AJIT.L Regulatory News (AJIT)

ABRDN JAPAN INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT ANNOUNCEMENT

FOR THE YEAR ENDED 31 MARCH 2023

Performance Highlights

Financial Calendar, Dividends and Highlights

Dividends

Highlights

Chairman's Statement

Performance Record

The last year to 31 March 2023 was a difficult period for stock markets globally, in particular for better quality growth stocks, as well as the broader global economy. Japanese equities faced an uphill struggle for much of the period with investors seemingly overly focused on the macro at the expense of company fundamentals which, for the most part, remain strong.

The Company's net asset value (NAV) total return for the year to 31 March 2023 was -4.4%, in sterling terms underperforming the TOPIX Index, the Company's benchmark's gain of 2.8%. The Company's Ordinary share price ended the year at 557.5p, down from 635.0p at the start of the period, and the discount to NAV per Ordinary share widened from 11.0% to 16.4%. Over one, three and five years to 31 March 2023 the Company's NAV total return has lagged the TOPIX Index (in sterling terms) by 7.2% and 9.9% and 13.1% respectively; and, since the change of mandate in October 2013, the Company's NAV total return has lagged the TOPIX Index by 0.4% per annum in sterling terms.

Every year the Company has a defined discount monitoring period, being 90 days up to 31 March 2023 (the "Discount Monitoring Period"). The average discount for this year's monitoring period was 14.0%, above the target of 10.0% requiring a continuation vote to be put to shareholders at the next Annual General Meeting ("AGM") or a general meeting held before the AGM. 

The Board, while an enthusiastic supporter of the attractions of Japan's equity markets for investment opportunities, has long been mindful of the need for the Company to deliver consistent competitive investment performance, increased scale, greater liquidity and a more modest discount. Increased investment resources, an enhanced dividend policy, more focused marketing and a change of corporate broker are some of the strategies the Board has employed in an attempt to address the challenges relating to performance, scale, liquidity and the discount. 

Strategic Review

Following consultation with a number of the Company's major shareholders, the Board undertook a rigorous strategic review of the opportunities in the Japan fund sector, to consider which investment strategy would be best for shareholders while remaining invested in the Japanese market. The Board considered solutions among closed-end investment trusts, where greater liquidity and a lower discount can reasonably be expected and where there is a clear, focused and differentiated investment strategy which has delivered strong performance.

The Board believes the strategic review demonstrated that the case for taking advantage of the corporate governance changes in Japan is more compelling than ever. Over recent decades, many Japanese companies have accumulated significant cash reserves and have reduced their reliance on debt financing. This has resulted in many companies having excess capital and, consequently, generating lower returns for equity investors. The Japanese authorities are seeking to address this by implementing regulations to improve governance and deliver improved returns to shareholders. The Board is of the view that this provides a highly favourable background for an active investment approach, particularly in smaller quoted companies.

Proposed rollover into Nippon Active Value Fund plc ("NAVF")

As announced on 18 May 2023, the Board has agreed terms for a proposed combination of the assets of the Company with the assets of NAVF (the "Proposal"). NAVF is a top-performing UK investment trust which targets attractive capital growth for its shareholders through active engagement with a focused portfolio of small and mid-cap quoted companies which have the majority of their operations in, or revenue derived from, Japan and that have been identified as being undervalued.

The proposed combination with NAVF is expected to improve the enlarged fund's liquidity as well as spreading the fixed costs of NAVF over a larger pool of assets. Following completion of the Proposal, it is expected that a director of the Company will join the Board of NAVF, taking the total number of directors of NAVF to six. The Company has consulted with a number of its major shareholders, together holding around 30% of the Company's issued share capital, who have indicated support for the Proposal.

Implementation of the Proposal is subject to the approval, inter alia, of the Company's shareholders as well as regulatory and tax approvals and approval by the shareholders of NAVF. A circular providing further details of the Proposal and convening general meetings to seek the necessary shareholder approvals will be published by the Company as soon as practicable. It is anticipated that the Proposal, if approved, will be implemented in Q3 2023.

The Board believes that implementation of the Proposal is in the best interest of shareholders as a whole and many shareholders will wish to continue to be invested in the enlarged fund. The Board would encourage them to roll over their interest into NAVF, as Sir David Warren and I, being the members of the Board with shares in the Company, intend to do with our holdings. Nevertheless, given the proposed change of investment strategy represented by the Proposal, the Board believes it is appropriate to offer shareholders the opportunity to realise part, or potentially all, of their investment in the Company via a cash exit for up to 25% of the Company's shares in issue, at 2% discount to fair value ("FAV") per share of the Company.

Japan Economic Background

One of the most significant developments domestically over the year to 31 March 2023 was regarding the Bank of Japan (BoJ) and monetary policy. Despite inflation creeping up to its highest level in more than 30 years (albeit much lower than elsewhere), BoJ Governor Haruhiko Kuroda stuck to his no-intervention policy for much of the year, even in the face of an increasingly weak currency; the yen fell to its lowest point against the US dollar in more than 20 years. At the same time, the BoJ remained committed to its policy of yield-curve control and restricting sales of 10-year Japanese Government Bonds to ensure that yields stayed around zero.

Towards the end of 2022, the BoJ relaxed its rules. And, with Kuroda's retirement in April 2023, there are expectations that new governor Kazuo Ueda will start to unpick some of the policies that have been pushed through in previous years. If this happens, the banking sector could start to become more profitable. Notably, despite some profit-taking and news from the US regarding the failure and subsequent buyout of Silicon Valley Bank, financials were the best performing sector over the review period.

Prevailing global concerns - the ongoing Ukraine war, rising inflation and disruption to supply chains - combined with domestic worries, not least the weaker yen, weighed on the market. While companies considered to be more sensitive to rising interest rates, and the more 'defensive' sectors fared well, most other sectors lost ground. The weaker yen was particularly damaging for the margins of the better quality companies favoured by the Investment Manager. Within the portfolio, this translated into weaker performance for sectors including consumer discretionary, communication services and real estate. The best relative performance came from consumer staples and materials holdings. For more detail on company-specific performance, see the Investment Manager's Review on pages 12 to 13 of the 2023 Annual Report.

There are already signs of improving macroeconomic conditions. The yen has bounced back from its October lows, there is general consensus that interest rate rises that have hurt the global economy should slow from here, while soaring inflation should slowly start to moderate. Meanwhile, China's reopening is proving to be a positive for the supply-chain issues that have beset many Japanese businesses, where shortages of essential components, such as semiconductors, have delayed production.

Dividend

The Company's revenue return per Ordinary share for the financial year was 7.1p (2022 - 8.5p). An interim dividend of 5.0p has already been declared and was paid to shareholders on 29 December 2022. The Board proposes a second interim dividend of 7.0p, making a total dividend of 12.0p (2022 - 15.0p) for the year ended 31 March 2023. The dividend comprises 7.1p from revenue return, 10.1p from revenue reserves and 1.9p from capital reserves.

Gearing

The Company continued to make use of its capacity to gear through its loan facilities provided by ING Bank. Earlier in the year these were renewed with the Yen 1.3 billion fixed term loan now expiring in January 2024 and the Yen 1.0 billion floating rate facility now extended to expire in December 2024.

Environmental, Social & Corporate Governance ("ESG")

Corporate governance remains highly topical in Japan and this is key to the Board's decision to recommend the Proposal given NAVF's active investment strategy is well aligned with these trends. There are signs of real progress in how Japanese companies seek to improve shareholder returns. There is a strong focus on making responsible use of capital, evident in the share buybacks that have reached their highest level in 16 years. The Tokyo Stock Exchange is also encouraging companies trading below book value to work to raise valuations and has detailed how it wants listed companies to become more aware of their cost of capital and stock price, to encourage more sustainable growth and promote longer-term increases in shareholder value.

External Service Providers

As usual, the Board has been monitoring costs generally and service providers during the year, considering the best interests of shareholders. This year, there have been some changes to service providers as a result of these discussions.

As mentioned in the last Half Yearly Report, KPMG resigned as the Company's external audit firm on 15 November 2022 following discussions regarding increasing fees and the Board's completion of a successful audit tender, which resulted in the appointment of Johnston Carmichael LLP ("Johnston Carmichael") to undertake the Company's audit for the year ended 31 March 2023. The appointment of Johnston Carmichael as auditor is recommended by the Board to shareholders at the Company's forthcoming Annual General Meeting ("AGM"). More information can be found in the Audit Committee Report on pages 50 to 52 of the 2023 Annual Report.

The Board also undertook a review of the terms of the Registrar during the year and, following careful consideration, determined that it was in the best interests of the Company to change Registrar. The transfer of services to Computershare was undertaken successfully in February 2023. Contact details are on page 106 of the 2023 Annual Report.

Annual General Meeting ("AGM")

Normally, the notice of the Company's AGM would accompany this Annual Report and the AGM would take place in early July. As a result of the average discount at which the Company's shares traded throughout the discount monitoring period to 31 March 2023, the Company is required to put a continuation resolution to shareholders at or before the forthcoming AGM. The outcome of the strategic review also requires that general meetings are convened to seek necessary shareholder approvals for the Proposal. The Board anticipates the continuation vote will be subsumed into the business of these meetings, and the Company's AGM is likely to be delayed accordingly. The Board will update shareholders on the timings of all shareholder meetings once these are confirmed by notice of meeting as usual and by RNS announcement.

Investment Manager's Review

Overview

Japanese shares fell initially but rebounded to finish the year 4.4% higher in Yen terms. Initial selling pressure came from fears over high inflation and concerns that central bank overreactions, particularly from the US Federal Reserve, would push economies into recession. As the period progressed, investors became more optimistic about the prospects for a recovery in global growth. While the Bank of Japan ("BoJ") held interest rates unchanged, it took steps to relax its market yield controls, a potential sign of tightening to come now that Kazuo Ueda has taken over from Haruhiko Kuroda as governor in April 2023.

There was a notable factor rotation within Japanese equities, which impacted our investment style and also led to our stock selection underperforming. This rotation also produced investment opportunities, as we capitalised on pockets of mispricing to identify new ideas and add to holdings which we deemed to be oversold given their strong fundamentals. As long-term investors in Japanese equities, we maintain our conviction that quality companies will outperform over the long term. This is particularly the case where there is inflation; price rises have been less extreme in Japan than in many other developed economies, but we have looked to invest in quality companies which have the ability to pass cost increases on to their customers.

The technology sector also saw testing times. Many global manufacturers struggled with high shipping costs and supply chain issues, particularly through China's intense lockdowns. The shortages were particularly acute in semiconductors, which in turn limited output for many companies in the technology sector. Signs of weakening end-demand also emerged amid a slowing global economy. At this stage, however, there are good reasons for optimism. After a difficult period at the end of 2022, China has now relaxed its harsh Covid-19 restrictions; logistical bottlenecks are moving and component shortages are easing: this bodes well for a consumer recovery.

Environmental, social and governance

Within corporate Japan, one key theme of ESG engagement has been the push to improve investor returns. In particular, the Tokyo Stock Exchange is encouraging companies that trade at low valuations to improve their capital efficiency, as it seeks to create a more vibrant stock market.

This has been an ongoing point of engagement with many of our portfolio companies; for instance, automotive lamp maker Koito Manufacturing has been growing its business continuously and with it, the amount of cash held on its balance sheet. As of December 2022, Koito held cash and cash equivalents that made up nearly 60% of its book value. We have petitioned the company to move towards a more independent board and improve its capital efficiency.

We have also been suggesting to the management of Japan Exchange Group that they make a clear statement on what they consider to be excess capital, and how they intend to use these funds. The company has announced a share buyback, which we see as a positive step, but we still see room for further improvement.

Across other areas, we reached out to endoscope maker Olympus to discuss its disclosure on responsible marketing. We were encouraged to learn that the company intends to set specific key performance indicators and action plans for the issues that have been identified internally and we will continue to track its progress in this area. We also engaged with Seven & i regarding the restructuring of its domestic businesses, a governance factor as it concerns good use of capital on its balance sheet.

You can read more about our engagement efforts in our case study on Keyence on page 34 of the 2023 Annual Report.

Portfolio Review

The Company's NAV fell by 4.4% in sterling total return terms during the year to 31 March 2023, underperforming the benchmark's (TOPIX Index) rise of 2.8%.

The Company's underperformance was primarily due to currency and stock selection effects. Within the portfolio, industrial, financial and healthcare stocks have generally detracted. However, information technology, communication services and consumer staples sectors have been positive for performance.

In terms of individual holdings, Ajinomoto performed well. The seasonings manufacturer delivered consistently good results as it grew its sales despite price increases. Semiconductor tester maker Advantest also contributed to returns, owing to growing confidence in the prospects for artificial intelligence ("AI"). Investors expect increased use of AI will boost demand for high-performance computing chips. AI marketing solution provider Appier Group was another key contributor on the back of good results.

The biggest detractor from performance was ValueCommerce, which was sold during the period. Its share price lagged on concerns that its parent company was introducing competing online marketing solutions. Electronic component maker Kohoku Kogyo reported weaker earnings due to a rapid rise in metal prices, but the company expects to pass this cost inflation on through price increases with a time lag of a few months. In our view, Kohoku's pricing power stems from a lack of competitors that can match its product quality and cost leadership.

Portfolio Activity

Over the year we added stocks to the portfolio which we believe offer good potential for upside in the current economic environment. In the first six months, the initiations were across various sectors. We invested in Seven & i, the convenience shop chain which benefits from economies of scale and a strong logistical advantage. The market is discounting the potential for meaningful restructuring of its domestic businesses which we see as an opportunity to add value. We also bought Olympus, the leader in gastrointestinal endoscopes, which has grown market share by investing in service centres and customer training. Another new holding was system integrator Nomura Research Institute ("NRI"). We believe Japanese corporate technology spend will remain firm, given rising digitisation and digitalisation, and NRI has a track record of providing high value-added solutions. We also introduced Katitas, which buys properties at appealing discounts, then re-models them into good quality homes for sale at affordable prices.

In the second half of the year, we initiated positions in Suntory Beverage & Food, MUFJ, Hitachi and Internet Initiative Japan. Suntory Beverage & Food owns many leading soft drinks brands across the globe. The company offers attractive exposure to resilient consumption trends in the soft-drinks market. Its focus on the low-sugar, energy and health-conscious segments has enabled the company to grow at a faster pace than the industry generally. Under its current management, geographic expansion into Vietnam and Thailand has proved successful and we see this as key to its further growth. In its home market of Japan and in Europe, price increases, product revamps and operational restructuring support further growth in sales and margins.

MUFJ is the largest of the three mega-banks in Japan with significant overseas operations that contribute a third of the group's profits. Under the current management led by CEO, Hironori Kamezawa, we believe that the company has become committed to a more disciplined and shareholder friendly approach to capital management. Its efforts to improve capital efficiency include the sale of US-based Union Bank last year. At the same time, MUFJ assesses new acquisitions based on stringent criteria. As the company uses excess capital to maintain attractive shareholder returns or fund growth initiatives, we believe that its share price discount will gradually narrow.

At the broader industry level, we have previously been concerned about the impact of the BoJ's policy. However, the recent adjustment to the trading band for 10-year Japanese government bonds showed the potential for policy changes to positively impact the banking sector.

Hitachi is Japan's major industrial and engineering conglomerate, covering a broad range of manufacturing and services in power generation, defence systems, electronics, construction and infrastructure, digital and other products. Over the past decade, its restructuring has led to an expansion in margins and a portfolio that is more resilient over differing business cycles. We expect its profitability and growth to improve further, led by the power-grid business that has world-leading technology for power-loss reduction during transmission. Hitachi stands to benefit from greater demand for renewable energy, as well as Lumada, an Internet of Things ("IoT") platform, and digital product engineering company GlobalLogic, which will capture rising digitalisation demand for factories and infrastructure.

Internet Initiative Japan is one of two business-to-business internet service providers remaining in Japan. The company is uniquely positioned to capture the rising corporate demand for bandwidth on the back of digital transformation needs. It can also leverage on its network know-how to cross-sell other services such as IoT, network security and system integration.

To fund these more attractive opportunities, we sold our positions in electronics components supplier Murata Manufacturing on concerns over an inventory correction affecting its earnings, semiconductor maker Sanken Electric, and laboratory operator BML. As we mentioned in the Half Yearly Report, this was a small holding which had benefited from the rise in testing over the Covid-19 pandemic. With the impact of the pandemic waning, we saw more limited potential for upside.

More recently, we sold Workman, over concerns that the company's unwillingness to raise prices in spite of cost inflation will lead to a deterioration in profitability and Heiwa Real Estate, in view of limited further upside to shareholder returns. ValueCommerce was another disposal. This company generates a large portion of its profits from providing advertising solutions to tenants on the e-commerce platforms of Z Holdings, which recently introduced competing advertising solutions. Other sales included Fukui Computer, which we sold due to concerns over a reduction in government subsidies affecting demand, and Renesas Electronics, Nippon Sanso and Daifuku, in view of better opportunities elsewhere.

Outlook

Looking ahead, there is cause for optimism. The macroeconomic conditions that have hurt some of our holdings in the recent past appear to be reversing: the yen has strengthened, inflationary pressures are easing, and interest rate rises are moderating. While there are still concerns that the market may be underestimating the persistence of inflation, and that geopolitics could still lead to sudden changes in the economic outlook, we believe that the prospects for better run businesses in Japan should improve and, over time, see them outperform. We remain true to our investment philosophy: that investing in a group of well-run companies, alongside increasing active engagement, will lead to better outcomes for shareholders.

Kwok Chern-Yeh,abrdn Japan Limited5 June 2023

Overview of Strategy

Business Model

This report provides shareholders with details of the Company's current business model and strategy as well as the principal risks and challenges it faces.

The Company is an investment trust which seeks to deliver a competitive return to its shareholders through the investment of its funds in accordance with the investment policy as approved by shareholders.

The Board appoints and oversees an investment manager, decides the appropriate financial policies to manage the assets and liabilities of the Company, ensures compliance with legal and regulatory requirements and reports objectively to shareholders on performance.

Investment Objective and Purpose

To achieve long-term capital growth principally through investment in listed Japanese companies which are believed by the Investment Manager to have above average prospects for growth.

The Board's strategy is represented by its investment policy, financial policies, and risk management policies.

Investment Policy

The Company primarily invests in the shares of companies which are listed in Japan. The portfolio is constructed through the identification of individual companies of any market capitalisation and in any business sector, which offer long-term growth potential.

The portfolio is selected from the 3,800 listed stocks in Japan and is actively managed to contain between 30 and 70 stocks which, in the Manager's opinion, represent the best basis for producing higher returns than those of the market as a whole in the long term. There will therefore inevitably be periods in which the Company's portfolio either outperforms or underperforms the market as represented by the Company's benchmark.

The Board does not impose any restrictions on these shorter term performance variations from the benchmark, nor any limits on the concentration of stock or sector weightings within the portfolio, except that no individual shareholding shall exceed 10% of the Company's portfolio at the time of purchase, although market movements may subsequently increasethis percentage.

The full text of the Company's investment policy is provided on page 91 of the 2023 Annual Report.

Benchmark Index

Tokyo Stock Price Index, TOPIX (in Sterling terms)

Investment Approach

The Investment Manager's investment philosophy is that markets are not always efficient. The Investment Manager's approach is therefore that superior investment returns are attainable by investing in companies with good fundamentals and above average growth prospects that in the Investment Manager's opinion drive share prices over the long-term. The Investment Manager follows a bottom-up investment process based on a disciplined evaluation of companies through active engagement, at least twice a year, with management on performance including environmental, social and governance issues by its fund managers who are based in Japan and supported by the Manager's Asian investment team in Singapore. The Manager estimates a company's worth in two stages; quality, defined by reference to management, business focus, the balance sheet and corporate governance; and then price, calculated by reference to key financial ratios, the market, the peer group and business prospects. Understanding a company's management and gauging its experience is essential and no stock is bought without the fund managers having first met management.

Stock selection is key in constructing a diversified portfolio of companies with macroeconomic, political factors and benchmark weightings being secondary. 

Given the long-term fundamental investment philosophy, the Manager expects to hold most companies in which the Company invests for extended periods of time.

Financial Policies

The Board's main financial policies cover the management of shareholder capital, risk management of the Company's assets and liabilities, including currency risk, the use of gearing and the reporting to shareholders of the Company's performance and financial position.

Management of shareholder Capital

The Board's policy for the management of shareholder capital is primarily to ensure its long term growth. This growth will reflect both the Manager's investment performance and from time to time the issue of shares, when sufficient demand exists to do this, without diluting the value of existing shareholder capital.

The Board's dividend policy is to make distributions on a semi-annual basis and currently consists of the Company's earnings for the year, 3.0p per share released from the revenue reserves and an amount from the distributable capital reserves.

The Board may authorise the buyback of shares in order to avoid excessive variability in the discount and if, despite this, the average discount exceeds 10% during the 90 day period preceding its financial year end, the Board will offer shareholders the opportunity to vote on the continuation of the Company at a general meeting. The average discount for this year's monitoring period was above the target, requiring a continuation vote to be put to shareholders at the next Annual General Meeting ("AGM") or a general meeting held before the AGM, to be confirmed in due course.

Risk Management

The policy for risk management is primarily focused on the investment risk in the portfolio using the Manager's risk management systems and risk parameters, overseen by the Board.

Derivatives

The Company may use derivatives from time to time for the purpose of mitigating risk in its investments. The performance of the Company is subject to fluctuations in the Yen/£ exchange rate. The Company's exposure to Yen fluctuations is partially offset by the natural hedge provided by any borrowing in Yen as well as by investments in Japanese companies which have significant sources of income from exports of goods or from non-Japanese operations.

The wider corporate risks, including those arising from the increasingly regulated and competitive marketplace, are managed directly by the Board. The principal risks are more fully described under the paragraph 'Principal Risks and Uncertainties'.

Use of Gearing

Gearing is the amount of borrowing used to increase the Company's portfolio of investments in order to enhance returns when and to the extent it is considered appropriate to do so or to finance share buybacks when necessary. The level of borrowing under the Company's investment policy is subject to a maximum of 25% of net assets but will normally be set at a stable and lower level than the maximum. The Board has currently established a gearing level of around 10% of net assets although, with stock market fluctuations, this may range between 5% and 15%.

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its business model, financial position, performance and prospects.

The Board has in place a robust process to identify, assess and monitor the principal risks and uncertainties facing the Company and to identify and evaluate newly emerging risks, such as geopolitical risk and cyber risk referenced in the table below. The Company's risks are regularly assessed by the Audit Committee and managed by the Board through the adoption of a risk matrix which identifies the key risks for the Company, including emerging risks, and covers strategy, investment management, operations, shareholders, regulatory and financial obligations and third party service providers. The principal risks and uncertainties facing the Company, which have been identified by the Board, are described in the table below, together with the mitigating actions.

Promoting the Success of the Company

The Board is required to report on how it has discharged its duties and responsibilities under section 172 of the Companies Act 2006 (the "s172 Statement"). Under section 172, the Directors have a duty to promote the success of the Company for the benefit of its members as a whole, taking into account the likely long term consequences of decisions, the need to foster relationships with the Company's stakeholders and the impact of the Company's operations on the environment.

The Board comprises four independent non-executive Directors and has no employees or customers in the traditional sense. As the Company has no employees, the culture of the Company is embodied in the Board of Directors. The Board seeks to promote a culture of strong governance and to challenge, in a constructive and respectful way, the Company's advisers and other stakeholders.

The Board's principal concern has been, and continues to be, the interests of the Company's shareholders and potential investors.

The Manager undertakes an annual programme of meetings with the largest shareholders and investors and reports back to the Board on issues raised at these meetings. The Investment Manager, who is based in the Manager's Tokyo office, will attend such meetings. The Board encourages all shareholders to attend and participate in the Company's AGM and shareholders can contact the Directors via the Company Secretary. Shareholders and investors can obtain up-to-date information on the Company through its website and the Manager's information services and have direct access to the Company through the Manager's customer services team or the Company Secretary.

As an investment trust, a number of the Company's functions are outsourced to third parties. The key outsourced function is the provision of investment management services to the Manager and other stakeholders support the Company by providing secretarial, administration, depositary, custodial, banking and audit services.

The Board undertakes a robust evaluation of the Manager, including investment performance and responsible ownership, to ensure that the Company's objective of providing sustainable income and capital growth for its investors is met. The Board typically visits the Manager's offices in Tokyo annually and last visited in November 2022. This enables the Board to conduct face to face meetings with the fund management and research teams. The portfolio activities undertaken by the Manager on behalf of the Company can be found in the Manager's Review and details of the Board's relationship with the Manager and other third party providers, including oversight, is provided in the Statement of Corporate Governance (pages 44 to 49 of the 2023 Annual Report).

Whilst the Company's direct operations are limited, the Board recognises the importance of considering the impact of the Company's investment strategy and policy on the wider community and the environment. The Board believes that its oversight of environmental, social and governance ("ESG") matters is an important part of its responsibility to stakeholders, and its proper consideration aligns with the Company's objective to achieve long-term capital growth. The Board's review of the Manager includes an assessment of their approach to ESG integration in the investment process. Further information can be found on pages 92 to 94 of the 2023 Annual Report.

During the year, the Board focused on the performance of the Manager in achieving the Company's investment objective within an appropriate risk framework. In addition to ensuring that the Company's investment objective was being pursued, key decisions and actions undertaken by the Directors during the financial year and up to the date of this report have included:

- conducting an extensive review of investment strategies in the Japan fund sector following the ongoing evaluation of the performance of the Manager, and in view of the requirement to hold a continuation vote under the articles of association. As a result of this process, the Board has announced the agreement of heads of terms for a proposed combination of the assets of the Company with the assets of Nippon Active Value Fund plc.

- renewal of the Company's fixed-term loan facility which matured in January 2023, in order to continue to take advantage of the Company's investment structure to allow the use of gearing, where appropriate, to enhance long-term total returns to shareholders.

- the appointment of Johnston Carmichael LLP as the Company's external auditor, following an early audit tender (more details can be found on page 10 of the 2023 Annual Report).

- change of the Company's registrar following review of contract provisions, specifically around data protection, and fees (new contact details can be found on page 106 of the 2023 Annual Report).

- the decision to pay an interim dividend of 5.0p per share and a second interim dividend of 7.0p.

In summary, the Directors are cognisant of their duties under section 172 and decisions made by the Board take into account the interests of all of the Company's key stakeholders and reflect the Board's belief that the long-term sustainable success of the Company is linked directly to its key stakeholders.

Key Performance Indicators ("KPIs")

Performance is compared against the Company's benchmark, the TOPIX Index in sterling terms, and its Peer Group. In view of the Manager's style of investing, there can be, in the short-term, considerable divergence from both comparators. The Board uses a three year rolling performance for the following KPIs: total NAV return against the benchmark index and share price total return compared with the Peer Group. The KPI for the discount comparison to its Peer Group is over one year. The Company's Ongoing Charges Ratio ("OCR") is compared with the Peer Group, taking into account its size, to ensure that total running costs remain competitive.

A See page 22 of the 2023 Annual Report for details of key performance indicator results.

B See page 87 of the 2023 Annual Report for details of the OCR calculation.

Over the three year period to 31 March 2023, the Company underperformed against all of the KPI's monitored by the Board.

Duration

The Company does not have a fixed life. However, under the articles of association (the "Articles"), if, in the 90 days preceding the Company's financial year-end (31 March), the Ordinary shares have been trading, on average, at a discount in excess of 10% to the underlying NAV over the same period, notice will be given of an ordinary resolution to be proposed at the following AGM to approve the continuation of the Company. In the 90 days to 31 March 2023, the Ordinary shares traded at an average discount of 14.0% to the underlying NAV and therefore exceeded the 10% limit defined in the Articles. A continuation vote is therefore required. A notice confirming the date of the AGM will be sent in due course together with details of General Meetings where resolutions will be recommended relating to the Proposal.

Board Diversity

The Board recognises the importance of having a diverse group of Directors with the appropriate mix of competencies and expertise to allow the Board to fulfil its obligations. At 31 March 2023 there were two male Directors and two female Directors, all of whom bring a variety of knowledge, experience and skills and contribute individually to the Board's performance. Further detail, including the Board's first formal Diversity Statement, is provided on pages 45 to 46 of the 2023 Annual Report.

Employee, Environmental, Social & Human Rights Issues

The Company has no employees as it has delegated operational management to the Manager. There are therefore no disclosures to be made in respect of employees. Further information on the Manager's approach to socially responsible investment can be found on pages 92 to 94 of the 2023 Annual Report.

Global Greenhouse Gas Emissions and Streamlined Energy and CarbonReporting ("SECR")

All of the Company's activities are outsourced to third parties. The Company therefore has no greenhouse gas emissions to report from the operations of its business other than Directors' travel, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013. For the same reason as set out above, the Company considers itself to be a low energy user under the SECR regulations and therefore is not required to disclose energy and carbon information.

Modern Slavery Act

Due to the nature of the Company's business, being a company that does not offer goods and services to customers, the Board considers that it is not within the scope of the Modern Slavery Act 2015 because it has no turnover. The Company is therefore not required to make a slavery and human trafficking statement. In any event, the Board considers the Company's supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.

Viability Statement

The Company's business model is designed to deliver long term capital growth to its shareholders through investment in readily realisable stocks in the Japanese equity markets. Its plans are therefore based on having no fixed or limited life provided the global equity markets continue to operate normally.

The Board has assessed the Company's prospects over a three year period, notwithstanding its announcement on 18 May 2023 of the proposed combination with NAVF and the material uncertainty identified in relation to this matter. The Board considers that this period reflects a balance between looking out over a long-term horizon and the inherent uncertainties of looking out further than three years. In assessing the viability of the Company over the review period the Directors have focused upon the following factors:

- The requirement under the articles of association to hold a continuation vote at the next AGM;

- The ongoing relevance of the Company's investment objective in the current economic environment, considered via an extensive strategic review;

- The Proposal arising from the strategic review, to combine the assets of the Company with those of NAVF by means of a section 110 scheme of reconstruction, which is subject to shareholder and regulatory approvals at the date of this Annual Report;

- The principal risks detailed in the strategic report on pages 16 to 17 of the 2023 Annual Report and the steps taken to mitigate these risks;

- The liquidity of the Company's underlying portfolio, which is invested in liquid and readily realisable securities;

- Recent stress testing has confirmed that shares can be easily liquidated, despite continued uncertainty and a volatile economic environment;

- The level of forecast revenue surplus generated by the Company and its ability to achieve the dividend policy;

- The level of gearing is closely monitored by the Board. Covenants are actively monitored and there is adequate headroom in place; and

- The Company has a fixed term loan facility of JPY 1.3 billion in place until January 2024 and a revolving loan facility of JPY 1.0 billion in place until December 2024. The Company has the ability to renew or repay its gearing through proceeds from equity sales.

Following the strategic review, the Board believes that the Proposal will benefit shareholders and expects that the required approvals will be received at a general meeting of the Company. Should the Proposal not receive the necessary approval, or the Continuation vote not be passed, the Board believes from the work carried out during their review, that other attractive options remain available for shareholders in the Japan sector which can be pursued.

Accordingly, taking into account the Company's current position and its prospects, and the potential impact of its principal risks and uncertainties, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of this Report.

In making this assessment, the Board has considered that matters such as significant economic or stock market volatility (including the possibility of a greater than anticipated economic impact of geopolitical developments), a substantial reduction in the liquidity of the portfolio, or changes in investor sentiment, and the outcome of the general meeting(s), could have an impact on its assessment of the Company's prospects and viability in the future.

The Strategic Report was approved by the Board of Directors and signed on its behalf for abrdn Japan Investment Trust plc (formerly named Aberdeen Japan Investment Trust plc) by:

Karen Brade,Chairman5 June 2023

Results

Key Performance Indicators

Ten Year Financial Record

Ten Largest Investments

As at 31 March 2023

Investment Portfolio

Investment Case Studies

Keyence Corporation

Keyence Corporation ("Keyence") specialises in making precision equipment used in factory automation, such as sensors, measurement devices, lasers, barcode readers and other devices. The company was founded almost 50 years ago and has grown steadily to become a global leader in factory automation and inspection equipment for manufacturing and research and development needs.

Standing out above its peers

Keyence has been included in the Company's portfolio since the change in mandate in 2013. From a top-down perspective, the Investment Manager believes that factory automation is a secular growth sector, as companies globally are increasingly automating processes to reduce labour costs and improve production standards. Keyence has, over time, positioned itself as a global leader, growing its customer base across a wide range of sectors with diverse requirements.

The Investment Manager has been impressed by the company's resilience through cycles. In the past few years, Keyence has delivered solid results with growth across its key markets and geographical regions, with five-year operating profit compound annual growth rate of 11%. The company runs on a fabless model, this means that it outsources its manufacturing process rather than making its products in-house, which allows it to operate a capital-light model. In more recent times, Keyence has weathered supply chain headwinds well, focusing on same-day shipment of its products. This is thanks to a flexible procurement and inventory management strategy, which includes dual sourcing and component interchangeability.

Keyence operates a direct sales model. Its in-house consultants develop products that meet the latest customer requirements. Keyence continues to expand sales locations and build its workforce overseas. This has allowed the company to be nearer to its customers locally and hence more responsive to their needs, which adds value to customers and builds loyalty.

Areas of engagement: Improving shareholder returns

A key area of the Investment Manager's engagement has been around the dividend. More broadly, returning capital to shareholders has also been an area of focus within corporate Japan, with the Tokyo Stock Exchange, among others, placing pressure on listed companies to return excess cash to investors. Keyence raised its annual dividend forecast for the financial year ended March 2023 by 50%. In its interaction with the company, the Investment Manager has discussed shareholder returns and has voted against its dividend policy at shareholder meetings.

Despite the increased pay-out, the company continues to hold cash and cash equivalents on its books that amount to nearly 80% of its total assets, and more than 10% of its market capitalisation. The company is able to pay out more to its shareholders, and the Investment Manager continues to engage on this subject, using proxy votes to reinforce good governance where required.

Zenkoku Hosho Company

Zenkoku Hosho Company ("Zenkoku") is the largest independent guarantor of home mortgages in Japan. It offers guarantee services for mortgages, and educational and card loans. The company is also involved in the insurance-agency and credit-research businesses.

Founded in 1981 to guarantee housing loans originated by the Japan Housing Finance Agency, Zenkoku now focuses on residential mortgages provided by private banks. In its early years it dealt mainly with smaller regional financial institutions, but has since used its track record, know-how and scale to gain market share with regional, city andtrust banks.

Broad knowledge and experience to drive market share gains and earnings

Over the past decade, regional banks have increasingly outsourced mortgage guarantees as a means of hedging credit risk in new territories. Guarantee services offered by third parties like Zenkoku have grown at a significant pace as a result.

Zenkoku's competitive edge lies in a broad database of local property values and deep expertise in handling defaults. This means it can underwrite credit guarantees anywhere in Japan. Its local rivals may have built up well in specific regions but are finding a wider knowledge base harder to acquire.

Looking ahead, Zenkoku's earnings are expected to be driven by growth in mortgage guarantees as more and more banks outsource this service in an effort to improve their capital ratios and minimise credit risk within their retail operations. The company has also taken market share from banks' captive insurers as some banks expand housing loans to less familiar customer segmentsor regions.

Areas of engagement: Better capital discipline and board independence and diversity

The Investment Manager has engaged extensively with Zenkoku over several years to encourage better capital discipline. This has included focusing on its capital adequacy ratio (a measure of available capital against risk). It has reiterated that there is room for greater capital return and emphasised the importance of shareholder returns, as excessive capital on the balance sheet negatively impacts the company's return on equity ratio ("ROE").

In March 2023, the company announced a new medium-term plan, which is viewed as a meaningful step in the right direction. Management is committed to a minimum ROE target predicated not only on growing net profits, but also on capital discipline through increased shareholder return. The plan will require the company to materially raise pay-out ratios over the next three years, in conjunction with increased ad hoc buybacks to prevent overcapitalisation of the balance sheet.

The Investment Manager has also engaged on board independence and diversity and requested that the company consider appointing an additional external director to achieve a majority independent board and a better gender balance.

Social risks are also material to Zenkoku, especially regarding its workforce. Here, the company continues to develop its human capital management framework, pursuing a better working environment for its employees and offering skills upgrading programmes for its employees.

Statement of Directors' Responsibilities

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

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK accounting standards and applicable law, including FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

- select suitable accounting policies and then apply them consistently;

- make judgements and estimates that are reasonable and prudent

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

- assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

- use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. 

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

Responsibility statement of the Directors in respect of the annual financial report

We confirm that to the best of our knowledge:

- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

- the strategic report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

In accordance with Disclosure Guidance and Transparency Rule 4.1.14R, the financial statements will form part of the annual financial report prepared using the single electronic reporting format under the TD ESEF Regulation. The auditor's report on these financial statements provides no assurance over the ESEF format.

We 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 Company's position and performance, business model and strategy.

For and on behalf of abrdnJapan Investment Trust plcKaren Brade,Chairman5 June 2023

Statement of Comprehensive Income

 Statement of Financial Position

Statement of Changes in Equity

Statement of Cash Flows

Notes to the Financial Statements

For the year ended 31 March 2023

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