Annual Financial Report

RNS Number : 5400D

Baillie Gifford Japan Trust PLC

27 October 2015

 

The Baillie Gifford Japan Trust PLC

Annual Financial Report

A copy of the Annual Report and Financial Statements for the year ended 31 August 2015 of The Baillie Gifford Japan Trust PLC has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM.

The Annual Report and Financial Statements for the year ended 31 August 2015 including the Notice of Annual General Meeting is also available on Baillie Gifford Japan's page of the Baillie Gifford website at www.japantrustplc.co.uk 

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 August 2015 which require to be published by DTR 4.1 is set out on the following pages.

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

Baillie Gifford & Co Limited

Company Secretaries

27 October 2015

Chairman's Statement

It has been a good year for Japanese investments and another good year for your Company with the net asset value (after deducting borrowings at fair value) rising by 20.4%, compared to a 13.4% rise in the benchmark TOPIX index total return (in sterling terms). The share price increased by 26.3% and the Company's shares are sitting at a premium to NAV (after deducting borrowings at fair value) of 4.6%, having traded at a premium for most of the year unlike the rest of our sector. This builds on an excellent five and ten year record for the Japan Trust.

As with last year, both stock selection and gearing contributed positively to the returns; further performance details are to be found in the Managers' Report.

Investment income increased 15% over the year, reflecting higher dividends, while expenses also increased due mainly to higher management fees in line with the substantial increase in net asset value.

Overall revenue gain per share was 0.28p (down from 0.47p last year) and, as in prior years, no dividend will be paid as the revenue reserve remains in deficit. Ongoing charges for the year were 0.9%, the same as in 2014.

Gearing

Gearing amounted to 15% of shareholders' funds at the start of the year and ended the year at 14%. The Company entered into two new revolving loan facilities with Scotiabank Europe plc, details of which can be found in note 11 of the Annual Report and Financial Statements. Gross borrowings increased to Y10.2bn from Y7.2bn and with the low cost of yen loans we continue to believe that borrowing to invest in Japanese equities is a sensible strategy.

Share Capital

The Company did not exercise its share buy back powers during the year; however, your Board believes that it is important that the Company retains this power and so, at the Annual General Meeting, it is seeking to renew this facility. The Company also has authority to issue new shares and to reissue any shares held in treasury for cash on a non-pre-emptive basis. Shares are only issued/reissued at a premium to net asset value, thereby enhancing net asset value per share for existing shareholders.

During the year to 31 August 2015, 5,790,000 shares were issued at a premium to net asset value raising proceeds of £26,469,000, continuing the trend of recent years. The Directors are, once again, seeking 10% share issuance authority at the Annual General Meeting and we will continue to issue shares only when at a premium to net asset value. This authority will expire at the conclusion of the Annual General Meeting in November 2016.

Continuance Vote

Our shareholders have the right to vote annually on whether the Company should continue in business, and will again have the opportunity to do so at the Annual General Meeting to be held on 30 November 2015.

Last year the Company received support for its continuance from 99.9% of those voting. Your Directors are of the opinion that there remain attractive opportunities in selected, well-run Japanese companies.

Given the long-term favourable outlook, my fellow Directors and I intend where possible to vote our own shareholdings in favour of the resolution and hope that all shareholders will feel disposed to do likewise.

Board

Your Board is committed to high standards of corporate governance. In particular it recognises the need to have a balance of skills, experience and length of service. It also believes that membership of the Board should be refreshed over time and to that end, after 14 years of excellent service, Martin Barrow is standing down at the AGM. The process to identify a new Director with the requisite skills has commenced using an external agency and we expect to make an appointment before the end of 2015.

Outlook

The year to 2015 saw renewed strength in Japanese equities and our Managers are continuing to find extremely interesting companies in which to invest, with their bottom up approach of stock selection adding significant value to the portfolio. The Board visited Japan in May this year, meeting with a variety of companies of interest to the Managers and we returned with a more positive outlook on the investment opportunities within Japan as a whole.

Prime Minister Abe strengthened his mandate for political and economic reforms by calling and winning a snap election last December.

We also saw much evidence of the encouraging improvements in corporate governance across Japan which the Manager continues to press for with all our holdings.

There has been significant volatility across world markets since our August year end with Japan no exception; however, we continue to believe there are significant opportunities for investment growth amongst the companies in our portfolio and that the Managers' approach of investing for medium to long term growth can capitalise on these opportunities going forward.

Nick Bannerman

Chairman

7 October 2015

Past performance is not a guide to future performance.

Managers' Report

Performance

Over the past year the NAV per share with borrowings deducted at fair value has increased by 20.4% compared to a rise of 13.4% in the Company's benchmark.  The share price also moved from a discount at the end of last year to a premium and this helped the share price increase by 26.3% over the period.  This is the first time in the past 10 years that there has been a premium at the year end.  On average over the year the shares traded at a premium of just over 1%. 

The Japanese stock market rose in the first half of the Company's year but has seen some volatility since the summer as various global concerns have hit markets.  The Company has continued to use its gearing and over the year this has contributed to roughly half the outperformance, with the rest coming from stock selection.   The yen weakened against sterling over the year by 7.5%, but trends are really driven by the yen/dollar rate translated into sterling.  Overall Japan remains a competitive place for high quality manufacture and services and an attractive country for tourists. 

The strongest returns within the portfolio came from the Commerce and Services sector which includes several of the internet related holdings, as well as companies involved in employment services.  In total there were 13 stocks which contributed more than 0.5% to outperformance and five which subtracted at the same level.  Notable amongst the winners were Cookpad, the recipe website which has continued to gather paying members, new recipes and is moving into advertising to its substantial subscriber base, Sysmex and Shimadzu, both manufacturers of medical equipment, and Don Quijote, the discount retailer benefiting from inbound tourism.  Toyo Tire and Rubber continues to do well selling truck tyres in the USA whilst Temp Holdings and Outsourcing both were helped by the labour shortage in Japan and the increase in women in the workforce.  Those that detracted from performance included Iriso electronics, which did very well last year and has had some pricing issues, along with energy related holdings Modec and Inpex. 

Portfolio

There have been relatively few changes within the portfolio in the past year as our growth orientated companies have continued to look appealing.  Turnover fell to 7.5% over the year even after buying eight new holdings and selling six. 

Three of the new purchases were new listings and the IPO market in Japan has been quite active, although the advent of sizeable companies is still rare.  The largest new listing we invested in was Recruit, a large service sector company involved in recruitment as well as property marketing and advertising.  We have admired their corporate culture for some time, as many key individuals in the internet sector in Japan have spent some of their careers at Recruit.  The other two are much smaller companies and both illustrate interesting points about current developments in Japan.  Nippon Ski Resort, a subsidiary of a parking company, was set up to buy underperforming ski operations and improve their facilities.  This has been successful and there are many further opportunities to expand, particularly as foreign tourists ski more in Japan. SanBio, a research oriented bio tech company founded by Japanese scientists, moved its headquarters from California to Japan after legislation was passed in November 2014 as part of the Prime Minister's third Arrow to speed up the approval processes for regenerative medicine.  Although at an early stage its technology could represent a significant breakthrough in stroke treatment. 

We sold six companies including Kyocera, Nomura, Sanrio and Industrial & Infrastructure Fund.  In the main these were sold because the prospects no longer looked appealing owing to a variety of reasons: intensified competition from the Frozen franchise in the case of Sanrio, to the unsuccessful move from feature phone to smart phones for Gree.  None of these were a significant portion of the portfolio and funds were used to invest in the more promising opportunities.

Economy and Corporate Developments

Usually Japan is regarded as a pro-cyclical market with corporate profits driven by the health of the economy and the speed of growth.  What has been interesting in the past year or so is the lack of correlation.  The economy in Japan has not recorded strong growth since the rise in the consumption tax in April 2014.  For the current fiscal year ending in March 2016 the consensus view is that the expansion is only going to be around 1.6% whilst profit growth is likely to be over 10% despite recent weakness.  Corporate profitability in aggregate and margins are also at record levels.  This is partly due to the ongoing internationalisation of corporate Japan, with more than half of profits now coming from overseas, and partly to the drivers of change within the economy, along with a greater focus on shareholder returns.  There is also a thesis that as the importance of the digital economy is mis-described by economic statistics first compiled more than a century ago. 

The Managers believe that there are three key forces driving changes in Japan at the moment.  The first is the fundamental sea-change in corporate governance, encouraged by the advent of Abenomics but also by the demographic changes and the increase in international competition.  Last year Japan introduced a new stewardship code encouraging institutional investors to constructively engage with the companies they invest in and this year a new Corporate Governance code was introduced in June.  This encourages companies to change their boards and already the number of independent directors has risen further and now 94% of companies have outsiders on the board.  Companies also have to issue a statement about their attitude to issues like cross-shareholdings by the end of this year.  This push is also coming at a time when the importance of some other stakeholder groups is lessening. We believe that there will be fundamental change over a five year period and that this will lead to lower cash holdings on balance sheets and increasing dividends along with investment for growth. 

The retirement of the baby-boomer generation, with their corporate pensions and the increasing labour shortage, means that managements no longer have to run companies to maintain employment in Japan.    The second development driving change is therefore the tightening labour shortage.  Again related to the aims of the Abe government more women have been working in Japan but the unemployment rate is now extremely low and surveys show employment conditions extremely tight.  There are suggestions that most new jobs in Japan in the past few years have been created by companies younger than five years, whilst the older companies are reducing employment.  This is a very welcome rebalancing and one that has very positive implications for productivity.  It goes alongside the change in corporate governance and the rise in entrepreneurship in Japan.  In 1992, after the bubble burst, the major cause of bankruptcy in Japan was a labour shortage for small companies artificially created by large corporations continuing to recruit whilst the economy turned down.  Now the situation is different and the very strong confidence being reported by the non-manufacturing sector, which is the majority of employment in the economy.  In terms of significant formal immigration that remains some years away, although the number of foreign residents of Japan continues to rise and there are many anecdotal reports of informal employment. 

Thirdly, increased inbound tourism is arguably one of the most successful outcomes of the original aims of Abenomics.  The easing of visa restrictions alongside the improvement in access provided by more low cost airlines flying into Japan, mainly from Asia have contributed to inbound tourism.  For example, there is now a new terminal at Narita, Tokyo's main international airport, dedicated to such airlines offering cheaper landing fees as historically the punitive rates for the main airport have been a deterrent to travel.  Last year the total number of foreign tourists reached 13.4m and the likely outcome for 2015 is now very likely to exceed 18m.  Originally the target had been 20m in 2020, when Japan is hosting the summer Olympics in Tokyo, but this is likely to be comfortably exceeded.  This new source of demand is helping certain retailers and manufacturers as well as increasing the occupancy rates of hotels, but it is also beginning to have social impacts.  As travellers come on return trips they are travelling outside the main cities and many traditional Japanese attractions, from temples to ryokan, are adapting and becoming more welcoming. Made in Japan is viewed increasingly as a badge of quality, particularly by Chinese tourists.

Outlook

Whilst global stock markets have been experiencing turbulence in recent weeks we think that the long term positive changes for Japanese companies outlined already will be more important over the next year.  This is not to deny that weakness in the Chinese economy will see demand fall for some products but rather that the longer term shifts in behaviour driven by the changes mentioned above will outweigh shorter term difficulties.  This is also not to claim that all the many aims of Abenomics will be a success, but that there is enough forward progress to be encouraged.  Prime Minister Abe was re-elected with a strong majority in December 2014, and having achieved his aims of changing the security laws in Japan is now refocused on improving the economy.  There is much negative commentary on Japan's outstanding levels of debt and very little on the overall level of assets, which makes Japan the world's largest ever net creditor nation.   In November Japan Post Holdings, Bank and Insurance will all be privatised which will move very significant businesses from the public to the private sector.  Against this background and with the belief that valuations are not too high the trust has increased its levels of gearing after the year end.  There is a further tranche of borrowing to be invested as appropriate. 

Past performance is not a guide to future performance.

Portfolio Performance Attribution for the Year to 31 August 2015*

Computed relative to the benchmark (TOPIX total return (in sterling terms)) with net income reinvested

Portfolio breakdown	Benchmark asset allocation		Baillie Gifford Japan asset allocation		Performance†			Contribution attributable to:
					BG Japan %	TOPIX total return %	Contribution to relative return %	Stock selection %	Asset allocation %	Gearing %
	01.09.14 %	31.08.15 %	01.09.14 %	31.08.15 %
Commerce and   services	12.5	12.6	24.9	27.9	26.8	12.6	3.1	3.1	-	-
Manufacturing and   machinery	21.0	19.8	20.6	19.6	20.4	8.8	2.2	2.2	-	-
Retail	4.1	4.8	5.5	5.3	52.3	34.0	0.9	0.7	0.2	-
Electricals and   electronics	12.8	11.7	14.2	12.9	5.7	4.9	-	0.1	(0.1)	-
Real estate and   construction	6.1	5.8	5.7	5.4	2.1	5.7	(0.1)	(0.2)	0.1	-
Information,   communication and   utilities	9.2	9.7	9.1	9.8	12.4	18.3	(0.5)	(0.5)	-	-
Chemicals and other   materials	11.6	10.9	7.3	5.6	(5.0)	7.1	(0.5)	(0.8)	0.3	-
Financials	13.9	14.9	10.0	10.3	15.6	20.0	(0.7)	(0.4)	(0.3)	-
Pharmaceuticals and food	8.8	9.8	2.7	3.2	6.2	26.0	(1.1)	(0.5)	(0.6)	-
Total assets	100.0	100.0	100.0	100.0	17.2	13.4	3.3	3.7	(0.4)	-
Impact of gearing					3.0	-	3.0	-	-	3.0
Total (including gearing)#					20.6	13.4	6.3	3.7	(0.4)	3.0

Past performance is not a guide to future performance.

Source: Statpro/Baillie Gifford

Contributions cannot be added together, as they are geometric; for example, to calculate how a return of 20.6% against a benchmark return of 13.4% translates into a relative return of 6.3%, divide the portfolio return of 120.6 by the benchmark return of 113.4, subtract one and multiply by 100. In addition, the total contribution figures include a residual element that relates to changes in weightings mid-month, which cannot be attributed to individual sectors. Consequently, the contributions for the individual sectors do not sum to the total contribution figures.

*      The performance attribution table is based on total assets.

†      The returns are total returns (net income reinvested), calculated on a monthly linked method.

#      The total return performance of 20.6% excludes expenses and, therefore, differs from the NAV return (after deducting borrowings at par value) of 19.9% as a result.

Investment Changes (£'000)

	Valuation at  31 August 2014 £'000	Net acquisitions/ (disposals) £'000	Appreciation/ (depreciation) £'000	Valuation at 31 August 2015 £'000
Equities:
Commerce and services	71,411	12,392	19,165	102,968
Manufacturing and machinery	59,035	2,477	11,072	72,584
Retail	15,691	(4,163)	7,898	19,426
Electricals and electronics	40,534	5,878	1,292	47,704
Real estate and construction	16,335	3,876	(271)	19,940
Information, communication and utilities	25,967	7,141	3,283	36,391
Chemicals and other materials	20,846	1,398	(1,414)	20,830
Financials	28,688	5,743	3,587	38,018
Pharmaceuticals and food	7,768	3,480	459	11,707
Total equity investments	286,275	38,222	45,071	369,568
Net liquid assets	4,172	4,600	(461)	8,311
Total assets	290,447	42,822	44,610	377,879
Bank loans	(41,733)	(16,154)	3,161	(54,726)
Shareholders' funds	248,714	26,668	47,771	323,153

Twenty Largest Holdings at 31 August 2015
Name	Business	2015 Value £'000	2015 % of total assets	2014 Value £'000
SoftBank	Telecom operator and internet investor	12,058	3.2	6,966
Sysmex	Medical equipment	11,183	3.0	6,607
Toyo Tire & Rubber	Tyre manufacturer	10,833	2.9	7,327
Temp Holdings	Employment and outsourcing services	10,568	2.8	6,236
Rakuten	Internet retail and financial services	9,676	2.6	6,664
Japan Exchange Group	Stock Exchange operator	9,329	2.5	6,580
Fuji Heavy Industries	Subaru cars	8,858	2.3	8,747
Itochu	Trading conglomerate	8,785	2.3	8,028
Cookpad	Recipe website	8,731	2.3	4,309
M3	Online medical database	8,690	2.3	6,073
GMO Internet	Internet services	8,460	2.2	4,438
Otsuka Corp	IT solutions for SMEs	8,272	2.2	6,158
H.I.S.	Travel agency and theme parks	8,257	2.2	6,666
Sumitomo Mitsui Trust	Trust bank and investment manager	8,242	2.2	4,808
Misumi Group	Precision machinery parts distributor	8,050	2.1	6,418
Kubota	Agricultural machinery	7,986	2.1	6,753
Sony	Consumer electronics, films and finance	7,770	2.1	4,418
Asics	Sports shoes and clothing	7,238	1.9	4,694
SMC	Pneumatic control equipment	7,209	1.9	5,375
Nitori	Furniture retail chain	7,005	1.8	4,894
		177,200	46.9	122,159

Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report on page 27 of the Annual Report and Financial Statements. No Director has a contract of service with the Company.

Investment Management Fee

An Investment Management Agreement between the Company and Baillie Gifford & Co Limited sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Management Agreement is terminable on not less than 6 months' notice or on shorter notice in certain circumstances. Compensation would only be payable if termination occurred prior to the expiry of the notice period. Careful consideration has been given by the Board as to the basis on which the management fee is charged. The Board considers that maintaining a relatively low ongoing charges ratio is in the best interests of the shareholders. The Board is also of the view that calculating the fee with reference to performance would be unlikely to exert a positive influence over the long term performance. The annual management fee payable is 0.95% on the first £50m of net assets and 0.65% on the remaining net assets, calculated and payable quarterly. The details of the management fee are as follows:

	2015 £'000		2014 £'000
Investment management fee	2,141		1,693

Principal Risks and Uncertainties

The Company invests in medium to smaller sized Japanese companies and makes other investments so as to achieve its investment objective of long term capital growth. The Company borrows money when the Board and Managers have sufficient conviction that the assets funded by borrowed monies will generate a return in excess of the cost of borrowing. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests and could result in a reduction in the Company's net assets.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Investment Manager assesses the exposure to market risk when making individual investment decisions as well as monitoring the overall level of market risk across the investment portfolio on an ongoing basis. Details of the Company's investment portfolio are shown on pages 16 and 17 of the Annual Report and Financial Statements.

 (i) Currency Risk

The Company's assets, liabilities and income are principally denominated in yen. The Company's functional currency and that in which it reports its results is sterling. Consequently, movements in the yen/sterling exchange rate will affect the sterling value of those items.

The Investment Manager monitors the Company's yen exposure (and any other overseas currency exposure) and reports to the Board on a regular basis. The Investment Manager assesses the risk to the Company of the overseas currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the currency in which a company's share price is quoted is not necessarily the one in which it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the share price of the company is quoted.

Yen borrowings are used periodically to limit the Company's exposure to anticipated future changes in the yen/sterling exchange rate which might otherwise adversely affect the value of the portfolio of investments. The Company has the authority to use forward currency contracts to limit the Company's exposure if it so chooses to anticipated future changes in exchange rates so that the currency risks entailed in holding the assets are mainly eliminated. No forward currency contracts have been used in the current or prior year.

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

At 31 August 2015	Investments £'000		Cash and cash equivalents £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	369,568		8,691		(54,726)		142		323,675
Total exposure to currency risk	369,568		8,691		(54,726)		142		323,675
Sterling	-		51		-		(573)		(522)
	369,568		8,742		(54,726)		(431)		323,153

* Includes net non-monetary assets of £27,000.

At 31 August 2014	Investments £'000		Cash and cash equivalents £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	286,275		5,238		(41,733)		(595)		249,185
Total exposure to   currency risk	286,275		5,238		(41,733)		(595)		249,185
Sterling	-		(7)		-		(464)		(471)
	286,275		5,231		(41,733)		(1,059)		248,714

*    Includes net non-monetary assets of £26,000.

Currency Risk Sensitivity

At 31 August 2015, if sterling had strengthened by 10% against the yen, with all other variables held constant, total net assets and net return on ordinary activities after taxation would have decreased by £35,906,000 (2014 - £27,687,000). If there had been a 10% weakening of sterling against the yen, with all other variables held constant, total net assets and net return on ordinary activities after taxation would have increased by £29,377,000 (2014 - £22,653,000).

(ii) Interest Rate Risk

Interest rate movements may affect the level of income receivable on cash deposits. They may also impact upon the market value of the Company's investments as the effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

The Board reviews on a regular basis the amount of investments in cash and the income receivable on cash deposits.

The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board.

The interest rate risk profile of the Company's interest bearing financial assets and liabilities at 31 August 2015 is shown below.

Financial Assets

Cash deposits generally comprise overnight call or short term money market deposits and earn interest at floating rates based on prevailing bank base rates.

Financial Liabilities

The interest rate risk profile of the Company's loans at 31 August was:

	2015			2014
	Book value £'000	Weighted average interest rate	Weighted average period until maturity	Book value £'000	Weighted average interest rate	Weighted average period until maturity
Bank Loans
Yen denominated	54,726	2.1%	43 months	41,733	2.5%	72 months

Interest Rate Risk Sensitivity

An increase of 100 basis points in interest rates, with all other variables held constant, would have decreased the Company's total net assets and total return on ordinary activities for the year ended 31 August 2015 by £161,000 (2014 - nil). This is mainly due to the Company's exposure to interest rates on its revolving bank loans. A decrease of 100 basis points would have had an equal but opposite effect. The Company does not hold bonds.

(iii) Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Company's exposure to changes in market prices relates to the fixed asset investments as disclosed in note 8 of the Annual Report and Financial Statements.

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Manager. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index.

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 16 and 17 of the Annual Report and Financial Statements. In addition, a list of the 20 largest holdings together with various analyses of the portfolio by industrial sector and exchange listing are shown on pages 14 and 15 of the Annual Report and Financial Statements.

114.4% (2014 - 115.1%) of the Company's net assets are invested in Japanese quoted equities. A 10% increase in quoted equity valuations at 31 August 2015 would have increased total net assets and net return on ordinary activities after taxation by £36,957,000 (2014 - £28,628,000). A decrease of 10% would have had an equal but opposite effect.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are in investments that are readily realisable.

The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding (see Investment Policy on page 6 of the Annual Report and Financial Statements).

The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's borrowing facilities are detailed in note 11 of the Annual Report and Financial Statements.

The maturity profile of the Company's financial liabilities at 31 August was:

Financial Liabilities	2015 £'000	2014 £'000
In less than one year In more than two years, but not more than five years In more than five years	16,096 38,630 -	- - 41,733
	54,726	41,733

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. This risk is managed as follows:

¾ where the Investment Manager makes an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question;

¾ the Depositary is liable for the loss of financial instruments held in custody. The Depositary will ensure that any delegate segregates the assets of the Company. The Depositary has delegated the custody function to Bank of New York Mellon SA/NV London Branch. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Managers monitor the Company's risk by reviewing the custodian's internal control reports and reporting their findings to the Board;

¾ investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed;

¾ the creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Manager; and

¾ cash is only held at banks that are regularly reviewed by the Managers.

Credit Risk Exposure

The exposure to credit risk at 31 August was:

	2015 £'000	2014 £'000
Cash and cash equivalents	8,742	5,231
Debtors	318	343
	9,060	5,574

None of the Company's financial assets are past due or impaired.

Fair Value of Financial Assets and Financial Liabilities

The Company's investments are stated at fair value and the Directors are of the opinion that the reported values of the Company's other financial assets and liabilities approximate to fair value with the exception of the long term borrowings which are stated at amortised cost. The fair value of borrowings is shown below.

	2015		2014
	Book Value £'000	Fair* Value £'000	Book Value £'000	Fair* Value £'000
Yen bank loans	54,726	58,336	41,733	45,496

* The fair value of each bank loan is calculated with reference to a Japanese government bond of comparable yield and maturity.

Capital Management

The Company does not have any externally imposed capital requirements other than the loan covenants detailed in note 11 on page 41 of the Annual Report and Financial Statements. The capital of the Company is the ordinary share capital as detailed in note 12 on page 41 of the Annual Report and Financial Statements. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 6 of the Annual Report and Financial Statements, and shares may be repurchased or issued as explained on page 20 of the Annual Report and Financial Statements.

Fair Value of Financial Instruments

Fair values are measured using the following fair value hierarchy:

Level 1:          reflects financial instruments quoted in an active market

Level 2:          reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables includes only data from observable markets.

Level 3:          reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.

The valuation techniques used by the Company are explained in the accounting policies on page 37 of the Annual Report and Financial Statements.

The financial assets designated as valued at fair value through profit or loss are all categorised as Level 1 in the above hierarchy.  None of the financial liabilities are designated at fair value through profit or loss in the financial statements.

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk - failure to comply with applicable legal and regulatory requirements such as the tax rules for investment companies, the UKLA Listing Rules and the Companies Act could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report or the Company being subject to tax on capital gains.

Baillie Gifford's Business Risk, Internal Audit and Compliance Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

Operational Risk - failure of Baillie Gifford's accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. Baillie Gifford have a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews Baillie Gifford's Report on Internal Controls and the reports by other key service providers are reviewed by the Managers on behalf of the Board.

Discount/Premium Volatility - the discount/premium at which the Company's shares trade can change. The Board monitors the level of discount/premium and the Company has authority to buy back or issue its own shares when deemed to be in the best interest of all shareholders.

Leverage Risk - the Company may borrow money for investment purposes. If the investments fall in value, any invested borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. All borrowings require the prior approval of the Board and leverage levels are discussed by the Board and Managers at every meeting. All of the Company's investments are in listed securities that are readily realisable. Further information on leverage can be found on page 54 of the Annual Report and Financial Statements.

Statement of Directors' Responsibilities in Respect of the Annual Report and Financial Statements

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration 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 applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). 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:

¾ select suitable accounting policies and then apply them consistently;

¾ make judgements and accounting estimates that are reasonable and prudent;

¾ state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

¾ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

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 and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page of the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed within the Directors and Management section, confirm that, to the best of their knowledge:

¾ the financial statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company;

¾ the Annual Report and Financial Statements taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy; and

¾ the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

By order of the Board

Nick AC Bannerman

16 October 2015

Income Statement

	For the year ended 31 August 2015				For the year ended 31 August 2014
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	45,071	45,071		-	18,801	18,801
Currency gains (note 2)	-	2,700	2,700		-	3,927	3,927
Income (note 3)	4,316	-	4,316		3,746	-	3,746
Investment management fee (note 4)	(2,141)	-	(2,141)		(1,693)	-	(1,693)
Other administrative expenses	(502)	-	(502)		(386)	-	(386)
Net return before finance costs   and taxation	1,673	47,771	49,444		1,667	22,728	24,395
Finance costs of borrowings	(1,042)	-	(1,042)		(1,004)	-	(1,004)
Net return on ordinary activities   before taxation	631	47,771	48,402		663	22,728	23,391
Tax on ordinary activities	(432)	-	(432)		(341)	-	(341)
Net return on ordinary activities   after taxation	199	47,771	47,970		322	22,728	23,050
Net return per ordinary share   (note 6)	0.28p	67.17p	67.45p		0.47p	33.45p	33.92p

All revenue and capital items in this statement derive from continuing operations.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

Balance Sheet as at 31 August

	2015		2014
	£'000	£'000	£'000	£'000
Fixed assets Investments held at fair value through profit or loss		369,568		286,275
Current assets
Debtors	345		369
Cash and cash equivalents	8,742		5,231
	9,087		5,600
Creditors: Amounts falling due within one year (note 7)	(16,872)		(1,428)
Net current (liabilities)/assets		(7,785)		4,172
Total assets less current liabilities		361,783		290,447
Creditors: Amounts falling due after more than one year (note 7)		(38,630)		(41,733)
Net assets		323,153		248,714
Capital and reserves
Called up share capital		3,756		3,467
Share premium		73,272		47,092
Capital redemption reserve		203		203
Capital reserve		251,739		203,968
Revenue reserve		(5,817)		(6,016)
Shareholders' funds		323,153		248,714
Net asset value per ordinary share (after deducting borrowings at fair value)		425.4p	353.3p
Net asset value per ordinary share (after deducting borrowings at par value)		430.2p	358.7p
Ordinary shares in issue (note 6)		75,121,750	69,331,750

The Financial Statements of The Baillie Gifford Japan Trust PLC (Company registration number SC075954) were approved and authorised for issue by the Board and were signed on 16 October 2015.

Reconciliation of Movements in Shareholders' Funds

For the year ended 31 August 2015

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2014	3,467	47,092	203	203,968	(6,016)	248,714
Shares issued	289	26,180	-	-	-	26,469
Net return on ordinary activities after taxation	-	-	-	47,771	199	47,970
Shareholders' funds at 31 August 2015	3,756	73,272	203	251,739	(5,817)	323,153

For the year ended 31 August 2014

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September      2013	3,251	32,019	203	181,240	(6,338)	210,375
Shares issued	216	15,073	-	-	-	15,289
Net return on ordinary activities after      taxation	-	-	-	22,728	322	23,050
Shareholders' funds at 31 August    2014	3,467	47,092	203	203,968	(6,016)	248,714

* The capital reserve balance as at 31 August 2015 includes investment holding gains of £140,216,000 (2014 - £103,632,000).

Cash Flow Statement

	For the year ended 31 August 2015			For the year ended 31 August 2014
	£'000	£'000		£'000	£'000
Net cash inflow from operating activities		1,327			1,322
Servicing of finance
Interest paid	(1,030)			(884)
Net cash outflow from servicing of finance		(1,030)			(884)
Financial investment
Acquisitions of investments	(62,854)			(52,638)
Disposals of investments	23,906			30,201
Exchange differences on settlement of investment   transactions	(117)			(54)
Net cash outflow from financial investment		(39,065)			(22,491)
Net cash outflow before financing		(38,768)			(22,053)
Financing
Shares issued	26,469			15,289
Bank loans drawn down	24,075			27,410
Bank loans repaid	(7,921)			(16,387)
Net cash inflow from financing		42,623			26,312
Increase in cash		3,855			4,259
Reconciliation of net cash flow to movement in net debt
Increase in cash		3,855			4,259
Net cash inflow from bank loans		(16,154)			(11,023)
Exchange differences on bank loans		3,161			4,869
Exchange differences on cash		(344)			(888)
Movement in net debt in the year		(9,482)			(2,783)
Opening net debt		(36,502)			(33,719)
Closing net debt		(45,984)			(36,502)

Notes

1.	The financial statements for the year to 31 August 2015 have been prepared on the basis of the same accounting policies set out in the Company's Annual Report and Financial Statements at 31 August 2014. In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis. In accordance with the Company's Articles of Association, shareholders have the right to vote annually at the Annual General Meeting on whether to continue the Company. The Directors have no reason to believe that the continuation resolution will not be passed at the Annual General Meeting. Accordingly, the financial statements have been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future. If the continuation resolution is not passed, the Articles provide that the Directors shall convene a General Meeting within three months at which a special resolution will be proposed to wind up the Company voluntarily. If the Company is wound up, its investments may not be realised at their full market value.
							31 August 2015 £'000			31 August 2014 £'000
2.	Currency Gains/(Losses)
	Exchange differences on bank loans						3,161			4,869
	Other exchange differences						(461)			(942)
							2,700			3,927
3.	Income						31 August 2015 £'000			31 August 2014 £'000
	Income from investments						4,316			3,746
4.	Investment Management Fee - all charged to revenue						31 August 2015 £'000			31 August 2014 £'000
	Investment Management Fee						2,141			1,693
	The annual management fee is 0.95% on the first £50m of net assets and 0.65% on the remaining net assets, calculated and payable quarterly.
5.	No final dividend will be declared.
6.	Net Return per Ordinary Share
		2015						2014
		Revenue		Capital	Total			Revenue	Capital		Total
	Net return on ordinary activities    after taxation	0.28p		67.17p	67.45p			0.47p	33.45p		33.92p
	Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £199,000 (2014 - £322,000), and on 71,115,407 (2014 - 67,942,092) ordinary shares, being the weighted average number of ordinary shares in issue during each year. Capital return per ordinary share is based on the net capital return for the financial year of £47,771,000 (2014 - £22,728,000), and on 71,115,407 (2014 - 67,942,092) ordinary shares, being the weighted average number of ordinary shares in issue during each year. There are no dilutive or potentially dilutive shares in issue.
7.	Total borrowings at 31 August 2015 were ¥10.2 billion and are detailed on page 41 of the Annual Report and Financial Statements. During the year the Company entered into two revolving loan facilities with Scotiabank Europe plc. At 31 August 2015, the ¥1.5 billion three year facility maturing in November 2017 was fully drawn down. The 5 year ¥3 billion five year facility maturing in August 2020 had ¥1.5 billion drawn down.
8.	Transaction costs incurred on the purchase and sale of investments are added to the purchase costs or deducted from the sales proceeds, as appropriate. During the year, transaction costs on purchases amounted to £30,000 (31 August 2014 - £32,000) and transaction costs on sales amounted to £12,000 (31 August 2014 - £19,000).
9.	At 31 August 2015 the Company had authority to buy back 10,415,314 shares. No shares were bought back during the year. Under the provisions of the Company's Articles share buy-backs are funded from the capital reserve. During the year, 5,790,000 (2014 - 4,300,000) shares were issued at a premium to net asset value raising proceeds of £26,469,000 (2014 - £15,289,000).
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 August 2015. The financial information for 2014 is derived from the statutory accounts for 2014 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2014 accounts, their report was unqualified and did not contain a statement under sections 495 to 497 of the Companies Act 2006. The statutory accounts for 2015 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 30 November 2015.
11.	The Report and Accounts will be available on the Company's page of the Managers' website www.japantrustplc.co.uk‡ on or around 27 October 2015.

^‡ Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

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