IDENTITY

MATERIALITY andSUSTAINABILITY

BUSINESS andSTRATEGIESGOVERNANCE

FINANCIAL INFORMATION /OTHERS

Risk factors
The JT Group is a leading global tobacco company, selling products in more than 130 markets. It also
operates pharmaceutical and processed food businesses. Our operations are subject to various risks stemming from their attributes, changes in business environments, and other factors.

We have established an integrated system for identifying and managing all identified risks. We promote a four-step risk management process: (1) identify risks, (2) assess them, (3) formulate plans to address them and (4) monitor the plans’ progress.

We identify and closely monitor risks that could affect our operations and implement measures to prevent them from materializing and mitigate their impacts in the event that they come to pass.

This following discussion of risk factors should be read together with “FORWARD-LOOKING STATEMENTS” at P.131.

Risk factors

1 L arge or repeated
tax increases

Risk description

The risks enumerated below are not all-inclusive. Other risks exist that could affect our operations and/or financial results.

Potential impact(s)Main measures to address risk

Tobacco products are subject to tobacco taxes or other similar taxes in addition to sales tax or VAT. Some countries have

Large or repeated increases in taxes on tobacco products tend romote understanding among relevant authorities that large or repeated tax•Pbeen raising tobacco taxes or discussing tax increases from a fiscal and/or public health standpoint. Additionally, VAT rates

to lead to reduced consumption of, and/or increased illicit

increases may have counterproductive consequences, such as growth in illicit

generally tend to increase over time. Our policy with respect to tax increases is to raise prices to pass on the tax increase totrade in, tobacco products. They may also induce consumers*

trade and decreased tax revenue due to reduced demand

consumers*, taking into account not only the tax increase’s magnitude but also the price elasticity of demand for tobac-

to switch to lower-priced products. Consequently, they may•O ptimize product portfolio for adaptability to changes in consumers* preferenc-co products. We also endeavor to minimize tax increases’ impact on our operations through measures to drive top-line

result in reductions in our unit sales, revenue and/or profits.

es and behavior

growth and improve cost efficiency. Most governments have adopted a reasonable approach to taxation, recognizing that

• Strengthen and expand global operational platform and increase number oflarge or repeated tax increases may end up reducing tax revenues. In some instances, however, past tax increases haveconsistently profitable markets to avoid overdependence on profits from amaterially affected our business in certain markets.

few markets• Further improve cost efficiency to ensure adequate profitability• Set prices appropriately to minimize tax increase impact in affected markets

2 Growth in illicittrade

3 Tightening of
tobacco regulations

Illicit trade is a problem for not only the tobacco industry but also society as a whole. It harms the tobacco industry by diverting

Growth in illicit trade results in decreased demand for legitimate

demand from law-abiding businesses. Its potential societal harms include reduction in government tax revenues, increased

products and may lead to reductions in our unit sales, revenue

authorities and law enforcement agencies

organized crime, and adverse health consequences due to poor production quality or inadequate post-production quality

and/or profits. Costs incurred to combat illicit trade may also weigh•D o business only with reputable parties in accord with stringent compliancecontrols. Together with the rest of the tobacco industry, we continue to endeavor to eradicate illicit trade, particularly cigaretteon profits. Additionally, circulation of counterfeit products maypoliciessmuggling and counterfeiting.

undermine trust in legitimate products and, in turn, impair the• E ducate consumers* on negative consequences of purchasing illegitimate

Illicit trade tends to grow following large or repeated tax increases. Additionally, regulations on cigarette ingredients and packag-value of both the brand and brand owner for a number of reasons,products

ing may facilitate illicit trade by making cigarettes easier to counterfeit and illegitimate products harder to detect.

including the low quality of counterfeit products.

4For more details on activities to eradicate illicit trade, please see Tackling illegal trade for more details.

The tobacco industry is subject to many regulations, most notably on sales promotion activities (including advertising).

Imposition of stricter regulations on sales promotion activities• Expeditiously collect accurate information to learn of regulatory developments

Regulatory developments may affect our operations and/or financial results.

may undermine top-line growth strategies’ effectiveness by•P ursue constructive dialogue with governments and regulatory authorities toSuch regulations can also lead to growth in illicit trade to the potential detriment of our law-abiding, above-board

depriving us of opportunities to grow brand equity. It can also

encourage reasonable, unbiased regulation that fulfills its intended objective

businesses. Additionally, if stricter regulations are imposed on communications with consumers*, they may preclude

cause us to incur additional regulatory compliance costs under

4Please see Regulation and key laws (P. 120) for more details.

effective sales promotion activities and, in turn, adversely affect top-line growth.

certain circumstances. Our unit sales, revenue and/or profits

As a responsible company, we comply with the laws and regulations of every market in which we operate. We believe

may decrease as a result of such impacts.

• Take action to eradicate illicit trade in cooperation with governments, regulatory

laws and regulations should rightfully differ from one country to another as a reflection of countries’ respective legal
systems, cultures and social conditions.

4 Competition

Our tobacco business is engaged in fierce competition with competitors.

Market share fluctuations may affect our financial results.

•O ptimize product portfolio by offering products that meet consumers’* needs

In the tobacco business, we have been expanding our operations through not only organic growth but also M&A, includ-

Additionally, markets in which we operate sometimes becomeand changing preferences/behavior, and by achieving strong brand positioning

ing acquisitions of RJR Nabisco Inc.’s non-U.S. tobacco business and Gallaher Group Plc. As a result of such acquisitions,embroiled in price competition due to events such as a brandin every price segment

we compete with both global tobacco companies and local players with strong footholds in their respective markets.

repositioning or a price cut in pursuit of market share gains.

• Strengthen sales capabilities and conduct effective sales promotions

Market shares fluctuate in response to various factors, including regulatory changes, shifts in consumer* preferences/

Such price competition may negatively impact our profit mar-• Further improve cost efficiency to ensure profitability

behavior, and local economic conditions. Market shares are also prone to short-term fluctuations in response to one-off

gins in individual markets.

• Strengthen and expand global operational platform and increase number of consis-

events such as competitors’ new product launches and accompanying sales promotion campaigns.

5 Country risk

tently profitable markets to avoid overdependence on profits from a few markets

To realize long-term growth, we have continued to expand our earnings foundation through M&A, entry into new markets

Political instability, economic recession, social unrest or other• Collect and monitor information related to country risk in markets in which weand organic growth in existing markets, mainly in our tobacco business. Such geographic expansion has been accompa-

such events could disrupt our operations in the market in ques-operate to maintain stable operations

nied by increased exposure to country risk. If political, economic or social turmoil were to occur in a market in which wetion. The disruption includes interruption in supply chains or• Strengthen and expand global operational platform and increase number of consis-operate, our operations and/or financial results may be affected. With the extension and increasingly complex effects of thedistribution, damage to assets or facilities, or difficulties in staffing

tently profitable markets to avoid overdependence on profits from a few markets

Russia-Ukraine war, the Company has been operating in the Russian market in strict compliance with all sanctions imposedand sales management. This may lead to a decrease in our unit

nationally and internationally. Since the challenges of operating in Russia at this time are unprecedented, the Company issales, revenue and/or profits.

unable to reasonably estimate the outlook and the impact on financial results as of the issued date of Integrated Report 2022.
*Adult consumers. Minimum legal age for smoking varies in accordance with the legislation in each country

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IDENTITY

MATERIALITY andSUSTAINABILITY

BUSINESS andSTRATEGIESGOVERNANCE

FINANCIAL INFORMATION /OTHERS

Risk factors
Risk factors

6 Currency risk

Risk description

Potential impact(s)Main measures to address risk

Our operations’ global scope exposes us to currency risk.

Our consolidated financial results are affected by changes in other• Formulate foreign-exchange hedging policies that comprehensively take into

While we prepare our consolidated financial statements in Japanese yen, our overseas subsidiaries prepare their financial

currencies’ exchange value against the yen. The international

account prevailing foreign-exchange market conditions, among other factors, andstatements in various other currencies, including the Russian ruble, euro, pound sterling, Taiwanese dollar, US dollar andtobacco business’s financial results, the reporting currency for

mitigate currency risk by hedging with foreign-currency debt or other suitable

Swiss franc. Changes in such foreign currencies’ exchange value against the yen affect our reported earnings. Additionally, inwhich is the US dollar, are affected by changes in other currencies’

instruments in accordance with said policies

our international tobacco business, JT International Holding B.V. consolidates its foreign subsidiaries’ financial statements into

exchange rate against the US dollar. Subsidiaries’ transactions infinancial statements presented in US dollars. Its financial statement data are affected by changes in exchange rates between

currencies other than their respective reporting currencies are

the US dollar and other local currencies used by those foreign subsidiaries. We generally do not hedge risks stemming fromalso subject to currency risk.

such currency translation of financial statements except to hedge the currency risk posed by translating foreign subsidiaries’equity into yen. We hedge this risk with foreign-currency debt, a portion of which is designated as net-investment hedges.
Additionally, gains or losses on the sale or liquidation of subsidiaries that were acquired in a transaction denominated in a nonyen currency and impairment losses recognized against such subsidiaries are affected by changes in the acquisition currency’s
exchange value against the yen between the acquisition date and the date of the sale, liquidation or impairment.

7 Pandemics

We operate businesses globally. Global pandemics have the potential to severely impact our operations. Since the global

Global pandemics could impede normal product supplies due to• Implement various preventive/anti-pandemic measures, including proactively uti-

spread of COVID-19 in 2020, the Company has been operating all businesses in accordance with the policies and guidance

confusion in distribution, limit consumption and alter consumer

lizing telecommuting and imposing stricter workplace hygiene controls, to preventof governments worldwide. We will continue watching and scrutinizing the possible effects of the prolonged pandemic on

behavior due to travel restrictions and lockdowns in leading

infections and keep employees and their families safe

our operations and financial results, as well as currency-exchange trends and the actions of leading governments. We are notmarkets, and subsequently may adversely affect our operations• Build stable supply chains from business continuity standpoint through such means

currently experiencing any business disruptions due to the pandemic, but our financial results could be adversely affected in

and/or financial results.

the event of renewed spread of COVID-19 or an outbreak of another pandemic.

8 Unfavorable
litigation
developments

as sourcing from multiple suppliers and maintaining safe production operations
through such means as stringent process hygiene controls

Some of JT’s subsidiaries are defendants in lawsuits filed by plaintiffs seeking damages for harm allegedly caused by smok-To date, the JT Group has never lost a case or paid any settlement award• Apply a system in order to deeply cooperate internally and externally, quickly under-

ing or vaping, the marketing of tobacco or E-Vapor products or exposure to tobacco smoke. There are lawsuits involving

in connection with smoking/vaping and health-related litigation. How-

stand the information regarding the case and share information with managementsmoking/vaping and health-related cases pending in which some of JT’s subsidiaries are named as defendant or for which JT

ever, the Group is unable to predict the outcome of currently pending orand relevant departments

may have certain indemnity obligations pursuant to the agreement for JT’s acquisition of RJR Nabisco Inc.’s non-U.S. tobacco

future lawsuits. A decision unfavorable to the JT Group and payment of• Coordinate with experienced external counsel if necessary and respond to litigation

business.

a substantial amount of monetary compensation could materially affectcases pertaining to the JT Group in a timely and appropriate manner

In addition, JT and/or some of its subsidiaries are also defendants in lawsuits other than the smoking/vaping and health-relat-

its financial performance.

4Please see Litigation (P. 123) for more details.

ed cases and may face further lawsuits in the future.

Moreover, critical media coverage of these lawsuits may reduce social tolerance of smoking, strengthen public regulations concerning
smoking and prompt the filing of a number of similar lawsuits against
the JT Group, forcing it to bear litigation costs and materially affecting its
business performance.
Apart from smoking/vaping and health-related ones, the JT Group also
may become a defendant in further litigation. Should any problems ariseon the Group’s product quality, this may lead to claims seeking productliability. Such litigation cases may negatively affect the Group’s businessperformance or the manufacture, sale and import and export of its products, should the outcome of any such claims prove unfavorable.

9 Natural disasters

Our financial results could be adversely affected by earthquakes, tsunami, typhoons, floods and/or other natural disasters’ conse-

Natural disasters could disrupt not only our own operations but•R outinely gather and relay information related to crisis management on ongoing basis

quences, potentially including employee casualties, supply shortages due to damage to suppliers’ facilities, disruptions in trans-also any of our value chain partners’ operations. Such disruptions• Periodically review business continuity plans and revise them as warranted

portation, distribution services and/or sales channels, power outages, water service interruptions, and reduced demand for ourcould adversely affect our financial results.

• Conduct initiatives such as disaster preparedness drills and foster disaster-prepared-products.

ness mindset among employees

To minimize natural disasters’ impact on our operations, we have adopted a Business Continuity Plan, the scope of which
includes global supply-chain optimization.

10 Climate change

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Climate change associated with global warming has various adverse impacts, including flooding and landslides due to ab-

Climate change could adversely affect our operations and/or value• Conduct climate scenario analysis in accord with TCFD recommendations and de-normal weather events such as torrential rainfall; intense heat waves, heavy snowfall and drought due to anomalous weather;chains and, in turn, our financial results. Additionally, our financial

velop the capability to more accurately ascertain climate change’s potential impacts

water-resource change and biodiversity loss. Such impacts’ potential consequences include supply chain disruptions andresults could be adversely affected by increases in operating ex-on our operations and take appropriate action to mitigate themchanges in the environments in which tobacco leaf and/or other agricultural commodities we use in our products are grownpenses stemming from the transition to a decarbonized society.

• Strive to reduce Greenhouse Gas (GHG) emissions to Net-Zero across our value

or raised. Such consequences may adversely affect our products and/or financial results through deterioration in thesechain to mitigate climate change’s impacts

inputs’ quality and/or increases in their prices/sourcing costs.

• Implement the measures in Section 9 above to address risks posed by natural disas-

Additionally, if a carbon tax is imposed on energy derived from fossil fuels in conjunction with the transition to a decarbon-ters, which may be exacerbated by climate change

ized society to mitigate climate change’s impacts, our profits may be reduced by increased operating expenses.

4Please see Improving our environmental impact (P. 78) for more details.

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