capital. All other expenses are charged to the Statement of Comprehensive Income in revenue.

Cash and cash equivalents

Cash and cash equivalents are defined as cash in hand, demand deposits and highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of change in value. Cash and cash equivalents at the year end constituted demand deposits.

Capital reserves

Gains and losses recorded on the realisation of investments and realised exchange differences of a capital nature are transferred to the realised capital reserve. Unrealised gains and losses recorded on the revaluation of investments held at a period end and unrealised exchange differences of a capital nature are transferred to the unrealised capital reserve.

Foreign currencies

(i) Functional and presentation currency

The Company’s shares are denominated in United States Dollars and accordingly the Board have determined that the Company’s functional and presentation currency is United States Dollars, despite the fact that the investments are in Japanese Yen.

(ii) Foreign currency transactions

Monetary assets and liabilities and investments at fair value through profit or loss are translated into United States Dollars at the rate of exchange ruling at the Statement of Financial Position date. Investment transactions and income and expenditure items are translated at the rate of exchange ruling at the date of the transactions. Gains and losses on foreign exchange are included in the Statement of Comprehensive Income.

Note 2 (Loss)/gain per Ordinary Share - Basic and Diluted and Net Asset Value per Ordinary Share - Basic and Diluted

The (loss)/gain per Ordinary Share - Basic and Diluted has been calculated based on the weighted average number of Ordinary Shares of 92,452,602 and a net loss of US$4,126,458 (2014: 93,521,466 Ordinary Shares and a net gain of US$10,475,494).

There were no dilutive elements to shares issued or repurchased during the year.

The Net Asset Value per Ordinary Share - Basic and Diluted has been calculated based on the number of shares in existence at the year end date of 92,452,602 (2014: 92,452,602) and shareholders' funds attributable to equity interests of US$125,296,979 (2014: US$129,423,437).

Note 3 Taxation

The Company has been granted Exempt Status under the terms of The Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in Guernsey. Its liability is an annual fee of £1,200 (2014: £600).

The amount disclosed as withholding tax in the Statement of Comprehensive Income relates solely to withholding tax suffered at source, on income in the investing country, Japan.

Note 4 Management Fees

The management fee is payable to the Manager, Prospect Asset Management (Channel Islands) (“PAM(CI)”), monthly in arrears at a rate of 1.5% per annum of the Net Asset Value, which is calculated as of the last business day of each month. Total management fees for the year amounted to US$1,744,965 (2014: US$1,827,971) of which US$155,954 (2014: US$140,024) is due and payable at the year end. The Management Agreement dated 1 December, 1994 remains in force until determined by the Company or by the Manager giving the other party not less than three months' notice in writing, subject to additional provisions included in the agreement regarding a breach by either party.

Note 5 Other Expenses

	01.01.2015 to 31.12.2015	01.01.2014 to 31.12.2014
	01.01.2015 to 31.12.2015	01.01.2014 to 31.12.2014
	In U.S. Dollars	In U.S. Dollars
Administration and secretarial fees*	290,827	304,662
Custodian's fees and charges**	105,482	125,556
General expenses	548,964	523,776
Directors' remuneration	116,723	138,280
Auditors' fees	46,133	38,000
Non-audit fees	20,635	16,750

	1,128,764	1,147,024

*The administration and secretarial fees are payable to Northern Trust International Fund Administration Services (Guernsey) Limited monthly in arrears at a rate of 0.25% of the Net Asset Value of the Company as at the last business day of the month. Total administration and secretarial fees for the year amounted to US$290,827 (2014: US$304,662) of which US$25,992 (2014: US$23,337) is due and payable at the year end.

** The custodian's fees and charges are payable to Northern Trust (Guernsey) Limited monthly in arrears at a rate of 0.08% of the value of the portfolio of the Company as at the last business day of the month. Total custodian's fees and charges for the year amounted to US$105,482 (2014: US$125,556) of which US$10,384 (2014: US$10,006) is due and payable at the year end.

Note 6 Financial Assets at Fair Value through Profit or Loss

	01.01.2015 to 31.12.2015	01.01.2014 to 31.12.2014
	01.01.2015 to 31.12.2015	01.01.2014 to 31.12.2014
	In U.S. Dollars	In U.S. Dollars

Opening book cost	114,885,517	101,576,898
Purchases at cost	109,096,236	103,729,025
Proceeds on sale	(124,491,720)	(94,952,422)
Realised gain on sale	13,753,120	4,532,016


Closing book cost	113,243,153	114,885,517


Unrealised (loss)/gain	(6,825,610)	9,116,533


Fair value	106,417,543	124,002,050

Note 7 Receivables

	31.12.2015 In U.S. Dollars	31.12.2014 In U.S. Dollars
	31.12.2015 In U.S. Dollars	31.12.2014 In U.S. Dollars
Amounts due from brokers	151,847	605,775
Dividends receivable	224,005	143,280
Other receivables	23,199	-


	399,051	749,055

Note 8 Payables

	31.12.2015 In U.S. Dollars	31.12.2014 In U.S. Dollars
	31.12.2015 In U.S. Dollars	31.12.2014 In U.S. Dollars

Amounts due to brokers	172,618	382,899
Other creditors	356,535	349,405


	529,153	732,304

Note 9 Share Capital, Redemption Reserve & Capital Redemption Reserve

Authorised Share Capital		31.12.2015 In U.S. Dollars	31.12.2014 In U.S. Dollars
Number of shares

150,000,000	Ordinary Shares of US$0.001 each	150,000	150,000


60,000,000	"C" Ordinary Shares of US$0.01 each	600,000	600,000

As approved at the AGM on 10 August, 2015, the Company may purchase a maximum of 13,858,645 Ordinary Shares, equivalent to 14.99% of the issued share capital of the Company as at the date of the AGM.

During the year, there were no repurchased or cancelled shares.

		Share Capital	Redemption Reserve	Capital Redemption Reserve

Ordinary Shares Number of shares
Ordinary Shares Number of shares		In U.S. Dollars	In U.S. Dollars	In U.S. Dollars
92,452,602	Balance at 1 January, 2015	92,452	85,533,077	323,057


92,452,602	Balance at 31 December, 2015	92,452	85,533,077	323,057

		Share Capital	Redemption Reserve	Capital Redemption Reserve

Ordinary Shares Number of shares
Ordinary Shares Number of shares		In U.S. Dollars	In U.S. Dollars	In U.S. Dollars
94,878,602	Balance at 1 January, 2014	94,878	88,197,203	320,631
	Shares repurchased and
(2,426,000)	cancelled during the year	(2,426)	(2,664,126)	2,426


92,452,602	Balance at 31 December, 2014	92,452	85,533,077	323,057

Other Reserves

The Redemption Reserve account is a distributable reserve account which can be used for, among other things, the payment of dividends, if any. The Directors do not recommend the payment of a dividend for the year.

The Capital Redemption Reserve is used to cancel the shares of the Company when they are redeemed or there is a share buyback.

Ordinary Shares carry the right to vote at general meetings of the Company and to receive dividends and, in a winding-up will participate in any surplus assets remaining after settlement of any outstanding liabilities of the Company.

“C” Ordinary Shares do not carry the right to attend or to vote at general meetings of the Company or to receive dividends and, in a winding up will participate in any “C” Ordinary Share surplus assets remaining after the settlement of any outstanding liabilities of the Company. There were no “C” Ordinary Shares in issue during the year (2014: Nil).

Note 10 Reconciliation of Deficit on Ordinary Activities to Net Cash (Outflow)/Inflow from Operating Activities

	31.12.2015	31.12.2014
	In U.S. Dollars	In U.S. Dollars
Revenue loss on ordinary activities for the year	(1,459,429)	(799,494)
Adjusted for:
Interest received	(108,112)	(23,738)
Dividends received	(1,253,596)	(1,280,553)
(Increase)/decrease in dividends receivable and other receivables	(103,925)	3,018,902
Increase in other creditors	7,130	50,270


Net cash (outflow)/inflow from operating activities	(2,917,932)	965,387

Note 11 Analysis of Financial Assets and Liabilities by Measurement Basis

	Investments at fair value	Net Current assets	Total
	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars
As at 31 December, 2015

Financial assets
Investments at fair value through profit or loss	106,417,543	-	106,417,543
Cash and cash equivalents	-	19,009,538	19,009,538
Receivables	-	399,051	399,051
	106,417,543	19,408,589	125,826,132
Financial liabilities
Payables	-	529,153	529,153
	-	529,153	529,153


	Investments at fair value	Net Current assets	Total
	In U.S. Dollars	In U.S. Dollars	In U.S. Dollars
As at 31 December, 2014

Financial assets
Investments at fair value through profit or loss	124,002,050	-	124,002,050
Cash and cash equivalents	-	5,404,636	5,404,636
Receivables	-	749,055	749,055
	124,002,050	6,153,691	130,155,741
Financial liabilities
Payables	-	732,304	732,304
	-	732,304	732,304

Note 12 Related Party Transactions

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.

The Directors are responsible for the determination of the investment policy of the Company and have overall responsibility for the Company's activities. The Company’s investment portfolio is managed by PAM(CI) (the “Manager”) whose parent company is Prospect Co., Ltd (Kabushiki Kaisha Prospect (“KKP”), a Japanese Company).

Mr Rupert Evans is a Director of the Manager.

Directors’ fees are disclosed in Note 5. The basic fee payable to Directors in 2015 is £25,000 (2014: £20,000), the Chairman of the Audit Committee £27,500 (2014: £22,500) and the Chairman of the Board £30,000 (2014: £25,000) per annum. At 31 December, 2015, £20,625 (2014: £16,875) of the fee remained payable.

No Directors holding office at 31 December, 2015, or their associates, had any beneficial interest in the Company's shares. There have been no changes in these interests between the end of the period and up to the date of this report.

Mr. Curtis Freeze is a Director of PAM(CI), the Manager of The Prospect Japan Fund Limited, and is the President of Prospect Co. Ltd., the owner of PAMI, the Investment Advisor to The Prospect Japan Fund Limited and PAM(CI), the Manager of The Prospect Japan Fund Limited.

Management fees are disclosed in Note 4.

During the year the Company purchased SARs in Prospect Co. Ltd, the value of which is disclosed in Note 14 under Unlisted investments.

Note 13 Financial Risk Management Objectives and Policies

Financial instruments

In accordance with its investment objectives and policies, the Company holds financial instruments which at any one time may comprise the following:

* securities held in accordance with the investment objectives and policies

* cash and short-term debtors and creditors arising directly from operations

* borrowing used to finance investment activity

* derivative transactions including investment in warrants and forward currency contracts

* options or futures for hedging purposes

The financial instruments held by the Company principally comprise equities listed on the stock market in Japan. The specific risks arising from the Company's exposure to these instruments, and the Manager/Investment Advisor's policies for managing these risks, which have been applied throughout the year, are summarised below.

Market price risk

The Company's investment portfolio - particularly its equity investments - is exposed to market price fluctuations, which are monitored by the Manager/Investment Advisor in pursuance of the investment objectives and policies.

Exceptional risks associated with investment in Japanese smaller companies may include:

a) greater price volatility, substantially less liquidity and significantly smaller market capitalisation, and

b) more substantial government intervention in the economy, including restrictions on investing in companies or in industries deemed sensitive to relevant national interests.

Market price sensitivity analysis

The sensitivity of the Company to market price risk can be approximated by measuring the impact that a movement in the MSCI Japan Small Cap Index would have on the percentage of funds invested. The MSCI Developed Markets Small Cap Indices offer an exhaustive representation of the size segment by targeting companies that are in the Investable Market Index but not in the Standard Index in a particular developed market. The indices include Value and Growth style indices and industry indices based on the Global Industry Classification Standard. The MSCI Japan Small Cap Index provides an indicator of the effect of market price risk on the Company's portfolio since its characteristics with respect to average market capitalisation more closely resemble the investment strategy pursued by the Company. However, the Company's investments do not reflect the full array of companies on the index. At 31 December, 2015, using a beta of 0.485 (2014:0.381), a 1% positive/negative movement in the index would produce a positive/negative movement in the investments of the Company of US$516,125 (2014:US$472,448) for equity related securities. This relationship between the movement in the value of the assets of the Company and the Index is of a linear nature.

A 1% increase/decrease in the value of the SARs would impact the NAV by US$23,914.

Foreign currency risk

The Company principally invests in securities denominated in Japanese Yen rather than United States Dollars, the functional currency of the Company. Therefore, the Statement of Financial Position may be affected by movements in the exchange rates of such currencies against the US Dollar. The Manager/Investment Advisor has the power to manage exposure to currency movements by using forward currency contracts. The Company was not party to any such instruments at the statement of financial position date in either the current or prior year.

It is not the present intention of the Directors to hedge the currency exposure of the Company, but the Directors reserve the right to do so in the future if they consider this to be desirable.

The treatment of currency transactions other than in US Dollars is set out in Note 1 to the Financial Statements under "Foreign Currencies”.

The Company's currency exposure is as follows:

	31.12.2015	31.12.2014
	In US Dollars	In US Dollars
Investments
Japanese Yen (¥12,815,864,703; 2014:¥14,258,762,107)	106,417,543	119,320,185



	106,417,543	119,320,185

Other (Liabilities)/Assets
US Dollars	(188,836)	(199,947)
Sterling (£74,287, 2014:£80,232)	(110,095)	(124,683)
Japanese Yen (¥2,309,650,737; 2014:¥686,649,031)	19,178,367	5,746,017


	18,879,436	5,421,387

The below details the Company's sensitivity to a 10% (31 December, 2014: 10%) change in Japanese Yen exchange rates against the US Dollar.

	31.12.2015	31.12.2014
	In US Dollars	In US Dollars
Impact on Statement of Comprehensive Income and Equity in response to a
- 10% increase in the US Dollar against other currencies	12,548,581	(11,382,120)


- 10% decrease in the US Dollar against other currencies	(12,548,581)	13,908,709

Interest rate risk

The Company may invest in fixed and floating rate securities. The income of the Company may be affected by changes to interest rates relevant to particular securities or as a result of the Manager/Investment Advisor being unable to secure similar returns on the expiry of contracts or sale of securities.

Interest receivable on bank deposits or payable on bank overdraft positions will be affected by fluctuations in interest rates, however the value of the underlying cash positions will not be affected.

The direct effect of movements in interest rates are not material on cash and cash equivalents as the Company predominantly keeps its surplus cash in Japanese Yen on which it does not earn interest.

If the risk-free rate of return increased/decreased by 0.5%, the impact on the net asset value and the profit and loss for the year would be a decrease/increase of US$95,686 (2014: US$614,132 with a 1% increase/decrease).

Short term debtors and creditors

Trade and other receivables and creditors do not carry interest and are short term in nature. They are stated at nominal value as reduced by appropriate allowances for irrecoverable amounts in the case of receivables.

Liquidity risk

Liquidity risk is the risk that the Company may encounter in realising assets or otherwise raising funds to meet financial commitments.

The Company invests primarily in listed securities. The tables below analyse liquidity of the Company's securities based on trading volumes in the period after the statement of financial position date and maturity of other financial assets and liabilities. Although market values are low in comparison to the Company’s shareholding for some securities, there is sufficient volume to demonstrate an active market.

The Investment Manager considers expected cash flows from financial assets in assessing and managing liquidity risk, in particular its cash resources and trade receivables. Cash flows from trade and other receivables are all contractually due within twelve months. Liquidity risk is not deemed to be significant.

As at 31 December, 2015

	Up to 1 week	1 week to 1 month	1-6 months	6-12 months	Greater than 12 months	Total
	In US Dollars	In US Dollars	In US Dollars	In US Dollars	In US Dollars	In US Dollars

Financial assets
Financial assets at fair
value through profit or loss	16,158,458	33,525,242	47,088,648	4,841,226	4,803,969	106,417,543
Dividends receivable	-	-	224,005	-	-	224,005
Other receivables	-	-	23,199	-	-	23,199
Cash and cash equivalents	19,009,538	-	-	-	-	19,009,538
Securities sold receivable	151,847	-	-	-	-	151,847

Financial liabilities
Amounts due to brokers	(172,618)	-	-	-	-	(172,618)
Other creditors	-	(299,113)	(57,422)	-	-	(356,535)

Total	35,147,225	33,226,129	47,278,430	4,841,226	4,803,969	125,296,979

As at 31 December, 2014

	Up to 1 week	1 week to 1 month	1-6 months	6-12 months	Greater than 12 months	Total
	In US Dollars	In US Dollars	In US Dollars	In US Dollars	In US Dollars	In US Dollars

Financial assets
Financial assets at fair
value through profit or loss	27,270,006	24,387,570	16,340,361	-	56,004,113	124,002,050
Dividends receivable	-	-	143,279	-	-	143,279
Cash and cash equivalents	5,404,636	-	-	-	-	5,404,636
Securities sold receivable	605,776	-	-	-	-	605,776
						-
Financial liabilities						-
Amounts due to brokers	(382,899)	-	-	-	-	(382,899)
Other creditors	(29,695)	(253,367)	(66,343)	-	-	(349,405)

Total	32,867,824	24,134,203	16,417,297	-	56,004,113	129,423,437

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Company. The Company's principal sources of credit risk arise on amounts due from brokers for settlement of outstanding investment transactions, dividends and interest receivable, corporate bonds and cash and cash equivalents.

The Company utilises 18 executing brokers setting allocation targets for each broker so as to not to place excessive concentration in any one counterparty.

The Investment Advisor performs a quarterly review of executing brokers as part of its “Best Execution” analysis, which is part of the advisor’s compliance program. The investment team reviews the quality of broker research, execution and service, and sets targets for each broker based on the brokers’ overall performance.

Currently all cash is placed with Northern Trust (Guernsey) Limited (“NTGL”). NTGL is also custodian of the majority of the Company's investments. NTGL is a wholly owned subsidiary of The Northern Trust Corporation (“TNTC”). TNTC is publicly traded and a constituent of the S&P 500. TNTC has a credit rating of A+.

All transactions in listed securities are settled/paid upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet their obligation.

When purchasing unlisted securities including over-the-counter bonds, the Investment Advisor prepares an evaluation on the company issuing these securities and monitors and reviews the Company's quality and performance over time. These unlisted investments are issued by the companies themselves and by their nature are either not rated or have a higher credit rating.

It is the opinion of the Board of Directors that the carrying amounts of these financial assets, excluding equities, represent the maximum credit risk exposure as at the statement of financial position date.

The Company’s maximum credit exposure is limited to the carrying amount of unlisted investment and financial assets recognised as at the statement of financial position date including bank balances, Level 3 investments, illiquid investments and other receivables with a possible risk of no recovery:

	31.12.2015	31.12.2014
	In US Dollars	In US Dollars
Unlisted investments	2,518,957	56,008,526
Cash and cash equivalents	19,009,538	5,404,636
Receivables	399,051	749,055
	21,927,546	62,162,217

Capital management

The Company is a close-ended investment company, and thus has a fixed capital. The Company's capital is represented by Ordinary Shares and each share carries one vote. Each share has an entitlement to dividends if declared.

As approved at the AGM on 10 August, 2015, the Company may purchase a maximum of 13,858,645 Ordinary Shares, equivalent to 14.99% of the issued share capital of the Company as at the date of the AGM provided that;

• the minimum price to be paid (exclusive of expenses) is US$0.001;

• the maximum price to be paid (exclusive of expenses) is 105% of the average mid-market valuation for five days preceding the purchase; and

• if the shares are trading on the London Stock Exchange, at a discount to the lower of the undiluted or diluted Net Asset Value;

The Company has not purchased any shares during the year to 31 December, 2015.

The Board also considers from time to time whether it may be appropriate to raise new capital by a further issue of shares. The raising of new capital would however be dependent on there being genuine market demand.

The Company is not subject to externally imposed capital requirements.

Note 14 Fair Value

Financial assets at fair value through profit or loss are carried at fair value. The valuation techniques for valuing unlisted investments are described below. Other assets and liabilities are carried at cost which approximates fair value.

IFRS 13 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

(i) in the principal market for the asset or liability, or

(ii) in the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible by the Company.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All financial instruments for which fair value is recognised or disclosed are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 — Quoted market prices (unadjusted) in an active market for identical assets or liabilities

Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable

Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For financial instruments that are recognised at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation, based on the lowest level input that is significant to the fair value measurement as a whole, at the end of each reporting period.

The following table analyses within the fair value hierarchy the Company’s financial assets and liabilities (by class) measured at fair value for the year ended 31 December, 2015.

	Level 1	Level 2	Level 3	Total
	In US Dollars	In US Dollars	In US Dollars	In US Dollars

Financial assets at fair value
through profit or loss:
-Equity Securities	103,898,586	-	-	103,898,586
-Derivative Instruments	-	-	2,391,431	2,391,431
-Debt Securities
Corporate bonds	-	-	127,526	127,526


Total as at 31 December, 2015	103,898,586	-	2,518,957	106,417,543

The following table presents the movement in level 3 instruments for the year ended 31 December, 2015 by class of Financial Instrument.

	Debt Securities	Derivative Securities
	Debt Securities	Derivative Securities	Total
	In US Dollars	In US Dollars	In US Dollars
Opening balance	56,008,526	-	56,008,526
Purchases	18,641,413	2,371,249	21,012,662
Sales	(52,378,965)	-	(52,378,965)
Realised gains during the year	3,131,464	-	3,131,464
Unrealised losses during the year	(25,274,912)	20,182	(25,254,730)


Closing balance	127,526	2,391,431	2,518,957

Net unrealised loss for the year included in the Statement of Comprehensive Income	127,526	20,182	147,708

There were no transfers between levels for the year ended 31 December, 2015.

The following table analyses, within the fair value hierarchy, the Company’s financial assets and liabilities (by class) measured at fair value for the year ended 31 December, 2014 as required by IFRS 7.

	Level 1	Level 2	Level 3	Total
	In US Dollars	In US Dollars	In US Dollars	In US Dollars
Assets
Financial assets at fair value
through profit and loss:
-Equity Securities	67,993,524	-	-	67,993,524
-Debt Securities
-Corporate bonds	-	-	56,008,526	56,008,526

Total assets as at 31 December, 2014
Total assets as at 31 December, 2014	67,993,524	-	56,008,526	124,002,050

The following table presents the movement in level 3 instruments for the year ended 31 December, 2014 by class of Financial Instrument.

	Debt Securities
	Debt Securities	Total
	In US Dollars	In US Dollars
Opening balance	15,113,042	15,113,042
Purchases	25,456,088	25,456,088
Sales	(9,166,872)	(9,166,872)
Realised losses during the year	(494,679)	(494,679)
Unrealised gains during the year	25,100,947	25,100,947


Closing balance	56,008,526	56,008,526

Net unrealised gain for the year included in the Statement of Comprehensive Income for level 3 Investments held at 31 December, 2014	25,100,947	25,100,947

There were no transfers between levels for the year ended 31 December, 2014.

Valuation techniques

Listed investments

Securities valued based on quoted market prices, in an active market for identical assets without any adjustments, are included within Level 1 of the hierarchy and are valued at bid price.

Unlisted investments

The Company invests in debt securities which are not quoted in an active market. Transactions in such investments do not occur on a regular basis. These positions are valued at the Directors’ estimate of their fair value in accordance with IFRS 13.

Level 3 valuations are monitored closely by the Investment Manager who reports to the Board of Directors on a quarterly basis. Valuations are based on the most appropriate method for each level 3 investment as described below.

As at 31 December, 2015, the Company holds stock acquisition rights (“SARs”) in Prospect Co. Ltd. In accordance with IFRS 13, the Directors have undertaken their responsibility to approximate a fair value of this level 3 investment by way of utilising the Black-Scholes-Merton model. The model uses both observable and non-observable inputs. The observable input is the underlying price of Prospect Co. Ltd (¥51.5). The significant unobservable inputs are the exercise period (21 December, 2015 to 20 December, 2020), the strike price of the SAR (¥54), the risk free rate (0.00%), the dividend yield (1.96%), the shares received for each right exercised (100,000), the expiry date (20 December, 2020),and the volatility rate used (15.7%), which was the implied rate of volatility having removed the peaks created by the previous convertible bond and adjusted for the dilution impact of the SARs issue on Prospect Co. Ltd. Using this model with the implied rate resulted in an uplift of US$490,243 in the valuation of the SARs which the Directors believed to be immaterially different to the cost price of the SARs. Therefore the Directors believe the cost price of the SARs to approximate fair value and is the value used in these financial statements.

As at 31 December, 2014, the Company held a bond in Taiheiyo Jisho (GK) a Japanese partnership set up to invest in real estate ventures at a fixed interest rate of 10%. Taiheiyo Jisho invested in SCD ML II, LLC, which was developing a project on the island of Hawaii. The project ran behind target and SCD ML II, LLC issued a revised completion date. As such, there was doubt that they would be able to pay all the interest on the bond on maturity. Due to the increased credit risk as a result of the non- performance of the bond, the Directors believed that this resulted in a reduction in the fair value. The value of the bond was therefore written down by US$2 million to US$4.7 million in the Financial Statements. The unobservable input used in arriving at this valuation was the discount rate and estimated repayment date which was dependent on the pace of progress of the project. The bond was settled in 2015.

During the year the Company issued two tranches of loans to Linkup KK for a total consideration of US$18.6 million. The first tranche matured on 1 July, 2015 for a value of US$9.2 million. Linkup KK defaulted on the second tranche, and following legal action the Company took the collateral shares in Tri-stage as payment on the loan. The market value of the Tri-stage shares at this time was US$13.2 million, realising a gain of US$3.5 million on the original loan.

As at 31 December, 2014, the Company held a convertible bond in Prospect Co. Ltd (formerly Gro-Bels). The bond was valued at the Directors’ estimate of its fair value in accordance with IFRS 13 using appropriate techniques. As the bond contained an embedded derivative, the Director’s believed that the valuation produced using the Black-Scholes model approximated fair value for accounting purposes. The model uses both observable and non-observable data. Observable inputs included the face value and coupon rate of the bond, the conversion period, the shares received for each bond converted and the maturity date. The significant unobservable input was the volatility rate used. Using the Black Scholes model to value the bond resulted in a US$26 million uplift in the valuation of the bond in the financial statements from the published NAV. A reconciliation of published to accounting NAV can be found in Note 17.

Note 15 Segmental Reporting

The Board is responsible for reviewing the Company’s entire portfolio and considers the business to have a single operating segment. The Board’s asset allocation decisions are based on a single, integrated investment strategy, and the Company’s performance is evaluated on an overall basis.

The Company invests in a diversified portfolio of Japanese investments. The total fair value of the financial instruments held by the Company and the equivalent percentages of the total value of the Company, are reported in the Portfolio Statement.

Revenue earned is reported separately on the face of the Statement of Comprehensive Income as investment income being dividend income received from equities, and interest income being interest earned from convertible and corporate bonds.

Note 16 Contingent Asset

The Company declined to tender its shares for Toho Real Estate, as the Company believed the true value to be considerably higher than that stated in the tender offer, and entered into an arbitration process. The Company has been involved in court proceedings with Toho Real Estate arising from the tender offer. In March 2015 the Company received notice from the court presiding over its petition that it had ruled in its favour. The court awarded the Company an aggregate amount of ¥121,600,000 (US$1.01 million). Although an improvement, this is still significantly discounted to the fair value of Toho Real Estate and as such, on 8 April, 2015 the Company filed an appeal against the ruling. Further information is given in Note 18.

With regard to Yukiguni Maitake, the Company believes that a tender offer was unfair and believes that the shares were artificially depressed due to poor management, which resulted in an accounting violation around the payment of dividends. The holding bank sold into the TOB and realised the collateral at what the Company believes to be an unfair price. Alix Partners Asia LLC and Nera Economic Consulting (“Nera”) were engaged to provide valuations, and Nera have provided a range of valuations however, the Company believes that it would be premature to utilise them at this time and believe a premium closer to 40% vs. the 18.7% paid would be in line with the market. Nera’s report was included in a brief and evidence submitted by the Company’s lawyers, and the court has appointed a technical advisor to the court. Yukiguni have until 9 May, 2016 to submit a rebuttal. The next court session is scheduled for 1 July, 2016.

Note 17 Reconciliation of Published Valuation to Audited Financial Statements Prepared under IFRS

	31.12.2015	31.12.2014
	In US Dollars	In US Dollars

Net assets per Financial Statements	125,296,979	129,423,437

Writeback of prior year uplift on Toho Real Estate (Note 16)	1,009,715	791,587
Buy back effective 30 December 2014 after valuation point	-	29,695
Adjustment in value of financial assets at fair value through profit and loss:
Godo Kaisha Taiheiyo Jisho (Note 14)	-	2,061,986
Prospect Co Ltd 2nd Series Unsecured Convertible Bond (Note 16)	-	(26,000,000)

Net assets per published valuation	126,306,694	106,306,705

NAV per share per Financial Statements (in cents)	135.53	139.99
NAV per share per published valuation (in cents)	136.62	114.99

Note 18 Subsequent Events

These Annual Report and Financial Statements were approved for issuance by the Board on 21 April, 2016. Subsequent events have been evaluated until this date.

On 1 February, 2016 the Company sent a circular to shareholders seeking approval to enter into an exercise agreement in relation to the SARs, and such approval was granted at the EGM on 24 February, 2016.

As referred to in Note 16, on 30 March, 2016 the Company announced that the Tokyo High Court had ruled that the tender offer price for Toho Real Estate amounted to fair value and eliminated a previous award of ¥121,600,000 to the Company. The Company has filed an appeal to this ruling.

GENERAL INFORMATION

General

The Company is a close-ended investment company incorporated in Guernsey in November, 1994 and was launched in December, 1994 with an initial asset value of US$70 million. There are 92,452,602 Ordinary Shares in issue as at 31 December, 2015. The Company's Ordinary Shares are listed on the Main Market of the London Stock Exchange.

The Ordinary Shares of the Company have not been registered under the United States Securities Act of 1933 or the United States Investment Companies Act of 1940. Accordingly, none of the Ordinary Shares may be offered or sold directly or indirectly in the United States or to any United States persons (as defined in Regulation ‘S’ under the 1933 Act) other than in accordance with certain exemptions. Investment in the Company is suitable only for sophisticated investors and should be regarded as long-term. Past performance is no indication of future results.

The Company is a FATCA compliant organisation with FATCA entity classification FFI and GIIN L0Q9R3.99999.SL.831.

Investment Objective

The Company's investment objective is detailed in the Strategic Report.

Investment Restrictions

The Company’s investment restrictions are detailed in the Strategic Report.

NAV and Information

The prices of Ordinary Shares and the latest NAV are published daily in the Financial Times. The price of the Ordinary Shares appears within the section of the London Share Service entitled "Investment Companies".

Life of the Company

From inception the Directors have believed that Shareholders should be able to review the progress of the Company so that a decision can be taken as to whether Shareholders should have an opportunity of realising the Company's underlying investments. Accordingly, at the eighteenth Annual General Meeting of the Company held on 27 August, 2014, the Board included in the business to be considered by Shareholders a special resolution that the Company should be wound up. The resolution was not passed. The board will include a similar resolution in the business to be considered at every third Annual General Meeting held. The next such resolution will be tabled at the Annual General Meeting to be held in 2017.

Financial Highlights	31.12.2015	31.12.2014
	In US Dollars	In US Dollars
Total Net Assets	125,296,979	129,423,437
NAV per share	135.53	139.99
Share Price	105.50	96.80
Discount to NAV	22.16%	30.85%

Directors

Brief biographical details of the Directors are as follows:

Rupert Evans, age 77, is a Guernsey advocate and former partner in the firm of the Guernsey legal advisors, Mourant Ozannes. He is now a consultant to Mourant Ozannes. He is a non-executive director of the Manager and of a number of investment companies. Mr Evans is resident in Guernsey. Mr Evans was appointed to the Board on 18 November, 1994.

John Hawkins, age 73, is a Fellow of the Institute of Chartered Accountants in England and Wales. He was formerly Executive Vice President and a member of the Corporate Office of The Bank of Bermuda Limited, with whom he spent many years in Asia. He retired from the Bank of Bermuda in 2001 after 25 years with the Group. He is a director of a range of funds which include hedge funds and equity funds investing in Japan and Asia. Mr Hawkins was appointed to the Board on 4 April, 2004. Mr Hawkins is resident in Guernsey.

Richard Battey, age 64, is a qualified chartered accountant. He is a non-executive director of a number of investment companies and funds. Mr Battey joined the Schroder Group in December 1977 and was a director of Schroders (C.I.) Limited from April, 1994 to December, 2004, where he served as Finance Director and Chief Operating Officer, and was a director of Schroder Group Guernsey companies before retiring from his last Schroder directorship in December, 2008. Mr Richard Battey was appointed as Chairman of the Audit Committee on 10 February, 2010. Mr Battey is resident in Guernsey.

Taxation Status

The Company has obtained exemption from Guernsey Income Tax under The Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. There is no capital gains tax in Guernsey.

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