UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                  Form N-CSR

         CERTIFIED AMENDED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

                             INVESTMENT COMPANIES

                 Investment Company Act file number: 811-08002


                    JAPAN SMALLER CAPITALIZATION FUND, INC.

          2 World Financial Center, Building B, New York, N.Y. 10281

                      Nomura Asset Management U.S.A. Inc.
          2 World Financial Center, Building B, New York, N.Y. 10281

Registrant's telephone number, including area code: (800) 833-0018

Date of fiscal year end:   February 28, 2007

Date of reporting period:  August 31, 2006

ITEM 1. REPORT TO SHAREHOLDERS
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                   JAPAN SMALLER CAPITALIZATION FUND, INC.


                                                              October 17, 2006

To Our Shareholders:

      We present the Semi-Annual Report of Japan Smaller Capitalization Fund,
Inc. (the "Fund") for the six months ended August 31, 2006.

      The Net Asset Value per share ("NAV") of the Fund decreased by 11.2%
during the six months. The closing market price of the Fund on August 31,
2006, on the New York Stock Exchange was $12.74 representing a premium of
0.47% to the NAV of $12.68. The net assets of the Fund were $268,518,386 on
August 31, 2006.

      The Fund's benchmark--the Russell/Nomura Small Cap(TM) Index--decreased
by 9.6% in United States ("U.S.") dollar terms. During the six months ended
August 31, 2006, the Fund underperformed the Russell/Nomura Small Cap(TM)
Index, by 1.6%. The Russell/Nomura Small Cap Index(TM)declined by 8.4% in
local currency terms for the six months ended August 31, 2006. The
Russell/Nomura Small Cap (TM)Index under-performed the broad Japanese stock
market, the TOPIX, which declined by 1.6%, in local currency terms. The TOPIX,
consisting of all companies listed on the First Section of the Tokyo Stock
Exchange (the "TSE"), decreased by 2.9% and the Nikkei Average Index, a
price-weighted index of the 225 leading stocks on the TSE, decreased by 1.7%
in U.S. dollar terms for the six months ended August 31, 2006. The Japanese
yen ("Yen") depreciated by 1.3% against the U.S. dollar during the period.

      Holdings in the information and communication sector, such as SOFTWARE
RESEARCH ASSOCIATES, SORUN CORPORATION and NIHON UNISYS, LTD. contributed to
the Fund's performance. Stock holdings from other sectors, such as JACCS CO.,
LTD., NICHIAS CORPORATION and HAMAMATSU PHOTONICS K.K. also added value to the
portfolio. On the other hand, some holdings in the Electric Appliances sector,
such as MEIKO ELECTRONICS CO., LTD. detracted from the relative return, as did
MAKINO MILLING MACHINE CO., LTD., MATSUI SECURITIES CO., LTD. and IWAI
SECURITIES CO., LTD.

The Portfolio

      Equity holdings represented 98.7% of the Fund's net assets at August 31,
2006. The Fund held 100 portfolio companies, of





which 73 were TSE First Section stocks, 11 were TSE Second Section stocks, 13
were JASDAQ stocks and three were other smaller capitalization stocks,
comprising 76.0%, 8.5%, 12.5% and 1.7%, respectively, of net assets on August
31, 2006.

Market Review

      Amid a firm recovery in stock prices, the TOPIX posted a gain of 4.6% in
March 2006 and the index climbed above the 1,700 level for the first time in
more than five years. Confirmation from the Bank of Japan on March 9, 2006
that it would gradually reduce the level of liquidity available to the banking
sector helped to relieve some of the market uncertainty over the Bank of
Japan's policy direction.

      Strong momentum continued early in April, on the back of favorable
macroeconomic data and expectations of further corporate earnings upgrades.
Investor sentiment then started to deteriorate and turned gradually more
cautious after the market had reached its highest level since the collapse of
the internet technology bubble in 2000. Towards the end of April, a sequence
of events, including the rise in oil prices, an interest rate increase by the
Chinese authorities, and the appreciation of the Japanese yen provided a
basis for profit taking.

      Japanese equities extended the downward trend that began during the
previous month and this slide accelerated further throughout May. It marks the
sharpest single monthly decline in the past four years. Conservative earnings
forecasts from companies for fiscal year 2006 undermined investor sentiment.
Later, sanctions against one of Japan's major accounting firms also raised
concerns about earnings quality.

      In June, the Japanese stock market managed to post a small gain. The
slide in Japanese stock prices continued towards the middle of June, with the
overall market decreasing another 7.0% at one point, as the global equity
downturn induced foreign investors to accelerate their share sales. However,
from midway through the month, Japanese stock prices began to recover and
eventually made up for the earlier losses. The turnaround came in parallel
with a rebound in the U.S. stock market, which followed indications from the
Federal Reserve Chairman of a possible end to interest rate tightening.

      Several external events buffeted the Japanese and other global stock
markets early in July, including the sudden worsening of global geopolitical
risk, with North Korea's missile test launch and Israel's attack on Lebanon.
Midway through the month, the Bank of Japan finally increased its official
bank rate to 0.25% for the first time since August 2000, but the market's
reaction was limited, as the news seemed to be priced in already. Although
domestic macroeconomic conditions were again robust in May, risk aversion
among overseas investors brought the market down.

      An upward trend in the Japanese stock market from the middle of July
extended further in August. Japanese stocks seem to


                                      2




have been moving in parallel with global stock markets over the past couple of
months. Therefore, the rebound in the U.S. stock market on the back of the
Federal Reserve's decision to suspend its monetary tightening activity has
provided some support to the Japanese stock market as well.

Outlook and Strategy

      Following the recent stock price recovery, which has been accompanied by
weakening U.S. economic indicators, the Fund is now taking a relatively
cautious view of the market in the short run. However, the Fund forecasts a
12-month target for the TOPIX of approximately 1,700, as the Fund expects the
domestic economy to stay robust while monetary policy will remain
accommodative for the stock market.

      The Fund has revised its economic GDP outlook for the full fiscal year
2006 to 2.8% from 3.0%, although this is a reflection of the weaker growth
numbers in the first half and implies no deterioration in the third and fourth
quarter growth picture. The forecast for GDP growth for fiscal year 2007
remains unchanged at 2.6%. External factors are likely to have a mixed impact
on the Japanese economy; on the one hand, economic prospects for the U.S. are
vulnerable to a slower property market that could have an impact on consumer
spending and growth; meanwhile, economic expansion continues in Europe and, at
a more robust pace, in many emerging markets like India and China. However,
given the recent high degree of correlation between the Japanese stock market
and Wall Street, weaker economic conditions in the U.S. could have a
short-term negative impact on Japanese stocks if these conditions translate
into weaker share price performance in the U.S.

      Recent global market gains suggest that a more positive interest rate
outlook has been priced in following the decision by the Federal Reserve to
call a halt to monetary tightening. There is still sustained price pressure
working through the core inflation data in the U.S., while the third quarter
GDP growth rate is still expected to reach more than 3.0%, implying that
further tightening of the Federal Funds target rate might be necessary.

      Japan's Consumer Price Index data for August was weaker than expected,
but above average economic growth and a recovery in property prices tend to
imply that another interest rate increase is probable before the end of the
fiscal year. Nevertheless, since market participants widely acknowledge the
Bank of Japan's intention to tighten monetary policy, and as long as the
central bank maintains a measured approach toward further tightening, then the
policy action will not have much impact on the market.

      Chief Cabinet Secretary Shinzo Abe, the new leader of the ruling Liberal
Democratic Party, and therefore a successor to Prime Minister Junichiro
Koizumi, was elected on September 20. His new cabinet seems likely to maintain
the existing fiscal policy mix, with spending cuts preferred over tax
increases.


                                      3





      The Fund will pay close attention to valuations, with the aim of
identifying companies that are relatively undervalued compared with their
long-term growth expectations.

      We appreciate your continuing support of your Fund.

                                        Sincerely,


                                        /s/ Hiroshi Terasaki

                                        Hiroshi Terasaki
                                        President

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              AVAILABILITY OF QUARTERLY SCHEDULE OF INVESTMENTS

      The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third quarters of
each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's
Web site at http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Information on
the operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
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                                 PROXY VOTING

      A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities is available
(1) without charge, upon request, by calling toll-free 1-800-833-0018; and (2)
on the Securities and Exchange Commission's web site at http://www.sec.gov.
Information about how the Fund voted proxies relating to securities held in
the Fund's portfolio during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling toll-free
1-800-833-0018; and (2) on the Securities and Exchange Commission's web site
at http://www.sec.gov.
------------------------------------------------------------------------------

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                       SHAREHOLDERS ACCOUNT INFORMATION

      Shareholders whose accounts are held in their own name may contact the
Fund's transfer agent, Computershare Trust Company, N.A. at (800) 426-5523 for
information concerning their accounts.
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                               INTERNET WEBSITE

      Nomura Asset Management U.S.A. Inc. has established an Internet website
which highlights its history, investment philosophy and process and products,
which includes the Fund. The Internet web address is www.nomura.com. We invite
you to view the Internet website.
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                                      4




                   JAPAN SMALLER CAPITALIZATION FUND, INC.

                       FUND HIGHLIGHTS--AUGUST 31, 2006

KEY STATISTICS
    Net Assets ..........................................      $268,518,386
    Net Asset Value per Share ...........................            $12.68
    Closing NYSE Market Price ...........................            $12.74
    Percentage Change in Net Asset Value per Share*+ ....             (11.2%)
    Percentage Change in NYSE Market Price*+ ............             (13.7%)

MARKET INDICES
    Percentage change in market indices:*
                                                            YEN     U.S.$
                                                            ---     -----
    Russell/Nomura Small Cap(TM) Index ..................  (8.4%)  (9.6%)
    TOPIX ...............................................  (1.6%)  (2.9%)
    Nikkei Average ......................................  (0.4%)  (1.7%)
    *From March 1, 2006 through August 31, 2006.
    +Reflects the percentage change in share price.

ASSET ALLOCATION
    Japanese Equities
       TSE First Section Stocks .........................           76.0%
       JASDAQ Stocks ....................................           12.5%
       TSE Second Section Stocks ........................            8.5%
       Other Smaller Capitalization Stocks ..............            1.7%
    Cash and Cash Equivalents ...........................            0.3%
                                                                   -----
     Total Investments ..................................           99.0%
    Other Assets less Liabilities, Net ..................            1.0%
                                                                   -----
         Net Assets .....................................          100.0%
                                                                   =====



INDUSTRY DIVERSIFICATION
                                       % of                                            % of
                                    Net Assets                                      Net Assets
                                    ----------                                      ----------
                                                                              
Miscellaneous Manufacturing .......    18.6     Telecommunications ................     3.5
Retail ............................    10.9     Food Manufacturing ................     3.1
Banks and Finance .................     8.7     Restaurants .......................     2.7
Machinery and Machine Tools .......     7.8     Iron and Steel ....................     2.2
Information and Software ..........     7.7     Oil and Gas .......................     2.2
Services ..........................     7.4     Chemicals and Pharmaceuticals .....     1.4
Automotive Equipment and Parts ....     6.0     Transportation ....................     1.3
Electronics .......................     5.2     Electric ..........................     1.1
Real Estate and Warehouse .........     4.0     Textiles and Apparel ..............     1.0
Wholesale .........................     3.9




                 TEN LARGEST EQUITY HOLDINGS BY MARKET VALUE

                                                           Market       % of
Security                                                   Value     Net Assets
--------                                                ----------   ----------
Jaccs Co., Ltd. ...................................     $8,739,735       3.3
Bosch Corp. .......................................      6,712,393       2.5
Hamamatsu Photonics K.K ...........................      6,180,718       2.3
Nichias Corporation ...............................      6,174,839       2.3
Dowa Mining Co., Ltd. .............................      6,117,411       2.3
Shizuoka Gas Co., Ltd. ............................      5,761,002       2.2
Nihon Unisys, Ltd. ................................      5,673,531       2.1
Yamatake Corp. ....................................      5,248,396       2.0
Doutor Coffee Co., Ltd. ...........................      5,219,358       1.9
Mani, Inc. ........................................      5,054,744       1.9


                                      5






                                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                                            SCHEDULE OF INVESTMENTS

                                                AUGUST 31, 2006

                                                  (Unaudited)
                                                                                                         % of
                                                                                              Market      Net
                                                                   Shares        Cost         Value      Assets
                                                                   ------        ----         -----      ------
EQUITY SECURITIES

                                                                                             
Automotive Equipment and Parts
Autobacs Seven Co., Ltd. ...................................        59,200   $ 2,539,847   $ 2,446,385     0.9
  Interior and exterior car accessories
Bosch Corp. ................................................     1,313,000     6,579,842     6,712,393     2.5
  Automotive parts
Nittan Valve Co., Ltd. .....................................       361,400     3,051,338     3,103,917     1.2
  Engine valves
Sanoh Industrial Co., Ltd. .................................       332,400     2,616,572     2,370,543     0.9
  Tubes, wires and electrical products
Unipres Corporation ........................................       201,300     1,813,738     1,512,773     0.5
                                                                            ------------   -----------  -------
  Press processed automobile parts
Total Automotive Equipment and Parts .......................                  16,601,337    16,146,011     6.0
                                                                            ------------   -----------  -------
Banks and Finance
Aizawa Securities Co., Ltd. ................................       143,600     1,636,457     1,164,804     0.4
  Financial services
The Bank of Fukuoka, Ltd. ..................................       378,000     2,451,826     2,908,312     1.1
  Deposits, loans and exchange transactions
Iwai Securities Co., Ltd. ..................................       165,000     4,472,433     3,114,003     1.2
 Financial services
Jaccs Co., Ltd. ............................................       797,000     8,081,410     8,739,735     3.3
  Consumer credit services
Kansai Urban Banking Corp. .................................        35,000       145,968       146,125     0.1
  General banking services
Matsui Securities Co., Ltd. ................................       175,300     2,332,877     1,557,857     0.4
  Online brokerage services
Sapporo Hokuyo Holdings, Inc. ..............................           314     3,156,881     3,451,284     1.3
  General banking services
Sumitomo Mitsui Financial Group, Inc. ......................           205     2,119,461     2,307,877     0.9
                                                                            ------------   -----------  -------
  Financial services
Total Banks and Finance ....................................                  24,397,313    23,389,997     8.7
                                                                            ------------   -----------  -------
Chemicals and Pharmaceuticals
Koatsu Gas Kogyo Co., Ltd. .................................       248,000     1,372,488     1,515,068     0.5
  High-pressured gases and chemicals
Taiyo Ink MFG Co., Ltd. ....................................        46,300     2,390,753     2,363,030     0.9
                                                                            ------------   -----------  -------
  Resist inks for printed circuit boards
Total Chemicals and Pharmaceuticals ........................                   3,763,241     3,878,098     1.4
                                                                            ------------   -----------  -------


                                       See notes to financial statements



                                                              6






                                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                                       SCHEDULE OF INVESTMENTS--Continued

                                                AUGUST 31, 2006

                                                  (Unaudited)
                                                                                                         % of
                                                                                              Market      Net
                                                                   Shares        Cost         Value      Assets
                                                                   ------        ----         -----      ------
                                                                                             
Electric
Mirai Industry Co., Ltd. ...................................       274,700   $ 2,672,664   $ 2,895,275     1.1
                                                                            ------------   -----------  -------
  Plastic molded electric materials
Total Electric .............................................                   2,672,664     2,895,275     1.1
                                                                            ------------   -----------  -------


Electronics
Iriso Electronics Co., Ltd. ................................        67,500     1,855,288     2,478,805     0.9
  Electronic connectors
Kimmon Manufacturing Co., Ltd.+ ............................     1,116,400     3,880,804     2,586,393     1.0
  Electronic measurement equipment
Meiko Electronics Co., Ltd. ................................       121,200     5,059,637     4,905,210     1.8
  Printed circuit boards
Nitto Kogyo Corporation ....................................        92,800     1,540,932     1,818,600     0.7
  Power switchboards
Sanken Electric Co., Ltd. ..................................       109,000     1,943,221     1,439,526     0.5
  Semiconductors
Toshiba Ceramics Co., Ltd. .................................       145,000       644,608       674,563     0.3
                                                                            ------------   -----------  -------
  Semiconductors
Total Electronics ..........................................                  14,924,490    13,903,097     5.2
                                                                            ------------   -----------  -------

Food Manufacturing
Oenon Holdings, Inc. .......................................       840,000     3,418,039     3,328,079     1.2
  Rice wine, liquor and seasoning
Ozeki Co., Ltd. ............................................       125,800     3,800,777     3,644,357     1.4
  Supermarket chain
Sansei Foods Co., Ltd. .....................................        77,400     1,680,467     1,381,613     0.5
                                                                            ------------   -----------  -------
  Candy products
Total Food Manufacturing ...................................                   8,899,283     8,354,049     3.1
                                                                            ------------   -----------  -------

Information and Software
Jastec Co., Ltd. ...........................................       256,600     2,719,784     2,577,697     1.0
  Applications software
Koei Co., Ltd. .............................................       135,830     2,997,022     2,418,819     0.9
  Video game software
Kyowa Exeo Corporation .....................................       138,000     1,359,554     1,502,697     0.5
  General telecommunications engineering
Nihon Unisys, Ltd. .........................................       318,600     5,088,596     5,673,531     2.1
  Computer software development
Software Research Associates ...............................       265,700     3,333,699     3,943,675     1.5
  Independent system development


                                       See notes to financial statements





                                                              7




                                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                                      SCHEDULE OF INVESTMENTS--Continued

                                                AUGUST 31, 2006

                                                  (Unaudited)
                                                                                                         % of
                                                                                              Market      Net
                                                                   Shares        Cost         Value      Assets
                                                                   ------        ----         -----      ------
                                                                                             
Sorun Corporation ..........................................       472,700   $ 3,541,498   $ 4,466,615     1.7
                                                                            ------------   -----------  -------
  Computer software development
Total Information and Software .............................                  19,040,153    20,583,034     7.7
                                                                            ------------   -----------  -------

Iron and Steel
Godo Steel, Ltd. ...........................................       658,000     4,073,394     3,761,922     1.4
  Construction steel products
Neturen Co., Ltd. ..........................................       185,800     1,667,137     2,058,024     0.8
                                                                            ------------   -----------  -------
  Metal processors
Total Iron and Steel .......................................                   5,740,531     5,819,946     2.2
                                                                            ------------   -----------  -------

Machinery and Machine Tools
Hitachi Construction Machinery Co., Ltd. ...................       173,800     3,834,504     3,835,402     1.4
  Construction machinery
Kato Works Co., Ltd. .......................................       413,000     1,694,710     1,755,949     0.7
  Construction and industrial machinery
Makino Milling Machine Co., Ltd. ...........................       387,000     4,486,285     3,491,952     1.3
  Industrial machinery
NS Tool Co., Ltd. ..........................................         7,300       390,403       375,061     0.1
  Industrial cutting tools
Sanyo Denki Co., Ltd. ......................................       187,000     1,459,826     1,303,336     0.5
  Small precision motors
Senshu Electric Co., Ltd. ..................................        72,100     1,626,900     1,842,969     0.7
  Electric wire and cables
Sintokogio, Ltd. ...........................................       254,000     2,786,079     2,977,924     1.1
  Engineering equipment
Yamatake Corp. .............................................       219,600     5,258,736     5,248,396     2.0
                                                                            ------------   -----------  -------
  Industrial automation equipment
Total Machinery and Machine Tools ..........................                  21,537,443    20,830,989     7.8
                                                                            ------------   -----------  -------

Miscellaneous Manufacturing
Dainichi Co., Ltd. .........................................       105,200       955,733       899,038     0.3
  Oil heating equipment
Dowa Mining Co., Ltd. ......................................       671,000     5,462,746     6,117,411     2.3
  Various metal-related products
Hamamatsu Photonics K.K ....................................       195,000     4,762,173     6,180,718     2.3
  Electron tubes, semiconductors, and image processors
Hogy Medical Co., Ltd. .....................................        33,500     1,619,671     1,509,948     0.5
  Medical supplies
Kinki Sharyo Co., Ltd. .....................................       648,000     2,830,442     2,777,182     1.0
  Passenger trains

                                       See notes to financial statements





                                                              8





                                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                                      SCHEDULE OF INVESTMENTS--Continued

                                                AUGUST 31, 2006

                                                  (Unaudited)

                                                                                                         % of
                                                                                              Market      Net
                                                                   Shares        Cost         Value      Assets
                                                                   ------        ----         -----      ------
                                                                                             
Mani, Inc. .................................................        79,100   $ 1,980,084   $ 5,054,744     1.9
  Medical goods and equipment
Milbon Co., Ltd. ...........................................        53,100     1,856,472     1,945,469     0.7
  Hair care products for beauty salons
Nichias Corporation ........................................       833,000     4,628,967     6,174,839     2.3
  Building and construction materials
Nichiha Corporation ........................................       227,400     3,592,158     3,355,828     1.3
  Ceramic exterior walls and fiber boards
Seiko Corp. ................................................       486,000     3,373,159     3,896,613     1.5
  Medical and commercial equipment
Tokai Rubber Industries ....................................       220,700     3,410,022     3,209,942     1.2
  Rubber and plastic products
Topcon Corporation .........................................       249,700     3,421,950     3,540,245     1.3
  Medical instruments
Toppan Forms Co., Ltd ......................................       220,700     3,165,446     2,878,982     1.1
  Commercial printing
Ulvac Inc. .................................................        68,300     2,667,896     2,310,323     0.9
                                                                            ------------   -----------  -------
  Vacuum devices
Total Miscellaneous Manufacturing ..........................                  43,726,919    49,851,282    18.6
                                                                            ------------   -----------  -------


Oil and Gas
Inpex Holdings Inc.+ .......................................             1         6,590         6,026     0.0
  Oil and natural gas
Shizuoka Gas Co., Ltd. .....................................       764,000     4,410,980     5,761,002     2.2
                                                                            ------------   -----------  -------
  Natural gas supplier
Total Oil and Gas ..........................................                   4,417,570     5,767,028     2.2
                                                                            ------------   -----------  -------

Real Estate and Warehouse
Daibiru Corporation ........................................       378,800     3,243,159     3,927,914     1.5
  Leases office buildings, apartments and hotels
Mitsui Home Co., Ltd. ......................................        39,000       305,618       306,710     0.1
  Residential housing
Suruga Corporation .........................................        68,900     4,535,821     5,019,341     1.9
  Multi-unit commercial and residential building
Takara Leben Co., Ltd. .....................................        81,000     1,296,403     1,363,055     0.5
                                                                            ------------   -----------  -------
  Condominiums
Total Real Estate and Warehouse ............................                   9,381,001    10,617,020     4.0
                                                                            ------------   -----------  -------

Restaurants
Doutor Coffee Co., Ltd. ....................................       291,700     5,621,360     5,219,358     1.9
  Coffee shop chains

                                       See notes to financial statements


                                                              9





                                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                                      SCHEDULE OF INVESTMENTS--Continued

                                                AUGUST 31, 2006

                                                  (Unaudited)

                                                                                                         % of
                                                                                              Market      Net
                                                                   Shares        Cost         Value      Assets
                                                                   ------        ----         -----      ------
                                                                                             
Hiday Hidaka Corp. .........................................       159,400   $ 1,392,030   $ 1,510,270     0.6
  Chinese restaurant chain
Yoshinoya D&C Co., Ltd. ....................................           278       499,253       492,685     0.2
                                                                            ------------   -----------  -------
  Fast food chain
Total Restaurants ..........................................                   7,512,643     7,222,313     2.7
                                                                            ------------   -----------  -------

Retail
Aoyama Trading Co., Ltd. ...................................       102,200     3,222,519     3,326,409     1.2
  Menswear
Arc Land Sakamoto Co., Ltd. ................................        51,000       835,748       721,339     0.3
  Operates home centers
Culture Convenience Club Co., Ltd. .........................       308,400     3,287,522     3,476,447     1.3
  Specialty bookstore
Felissimo Corporation ......................................       115,600     3,294,472     3,191,275     1.2
  Catalog shopping
IK Co., Ltd.+ ..............................................            84       233,359       391,497     0.2
  Used motorcycle dealer
Isetan Co., Ltd. ...........................................       193,800     3,209,592     3,269,493     1.2
  Department stores
Kirindo Co., Ltd. ..........................................        67,900       885,632       696,559     0.3
  Drug store chain
Meganesuper Co., Ltd. ......................................       153,000     2,130,867     1,447,024     0.5
  Eye glasses chain
Ryohin Keikaku Co., Ltd. ...................................        42,300     3,327,828     3,081,540     1.2
  Knitwear, food and household items
Takashimaya Co., Ltd. ......................................       257,000     3,209,539     3,240,830     1.2
  Department stores
Village Vanguard Co., Ltd. .................................           519     2,765,461     3,665,923     1.4
  Books, music,videos and office supplies
Yaoko Co., Ltd. ............................................       112,200     2,601,494     2,676,778     0.9
                                                                            ------------   -----------  -------
  Supermarkets
Total Retail ...............................................                  29,004,033    29,185,114    10.9
                                                                            ------------   -----------  -------

Services
Aeon Delight Co., Ltd. .....................................       138,500     3,155,005     2,997,401     1.1
  Building management
Chintai Corporation ........................................           382       292,465       297,815     0.1
  Real estate information magazines
DTS Corporation ............................................       111,200     3,833,664     3,903,583     1.5
  System and network engineering
Funai Consulting Co., Ltd. .................................       119,200     1,042,819       770,867     0.3
  Management and financial consulting

                                       See notes to financial statements





                                                             10




                                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                                      SCHEDULE OF INVESTMENTS--Continued

                                                AUGUST 31, 2006

                                                  (Unaudited)

                                                                                                         % of
                                                                                              Market      Net
                                                                   Shares        Cost         Value      Assets
                                                                   ------        ----         -----      ------
                                                                                             
Human Holdings Co., Ltd. ...................................           363   $   674,442   $   621,676     0.2
  Exam preparation classes
Meiko Network Japan Co., Ltd. ..............................       602,200     3,349,883     2,940,064     1.1
  Private schools and academic tutoring
Relocation Holdings Inc. ...................................        38,600       646,130       758,088     0.2
  Housing maintenance
Resorttrust, Inc.+ .........................................         5,600       155,019       157,458     0.1
  Timeshare resort hotels
Space Co., Ltd. ............................................        65,150       591,849       528,461     0.2
  Interior design and display work
Tempstaff Co., Ltd. ........................................           668     1,014,163     1,087,105     0.4
  Employment and outsourcing
Tohokushinsha Film Corporation .............................       196,200     2,240,615     2,006,050     0.8
  Television programs, movies and commercial films
Yahagi Construction Co., Ltd. ..............................       517,000     3,081,674     2,189,315     0.8
  General contractor
Yusen Air & Sea Service Co., Ltd. ..........................        66,100     1,471,610     1,574,145     0.6
                                                                            ------------   -----------  -------
  Domestic and international air freight forwarding
Total Services .............................................                  21,549,338    19,832,028     7.4
                                                                            ------------   -----------  -------

Telecommunications
Daimei Telecom Engineering Corp. ...........................       441,000     4,596,094     4,974,941     1.9
  Telecommunication wire installations
Jupiter Telecommunications Co., Ltd.+ ......................         6,082     4,598,143     4,513,630     1.6
                                                                            ------------   -----------  -------
  Cable television broadcasting
Total Telecommunications ...................................                   9,194,237     9,488,571     3.5
                                                                            ------------   -----------  -------

Textiles and Apparel
Workman Co., Ltd. ..........................................        89,700     1,924,728     3,294,057     1.0
                                                                            ------------   -----------  -------
  Uniforms
Total Textiles and Apparel .................................                   1,924,728     3,294,057     1.0
                                                                            ------------   -----------  -------

Transportation
Alps Logistics Co., Ltd. ...................................       113,400     1,205,129     2,125,676     0.8
  Trucking
Iino Kaiun Kaisha, Ltd. ....................................       151,800     1,357,459     1,380,059     0.5
                                                                            ------------   -----------  -------
  Oil tankers
Total Transportation .......................................                   2,562,588     3,505,735     1.3
                                                                            ------------   -----------  -------

Wholesale
Doshisha Co., Ltd. .........................................        68,600     1,408,131     1,233,298     0.5
  Apparel, accessories and electronics


                                       See notes to financial statements




                                                             11





                                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                                      SCHEDULE OF INVESTMENTS--Continued

                                                AUGUST 31, 2006

                                                  (Unaudited)

                                                                                                         % of
                                                                                              Market      Net
                                                                   Shares        Cost         Value      Assets
                                                                   ------        ----         -----      ------
                                                                                             
Hitachi High-Technologies Corporation ......................       105,700   $ 2,634,383   $ 2,791,889     1.0
  Computers and electrical devices
Kondotec, Inc. .............................................       250,500     1,980,776     2,337,132     0.9
  Construction materials
Ohashi Technica Inc. .......................................        34,700       362,311       381,991     0.1
  Automobile related parts
Ryoden Trading Co., Ltd. ...................................       156,000     1,139,403     1,194,939     0.4
  Electronic components
Yuasa Trading Co., Ltd.+ ...................................     1,419,000     3,318,173     2,611,545     1.0
                                                                            ------------   -----------  -------
  Industrial machinery
Total Wholesale ............................................                  10,843,177    10,550,794     3.9
                                                                            ------------   -----------  -------
TOTAL INVESTMENTS IN EQUITY
SECURITIES .................................................                $257,692,689  $265,114,438    98.7
                                                                            ------------  ------------  -------

INVESTMENTS IN FOREIGN CURRENCY                                  Principal
                                                                   Amount
                                                                   ------
Hong Kong Shanghai Bank-Tokyo
  Non-interest bearing account ............................. JPY82,072,307  $    700,670  $    699,291     0.3
                                                                            ------------  ------------  -------
TOTAL INVESTMENTS IN FOREIGN CURRENCY ......................                $    700,670  $    699,291     0.3
                                                                            ------------  ------------  -------
TOTAL INVESTMENTS ..........................................                $258,393,359  $265,813,729    99.0
                                                                            ------------  ------------  -------
OTHER ASSETS LESS LIABILITIES, NET .........................                                 2,704,657     1.0
                                                                                          ------------  -------
NET ASSETS .................................................                              $268,518,386   100.0
                                                                                          ============  ======

+ Non-income producing security.




                       Portfolio securities and foreign currency holdings were translated
                             at the following exchange rate as of August 31, 2006.

                                      Japanese Yen JPY (Y) 117.37 = $1.00












                                       See notes to financial statements



                                                             12




                                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                                      STATEMENT OF ASSETS AND LIABILITIES

                                                AUGUST 31, 2006

                                                  (Unaudited)
                                                                                       
ASSETS:
   Investments in securities, at market value (cost--$257,692,689) ......................   $ 265,114,438
   Investments in foreign currency, at market value (cost--$700,670) ....................         699,291
   Cash or cash equivalents .............................................................       2,781,104
   Receivable for investments sold ......................................................       1,174,414
   Receivable for dividends and interest, net of withholding taxes ......................         214,348
   Prepaid expenses .....................................................................          39,927
                                                                                            -------------
   Total Assets
                                                                                              270,023,522
                                                                                            -------------

LIABILITIES:
   Payable for investments purchased ....................................................       1,046,003
   Accrued management fees ..............................................................         208,439
   Other accrued expenses ...............................................................         250,694
                                                                                            -------------
          Total Liabilities .............................................................       1,505,136
                                                                                            -------------

NET ASSETS:
   Capital stock (par value of 21,179,542 shares of capital stock outstanding, authorized
     100,000,000, par value $0.10 each) .................................................       2,117,955
   Paid-in capital ......................................................................     236,740,893
   Accumulated net realized gain on investments and
   foreign currency transactions ........................................................      23,015,076
   Unrealized net appreciation on investments and foreign exchange ......................       7,419,163
   Distribution in excess of net investment income ......................................        (774,701)
                                                                                            -------------
          Net Assets ....................................................................   $ 268,518,386
                                                                                            -------------
   Net asset value per share ............................................................   $       12.68
                                                                                                    =====





                                       See notes to financial statements




                                                             13



                                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                                            STATEMENT OF OPERATIONS

                                   FOR THE SIX MONTHS ENDED AUGUST 31, 2006

                                                  (Unaudited)

INCOME:
Dividend income (less $143,240 withholding taxes) ...... $1,903,047
Interest income ........................................     51,610
       Total Income ....................................             $ 1,954,657
                                                                     -----------


EXPENSES:
Management fees ........................................  1,381,974
Custodian fees .........................................    184,900
Legal fees .............................................     77,600
Directors' fees and expenses ...........................     77,475
Auditing and tax reporting fees ........................     41,400
Shareholder reports fees ...............................     32,107
Insurance fees .........................................     17,770
Annual meeting expenses ................................     14,765
Registration fees ......................................     13,359
Transfer agency fees ...................................      6,575
Miscellaneous fees .....................................      5,234
                                                          ---------
       Total Expenses ..................................               1,853,159
                                                                     -----------
INVESTMENT INCOME--NET .................................                 101,498
                                                                     -----------


REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Realized gain (loss) on investments and foreign currency transactions:
Net realized gain on investments .......................              22,181,554
Net realized loss on foreign exchange ..................                (42,522)
                                                                     -----------
Net realized gain on investments and foreign exchange ..              22,139,032
Change in net unrealized depreciation on translation
  of foreign currency and other assets and
  liabilities denominated in foreign currency ..........             (1,538,089)
Change in net unrealized depreciation on investments ...            (56,934,298)
                                                                     -----------
Net realized and unrealized loss on investments
  and foreign exchange .................................            (36,333,355)
                                                                     -----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ...           ($36,231,857)
                                                                   =============






                        See notes to financial statements




                                      14




                                           JAPAN SMALLER CAPITALIZATION FUND, INC.

                                              STATEMENT OF CHANGES IN NET ASSETS



                                                                                           For the Six
                                                                                          Months Ended         For the Year
                                                                                         August 31, 2006           Ended
                                                                                           (Unaudited)       February 28, 2006
                                                                                           -----------       -----------------

                                                                                                      
FROM INVESTMENT ACTIVITIES:
    Net investment income ...........................................................   $        101,498    $       (830,270)
    Net realized gain on investments ................................................         22,181,554          36,025,536
    Net realized loss on foreign exchange ...........................................            (42,522)            104,916
    Change in net unrealized depreciation on investments
       and foreign exchange .........................................................        (58,472,387)         32,590,786
                                                                                        ----------------    ----------------
    Increase (decrease) in net assets derived from investment activities and
       net decrease in net assets ...................................................        (36,231,857)         67,890,968
                                                                                        ----------------    ----------------


FROM CAPITAL SHARE TRANSACTIONS:
    Net asset value of shares issued to shareholders on rights offering .............                  0          70,416,485
    Proceeds from reinvestment of dividends* ........................................            666,450                   0
                                                                                        ----------------    ----------------

    Increase in net assets derived from capital share transactions ..................            666,450          70,416,485
                                                                                        ----------------    ----------------


FROM DISTRIBUTION TO SHAREHOLDERS:
    Net investment income ($0.04147 per share) ......................................           (876,199)                  0
    Long term capital gain ($0.807672 per share) ....................................        (17,064,907)                  0
    Net increase (decrease) in net assets ...........................................        (53,506,513)        138,307,453
                                                                                        ----------------    ----------------
NET ASSETS:
    Beginning of period .............................................................        322,024,899         183,717,446
                                                                                        ----------------    ----------------
    End of period (including accumulated undistributed (distribution in
      excess of) net investment income of $(774,701) and
      $0, respectively ..............................................................   $    268,518,386    $    322,024,899
                                                                                        ================    ================


*Reinvestment of dividends resulted in issuance of 51,030 shares.






                                              See notes to financial statements

                                                              15








                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                         NOTES TO FINANCIAL STATEMENTS

                          August 31, 2006 (Unaudited)

1. Significant Accounting Policies

      Japan Smaller Capitalization Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund was incorporated in Maryland on January 25, 1990
and investment operations commenced on March 21,1990. The following is a summary
of significant accounting policies followed by the Fund. In the opinion of
management, all material adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been included.

      (a) Valuation of Securities--Investments traded in the over-the-counter
market are valued at the last reported sales price as of the close of business
on the day the securities are being valued or, if none is available, at the mean
of the bid and offer price at the close of business on such day or, if none is
available, the last reported sales price. Portfolio securities which are traded
on stock exchanges are valued at the last sales price on the principal market on
which securities are traded or lacking any sales, at the last available bid
price. Short-term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity at the date of purchase was 60 days or
less, or by amortizing their value on the 61st day prior to maturity if their
term to maturity at the date of purchase exceeded 60 days. Securities and other
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund.

      (b) Foreign Currency Transactions Transactions denominated in Japanese yen
("Yen") are recorded in the Fund's records at the current prevailing rate at the
time of the transaction. Asset and liability accounts that are denominated in
Yen are adjusted to reflect the current exchange rate at the end of the period.
Transaction gains or losses resulting from changes in the exchange rate during
the reporting period or upon settlement of foreign currency transactions are
included in operations for the current period.

      The net assets of the Fund are presented at the exchange rate and market
values at the end of the period. The Fund does not isolate that portion of the
change in unrealized appreciation (depreciation) included in the statement of
operations arising as a result of changes in Yen rates at August 31, 2006 on
investments and other assets and liabilities. Net realized foreign exchange
gains or losses includes gains or losses arising from sales of portfolio
securities, sales and maturities of short-term securities, currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid.



                                      16



                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                    NOTES TO FINANCIAL STATEMENTS--Continued

                                  (Unaudited)

      (c) Security Transactions, Investment Income and Distributions to
Shareholders -- Security transactions are accounted for on the trade date.
Dividend income and distributions are recorded on the ex-dividend date and
interest income is recorded on the accrual basis. Realized gains and losses on
the sale of investments are calculated on the identified cost basis.

      Distributions from net investment income and net realized gains are
determined in accordance with Federal income tax regulations, which may differ
from generally accepted accounting principles. To the extent these "book/tax"
differences are permanent in nature (i.e., that they result from other than
timing of recognition--"temporary"), such accounts are reclassified within the
capital accounts based on their Federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net realized gains for financial reporting purposes, but not for tax
purposes, are reported as distributions in excess of net realized gains.

      (d) Income Taxes -- A provision for United States income taxes has not
been made since it is the intention of the Fund to qualify as a regulated
investment company under the Internal Revenue Code and to distribute within the
allowable time limit all taxable income to its shareholders.

      Under Japanese tax laws, a withholding tax is imposed on dividends at a
rate of 7.0% (7.0% effective 1/1/04 to 3/31/08) and on interest at a rate of
10.0% and such withholding taxes are reflected as a reduction of the related
revenue. There is no withholding tax on realized gains.

      (e) Capital Account Reclassification -- For the year ended February 28,
2006, the Fund's accumulated net investment loss was increased by $830,270 with
an offsetting decrease in accumulated net realized gain of $830,270. This
adjustment was primarily the result of the reclassification of foreign currency
gains and the net operating loss.

      (f) Use of Estimates in Financial Statement Preparation -- The preparation
of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from these estimates.

      (g) Concentration of Risk -- A significant portion of the Fund's net
assets consists of Japanese securities which involve certain considerations and
risks not typically associated with investments in the United States. In
addition to the smaller size, and greater volatility, there is often
substantially less publicly available information about Japanese issuers than
there is about U.S. issuers. Future economic and political developments in Japan
could adversely affect the value of




                                      17


                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                    NOTES TO FINANCIAL STATEMENTS--Continued

                                  (Unaudited)

securities in which the Fund is invested. Further, the Fund may be exposed to
currency devaluation and other exchange rate fluctuations.

      (h) Indemnifications--Under the Fund's organizational documents, its
officers and directors are indemnified against certain liabilities arising from
the performance of their duties to the Fund. Additionally, in the normal course
of business, the Fund enters into contracts that contain a variety of
representations which provide general indemnifications. The Fund's maximum
exposure under these agreements is unknown as this would involve future claims
that may be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risk of loss to be remote.

2. Management Agreement and Transactions With Affiliated Persons

      Nomura Asset Management U.S.A. Inc. (the "Manager") acts as the manager of
the Fund pursuant to a management agreement. Under the agreement, the Manager
provides all office space, facilities and personnel necessary to perform its
duties. Pursuant to such management agreement, the Manager has retained its
parent company, Nomura Asset Management Co., Ltd. (the "Investment Adviser"), to
act as investment adviser for the Fund.

      As compensation for its services to the Fund, the Manager receives a
monthly fee at the annual rate of 1.10% of the value of the Fund's average
weekly net assets not in excess of $50 million, 1.00% of the Fund's average
weekly net assets in excess of $50 million but not exceeding $100 million, .90%
of the Fund's average weekly net assets in excess of $100 million but not
exceeding $175 million, and .80% of the Fund's average weekly net assets in
excess of $175 million. For services performed under the Investment Advisory
Agreement, the Investment Adviser receives a monthly fee from the Manager at the
annual rate of .50% of the Fund's average weekly net assets not in excess of $50
million, .45% of the Fund's average weekly net assets in excess of $50 million
but not in excess of $100 million, .40% of the Fund's average weekly net assets
in excess of $100 million but not exceeding $175 million, and .35% of the Fund's
average weekly net assets in excess of $175 million. Under the Management
Agreement, the Fund accrued fees to the Manager of $1,381,974 for the six months
ended August 31, 2006. Under the Investment Advisory Agreement, the Manager
informed the Fund that the Investment Adviser earned fees of $614,853 for the
six months ended August 31, 2006. At August 31, 2006, the fee payable to the
Manager, by the Fund, was $208,439.

      Certain officers and/or directors of the Fund are officers and/or
directors of the



                                      18


                    JAPAN SMALLER CAPITALIZATION FUND, INC.

                    NOTES TO FINANCIAL STATEMENTS--Continued

                                  (Unaudited)

Manager. Affiliates of Nomura Holdings, Inc. (the Manager's indirect parent)
earned no commissions on the execution of portfolio security transactions for
the six months ended August 31, 2006. The Fund pays each Director not affiliated
with the Manager an annual fee of $10,000 plus $1,000 per meeting attended,
together with such Director's actual expenses related to attendance at meetings.
Mr. Barker who had been designated by the Directors not affiliated with the
Manager to serve as lead Director, is paid an additional $5,000, effective June
2005. Such fees and expenses for unaffiliated Directors aggregated $77,475 for
the six months ended August 31, 2006.

3. Purchases and Sales of Investments

      Purchases and sales of investments, exclusive of investments in foreign
currencies and short-term securities, for the six months ended August 31, 2006
were $120,222,851 and $138,985,933, respectively.

      As of August 31, 2006, net unrealized appreciation on investments,
exclusive of investments in foreign currency and short-term securities, for
Federal income tax purposes was $7,421,749 of which $21,495,561 related to
appreciated securities and $14,073,812 related to depreciated securities. The
aggregate cost of investments, exclusive of investments in foreign currencies of
$700,670, at August 31, 2006 for Federal income tax purposes was $257,692,689.

4. Rights Offering

      The Fund issued to its shareholders of record as of the close of business
on November 21, 2005 transferable Rights to subscribe for up to an aggregate of
5,282,128 shares of Common Stock of the Fund at a rate of one share of Common
Stock for three Rights held ("Primary Subscription"). During December 2005, the
Fund issued a total of 5,282,128 shares of Common Stock on exercise of such
Rights at the subscription price of $13.98 per share, compared to a net asset
value per share of $15.09 and a market value per share of $15.51. A sales load
of 3.75% was included in the subscription price. Offering costs of approximately
$650,000 and the sales load were charged directly against the proceeds of the
Rights Offering.


                                      19


JAPAN SMALLER CAPITALIZATION FUND, INC.

FINANCIAL HIGHLIGHTS

Selected per share data and ratios for a share of common stock outstanding
throughout the period.



                                                                                          For the Year Ended
                                                For the Six       ----------------------------------------------------------------
                                                Months Ended             February 28,        February 29,         February 28,
                                              August 31, 2006     ------------------------  --------------    --------------------
                                                (Unaudited)             2006         2005         2004           2003        2002
                                                -----------             ----         ----         ----           ----        ----
                                                                                                       
Net asset value, beginning of period ......            $15.24        $11.59         $9.40        $5.74         $5.86        $7.59
                                                       -------       -------       -------       ------        ------       -------
  Net investment income (loss)@ ...........             0.00#         (0.05)        (0.06)       (0.03)        (0.05)       (0.06)
  Net realized and unrealized gain (loss)
    on investments and foreign currency ...             (1.71)         4.14          2.25         3.69         (0.07)       (1.59)
                                                       -------       -------       -------       ------        ------       -------
  Total from investment operations ........             (1.71)         4.09          2.19         3.66         (0.12)       (1.65)
Distributions to shareholders from:
  Net realized capital gains ..............             (0.81)           --            --           --            --        (0.08)
  Net investment income ...................             (0.04)           --            --           --            --           --
                                                       -------       -------       -------       ------        ------       -------
Total distributions .......................             (0.85)         0.00          0.00         0.00         (0.00)       (0.08)
Fund Share Transactions
Dilutive effect of Rights Offering* .......                --         (0.22)           --           --            --           --
  Offering costs charged to paid-in capital
    in excess of par ......................                --         (0.22)           --           --            --           --
                                                       -------       -------       -------       ------        ------       -------
Total Fund share transactions .............                --         (0.44)           --           --            --           --
                                                       -------       -------       -------       ------        ------       -------
Net asset value, end of period ............            $12.68        $15.24        $11.59        $9.40         $5.74        $5.86
                                                       =======       =======       =======       ======        ======       -------
Market value, end of period ...............            $12.74        $15.75        $12.20       $10.79         $6.38        $5.53
Total investment return+ ..................             (13.7%)        29.1%         13.1%        69.1%         15.4%       (18.6%)
Ratio to average net assets/supplemental
data:
  Net assets, end of period (in 000) ......          $268,518      $322,025      $183,717     $149,012       $90,930      $92,815
  Operating expenses ......................              1.21%**       1.32%         1.54%        1.47%         1.63%        1.58%
  Net investment income (loss) ............              0.07%**      (0.37%)       (0.57%)      (0.41%)       (0.75%)      (0.84%)
  Portfolio turnover ......................                40%           81%           86%          28%           28%          38%


+Based on market value per share, adjusted for reinvestment of income dividends
and long term capital gain distributions, and capital share transactions. Total
return does not reflect sales commissions.
@ Based on average shares outstanding.
*Decrease is due to the Rights Offering (see note 4).
**Annualized.
#Amount represents less than $0.005 per share.


                                                             20


                    JAPAN SMALLER CAPITALIZATION FUND, INC.

       Board Review of the Management and Investment Advisory Agreements

      The Board of Directors of the Fund (the "Board") consists of six
directors, five of whom are independent or non-interested, directors (the
"Independent Directors"). The Board considers matters relating to the Fund's
management and investment advisory agreements throughout the year. On an annual
basis, the Board specifically considers whether to approve the continuance of
these agreements for an additional one-year period. The specific agreements (the
"Agreements") consist of the Fund's management agreement with Nomura Asset
Management U.S.A. Inc. (the "Manager") and the investment advisory agreement
between the Manager and its parent, Nomura Asset Management Co., Ltd. (the
"Investment Adviser").

      The Board, including the Independent Directors, most recently approved the
continuance of the Agreements at a meeting held on August 17, 2006. In
connection with their deliberations at that meeting, at a separate meeting of
the Independent Directors held on August 2, 2006, the Independent Directors
received materials that included, among other items, information provided by the
Manager regarding (i) the investment performance of the Fund, performance of
other investment companies and performance of the Fund's benchmark, (ii)
expenses of the Fund and the management fee paid by the Fund to the Manager and
the advisory fee paid by the Manager to the Investment Adviser, and (iii) the
profitability of the Agreements to the Manager and the Investment Adviser. The
lndependent Directors sought and received additional information from the
Investment Adviser. The Independent Directors were advised by independent
counsel in considering these materials and the continuance of the Agreements.

      In approving the continuance of the Agreements at the meeting held on
August 17, 2006, the Board, including the Independent Directors, did not
identify any single factor as determinative. Matters considered by the Directors
in connection with their approval of the Agreements included the following:

      The nature, extent and quality of the services provided to the Fund under
the Agreements. The Board considered the nature, extent and quality of the
services provided to the Fund by the Manager and the Investment Adviser and the
resources dedicated by the Manager and the Investment Adviser. These services
included both investment advisory services and related services such as the
compliance oversight provided by the Manager. Based on its review of all of
these services, the Board, including the Independent Directors, concluded that
the nature, extent and quality of these services supported the continuance of
the Agreements.

      lnvestment performance. The Board considered performance information
provided by the Manager regarding the Fund's investment performance over a
number of time periods, including the one-year, three-year and five-year periods
recently ended. The Manager also provided the Directors with comparative
performance information that they requested.

      In response to requests for additional information by the Independent
Directors, the Board received information about the performance of the Fund
compared to the Fund's benchmark index, data on the Fund's expense ratio and
components thereof, and comparative fee, expense ratio and performance
information for other funds investing primarily in Japanese stocks.



                                      21


                    JAPAN SMALLER CAPITALIZATION FUND, INC.

Board Review of the Management and Investment Advisory Agreements--Continued

      After considering all factors deemed appropriate, the Board, including the
Independent Directors, concluded that the Fund's performance supported the
continuance of the Agreements.

      The costs of the services to be provided and the profits to be realized by
the Manager and its affiliates from their advisory relationships with the Funds.
The Board considered the fee payable under the Fund's management agreement in
connection with other information provided for the Directors' consideration. The
Manager and its affiliates also act as advisers to one additional investment
company registered under the Investment Company Act of 1940 and the Board of
Directors of the Fund compared the advisory arrangements and fees for these two
companies. The Board of Directors of the Fund recognized that the nature of the
services provided by the Manager and the Investment Adviser to other investment
vehicles and separate accounts differed from the range of services provided to
the two registered investment companies.

      The Manager also provided the Board with information prepared by the
Manager and the Investment Adviser indicating the profitability of the
Agreements to these respective advisors. The Independent Directors reviewed this
information with the Manager and requested and received certain supplemental
information from the Manager and the Investment Adviser with respect to the
methodologies used to charge and allocate expenses to the Fund.

      After reviewing the information described above, the Independent Directors
concluded that the management fee charged to the Fund was reasonable and that
the costs of the services provided pursuant to the Agreements and the
profitability of the Agreements to the Manager and the Investment Adviser
supported the continuance of the Agreements.

      Economies of scale. The Board also considered whether the Manager realizes
economies scale as the Fund grows larger and the extent to which any economies
of scale are shared with the Fund and its shareholders. The Board noted that the
management agreement contains three separate breakpoints in the management fee
for net assets above $50 million, with the last breakpoint applicable to net
assets in excess of $175 million. The Fund had net assets of approximately $273
million at August 17, 2006 (the date the Agreements were most recently
considered). The Independent Directors recognized that the existing breakpoints
had provided benefits to the Fund over time but determined that adjustments to
the fee schedule might be appropriate in light of increases in the Fund's assets
resulting from the rights offering completed in early 2006. The Board agreed at
the meeting held on August 17, 2006 to consider the approval of the Agreements
for an interim three-month period to permit the Independent Directors to
consider whether it was appropriate to seek potential amendments to the fee
schedules with different breakpoints that would have the effect of reducing the
aggregate management fee payable by the Fund.

      Based on an evaluation of all factors deemed relevant, including the
factors described above, the Board, including each of the Independent Directors,
concluded that each of the Agreements should be continued through November 30,
2006.



                                      22

















                           [INTENTIONALLY LEFT BLANK]















                                      23




                                                                              ===================================
                                                                           
BOARD OF DIRECTORS

William G. Barker, Jr.
William K. Grollman
Hiroshi Terasaki
Chor Weng Tan
Arthur R. Taylor
John F. Wallace

OFFICERS
Hiroshi Terasaki, President
Keiko Tani, Vice President
Kenneth L. Munt, Vice President
Rita Chopra-Brathwaite, Treasurer
Neil A. Daniele, Secretary and Chief Compliance Officer

MANAGER
Nomura Asset Management U.S.A. Inc.
Two World Financial Center, Building B
New York, New York 10281
Internet Address
www.nomura.com                                                              JAPAN

INVESTMENT ADVISER
Nomura Asset Management Co., Ltd.                                                    Smaller Capitalization
12-1,1-Chome, Nihombashi, Chuo-ku,
Tokyo 103-8260, Japan

DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR                                        Fund, Inc.
Computershare Trust Company, N.A.
P.O. Box 43011
Providence, RI 02940-3011

CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109

COUNSEL
Sidley Austin LLP
787 Seventh Avenue
New York, New York 10019

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                           SEMI-ANNUAL REPORT
Ernst & Young LLP
5 Times Square
New York, New York 10036                                                                 AUGUST 31, 2006

JAPAN SMALLER CAPITALIZATION FUND, INC.
TWO WORLD FINANCIAL
CENTER, BUILDING B
NEW YORK, NEW YORK 10281

------------------------------------------------------------
This Report, including the Financial Statements, is
transmitted to the Shareholders of Japan Smaller
Capitalization Fund, Inc. for their information. This is not
a prospectus, circular or representation intended for use in
the purchase of shares of the Fund or any securities
mentioned in the Report.

The accompanying Financial Statements, including the
Schedule of Investments, have not been examined by the
Fund's independent accountants, Ernst & Young, LLP, and
accordingly, they express no opinion thereon.

                                                                              ===================================


                                                              24



ITEM 2.  CODE OF ETHICS
------------------------------------------------------------------------------

Not Applicable to this semi-annual report


ITEM 3.  AUDIT COMMITTEE FINANCIAL EXPERT
------------------------------------------------------------------------------

Not Applicable to this semi-annual report

ITEM 4.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------------------------------------------

Not Applicable to this semi-annual report



                                      25


ITEM 5.  AUDIT COMMITTEE OF LISTED REGISTRANTS
------------------------------------------------------------------------------

Not Applicable to this semi-annual report


ITEM 6.  SCHEDULE OF INVESTMENTS
------------------------------------------------------------------------------

Not Applicable

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
------------------------------------------------------------------------------

Not Applicable to this semi-annual report

ITEM 8. PORTFILIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
------------------------------------------------------------------------------

(a)   Not applicable

(b)   Not applicable

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
------------------------------------------------------------------------------

(a)   Not applicable

(b)   Not applicable

ITEM 10.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------------------------

Not Applicable

ITEM 11.  CONTROLS AND PROCEDURES
------------------------------------------------------------------------------

The Registrant's Principal Executive Officer and Principal Financial Officer
have evaluated the Registrant's disclosure controls and procedures within 90
days of the filing of this report and have concluded that they are effective
in providing reasonable assurance that the information required to be
disclosed by the Registrant in its reports or statements filed under the 1934
Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.

There were no changes in the Registrant's internal control over financial
reporting that occurred during the Registrant's last fiscal half-year (the
Registrant's second fiscal half-year in the case of an annual report) that
have materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.




                                      26



ITEM 12.  EXHIBITS
------------------------------------------------------------------------------

(a)(1) Not applicable.

(a)(2) Certifications of Principal Executive Officer and Principal
       Financial Officer pursuant to Rule 30a-2 under the Investment Company
       Act of 1940 are attached hereto as an exhibit.

(a)(3) Not applicable.

(b)    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       are furnished herewith as an exhibit.



                                      27


                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Japan Smaller Capitalization Fund, Inc.

By: /s/ Hiroshi Terasaki
----------------------------------
Hiroshi Terasaki
(Principal Executive Officer)

Date:  December 29, 2006
----------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

By: /s/ Rita Chopra-Brathwaite
----------------------------------
Rita Chopra-Brathwaite, Treasurer
(Principal Financial Officer)

Date:  December 29, 2006
----------------------------------




                                      28