EDINBURGH Japan Trust turned in a sparkling 27% increase in net asset value to soundly beat returns from its benchmark, the Tokyo First Section Index, by 19.5%.

The trust, which has total assets of nearly #73m following its acquisition of Dunedin Japan Investment Trust, saw NAV increase from 142p to 181p per share during the year to May 31.

Director David Currie said one of the reasons for the significant outperformance was the decision in July 1995 to take out a 40% currency hedge. That move saved the trust from a roughly 20% depreciation in the yen during the second half of 1995.

``That was the first thing,'' Mr Currie said. ``The second thing was that the trust was geared to the tune of about 20%. As the market went up, we were getting a nice little kicker out of that.

``The third thing was stock and sector selection. During the second half of the year, economy-sensitive sectors performed very well, and we were overweight in those areas.''

Edinburgh Japan finished the year with a #45,000 surplus in the revenue account, which equated to 0.2p of earnings per share against a loss of 0.26p the previous year. In spite of that, directors of the capital growth trust once again declared no final dividend. Although some observers are concerned about the possibility of increased interest rates in Japan, Mr Currie said his organisation was confident that conditions for the economy and stock market would continue to improve.

``The main thing that we are seeing is the end of deflation, which was prevalent for most of 1995,'' he said. ``I think what we are going to see is a period of inflation-free growth.''

The assimilation of Dunedin Japan Investment into Edinburgh Japan has almost been completed. Shareholders of more than 90% of Dunedin Japan have accepted the offer, and it is now just a matter of completing the compulsory purchases.

Mr Currie said it had been an easy transition because Dunedin Japan, which brought with it #20.9m of assets, had essentially the same investment goals as Edinburgh Japan. Trust directors are also anticipating long-term cost savings from the transaction.

``It's always more effective to run one trust rather than two trusts because the costs are spread over a wider asset base,'' Mr Currie said.