JOF Japan Smaller Capitalization Fund Inc

We present the Semi-Annual Report of Japan Smaller Capitalization Fund, Inc. (the “Fund”) for the six months ended August 31, 2022.

The net asset value (“NAV”) per share of the Fund decreased by 16.7% and the closing market price of the Fund (on the New York Stock Exchange) decreased by 17.2% for the six months ended August 31, 2022. The closing market price of the Fund on August 31, 2022 was $6.32, representing a discount of 15.6% to the NAV of $7.49. The net assets of the Fund totaled $212,123,309 on August 31, 2022.

The Russell/Nomura Small Cap™ Index, the Fund’s benchmark (“Benchmark”), decreased by 11.7% in United States (“U.S.”) dollar terms. During the six months ended August 31, 2022, the Fund underperformed the Benchmark by 5.0% on a NAV basis. The Tokyo Price Index (the “TOPIX”), a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange (the “TSE”), decreased by 13.7% and the Nikkei Stock Average Index (“Nikkei”), a price-weighted index of the 225 leading stocks on the TSE, decreased by 12.2% in U.S. dollar terms for the six months ended August 31, 2022. The Japanese yen (“Yen”) depreciated by 20.6% against the U.S. dollar during the six months ended August 31, 2022.

For the quarter ended August 31, 2022, the Benchmark decreased by 1.3%, the TOPIX decreased by 4.9%, and the Nikkei decreased by 4.6% in U.S. dollar terms. The NAV of the Fund decreased by 2.4% and underperformed the Benchmark by 1.1%. The closing market price of the Fund decreased by 2.8% and the Yen depreciated by 7.9% against the U.S. dollar during the quarter ended August 31, 2022.

The Fund aims to invest in undervalued stocks that offer fundamental strength and potential for improvement. The Fund performs extensive fundamental research to identify stocks that can create shareholder value. The Fund focuses on companies that are leaders in certain niche markets, companies with large or expanding market shares, stocks with superior shareholder distribution policies, and stocks that offer good growth prospects. In the Japanese small cap equity market, valuation anomalies do exist and can be exploited through active management. There are a number of factors that the Fund considers when selling an investment including a stock which appears fully valued, unexpected deterioration in earnings or a substantial loss that impairs the company’s net assets, and a stock’s diminishing potential given declining competitiveness due to a change of business environment or failure of business strategy.

In terms of the sector allocation strategy during the six months ended August 31, 2022, overweight positions in the Transportation Equipment, Transportation and Warehousing, and Services sectors generated the largest positive contributions. Sector returns were eroded by overweight positions in the Chemicals and Banks sectors.

Relative performance was positively impacted by PAL GROUP Holdings Co., Ltd. in the Retail Trade sector, Osaka Steel Co., Ltd. in the Iron and Steel sector, and Piolax,

Inc. in the Metal Products sector. Conversely, relative performance was negatively impacted by Hi-Lex Corporation in the Transportation Equipment sector, JM Holdings Co., Ltd. in the Retail Trade sector, and Nishikawa Rubber Co., Ltd. in the Other Products sector.

The Benchmark increased by 8.9% and outperformed the TOPIX index, which increased by 6.9% in local currency terms, for the six months ended August 31, 2022. The Tokyo stock market rose in March 2022 as oil prices settled higher and expectations for progress in peace talks between Russia and Ukraine grew. The quarter ended June 2022 was challenging for global stock markets as the ongoing war between Ukraine and Russia spurred higher prices of agricultural commodities as well as higher energy prices, while the U.S. Federal Reserve Board quickened the pace of monetary tightening. Nevertheless, the Japanese stock market remained relatively stable, at least in local currency terms, buoyed by expectations of improved earnings from exporters as the Yen fell to the 139 level against the U.S. dollar. The Tokyo stock market strengthened during the months of July and August 2022 as the Liberal Democratic Party won a sweeping victory in the upper house election, while U.S. Federal Reserve Chair Jerome Powell signaled a slowdown in the pace of interest rate hikes. This dovish tone reflected the release of economic data in August 2022 showing that inflation might be approaching a peak which helped to ease concerns of further aggressive rate hikes.

In March 2022, the Japanese equity market rallied. Until the middle of the month, the domestic stock market fell sharply due to growing anxiety about the future of the global economy, including a sharp rise in crude oil prices following the escalation of the Russian invasion of Ukraine. The Nikkei 225 average briefly fell to a 24,000 level, its lowest level since November 2020. In the middle of March, however, the market began to advance again after a pause in the rise in crude oil prices and increased expectations of progress in peace talks between Russia and Ukraine. Although the U.S. Federal Open Market Committee raised interest rates by 25 basis points, market participants were reassured that the outlook for interest rates in 2022 was within expectations. Export-related stocks also rebounded strongly as the Yen weakened to the 125 level against the U.S. dollar at one point due to the widening gap between Japanese and U.S. interest rates.

Although the quarter ended June 2022 proved to be a very tough period for global equity markets, with the MSCI World Index tumbling by 16%, Japan’s stock market held relatively steady in local currency terms, falling by 3.65%. The ongoing war between Ukraine and Russia, both of which are major grain and fertilizer exporters, impeded production and restricted their export capabilities, fueling agricultural commodity and food price increases on top of already elevated energy prices. In response to persistent inflationary pressure, the U.S. Federal Reserve increased the pace of its monetary tightening by raising its policy rate by 75 basis points instead of the previous 50 basis points increment. Fears of higher interest rates undermined equity valuations and triggered a steep correction in the global stock markets. The Yen then came under strong selling pressure and weakened by around 12% and 6% against the U.S. dollar and the Euro, respectively. Towards the end of the quarter, market attention shifted to an economic growth slowdown or even the prospect of a looming recession, exacerbating the market’s woes. In Japan, investors anxiously monitored earnings results for the fiscal year ended March 2022 and paid close attention to management guidance for the current fiscal year given the deepening uncertainty regarding the combined impact of higher commodity and energy prices, supply chain disruption, and the demand outlook. Results and guidance were not as bad as feared, which encouraged investors to buy on dips. Improved sentiment towards economic reopening was a supporting factor in addition.

The Tokyo stock market rallied in July 2022. Growth stocks, which had been falling until June 2022, recovered sharply as the rise in long-term interest rates in the U.S. came to a halt. Expectations for economic stimulus measures increased in the wake of the Liberal Democratic Party's landslide victory in the upper house election, and sales were generally solid, supported by expectations for improved earnings by exporters due to the

weakening of the Yen to the 139 level against the U.S. dollar. U.S. stocks continued to post strong gains following the U.S. Federal Open Market Committee meeting, with the U.S. Federal Reserve Chair Jerome Powell signaling a moderation in the pace of interest rate hikes. On the other hand, domestic stocks saw an increase in profit-taking due to a sharp rise in the number of new COVID-19 cases in Japan.

In August 2022, the Tokyo stock market continued to rally at first. At the beginning of the month, the market began with a rise mainly in the manufacturing sector, where the negative effects of rising raw material prices were covered by the benefits of a weaker Yen. With generally favorable financial results for the quarter ended June 2022, the market experienced significant fluctuations, such as a decline due to heightened concerns about deteriorating U.S. and China relations following the visit of U.S. House Speaker Nancy Pelosi to Taiwan. In the middle of the month, economic indicators were released, including a slowdown in the U.S. consumer price index growth rate in July 2022, indicating that inflation was peaking out, and the domestic stock market also rose as U.S. stocks turned upward, partly because expectations of a major U.S. rate hike receded. In Japan, there was a rebound in domestic demand stocks, with reports that the government was considering relaxing the cap on the number of people entering the country imposed as part of its COVID-19 control measures.

The six months ended August 2022 were marked by optimism regarding inflation, the U.S. Federal Reserve's monetary stance, and geopolitical issues, as well as a strong Tokyo stock market. There was a rally in growth stocks after July 2022, with little difference in performance between small-cap value and small-cap growth. In view of the cyclical changes in the economy, this may have been due in part to growing expectations that the U.S. Federal Reserve's tightening of monetary policy would trigger a recession and curb inflation. From this perspective, interest rates were expected to stabilize at some point, but early in September 2022 those expectations fell short, with a faster than forecasted rise in the U.S. consumer price index reinforcing the central bank's tight monetary stance. As a result, the stock market turned downward again in September 2022.

The Fund does not rule out the view that inflation together with the U.S. Federal Reserve's rate tightening stance will temporarily slow down over the next year as commodity markets such as oil show signs of softening. However, given the longer supply shortages in many industries than many economists had expected, coupled with geopolitical risks, the Fund believes that the inflation problem is not just a cyclical problem on the demand side, but a structural problem on the supply side. Even if the rate of increase in inflation stabilizes temporarily, there is a risk that it could remain high for some time. In this case, it would be difficult to imagine a return to the ultra-low interest rate policy settings that existed previously. The Fund believes it is not just the change in interest rates, but also their levels, that is important in terms of value and growth preferences. In recent months, volatility has risen markedly for many stocks, especially for growth equities. In terms of the growing number of material risk factors, this bears notice. The Fund believes the value trend that has continued this year could become a long-term trend, especially given the historic shift away from more than ten years of ultra-low interest rates. Moreover, value stocks have traded at relatively inexpensive valuations for a long period since the Information Technology bubble. However, top-down predictions like this are often unreliable. The most important thing for the Fund’s investments is to use bottom-up research to identify companies that are competitive or have growth potential, and then to make purchases while those stocks are attractively valued. Many small-cap value stocks are in a more robust financial position than large-cap stocks, and many companies are highly profitable because they operate in niche businesses with high market shares. Among these companies, quite a few stocks combine attractive valuations with high growth rates. Even if they will not be leading the Japanese equity market in the short term, holding these stocks is likely to generate favorable long-term returns. In addition, among small-cap value stocks, including the long unpopular regional banks, there has been a movement towards industry reorganization and management reform. Considering

the backdrop of political pressure, increased mergers and acquisitions activity, and behind-the-scenes investor activism, it should be understood that moves to improve governance and shareholder returns have occurred in the small cap market too.

The Fund appreciates your continuing support.

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