Japan Tobacco Inc.

Annual Report 2018

Contents

Year ended December 31, 2018
Management

Corporate Information

001 Performance Indicators

052 Corporate Governance

002 At a Glance004	Consolidated Five-Year Financial
Summary
006 Message from the Chairman and CEO
008 Message from the CEO
014 Our Approach to Sustainability
018 In Focus — Tackling the Illegal
Trade of Our Products

052 Decision-Making,Business Execution, Supervision
		056 Interviews with Outside
Directors
060 Internal Control System &Risk Management System
062 Executive Remuneration
064 Regulation and Other Relevant Laws

020 Business Plan 2019067 Litigation

024 The History of JT

068 The Board of Directors,
Audit & Supervisory Board,and Executive Officers

025 Message from the CFO026	
2018 Highlights /Investor Relations Activities
028 Performance Measures

Operations & Analysis
030 Industry Overview
031 Tobacco Business
033 Pharmaceutical Business
033 Processed Food Business
034 Review of Operations
034 International Tobacco Business
040 Japanese Domestic Tobacco
		Business
043 Tobacco Business Value Chain
044 Pharmaceutical Business
046 Processed Food Business
048 Risk Factors

069	
Members of the JTI Executive
Committee

Financial Information
070 Financial Review
078 Consolidated Financial Statements
137 Independent Auditor’s report
138 Glossary of Terms
140 Shareholder Information
141 Corporate Data

Per formance Indicators

Adjusted Operating Profit

Annual Dividend per Share595.5 150
(JPY BN)+1.7%
Year-on-Year Change

(JPY)

+7.1%

Environment

Our Supply Chain - Agricultural Labor Practices:

21.2% 96% 96%
Reduction in total greenhouse gas
emissions between 2009 and 2017** The original target: reducing absolute greenhouse gas
emissions by 20% between 2009 and 2020

Of our directly contracted leaf
growers were observed by farming
experts against our ALP standards
in 2018

Of our leaf merchants reported
against our ALP standards in 2018

Year-on-Year Change

Adjusted Operating Profit
at Constant FX+8.9%

Fact Sheets are available at:https://www.jt.com/investors/results/annual_report/

Year-on-Year Change

637.2(JPY BN)

Unless the context indicates otherwise, references in this Annual Report to‘we’, ‘us’, ‘our’, ‘Japan Tobacco’, ‘JT Group’ or ‘JT’ are to Japan Tobacco Inc.
and its consolidated subsidiaries. References to ‘JTI’ are to JTI Holding B.V.,
our consolidated subsidiary, and its consolidated subsidiaries. References to‘TableMark’ are to TableMark Co., Ltd. and its Group companies. Referencesto ‘Japan Tobacco Inc.’ are only to Japan Tobacco Inc. and references to ‘JTInternational Holding B.V.’ are only to JTI Holding B.V. References to ‘Audit &Supervisory Board’ are to ‘kansayaku-kai’ (as defined in the Companies Act
of Japan) that performs certain supervisory functions through its monitoring
and audit activities within the overall scheme of corporate governancepursuant to the Companies Act of Japan. References to ‘Audit & Supervisory
Board Member’ are to a member or members of an Audit & Supervisory
Board, also referred to in Japanese as ‘kansayaku’ (as defined in the
Companies Act of Japan).

looking statements are necessarily dependent upon assumptions, estimatesand data that may be incorrect or imprecise and involve known and unknown
risks and uncertainties. Forward-looking statements regarding operating
results are particularly subject to a variety of assumptions, some or all ofwhich may not be realized.
Risks, uncertainties or other factors that could cause actual results to differ
materially from those expressed in any forward-looking statement include,
without limitation:
1. ‌increase in awareness of health concerns related to smoking;
2. ‌regulatory developments; including, without limitation, tax increases
and restrictions on sales, marketing, packaging, labeling and use of
tobacco products, privately imposed restrictions and governmental
investigations;3. ‌litigation around the world alleging adverse health and financial effects
resulting from, or relating to, tobacco products;
4. ‌our ability to further diversify our business beyond the traditional
tobacco industry;
5. ‌our ability to successfully expand internationally and make investments
outside Japan;
6. ‌competition and changing consumer preferences;
7. ‌our ability to manage impacts derived from business diversification orbusiness expansion;
8. ‌economic, regulatory and political changes, such as nationalization,
terrorism, wars and civil unrest, in countries in which we operate;
9. ‌fluctuations in foreign exchange rates and the costs of raw materials; and10. ‌catastrophes, including natural disasters.

Forward-looking statements
This presentation contains forward-looking statements. These statements
appear in a number of places in this document and include statements
regarding the intent, belief, or current and future expectations of ourmanagement with respect to our business, financial condition and results ofoperations. In some cases, you can identify forward-looking statements byterms such as “may”, “will”, “should”, “would”, “expect”, “intend”,“project”, “plan”, “aim”, “seek”, “target”, “anticipate”, “believe”, “estimate”,“predict”, “potential” or the negative of these terms or other similarterminology. These statements are not guarantees of future performance andare subject to various risks and uncertainties. Actual results, performance or
achievements, or those of the industries in which we operate, may differ
materially from any future results, performance or achievements expressedor implied by these forward-looking statements. In addition, these forward-

Japan Tobacco Inc.

001

Annual Report 2018

At a Glance

Our Businesses
Results for the fiscal year ended December 31, 2018

The JT Group is a leading global

tobacco company operating in over 70 countries.
Our products are sold in over 130 countries and ourinternationally recognized brands include Winston, Camel,
MEVIUS and LD. Our pharmaceuticals and processed foods
businesses complement the Group's profit growth and we aredeveloping these businesses for sustainable growth.

Market ShareJT’s position in key markets

23.9%

International Tobacco BusinessJapanese Domestic Tobacco Business

The international tobacco business remains the JT Group’s
growth engine, accounting for over 60% of the Group’s consolidated adjusted operating profit. Looking ahead, we expect theinternational tobacco business to continue achieving sustainable top- and bottom-line growth in the mid- to long-term period, further strengthening its competitiveness in both
combustibles and Reduced-Risk Products (RRP)*.
Our international brand portfolio is very competitive andwell-balanced, with strong equity brands across all relevant
product categories and price segments. The portfolio includes
leading brands in cigarettes and fine cut, such as Winston,Camel, MEVIUS and LD, as well as in Reduced-Risk Products,
such as Ploom and Logic.

Our Japanese domestic tobacco business generates about one
third of our consolidated adjusted operating profit.

Results for 2018:

Results for 2018:

Core Revenue

Core Revenue

Adjusted Operating Profit(USD MM)(JPY BN)(JPY BN)

3,493

+7.9%

+11.3%

Year-on-Year Change*	Reduced-Risk Products (RRP): Products with the potential to reduce the risks
associated with smoking** RMC: Ready-made cigarettes

Adjusted Operating Profit

11,330(USD MM)In the RMC** category, we have captured over 60% market
share. We continue to enhance brand equity and strengthen
our leading position. In addition, we also focus on the RRP
category, which has become widely popular.

582.4
-1.4%

Year-on-Year Change

Year-on-Year Change

209.0-10.0%

Year-on-Year Change• Robust volume increase driven by acquisitions and
GFB expansion• Significant core revenue growth, bolstered by improved
pricing in Russia and the UK• Strong top-line momentum drove double-digit adjusted
operating profit growth• National rollout of Ploom TECH
• Enhanced No.1 position in RMC category with 61.8%
market share• Decreased revenue and profit due to a decline in RMC
sales volume

Global Flagship Brands

Key Brands

ITALY
RRP Brands

RUSSIA

35.6%

UNITED KINGDOMFRANCE

41.3%

TURKEY

23.2%

27.7%

Processed Food Business

Our pharmaceutical business focuses on the research anddevelopment, manufacturing and sale of prescription pharmaceuticals. Its mission is to build a R&D-led business, aiming at
first-in-class internationally competent compounds, to increase
our market presence.

Our processed food business primarily engages in frozen
and ambient processed food (mainly staple food products
such as frozen noodles, frozen rice, packed cooked rice andfrozen baked bread), seasonings (including yeast extracts andoyster sauce), and bakery chain outlets mainly in the Tokyo
metropolitan area.

We concentrate on specific therapeutic areas: metabolic diseases, autoimmune/inflammatory diseases and viral infection;
while Torii Pharmaceutical Co., Ltd. is in charge of manufacturing as well as sales and promotion in the domestic market.

JAPAN

61.8%
SPAIN

24.8%

Pharmaceutical Business

TAIWAN

42.5%

Results for 2018:

Results for 2018:

Revenue

Adjusted Operating Profit

Revenue

Adjusted Operating Profit(JPY BN)(JPY BN)(JPY BN)(JPY BN)

114.0
+8.9%

Year-on-Year Change

28.4

-1.1%

+18.0%

Year-on-Year Change

Year-on-Year Change

Revenue Breakdown by
Business Segment(Source: IRI, Nielsen, Logista)

161.4

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Annual Report 2018

Year-on-Year Change

Pharmaceutical

0.3%

Japanese Domestic Tobacco

International Tobacco

5.1%

28.0%
Japan Tobacco Inc.

-23.6%
OthersProcessed Food

7.3%

4.1

Japan Tobacco Inc.

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Annual Report 2018

59.2%

Consolidated Five -Year Financial Summar yJapan Tobacco Inc. and Consolidated Subsidiaries

Results for the fiscal year ended December 31, 2018

Results for the fiscal year ended December 31, 2018

Billions of yen
2014(Jan-Dec)
For the year:

2015(IFRS)

2016(IFRS)

2017(IFRS)

Consolidated (Continuing and discontinued operations combined)

2018(IFRS)(Continuing operations)

Billions of yen
At year-end:

FY2014(IFRS)

2015(IFRS)

2016(IFRS)

2017(IFRS)

2018(IFRS)

4,704.7

4,558.2

4,744.4

5,221.5

5,461.4

228.2

255.3

555.3

755.8

987.6

Revenue (Note 1)

2,259.2

2,252.9

2,143.3

2,139.7

2,216.0

AssetsInternational Tobacco

1,328.0

1,317.2

1,199.2

1,237.6

1,312.3

Interest-bearing debts (Note 6)

Japanese Domestic Tobacco

687.4

677.3

684.2

626.8

621.4

Liabilities

2,082.2

2,036.7

2,216.3

2,379.5

2,761.0

Pharmaceutical

65.8

75.6

87.2

104.7

114.0

Equity2,622.5

2,521.5

2,528.0

2,842.02,700.4

ROE (Note 7)

14.4%

19.5%

17.2%

15.0%

14.3%

ROA (Note 8)

10.8%

14.8%

12.4%

10.8%

10.0%

199.56270.37235.33218.97215.201,395.74

1,369.06

1,371.39

1,541.94

1,468.44

100

118

130

140

150

50.1%

53.2%

55.2%

63.9%

69.7%

–

–

–

–

–

Processed Food

161.2

165.8

164.1

163.1

161.4

Others

16.9

17.0

8.6

7.5

6.8

Beverage

Major Financial Ratios

Amounts per share: (in yen)Core revenue (Note 2)

Diluted EPS (Note 9)

1,258.2

1,252.5

1,138.8

1,177.0

1,250.7

Japanese Domestic Tobacco

649.8

642.2

649.7

590.6

582.4

Operating profit (Note 3)

572.6

565.2

593.3

561.1

565.0

International Tobacco

379.5

346.9

301.8

325.6

339.5

Japanese Domestic Tobacco

181.5

249.2

244.1

215.8

192.5

(7.3)

(2.3)

9.7

24.1

26.3

–

–

–

–

–

Processed Food

(1.2)

3.2

5.0

5.4

2.9

Others20.2(31.8)

32.7

(9.8)

3.8

Adjusted operating profit (Note 3)

661.0

626.7

586.8

585.3

595.5

International Tobacco

447.1

394.4

336.2

351.3

384.5

Notes:
1.	E xcludes tobacco excise taxes and agency transactions. In addition,from 2018, in accordance with the application of IFRS 15, certain items
formerly treated as selling, general and administrative expenses areaccounted for as reductions of revenue.
2.	E xcluding revenue from distribution business of imported tobacco,among others, in the Japanese domestic tobacco business, in addition to
the distribution, contract manufacturing, and other peripheral businesses
in the international tobacco business.
3.	Adjusted operating profit = Operating profit + amortization cost of
acquired intangibles arising from business acquisitions + adjusted items(income and costs)**
adjusted items (income and costs) = impairment losses on goodwill ±restructuring income and costs ± others.
4.	Under IFRS, profit is presented before deducting non-controlling interests.
For comparison, we show the profit attributable to the owners of theparent company.

International Tobacco

Pharmaceutical
Beverage

238.7

254.1

260.2

232.3

209.0

(7.3)

(2.3)

9.7

24.1

28.4

Beverage

–

–

–

–

–

Processed Food

1.4

2.7

5.0

5.4

4.1

Others(18.9)(22.2)(24.4)(27.8)(30.6)

Depreciation and amortization (Note 3)

128.6

133.1

140.8

145.4

158.7

Profit (attributable to owners of the parent company) (Note 4)

391.4

398.5

421.7

392.4

385.7

Free cash flow (FCF) (Note 5)

455.4

386.7

(316.2)

72.6

105.6

Japanese Domestic Tobacco
Pharmaceutical*** Results from continuing operations and discontinued operations for both 2015 and Jan-Dec 2014.

Japan Tobacco Inc.

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Annual Report 2018*

Book value per share (attributable to owners of the parent company)
Dividend per share
Dividend payout ratio (Note 9)**** Payout ratio for 2015 is based on basic EPS from continuing operations.

Japan Tobacco Inc.

5.	FCF = Cash flows from operating activities + cash flows from investing
activities excluding the following items:
From “cash flows from operating activities:” Interest and dividends
received, interest paid and income taxes related to these items.
From “cash flows from investing activities:” Purchase of securities/
proceeds from sale and redemption of securities/payments into time
deposits/proceeds from withdrawal of time deposits/others (but notbusiness-related investment securities, which are included in theinvestment securities item).
6. Including lease obligation.
7. ROE = Return on equity (attributable to owners of the parent company).
8.	ROA = (Profit before income taxes)/Total assets (average of beginningand ending balance of the period).
9. Based on profit (attributable to owners of the parent company).
10. The financial data disclosed herein are rounded.

005

Annual Report 2018

Message from the Chairman and CEO

Under the 4S model, we strive to fulfill our
responsibilities to our valued consumers, shareholders,
employees and the wider society.

robust and that, globally, there are still opportunities toexpand the profit pool of the tobacco industry.

We have attained sustainable profit
growth and will continue throughthe pursuit of the 4S model.

In the pharmaceutical and processed food businesses, whileboth businesses are facing harsh conditions, we will rebuild
a solid business base as early as possible, so that they canagain complement the Group's profit growth.
Shareholders Return

Achieved Robust Profit Growth while Strengthening
the Business Foundation for the Future

Yasutake Tango

Masamichi Terabatake

Chairman of the Board

Representative Director andPresident, Chief Executive Officer

Our resource allocation policy is to prioritize business investments for sustainable profit growth over the mid- to long-term
as well as to strike a balance between business investments
for sustainable profit growth and shareholder returns.

In 2018, the operating environment surrounding us continued
to be challenging due to the changes in the global economy
and political conditions, significant currency volatility andincreased geopolitical risks. However, even in such an environment, we believe that 2018 was a year in which weachieved robust profit growth while strengthening the business foundation for sustainable profit growth in the future. In
the Japanese domestic tobacco business, our presence in
the RRP category was boosted by the nationwide Ploom
TECH distribution. We also completed the development of
new RRP products such as Ploom TECH+ and Ploom S. On
a conventional products front, which is the platform of profitability to support growth, we further solidified our leading position through market share gains. In the international tobacco
business, we achieved strong profit growth by growing market
share in our key markets and implementing a steady pricing
strategy, and reinforced our earnings base for further growth.
In addition, we completed acquisitions in Russia and
Bangladesh, and in parallel, made excellent progress integrating businesses in the Philippines, Indonesia and Ethiopia
where we completed acquisitions in 2017. With regard to thepharmaceutical and processed food businesses, they fully
delivered on their role to complement the Group’s profit
growth during 2017 and 2018, when the Japanese domestic
tobacco business was facing significant headwinds.
Furthermore, we are advancing a variety of initiatives to evolve
our organizational capabilities in order to ensure our sustainable growth into the future. We have been putting greater
focus on consumers in all that we do, as represented by oursales activities, now emphasizing face-to-face and interactive
communication with consumers in the Japanese domestic
tobacco business. In addition, we are accelerating collaboration between JT and JTI aiming to make our business evenmore competitive and agile. As an example, we have been
integrating the R&D functions of JT and JTI.

With regard to our shareholder return policy, we aim to enhanceshareholder returns considering our mid- to long-term profit
growth trend, while maintaining a strong financial base.
Specifically, we work toward stable and consistent growth in dividend per share. Decisions under this policy, have been largely
carried out based on the growth rate of adjusted operating profit
excluding foreign exchange impacts, an indicator which represents our business performance. However, looking at all the
dynamics influencing us, we decided to take into account thelevel of net income from fiscal year 2019, which includes foreignexchange impacts, to determine the dividend per share. Thus,
we plan to offer an annual dividend per share of 154 yen in
2019. Looking ahead, we will continue to work toward stable
and consistent growth in dividend per share and focus on
adjusted operating profit excluding foreign exchange impacts
as an indicator of our business performance. Lastly, we haveannounced that we decided to conduct a share buybacks, of
up to 50 billion yen or 23 million shares, as part of our efforts toprovide returns to shareholders.
Our Management Principle “4S Model”
Our management principle is the 4S model. Under the 4S
model, we strive to fulfill our responsibilities to our valued consumers, shareholders, employees and the wider society, carefully considering the respective interests of these four key
stakeholder groups, and exceeding their expectations wherever we can. We believe that pursuing this 4S model is the best
approach to achieve sustainable profit growth over the mid- tolong-term and thus increase the Group’s enterprise value. Itmeans that this conveys benefits to the four stakeholder groups.
We have enhanced our corporate governance, which is one of
the key challenges for management. We base this on our belief
that it is the means for conducting transparent, fair, timely anddecisive decision-making for pursuing the 4S model.

Achieve Sustainable Profit Growth for the JT GroupThe key to our future success has and will continue todepend on the tobacco business. Even in an increasingly
uncertain and challenging business environment, the tobacco
business will play a role as the core driver of the Group's profit growth. Our Japanese domestic tobacco business will
resume profit growth from this year. In parallel, it is our strong
intention to increase our combined market share of RRP andconventional products by offering consumers a variety ofoptions in each category. In the international tobacco business, we aim to continue strong profit growth through our
growth agenda which includes sustainable profit growth inexisting markets, geographic expansion in emerging markets
and acceleration of growth in the RRP category. In 2018, ourstrong results confirmed that the pricing environment is still
Japan Tobacco Inc.

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Annual Report 2018

Japan Tobacco Inc.

In March 2019, we established the Advisory Panel on Nomination
and Compensation to take over the functions of the existing
Compensation Advisory Panel. The new Panel is comprised mainlyof Independent Outside Directors, and serves as a voluntary advisory panel to the Board of Directors. We also increased the number of Outside Directors and Outside Audit & Supervisory Board
Members by one each. Through these initiatives, we are strengthening the supervisory functions and transparency of business.
We continuously aim to fulfill our responsibilities as a memberof society in order to remain the preferred choice of consumers, shareholders, employees and the wider society.
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Annual Report 2018

Message from the CEOJapanese domestic tobacco business, we completed thenationwide expansion of Ploom TECH and solidified ourleading position in cigarettes by increasing our market
share. In the pharmaceutical business, we achieved our
profit target driven by increasing royalty revenue. Going forward, due to the end of a licensing agreement in Japan
related to an anti-HIV drug, we expect overseas royalties todecrease. However, we will continue working to maximize
product value across the board while researching anddeveloping next-generation strategic products. Lastly,
although profit declined in the processed food business due
mainly to increasing raw material costs, we will continue
striving to boost profitability by stepping up sales of mainstay products and improving productivity.

In 2018, we achieved our profit target.
Going forward, we will continue toprioritize business investments as we
aim to ensure sustainable growth.
2018 Key Highlights
Adjusted Operating
ProfitAnnual Dividendper Share(JPY BN)

(JPY)

595.5
+1.7%

Year-on-Year Change

150

+7.1%

During my first year as Group CEO, my priority was tostrengthen our Japanese domestic tobacco business. I visited each of our domestic sites and spent a lot of time sharing my ideas directly with employees, literally telling them “Iwant you to think this way” or “behave in this manner”. To
ensure continued growth amid this tough environment, I
focused on getting the JT Group and all its employees on
the same page regarding what needs to be done.

Year-on-Year Change

Adjusted Operating
Profit at Constant FX+8.9%

Year-on-Year Change

637.2

Be Better, Be Faster and Be Bolder—this is the mantra weadopted after I became Group CEO. Before assuming thisrole, I worked at JT International S.A., a Group company
based in Switzerland. The main thing I noticed when I
returned to Japan was a difference in speed. I felt that decision making at JT took an excessive amount of time, especially when it came to decisions that extended beyond theorganization or that encompassed multiple departments. I
sensed that this lack of speed was putting us at risk, so I
directed my efforts at accelerating the processes internallyby promoting greater delegation of authority.

(JPY BN)Be Better, Be Faster and Be Bolder
JT is striving to be No. 1 globally by accelerating its
efforts towards becoming “a company that initiates
change and drives evolution”.

In 2018, my first year as Group CEO,I strove to thoroughly pave a new pathwithin the Group, and those efforts arestarting to bear fruit.

Masamichi Terabatake

In the international tobacco business, market share gains
and strong pricing in key markets, supported by the positive
impact of acquisitions, drove profit performance. In the

Representative Director and President,
Chief Executive Officer

Japan Tobacco Inc.

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Annual Report 2018

The new mantra emphasizes the fact that we will never beable to beat the competition in the future if JT does not
actively change its current ways of thinking and working.
We must change JT to increase the speed at which it does
business. Throughout 2018, I promoted extensively this policy of “Be Better, Be Faster and Be Bolder.” I believe there
has been a solid response, with each of our organizations
and every employee beginning to do all they can right now.
For example, we quickly responded to the rapid expansionof Reduced-Risk Products (RRP) in Japan, by uncovering
growth opportunities and revising our sales structure tocoordinate our employees’ efforts.

“We are not going to wait forchange to happen. If JT continues totake action, we will see growth
proliferate across Japan andthe globe.”

Adjusted operating profit at constant FX basis grew 8.9%
year on year, enabling us to achieve sustainable profit
growth and strengthen our business foundation despite achallenging environment.

Japan Tobacco Inc.

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Annual Report 2018

Message from the CEO

We have created an unshakable businessfoundation, and, in any environment, ourpolicy will be based on the unwavering
management principle of the 4S model.

eye on mid- to long-term returns. And, as we reap theresults of these actions, they will come to understand the
4S model and that this way of thinking is the right way forward. This embodies the ideal the JT Group strives for,which is a little different from that of other tobacco companies or, for that matter, European and American companies. Employees who have had lengthy careers outside of
JT will come to truly understand that sustainable growth iscentral to JT’s business model, and I feel that this has
become engrained as a steadfast policy.

The tobacco industry has traditionally had a reputation forbeing able to accurately assess medium- to long-term business conditions. With the emergence of the new RRP category over the last two to three years, however, we havewitnessed faster changes. Naturally, investment in RRP
products has grown, but investors are still somewhat
uneasy about whether they really can count on returns.
Businesspeople, meanwhile, are feeling increasingly uncertain about the environment surrounding JT, includingchanges in international politics, issues associated with
Brexit and other geopolitical risks, and exchange risks related to the currencies of emerging economies. In the tobacco
industry, conditions grow harsher every year due to intensifying competition in the RRP category as well as tightening
regulations, tax increases, and a natural decline in overall
demand in the face of rising health awareness.

M&A also provides the ultimate pool of human resources
for us. We thoroughly assess each individual, giving consideration to who is best for each position, regardless of theirexperience or background, such as whether they came from
Gallaher, JT or R.J. Reynolds. This is what we have always
done. We try to be as fair as possible to each employee andplace people according to their abilities regardless of theirbackground; in this way, we have maximized the performance of the Company. By respecting the diversity of ouremployees’ values and attributes, we have fostered an environment in which everyone can reach their full potential.
Our employees represent over 100 nationalities, and weappreciate their expertise, experience, age, gender, andnationality. In the management of our diversity-rich organization, we are always trying to be fair, transparent, andrespectful. This is what I believe in, a conviction that springs
from our unique corporate culture.

The JT Group—the third largest global tobacco company—
adopted the 4S model to transform these risks into opportunities. Consumers are the core of the 4S model. Under thismodel, we will continuously provide them with better products and increase the number of options on offer. Then, we
will utilize the profits gained from doing so to provide acompetitive level of returns to shareholders and wider society as well as fair compensation for employees. In addition,
to realize sustainable profit growth, we will not focus solely
on short-term profits; rather, to ensure solid medium- tolong-term returns, we will strongly prioritize business investment. By repeating these actions, we will improve profitability and deliver a stable financial foundation, which, in turn,will allow us to commit to mid to high single-digit profit
growth over the mid- to long-term.

We view risks as growth opportunities
and aim to become the Global No. 1
tobacco company.

Japan has garnered global attention due to the rapid growthof its RRP market. The percentage of the domestic tobacco
market accounted for by RRP grew from almost nothing to
3% in 2016, 12% in 2017, and 21% in 2018. This means that
there had been a need for RRP in Japan all along, and,despite being the leader in the Japanese market, JT did not
notice that need. As a result, consumers shifted to other companies’ products. Realizing that we should have recognized
this need sooner, we instructed the sales teams to rethinktheir approach; they should be putting consumers at the forefront and thinking about how to improve.

Our medium- to long-term vision in the tobacco business is
to be No. 1 globally. In this case, No. 1 means steadily
expanding our share of the market in each country to achieve
the No. 1 sales volume in the world as well as being the first
choice of consumers. Over the last twelve months since I
took over the reigns, after clearly defining what we meant by
No. 1, we have been adjusting our operations accordingly.

Although we had previously preached putting consumers at
the forefront, our thinking may have been biased toward
patrons of tobacconists and convenience stores. We might
have been too caught up in how to control points of saleand how our products are displayed, rather than focusing
on end-users.

To realize our vision, we have put in place three major strategies. The first is enhancing the equity of our brands. Thismeans solidly expanding our current market share in countries where we already have a large share, including Japan.
To do so, we will steadily invest in our existing brands andproducts, and differentiate ourselves by developing products that consumers enjoy along with prompt and efficient
services. This will, in turn, lead to steady gains in profit.

We began 2018 by reflecting on whether we really had inplace a system to listen to the needs of consumers. Our
approach was to rely more on the sales teams by placing
them at the core of the system. The approach allowed formore direct communication with the consumers and their
feedback, enabling us to better identify consumer needs andprepare a wide array of options to satisfy these needs.
Actually, we have developed a system that can design
options to meet a broad range of needs; we can then develop products and test them with consumers. If the results are
positive, we work to expand sales, and if they are not, wequickly move on and release something new. We develop
products by broadening our imagination, thinking about whatkind of needs consumers have and realizing how we canmeet those needs. We do this again and again. While this all
might seem obvious, we made a lot of progress in 2018
toward building a system that can foster the right kind ofmindset and awareness. We are currently working to expand
our lineup. Also in 2018, we rolled out the low-temperature
heating product Ploom TECH nationwide, and, in January 2019,
we initiated sales of Ploom TECH+, which has a richer vapor,as well as the high-temperature heating product Ploom S.

The second strategy is geographic expansion in emerging
markets. As we look toward the future, we will invest
some of the profits earned from existing strongholds into
emerging markets. Before I assumed the role of Group
CEO, I led M&A efforts, notably in 2017 with transactionsin Indonesia, the Philippines and Ethiopia. In 2018, we carried out M&A in Russia and Bangladesh. These investments enhanced our revenue immediately, with thepotential to generate even more revenue in the future byboosting sales volume. While we are steadily expanding
our footprint in major markets, there remain markets
where our presence is small. We are now turning ourattention toward Asia, Africa, and South America in pursuit of greater growth for the tobacco business.
Our third major strategy is to actively invest in RRP, including in Japan. I have been involved in this new category
since 2014, when I became responsible for the RRP operations at JT International S.A., overseeing investment aimed
at enhancing manufacturing and R&D capabilities. In my
new role, I will ensure we continue to strengthen our presence in the category and expect to invest a total of 200.0
billion yen by 2020. Moreover, in 2019, we revised the structure of the R&D organization, optimally distributing resources throughout the JT Group to enhance competitiveness.
We have now begun sprinting toward the realization of ourvision through the implementation of these three strategies.

“Deciding where to focus ourlimited investment capacity is oneof our strengths.”
One of our strengths is the fact that the 4S model is ashared philosophy that has become engrained throughout
the JT Group. Obviously, it will take time for the employeesof acquired companies to fully understand the 4S model.
Some of our acquisitions have been utterly unprepared forbusiness investment. When I speak to them, I explain that
we can outperform the competition through such actions
as overhauling production systems and unifying global
brands as well as by creating products that consumers
want and by appropriately investing in brand equity. I also
tell them how critical it is to invest in the business with an

Ploom TECH uses JT’s original low-temperature heating technology to greatly reduce the generation of odor* and allow
consumers to enjoy a variety of flavors with a clear tobacco
taste. Some consumers of tobacco products are themselves
sensitive to the odor of tobacco and many people who don’t
smoke tobacco are also very sensitive or dislike its odor. RRP
is one tool to help solve the problem posed by odor, and we
expect that this strong Ploom TECH attribute will offer a huge
opportunity moving forward. We are thinking about consumers in different situations, such as doing office work or going
about everyday tasks. Consumer needs may vary depending
on if they are in a factory, a senior facility, or a hotel or operating some kind of vehicle. For example, at senior facilities,
there is the societal need to refrain from using fire to ensure
safety. Delivery drivers also are prohibited from using fire andwant to avoid filling up the ash tray. They also do not want toleave behind any odor, which could cause problems whenanother driver uses the vehicle. Smokers worry about whether“We make decisions with an eye
toward the future. However, ouroptions are limited when no profits
are made.”* Odor that is less than 1% of the strength of that of ready-made cigarettes

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Message from the CEO

gy to our business activities and to our contributions to
SDGs. By pursuing the strategy globally, we will strengthen
our commitment to sustainability.

hotels have smoking rooms available. We believe that our
products offer a tailored solution to these various societal
and latent needs. These products can also help bring abouta society where smokers and non-smokers coexist in harmony. We can create business opportunities by looking at
issues from different perspectives to uncover needs andexpand our RRP offerings.

In our tobacco business, we have set out four strategic focus
areas: 1) products and services, 2) people, 3) supply chains,
and 4) regulatory environment and illegal trade. The four strategic focus areas are supported by the JT Group’s threeabsolute requirements for sustainability: respect for humanrights, an improved social and environmental impact, andgood governance and business standards. Specific targets
have been set for the focus areas and by implementing PDCA
cycles, we will continue to support sustainable growth. As forbuilding a sustainable supply chain and ensuring a sustainable tobacco leaf procurement structure, rather than merely
purchasing tobacco leaf from the market, we source about
half of our leaf from tobacco dealers while the other half ispurchased directly from contracted farmers. Securing a longterm supply of quality leaf at the best cost is critical to our
future growth. By building strong relationships with our farmers, we help improve their incomes and standards of living aswell as labor practices, environmental or social conditions.
Furthermore, since 2011 we have been working through the
ARISE (Achieving Reduction of Child Labor in Support of
Education) program to eliminate child labor at tobacco farms.

We also consider regulations to be opportunities. In 2018, in
the lead up to the Tokyo Olympics and Paralympics, Japan’sDiet passed The Revised Health Promotion Act that is expected to take effect in the near future. Restaurants and bars that
understand the characteristics of Ploom TECH allow patrons
to use Ploom TECH even in areas that currently prohibit cigarettes. These establishments numbered around 800 a year
ago but now exceed 3,700. Once the benefits of Ploom TECH
are explained to business owners as well as consumers, theyrealize, “Hey, this product is really great. It enables smokers
and non-smokers alike to coexist.” More and more businesses are therefore allowing people to enjoy the product in theirestablishments, leading to the considerable growth seen injust one year. Earlier, I mentioned that we are changing oursales system so that we can communicate directly with consumers. We think another of our accomplishments this year
has been an improvement in our understanding of regional
characteristics and the strengthening of our sales networks
rooted in regional communities.

Environmental protection is also essential. As a responsible
company, JT operates its businesses without increasing environmental impact. Under the JT Group Long-Term
Environment Plan 2020, we have been taking steps to reduce
the environmental impacts of our Group. As a result, in 2017,
we achieved our target to reduce total Greenhouse Gas

Globally, the RRP market is still in its infancy. Although it has
grown quite rapidly in Japan, no other country has matchedthat speed of growth. If the JT Group can first reestablish its
position in Japan by capturing a larger share of the market,
we can use that know-how to expand globally. The real battle
has yet to begin.

In 2018, I got off to a strong start in my first year as GroupCEO with all of these measures. The tobacco business still
has untapped potential for growth and the confidence tospark that growth. We believe that the Japanese domestic
tobacco business bottomed out in 2018 and have outlined aplan to boost revenue and profit in 2019. In 2018, the international tobacco business returned to a path of profit growth
driven by strategic pricing. The tobacco business overall will
therefore achieve mid to high single-digit growth over the
medium- to long term. The pharmaceutical business will continue to rebuild its business foundation. The processed foodbusiness established a Processed Food Business Planning
Division in 2019. Under this new business operation system,
we will work to sustainably improve profit and aim to complement Group-wide profit growth through both the pharmaceutical and processed food businesses.

(GHG) emissions three years ahead of schedule. Furthermore,
we are turning our attention to the future and we have started to establish the JT Group Environment Plan 2030. Under
the new plan, we will further strengthen initiatives aimed atenvironmental issues that could have long-term impact, notonly for our Group, but also for our value chain.

By transforming itself, JT is bringing
change as it steadfastly works towardsustainable growth.
No matter the environment, we believe business investment
should be the priority when allocating management resources.
We will also strive to steadily increase dividends while carefullybalancing shareholder returns and business investments forsustainable profit growth. As for returns to shareholders, wehave increased dividends in line with the pace of growth ofadjusted operating profit at constant FX basis.

With the advent of new technologies and rapid changes inthe business environment, we are no longer able to rely on
conventional models for success. Through unwavering
adherence to the 4S model, with our diverse human resources working more boldly and with unprecedented speed, andby transforming ourselves, we aim to continue realizing sustainable growth.

There has been no change in this basic policy. However, tomaintain a robust financial foundation while steadily and continuously increasing dividends, we have decided to also take
into consideration annual net income from fiscal year 2019
forward. As always, we will still prioritize business investmentthat leads to sustainable profit growth over the medium- tolong-term. We will then utilize those earnings to return themat a competitive level to our shareholders while continuing tomonitor trends in returns for global fast moving consumer
goods (FMCG) companies.**** G lobal FMCG: Companies that have a stakeholder model similar to the 4S model and deliver
strong business growth

Our Approach to Sustainability on p. 14
In Focus — Tackling the Illegal Trade of Our Products on p. 18
Business Plan 2019 on p. 20
Message from the CFO on p. 25“We are under a lot of pressure, but
our employees are enthusiastic andour manufacturing system is in place.
The real battle has yet to begin.”
Our sustainability strategy supports thesustainable growth of our business.
In order for our Group to achieve sustainable growth, it isessential for our business to contribute to the sustainable
development of our society. With this in mind, we launched
our sustainability strategy in 2018. Global conditions and regulations are changing at a fast pace and the rapid growth of
RRP has brought further changes to our business environment. We need to position and consider sustainability at thecenter of managing our business. In 2019, we appointed an
Executive Officer dedicated to sustainability management andtransformed the CSR Division into the Sustainability
Management Division. We have tied our sustainability strate-

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Our Approach to Sustainabilit y

Our Sustainability Strategy
4S ModelJT Group’s Sustainability Strategy

Our management approach and our approach to sustainability are underpinned by our 4S model. Consumers, shareholders, employees and society
represent the four stakeholder groups (4S) at the heart of everything we do.
Based on the principles of the 4S model, we always strive to exceed the
expectations of our four stakeholder groups, wherever we can.

In 2018, our tobacco business, the Group’s core business,launched its sustainability strategy. The strategy encompasses our material issues and it is also underpinned by our

In order for our group to achieve sustainable growth, it is essential for ourbusiness to contribute to the sustainable development of our society. We
maintain on-going dialogues with our stakeholders and work continuously
on a variety of sustainability issues to fulfill our responsibilities as a memberof our society.
Shareholders

4S model. There are four focus areas with three absolute
requirements for sustainability. The three absolute requirements for sustainability apply across the Group.

Tobacco Business – Sustainability Strategy
Four Focus Areas
Products
andServices

We will be a total tobacco company offering consumers
an even greater choice of products by focusing on quality, innovation and reduced-risk potential.

PeopleWe will be the employer of choice by investing in people.

Supply Chain

We will reduce environmental and social risks, andenable transparent and responsible practices across our
supply chain.

Regulatory
We will ensure the company is included in policymaking
Environment
leading to fair and balanced regulation and enhance ourandBusiness Standards cooperation with governments to combat illegal trade.

Three Absolute Requirements

Consumers

RESPECT FOR
HUMAN RIGHTS
Employees

United Nation’s Sustainable Development Goals (SDGs)
Our group supports the United Nation’s Sustainable Development Goals. We would like to contribute to thefollowing SDGs through our business activities and sustainability initiatives.

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Society

We are committed to respecting humanrights across our global operations andvalue chains, as expressed in our JT Group
Human Rights Policy.

AN IMPROVED SOCIAL AND
ENVIRONMENTAL IMPACT
We are committed to protecting theenvironment and making a positive
difference wherever we operate.

Read more about the four strategic focus areas and therelated targets of our tobacco business in the FY2018 JT
Group Sustainability Report. The report will be available on
JT’s website at the end of May 2019.

GOOD GOVERNANCE AND
BUSINESS STANDARDSWe are committed to promoting transparent, fair, and timely decision-making that
carefully considers the respective interestsof consumers, shareholders, employees,
and the wider society.

Learn more about JT Group's approachto sustainability on our website:
https://www.jt.com/sustainability/

Furthermore, our pharmaceutical business and processedfood business are both currently formulating their respective sustainability strategies.

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O ur A p pr oac h to Su s t aina bilit y

JT Group
Environment Plan 2030

Leaf Supply

The JT Group strives to foster a healthy, sustainable andproductive environment for future generations by balancing
our activities and our relationship with the environment
across our value chain and in wider society. We believe that
reducing environmental impacts contributes to the sustainable growth of the JT Group, as it results in efficient
resource use, improved performance and cost reduction.

Our Agricultural Labor Practices (ALP) are based on theInternational Labor Organization’s conventions and recommendations. The program consists of three pillars: tacklingchild labor, respect for the rights of workers, and ensuring
workplace health and safety.

2016

2017

2018

Directly contracted growers
observed against ALP

21%

90%

96%*

Leaf merchants who reported
against ALP

31%

73%

96%

* This percent includes Japan.

We were able to achieve almost 100% coverage in a relatively short period of time due to a successful pilot program thatran between 2013 and 2016. Our learning shaped our current
approach and enabled an effective implementation with bothour directly contracted growers and leaf merchants.

Whether we source tobacco directly or through leaf merchants, all of our suppliers have a contractual obligation to
implement our ALP. The program drives a continual cycleof improvement and dialogue, a concept deeply rooted inour business. See more on ALP in our leaflet published on
jti.com.

We have set a long-term GHG emission reduction
target in line with the Paris Agreement, which wasapproved as SBT by the Science Based Targets initiative in February 2019.

In 2014, we established the Environment Long-term Plan
2020, and we have been taking steps to reduce our environmental impacts. Under this long-term plan, we havestrengthened our approaches to reducing the environmental impacts across the JT Group, covering all the locations in
the Japanese domestic tobacco business, the international
tobacco business, the pharmaceutical business and processed food business.

Tobacco leaf sourcing is a key part of our supply chain,
and a critical component of future business growth. We purchaseapproximately half of our tobacco leaf from directly contracted
growers, and the other half from tobacco leaf merchants.

Agricultural Labor Practices

Our Greenhouse Gas reduction targets by 2030
confirmed as Science Based Targets (SBT)

Through a number of initiatives, we achieved in 2017 our
key target to reduce total Greenhouse Gas (GHG) emissions
from our operations by 20%, three years ahead of theschedule. Given this and that we are approaching 2020, thetarget year of the current plan, we have started to establish
the JT Group Environment Plan 2030, looking beyond 2020.

Received high recognition from CDP(formerly the Carbon Disclosure Project)
Our approach to climate change was showcased as
one of the best practices in the CDP Stories of
Change published in January 2019.

Based on the JT Group Environment Plan 2030, which takes
account of the social and business environments that havechanged dramatically in recent years, we will be addressing
environmental issues that may have a long-term impact on
the JT Group’s value chain. Specifically, we will set clear
objectives and targets for Energy and Emissions, Natural
Resources (water and forestry), and Waste.
For detailed information, please refer to the “FY2018 JT
Group Sustainability Report,” which is scheduled to be published at the end of May 2019.

We have now broadened the target to include new acquisitions such as Ethiopia and Bangladesh.

We previously made a commitment to implement ALP in all
sourcing countries by 2019. We are pleased to share that in2018, we observed 96% of our directly contracted growers
and 96% of our leaf merchants reported against ALP.

Agricultural Labor Practices
We will implement our Agricultural Labor Practices (ALP)
program in all sourcing countries by 2025.
ARISE
Our flagship program, ARISE – Achieving Reduction ofChild Labor in Support of Education – has been committed
to tackling child labor in our tobacco growing communities
since 2011. In preparation for the next phase of the program, in 2018 the ARISE team carried out a Social Returnon Investment assessment of the program. The aim was tobetter understand the value of our investments, from theperspective of our beneficiaries.

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O ur A p pr oac h to Su s t aina bilit y

In FOCUS – Tackling the Illegal Trade of Our Products
Experts estimate that over 10% of allcigarettes sold globally (excluding
China) are illicit, with approximately
US$45 billion in global tax revenue
lost each year. This illegal trade fuels
human trafficking, organized crime,
and terror groups; and undermines
legitimate tobacco businesses. It also
causes harm to consumers, as
uncontrolled products circumvent
regulations and quality controls.

Supporting business performance through anti-illicit trade programs

1

Key Wins in 2018
We advised 1,329 law enforcement officers on
counterfeit recognition
With the goal of reducing the supply ofillegal products

2Over 2,775 million illegal cigarettes seizedThanks to intelligence reports provided
by our team to law enforcement

3

32% decrease in seizures ofour genuine products

threat of illegal tobacco through public private partnerships.
Our Anti-Illicit Trade team also supports other areas of ourbusiness with research on illegal tobacco and raises awareness of the problem among our business partners, consumers and society in general. The team protects the JT Group’sbusiness and reputation, supporting our long-term, sustainable future.

PROACTIVELY COMBATTING ILLEGALTOBACCO GLOBALLY

Formulate strategy
and prioritize issues

PREVENTING THE DIVERSIONOF OUR PRODUCTS BY CRIMINALS

3

2

3

Activate strategy
at market level

Our Seizure Investigation Review
Committee collaborates with market and customer task forces tosecure our supply chain

Share investigation resultswith law enforcement andidentify criminals involved in diverting our product

1

4

1

4

Analyze market
dynamics and risks(e.g. Legitimate Market Demand
program)

Work with our markets andlaw enforcement to investigate
and combat illegal tobacco andidentify further risks

Analyze authenticity of
seized products and identify sources of genuine
diverted productLaw enforcement takes
action against criminalorganizations(arrests/ raids/ seizures)

PRODUCT SEIZURES BY LAW ENFORCEMENT

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Anti-illicit trade task forces set up
in priority markets

Focus on priority regions & markets
Combat counterfeit and illicit whites*

Efficient and effective responses
to information requests
by law enforcement agencies

Fulfill legal obligations
Legitimate Market Demand analyses
and seizure investigations

Strengthen our partnership with customers,
government and law enforcement
Knowledge sharing with law enforcement
Implement anti-illicit trade awareness programs

Advise law
enforcement on
counterfeit
recognition

Global media
campaigns to educate
consumers on theimpact of illegal trade2018 Performance
In 2018, new task forces were set-up in
our Russia, Ukraine and Belarus
priority markets.

In 2018, our intelligence led to theseizure of over 2,775 million cigarettes(or equivalent in tobacco).
We responded to over 500 law
enforcement information requests in 2018,
and are fully compliant
with all our legal obligations.

In 2018, we advised 1,329
law enforcement officers on
counterfeit recognition.

*Illicit whites: Tobacco products manufactured legitimately but without any product flow control measures afterwards and, smuggled and sold in another market.

Resulting from our efforts to ensure the securityof our supply chain

Our global Anti-Illicit Trade team investigates the illegal
tobacco trade and protects consumers and society, as well as
our business, from criminal elements. A key part of our business, the team works with our markets to secure our supply
chain, and assists law enforcement in removing illegal tobacco from the marketplace. They maintain a robust dialogue
with governments and law enforcement agencies on theProtect our business through anti-illicit
trade operations

Ensure anti-illicit trade compliance

Our approach2

Key Initiatives

Key Strategies

Tackling illegal trade is a top priority
for us, and our Anti-Illicit Trade teamis recognized as the industry leader incombating this problem.

our supply chain, safeguarding and creating opportunities
for volume and profit growth, and protecting our company's reputation.

Our global anti-illicit trade programs create the opportunity
for public-private partnerships to combat highly organizedcriminality. They are also designed to support our businessperformance by fulfilling all legal requirements, securing

Protecting our business

Ensuring anti-illicit trade compliance

In 2018 our Anti-Illicit Trade team provided 1,328 intelligence reports to law enforcement agencies, leading to theseizure of more than 2,775 million illegal cigarettes. Basedon our information, law enforcement raided more than 39
counterfeit tobacco factories and storage locations.

We comply with the European Union Cooperation
Agreement signed in 2007, supplying tobacco products
only in volumes that correspond with the legitimate demandof the intended market of retail sale. We have developed aglobal methodology to assist our markets with their annual‘Legitimate Market Demand’ (LMD) calculations. Our markets perform these calculations in conjunction with theirannual plan, creating a proactive supply chain control
mechanism to make sure that the planned sales volumes
are in line with LMD.

As a direct result of our work to tackle illegal trade, andbased on seizure statistics, notified seizures of counterfeit
products in the EU have increased by 82% over the past
four years. During the same period, notified seizures of ourown genuine products in the EU have decreased by 57%,
thanks to our efforts in securing our supply chain in eachmarket, with the support of the Anti-Illicit Trade team. Thishas been acknowledged by both the EU and the UK’s HM
Revenue and Customs, which recognized JTI as an industry
leader in the fight against illicit trade.

In 2019, some JTI markets will be implementing a mandatory
Track and Trace system, including the 28 Member States of
the European Union as per the European Tobacco Products
Directive. We are working with key stakeholders to comply
with these regulations in the most effective way, while ensuring affected markets will not be disrupted.

Taking the fight to the digital world

In September 2018, the WHO FCTC Protocol to Eliminate
Illicit Trade in Tobacco Products entered into force. One of
the main requirements is that the Parties must implement a
Track and Trace regime by 2023 (for cigarettes) and by 2028
(for all other tobacco products). In order for this regime to beeffective, we support the implementation of an architecture
based on “open standards” and interoperability for every
actor in the supply chain, whilst taking into account existing
systems such as the new EU-wide Track and Trace system.

Our project to tackle illegal online trade expanded acrossWestern Europe in 2018. It yielded excellent results, disrupting sales through the takedown of links and social
media posts that advertise JTI products illegally.
In 2018, we took down over 5,960 posts and over 65,300
items. This represents US$710,433 worth of potential product losses to the JT Group.
We continue to take down illegal advertisements andcollaborate with law enforcement agencies by providing
evidence that leads to prosecutions.
Drawing upon this continued success, similar projects have
now launched in the Americas and Eastern Europe regions.
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Business Plan 2019

The JT Group’s Business Plan covers a three-year period,and is rolled-over annually to reflect the most recent changes in ourbusiness environment including economics, geopolitics andcompetition. The operating environment surrounding us is expected to
revolve dramatically. By developing ourselves into a company that
initiates change and drives evolution, we aim to achieve sustainableprofit growth under such circumstances.
2019 Outlook

Group profit target
Annual average growth rate of adjusted operating profit at constantcurrency over mid- to long-term: Mid to high single-digit

Shareholder return policy
Aim to enhance shareholder returns considering the Group’s mid- to long-term profit growth trend,
while maintaining a strong financial base*• Work toward stable and consistent growth in dividend per share• Consider implementing a share buy-back program, taking into account the Group’s mid-term operating
environment and financial outlook• Continue to closely monitor shareholder returns of global FMCG companies***	As its financial policy, the Company will maintain a strong financial base that secures stability in case of changes in the business environment, such as economic
crises, and flexibility enabling expeditious responses to business investment opportunities.
** FMCG companies: Specifically, Fast Moving Consumer Goods (daily consumer goods) companies which have a stakeholder model similar to our “4S” model, andwhich realize strong business growthof our key currencies, including the Iranian rial and Russian
ruble, JPY based adjusted operating profit is expected to
decline by 7.4%. For the pharmaceutical business, we forecast a significant decline in adjusted operating profit withthe termination of the exclusive license agreements for antiHIV drugs in Japan and also the decline of royalty revenue
from outside of Japan. In the processed food business,despite soaring raw material costs, we are striving to
improve profitability by enhancing productivity.

On a consolidated basis, we target adjusted operating profit
at constant FX, our KPI, of 610.0 billion yen. We expect thisyear-on-year growth of 2.4% to be driven by the tobacco
business, overcoming a significant decline in profit for thepharmaceutical business. On a reported basis, we forecast
a decrease of 8.3% in adjusted operating profit due to thecontinuous negative FX impact.
In the Japanese domestic tobacco business, the cigaretteprice increase in October 2018 and RRP top-line growth
including Ploom TECH will more than offset the decline ofcigarette sales volume and higher investment in sales promotions for RRP, leading to an increase in adjusted operating profit by 2.9% year-on-year. In the international tobacco
business, as robust pricing gains are expected to continue
in 2019 and taking into account the contribution from prioryear acquisitions in Russia and Bangladesh, the adjusted
operating profit in USD at constant FX is forecast to grow by
8.8%. On a reported basis, however, due to the depreciation

We plan to offer an annual dividend per share of 154 yen in
2019, representing a 2.7% increase year-on-year, based on
the growth rate forecast of adjusted operating profit at constant FX. In addition, from fiscal year 2019, we will also consider the outlook for net income, under our shareholder
return policy of “aiming to enhance shareholder returns considering the Group’s mid- to long-term profit growth trend,
while maintaining a strong financial base”.

Message from the CFO on p.25

Role & objective of each businessTobacco Business: The core and driver of the JT Group’s profit growth
Japanese Domestic Tobacco Business : Return to sustainable profit growth with both RRP as our growth driverand cigarettes as our profitable platform to support growth, increase ourtotal market share by offering consumers various options in each category
International Tobacco Business: Further strengthen its role as the JT Group’s profit growth engine,
through sustainable profit growth in existing markets, geographic
expansion in emerging markets and acceleration of growth in the
RRP category
Pharmaceutical & Processed Food Businesses: Complement the JT Group’s profit growth byrebuilding their business foundations: Promote R&D for next-generation strategic products and maximize
Pharmaceutical Businessthe value of each product
Processed Food Business: Business operation for sustainable top-line growth

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Adjusted Operating Profit (JPY BN)+2.4%

Dividend Per Share (JPY)

-8.3%

+14.5

-61.8
-2.2

610.0

595.5

2018
Results

Business
Momentum2019
Forecast
at constant
FX

546.0

FX effect
FX effect
2019
Local
JPY vs. USD Forecast
currencies
vs. USD

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100

118

130

140

150

154

FY2014

2015

2016

2017

2018

2019
Forecast

Annual Report 2018

Global RRP Strategy

Please be reminded that this section is intended
to explain the business operations of JT to
investors, but not to promote sales of tobacco
products or encourage smoking by consumers.

Addressing diverse consumer needs by offering a broad choice
Within RRP, we are focusing on three specific categories:
E-Vapor (e-cigarettes), which does not use tobacco leaf but
electronically heats liquid, and two T-Vapor technologies(Heated and Infused) which do not burn tobacco leaf, butrather offer consumers the enjoyment of an enriched
tobacco vapor.

We believe that the options for adult consumers to choose
the use of tobacco or nicotine products should not be
restricted to any specific product category. Provided they
understand the health risks associated with the use of suchproducts, it is important that they remain free to choose themost appropriate proposition in response to their taste preferences, their living environment, their life stage or other factors. Therefore, we are committed to offering consumers avariety of choices addressing their individual needs.

Expanding the T-Vapor portfolio in Japan for global success in RRP
Outside Japan, we currently offer Ploom TECH in Canada,
Switzerland and the USA*. In the near future, the international T-Vapor portfolio will be shaped by mining the consumer insights and learnings in Japan.

In Japan, we currently offer the broadest RRP portfolio withthree T-Vapor options: Ploom TECH, Ploom TECH+ Tobaccoinfused Vapor (low temperature heating) products, andPloom S Heated Tobacco (high temperature heating). We willseek out opportunities to communicate directly with consumers in order to build awareness and recognition of how eachproduct can satisfy their needs.

* In the USA, Ploom TECH is sold by Logic Development LLC, a member of the JT Group,
and under the name ‘Logic Vapeleaf’.

In each of these categories, we will continue to enhance our
product pipeline and expand our product portfolio in linewith the increasingly diverse needs of our consumers
around the world.

Our concept is unchanged when it comes to Reduced-Risk
Products (RRP) which have been gaining popularity in recent
years, particularly in Europe, the USA and Japan.

"Logic" and "Ploom" are our flagship brands in the respective
E-Vapor and T-Vapor categories.

We are confident that through this approach, we will be able
to deliver mid to high single-digit earnings growth over the
medium to long term. RRP is one of the key pillars of our
growth strategy in the tobacco business, and we will prioritize allocation of resources into the category.

We will maximize our presence in key markets andexpand the reach of our product portfolio.

T-Vapor

E-VaporTobacco-Infused
Vapor(Low-temperature
heating type)Heated Tobacco(High-temperature
heating type)

By the end of 2018, our E-Vapor products under the Logic brandwere available in 11 markets, including the UK and the USA, andwe recently launched a new pocket-sized, high performancedevice – Logic Compact – which provides high vapor and ultimate convenience to the modern, design-conscious vaper.
Reactions from consumers and opinion leaders on product performance and vaping experience has been generally positive.
Over the course of 2019 we will roll-out Logic Compact in 13
additional geographies. We thereby continue our focused geo-expansion approach, prioritizing the markets that matter the most.
In E-Vapor, our strong growth will continue to accelerate, driven
by new compelling products and effective execution in current
and new markets.

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• Less than 1% of odor* and morethan 99% reduction** in the levelsof measured potentially harmful
constituents compared tocigarette smoke• Various flavors and clear taste of
tobacco• Easy to use and no maintenance• Less than 1% of odor* and morethan 99% reduction** in the levelsof measured potentially harmful
constituents compared tocigarette smoke• Rich vapor with improved
satisfaction• Profound taste of tobacco• Less than 5% of odor* and morethan 90% reduction** in the levelsof measured potentially harmful
constituents compared tocigarette smoke• Superior taste and reduced odor
• A taste like the MEVIUS cigarettes* Results of the research based on the three-point comparative odor intensity indication method by six people who have passed the olfactory test. Cigarette smoke and Ploom
TECH, Ploom TECH+ and Ploom S tobacco vapor, which contains constituents derived from tobacco leaves, were diluted with odorless air in the bags, and the odor of eachbag was statistically quantified as the "dilution factor of just no odor".
** It does not imply that the health risk associated with the use of the product is relatively small compared with that of cigarettes. It compares the amounts of nine constituents,
the WHO recommend to reduce as a priority, which are contained in one puff of cigarette smoke and one puff of a tobacco vapor of Ploom TECH, Ploom TECH+ and Ploom S.
Standard test cigarette (3R4F) was selected as the test cigarette product.

Japan Tobacco Inc.

023

Annual Report 2018

The History of JT

Message from the CFO

Through M&A and organic growth,
The JT Group has successfully become highly
diverse and global

Achieve the JT Group’s mid- tolong-term profit growth throughbusiness investment and enhanceshareholder returns
Naohiro Minami
2018 Financial Results

1985–1998

1999–2006

2007–2018

Expanding business scope andglobal scale

Embarking on a path to growthDriving profit growth with theinternational tobacco businessJapan Tobacco Inc. was established in1985 upon the privatization of Japan
Tobacco and Salt Public Corporation. In
the next two years, the operating environment changed dramatically. Major
events included the Plaza Accord of 1985
and the subsequent appreciation of theyen, the tobacco tax hike in 1986, theabolition of tariffs on imported cigarettes
in 1987, and the subsequent offensive byforeign tobacco manufacturers.

The international tobacco
business had sales of only
about 20 billion units in 1998,
and its scale was limited.
However, the acquisition of the
non-US tobacco business of
RJR Nabisco Inc. in 1999 led todramatic growth. Through thisacquisition, our market
expanded rapidly, with
“Winston” and “Camel” joining
our brand portfolio.

To cope with the rapid deterioration of theoperating environment, JT implemented measures to maintain domestic sales volume bystrengthening its marketing capabilities and costcompetitiveness, in addition to pursuing business diversification. This was the time when welaid the groundwork for the pharmaceuticals andprocessed food businesses.
Since then, the total demand for tobacco inJapan has started to decline. Demand peaked in
the latter half of the 1990s due to a contraction of
the adult population and growing concerns withhealth problems associated with smoking. Amid
the increasingly severe business environment, we
implemented rationalization steps, selected andconcentrated our diversified businesses, andexpanded the international tobacco business inorder to achieve sustainable growth.
Privatization of Japan Tobacco and Salt
Public Corporation and establishmentof Japan Tobacco Inc. (1985).
Established the Business Development
Division (1985) to aggressively develop
new businesses. Subsequently,
the division was reorganized to form
the Pharmaceuticals and Food
Products Division (1990).
Acquired Manchester Tobacco
Company Ltd. (1992).
Listed on stock exchanges inTokyo, Osaka, Nagoya and elsewhere (1994).
Acquired a majority of the outstanding shares of Torii
Pharmaceutical Co., Ltd.
through a tender offer (1998).

Since acquiring the non-US tobacco businessof RJR, the international tobacco business has
continued to grow organically, increasing its
share in each market. However, the acquisitionof Gallaher (UK) in 2007 propelled the growth ofthe entire JT Group.

In the Japanese domestic
tobacco business, we faced
major changes, such as thetermination of the Marlboro
license contract, which lasted
for approximately 30 years,
but we worked to strengthen
our business base throughstructural reforms.
Acquired non-US tobacco
business of RJR Nabisco
Inc. (1999).
Terminated license
contract for the exclusive
rights to produce and sell
Marlboro brand products
in Japan and use the
Marlboro trademark in
the country (2005).

International tobacco business revenues
increased significantly with the addition ofimportant markets, such as Russia and UK. In
addition, our brand portfolio grew more robust
and solid thanks to the inclusion of LD, which iscurrently a GFB*, and local heritage brands with along history in each market.
In Japan, we focused on the selection and concentration of our business other than tobacco,including the acquisition of Katokichi Co., Ltd. in2008 and the withdrawal from our beveragebusiness in 2015. In the Japanese domestic
tobacco business, we decided to change thename of Mild Seven, which has the No. 1 sharein Japan, to MEVIUS, and reinforce the brand.
We also acquired the Natural American Spirit
business outside the USA to further strengthen
our business foundation.
In recent years, in addition to geographic
expansion centering on Asia, we have been
actively investing in the RRP growth category.
In Japan, where RRP is growing, we expanded
our sales of Ploom TECH nationwide in 2018.
Going forward, we will continue to invest in thethree key areas of our tobacco business** withthe aim of achieving high levels of
earnings growth.

Acquired all outstanding shares ofGallaher Group Plc. (UK) (2007).
Acquired issued shares of Katokichi Co.,
Ltd. (2008).
Changed "Mild Seven" to "MEVIUS"(2013).
Acquired Natural American Spirit's
business outside the USA (2016).
Acquired operations in the Philippines,
Indonesia, Russia, Bangladesh andelsewhere (2016-2018).
Expanded nationwide sales of"Ploom TECH" (2018).
*	GFB: Winston, Camel, MEVIUS and LD are our Global
Flagship Brands.
**	Sustainable profit growth in existing markets by strengthening
brand equity, geographic expansion in emerging markets, andacceleration of growth in the RRP category

Representative Director andExecutive Vice President

Adjusted operating profit at constant FX, our KPI, grew
8.9% year-on-year to 637.2 billion yen. This is most notably
due to pricing in the international tobacco business, despite
the profit decline in the Japanese domestic tobacco business with decreasing cigarette sales volume and higher
investment in sales promotions for RRP. Excluding a onetime loss related to a key UK distributor going into administration, adjusted operating profit at constant FX increased
by approximately 5%.

Shareholder Return Policy
We give the highest priority to business investment which
contributes to sustainable profit growth in the mid- to longterm and seek a balance between profit growth throughbusiness investment and shareholder returns under our
resource allocation policy. Our policy remains unchanged,
aiming to deliver a stable and consistent growth in dividend
per share based on the mid- to long-term profit growth outlook while maintaining a strong financial base. We will pay
an annual dividend per share of 150 yen, as announced at
the beginning of the year.

On a reported basis, revenue and adjusted operating profit
growth was 3.6% and 1.7% respectively, reflecting negative
FX impact.
Operating profit increased by 0.7% to 565.0 billion yen due
to an increase in intangible amortization related to acquisitions. Profit decreased by 1.7% to 385.7 billion yen impacted by an increase in financial expenses.

On the other hand, foreign exchange has been volatile inrecent years as uncertainty for world economy has increased.
The negative currency impact in 2018 was over 40.0 billion
yen and is expected to be over 60.0 billion yen in 2019. The
current situation is expected to continue for a certain periodof time, and as we aim to achieve consistent dividend pershare growth, we will decide future annual dividend pershare based on the mid- to long-term growth rate for adjusted operating profit at constant FX, while also taking into
account the outlook for net income from 2019. We plan tooffer an annual dividend of 154 yen in 2019, representing a 4
yen increase. In order to mitigate FX impact, we are hedging
naturally by matching the currency for income and expense.
Establishing a local manufacturing base after considering thescale of business is a case in point. For the mid- to long-term,
we are working on lowering the degree of dependence on a
specific currency by geographically expanding our business.
We fully consider the risk of FX movement when investing
into emerging markets including through M&A. For markets
with mid- to long-term growth potential, we will firmly capitalize on economic growth and aim for profit growth.

Free cash flow increased by 33.0 billion yen to 105.6 billion
yen. An increase in proceeds from real estate sales andimprovement in working capital more than offset an incremental cash payment caused by the acquisitions in Russia
and Bangladesh and higher capital expenditure mainly related to RRP.
2019 Financial Outlook
Revenue will remain largely unchanged, as the increase in
the Japanese domestic tobacco business and the international tobacco business will be offset by the negative FX impact
and the decrease in the pharmaceutical business. Adjusted
operating profit is forecast to decline by 8.3% year-on-year.
Operating profit and profit are expected to decrease by
4.4% and 4.1% respectively. One-time compensation gain
related to the termination of the exclusive license agreement for anti-HIV drugs in the pharmaceutical business will
partially offset a decline of adjusted operating profit, adecline of gain from sale of real estate and an increase inintangible amortization arising from acquisitions.

As for 2019, we approved a share buy-back of up to 50.0 billion yen or 23.0 million shares over the period from 8
February to 22 April as part of our shareholder return. We
have considered our FCF outlook, balance sheet and othertypical elements as well as various factors including one-off
cash proceeds in the pharmaceutical business and our shareprice movement.

Free cash flow is estimated at 360.0 billion yen. In 2019, we
do not assume new acquisitions, compared with the last
two years. Additionally, we will strengthen JT’s ability togenerate free cash flow and improve working capital.

We aim to deliver a stable and consistent increase in dividend
based on the mid- to long-term outlook for profit growth, while
growing profit through aggressive business investment.

We target growing adjusted operating profit at constant FX
by 2.4% year-on-year to 610.0 billion yen.

Business Plan 2019 on p.20
Japan Tobacco Inc.

024

Annual Report 2018

Japan Tobacco Inc.

025

Annual Report 2018

2018 Highlights

Please be reminded that this section is intended
to explain the business operations of JT to
investors, but not to promote sales of tobacco
products or encourage smoking by consumers.

The Japan Tobacco Group’s Activities

Investor Relations Activities

2018

We are pursuing the fair and broad disclosure of financial informationsuch as operating results and non-financial information including management strategies, governance, ESG information and the status of eachbusiness through direct communication with shareholders and institutional investors.
Our dedicated IR team based in Tokyo and Geneva hold daily dialogues
with analysts and institutional investors. The following is an overview ofour major IR activities in 2018.

The number of IR interviews with analysts
and institutional investors in 2018

March 15Signed exclusive license agreement with ROHTO Pharmaceutical for thedevelopment and commercialization of JAK inhibitor in Japan1

May 21

Details2

We report our IR activities to the Board of
Directors twice a year. In addition, we edit aninternal report of IR-related activities and submit this monthly report to the management.

IR meetingfor quarterly
4
financial results

We hold telephone conferences for the first,
second and third quarter. In addition, weorganize an IR meeting for the full year
results. The speakers are the president, chief
financial officer and other executives.

3

Report to
the Board of
Directors

Announced achievement of greenhouse gas emission reduction target three
years ahead of schedule, a 20% reduction in 2017 compared with 2009

June 5
Held an investor conference in London 1

July 2Completed national roll-out of the Ploom TECH starter kit and tobacco
capsules in convenience stores

August 1
Completed the acquisition of Donskoy Tabak in Russia 2

August2

IR interview

Approx. We have IR interviews and teleconferences700
for analysts and institutional investors.

In addition, as a follow-up to the London
Investor Conference, we held small meetings for analysts and institutional investors
in Japan.

September
4

November 29
Completed the acquisition of tobacco business* of Akij Group in Bangladesh 4

5

5

A president, executive vice president or
senior vice president visits shareholders andinstitutional investors in major cities in North
America, Europe and Asia.

IR conferencesin Japan andoverseas12

We participate in conferences sponsored by
securities companies and senior vicepresidents or IR team members meet
analysts and institutional investors both inJapan and overseas.

IR meetingfor individual
investors

4

An executive vice president or senior vicepresident visits major cities in Japan to speakat IR meetings for individual investors.

IR road show
overseas* Acquired the shares of United Dhaka Tobacco Company Limited (UDTC), the entity taking over the tobacco
business assets of Akij, as well as all tobacco related trademarks and design rights from Akij.

December 3
Launched the new white Ploom TECH starter kit and two new tobacco
capsule flavors in Japan 5

Japan Tobacco Inc.

026

Annual Report 2018

In June 2018, we held an investor conference in London to discuss the Group’s midto long-term business strategy, our global
tobacco growth strategy focused on M&A,
and RRP business strategy. The conference
attracted approximately 110 visitors andwebcast viewers.

Business
conference foranalysts andinstitutional
investors

Launched Logic Compact, the new premium E-Vapor product in UK 3

JT has been selected as a member of the Dow Jones Sustainability
Asia/Pacific Index for the fifth consecutive year

Approx.

Results

Activities
2700

Japan Tobacco Inc.

027

Annual Report 2018

Per formance Measures

Results for the fiscal year ended December 31, 2018

In our Business Plan 2019, a target is set for adjusted operating profit
growth rate at constant exchange rates. While it is a mid- to long-termtarget, we also monitor performance measures annually.

In our strategic framework to achieve adjusted
operating profit growth, the JT Group places a particularemphasis on “quality top-line growth”, while, at the sametime, focusing on building a “competitive cost base” and“robust business foundation”. In line with our strategic

Tobacco Sales Volume

Core Revenue

International Tobacco (BnU)

Japanese Domestic Tobacco (BnU)emphasis, the measures to review our business performance are skewed towards top-line related indicators.
As for shareholder return, we will deliver sustainable andsteady increase of dividend per share.

International Tobacco (USD MM)

Japanese Domestic Tobacco (JPY BN)-450+1,282

398.7

398.5

427.6

106.2

92.9

82.0

10,49010,498

2016

2017

2018

2016

2017

2018

2016

2017

+7.3%

11,780Business2018
at constantcurrency

FX

11,330

649.7

590.6

582.4

2018

2016

2017

2018

82.0 BnU+12.2 %GFB Shipment Volume

Consolidated Revenue

Consolidated Adjusted Operating Profit

Dividend Per ShareGFB Shipment Volume (BnU)

Revenue (JPY BN)

Adjusted Operating Profit (JPY BN)

Dividend Per Share (JPY)-11.7% year-on-year

to 427.6 BnU

For the international tobacco business, total shipment volume includes fine cut, cigars, pipe tobacco, snus and kretek,
but excludes contract manufactured products, waterpipe
tobacco products and Reduced-Risk Products.

For Japanese domestic tobacco, total cigarette sales volume
excludes sales volume of Japanese domestic duty free,
the Chinese business and Reduced-Risk Products.

For the international tobacco business, US dollar-based
core revenue includes revenue from waterpipe tobacco products and Reduced-Risk Products, but excludes revenues
from distribution, contract manufacturing and other peripheral businesses.

637.2

257.1

260.4

266.4

2,143.3

2,139.7

2,216.0

586.8

585.3

2016

2017

2018

2016

2017

2018

2016

2017

Business+8.9 %

at constantexchange
rates to JPY
637.2 BN+2.3 %

2,216.0 BN

to 266.4 BnU

Shipment volume of GFBs, namely Winston, Camel,
MEVIUS and LD in the international tobacco business.

Revenue on a consolidated basis which, for the avoidanceof doubt, excludes excise and other similar taxes, as well
as sales from transactions in which the JT Group acts as
an agent.

For the Japanese domestic tobacco business, core revenue
excludes revenue from distribution of imported tobacco inJapan, among others, and includes revenue from domestic
duty free, the China business and Reduced-Risk Products
such as Ploom TECH devices and capsules.

2018
at constantcurrency

FX

595.5

130

140

150

2018

2016

2017

2018

595.5 BN 150 yen+1.7% including currency impact to JPY+10 yen to

Adjusted operating profit is calculated as follows: Adjusted
operating profit = Operating profit + amortization cost of
acquired intangibles arising from business acquisitions +adjusted items (income and costs)*

The sum of interim and year-end dividends per share,
the record dates of which fall in the relevant fiscal year.

* Adjusted items (income and costs) are impairment losses on goodwill, restructuring
related income and costs and others.

Japan Tobacco Inc.

028

Annual Report 2018

to JPY 582.4 BN

-41.7

+51.9

+3.6% to JPY-1.4 %

at constant exchange
rates to USD11,780 MM

Japan Tobacco Inc.

029

Annual Report 2018

Industr y Over view

Please be reminded that this section is intended
to explain the business operations of JT to
investors, but not to promote sales of tobacco
products or encourage smoking by consumers.

Tobacco Business“Reduced-Risk Products* have been
expanding at a fast rate in markets
such as the USA, Europe and Japan,
with global sales reachingapproximately US$16 billion.”

Tobacco Industry
Market Dynamics
There are many types of tobacco products available intoday’s marketplace. Cigarettes remain the most popular
choice for consumers, while fine cut, cigars, pipe tobacco,snuff, chewing tobacco, waterpipe tobacco and kretek continue to draw consumers’ interest, with some of these product categories increasing their volumes worldwide.
In addition, Reduced-Risk Products (RRP)* have become
widely popular. In particular the market size of ‘E-Vapor’
products has been expanding at a fast rate notably in the
USA and Europe. The products use vaporized liquid solutions often containing nicotine, and vapor is inhaled to offer adifferent experience. As E-Vapor products do not use tobacco leaf, they are usually not regulated or taxed as tobacco
products, however, regulation or taxation of E-Vapor products vary across markets.

Industry data will be updated on the JT website
around July 2019
Top market players
Share of market (%)

Another type of RRP referred to as ‘T-Vapor’ or ‘Tobacco
Vapor’ has been growing particularly in Japan. Unlike
E-Vapor, T-Vapor products use tobacco leaf and are therefore taxed and regulated as tobacco products in principle.
We expect further innovation and product offerings will
drive growth in the T-Vapor category, as market players takekeen interest in this new growing market.

2013

2014

2015

2016

2017

Philip MorrisInternational Inc.

24.5

24.5

24.9

24.7

24.7

British American
Tobacco Plc.

17.9

18.3

19.1

19.4

20.5

Japan Tobacco Inc.

14.1

13.8

13.7

14.2

14.7

Imperial Brands Plc.

6.4

6.3

6.7

6.5

6.5

Source: JT estimate (2017 data).
Excluding China National Tobacco Corp (CNTC).

Approximately 5.4 trillion cigarettes are consumed aroundthe world, reaching global sales of approximately US$700
billion. China is by far the largest market, accounting forover 40% of global consumption, but it is almost exclusively
operated by a state monopoly. Indonesia, Russia, the USA
and Japan are the next four largest markets, according to asurvey conducted in 2017.**

Top 10 countries by cigarette volume
BnU
Country

China

In general, the market dynamics of cigarettes are distinctively different between mature and emerging markets. In
mature markets, industry volume tends to decline reflecting
various factors such as limited economic growth, tax
increases, tightening regulations, and demographic changes, among others. In addition, down-trading is prevalent inthese markets. Consumers are inclined to seek more value
as they feel tobacco products become less affordable in thecontext of limited growth of disposable income.
In emerging markets, on the other hand, total consumption
tends to increase, driven by population growth and economic development, particularly many countries in Asia, theMiddle East and Africa. As their disposable income increases, consumers look for quality and trade up to products in ahigher price range.

Annual Report 2018

Japan Tobacco Inc.

2016

2017

2,490.5 2,549.5 2,489.5 2,350.5 2,368.9
314.3

320.4

316.1

308.2

Russia

346.3

316.2

292.5

278.9

258.9

USA

279.5

270.6

269.9

262.5

252.7

Japan

194.1

186.2

182.3

173.8

151.4

Turkey

91.7

94.7

103.2

105.5

106.2

Egypt

80.2

83.2

86.4

90.0

93.1

Bangladesh

78.6

80.6

83.4

86.1

88.9

India

100.9

95.9

88.1

84.9

81.3

Germany

79.6

80.3

80.0

78.2

79.0

Source: JT estimate (2017 data).

031

2015

308.3

* R
 educed-Risk Products (RRP): Products with the potential to reduce the risks
associated with smoking.
** Source: JT estimate (2018 data).
030

2014

Indonesia

Overall, global cigarette industry volume has been slightly
decreasing in 2018. However, more importantly, industry
value continues to grow even in the current difficult operating environment, mainly driven by price increases. This is asign of the resilience of the industry. These trends – decline
in volume and increase in value – are expected to continue
in the years ahead. In addition, the RRP category value**
continues to grow and its market size is expected to growfrom US$16 billion in 2018 to US$29 billion in 2021.

Japan Tobacco Inc.

2013

Annual Report 2018

I n d u s t r y O ve r v i ew

Regulations

increases in a short period of time, or steep tax increases,
could lead to a decline in industry volume. Often, tax
increases coincide with an increase in illicit trade, which
could in turn affect our business.

The regulatory environment continues to be more restrictive
for the tobacco industry. Restrictions on promotions andadvertisements are the most common around the world.
An increasing number of markets are introducing banson smoking in public places and promoting larger healthwarnings on product packaging, in some cases with pictorial
health warnings. There are also some markets where displaying tobacco products at retail stores is banned.

Competition
Excluding China, two-thirds of world industry volume
is produced by four major global tobacco companies,
namely Philip Morris International Inc., British American
Tobacco Plc., Japan Tobacco Inc. and Imperial Brands Plc.**
The competition within the industry is intense and, as consumers’ needs and preferences continue to diversify,
a strong portfolio with established brands is increasingly
important to support market share gains. Therefore, major
global companies are focusing on brand equity enhancement
to strengthen their brand portfolio by introducing innovative
products. Competition in the RRP category has been intensifying as recently the products have subsequently beenlaunched in many markets.

Recent regulations are focusing more on the product itself.
Plain packaging, or a branding ban, have been introduced insome markets and furthermore, regulators are becoming
more aggressive by restricting ingredients and emissions,following the guidelines on these attributes proposed by
the Framework Convention on Tobacco Control.
In Europe, all member states have already implemented the
new Tobacco Products Directive from 2017, which adopted
extended health warnings, minimum packaging requirements or restrictions on the use of additives, among others.
EU Member States have started implementing these restrictions. These moves to commoditize tobacco products will
undermine fair competition among tobacco manufacturers
trying to meet increasingly diverse consumer preferences.
Worse, they could result in an undesired increase in illicit trade,as commoditized products with less uniqueness are easier tocounterfeit and more difficult to detect when smuggled.

In addition to the pursuit of organic growth, M&A is an effective
way to supplement growth opportunities in this industry.
* 	Reduced-Risk Products (RRP): Products with the potential to reduce the risks
associated with smoking.
** Source: JT estimate (2017 data).

Recently new standards or frameworks for reduced risk claims
have been established in a few countries such as the USA
and parts of Europe. In order to gain official approval fromgovernments, activities in developing reduced risk claims havebeen intensified among major global tobacco manufacturers.

Pharmaceutical Business

Processed Food Business

Market dynamics

Market dynamics

The global pharmaceutical market continues to grow, reaching sales of approximately US$1,143.3 billion in 2017, anincrease of 2.5% year-on-year.* Developed countries takethe lead, with North America accounting for approximately
43%* of the global pharmaceutical market, the largest
share. In emerging countries, demand for advanced medicine is also rapidly growing due to multiple factors including
increasing health awareness, population growth, and development of public healthcare systems. Facing a rapidly aging
society and fiscal deficits, however, governments often try
to control drug prices and hold back medical costs.

Annual consumption of frozen food in Japan increased
4.7% in 2017 to 2,855,330 tons, a record high. Domestic
market size, on a consumption basis including imports,
grew 7.0% year-on-year to ¥1,058.5 billion,* exceeding one
trillion yen for the first time. Domestic production of frozen
food in 2017 increased 3.0% from the previous year to1,600,968 tons, a record high for the second consecutive
year. Production value also grew, increasing by 4.5% to¥718.0 billion.
We expect continuous growth for the Japanese processedfood industry given the increasing number of one-personhouseholds and rising gender equality for women. Offering
abundant variety, frozen foods can help meet the sophisticated needs of today’s consumers as technology can now
maintain fresh taste beyond defrosting.

In Japan, the main market for our pharmaceutical business,the majority of net sales comes from originator drugs.
Compared with the USA and Europe, the market share in
Japan for generic drugs is still small. However, the market
has been expanding, in part due to government promotionof generic drugs in order to control medical care expenses.
Drastic reform of the drug pricing system will create challenging circumstances due to annual drug price revision,
constraints on the scope of price maintenance premium
drugs, price reduction of long-listed drugs according to
replacement rate, and similar factors. In April 2018, the latest round of price revisions led to an industry-wide reduction of drug prices by 7.48% on average.

At the same time, we believe it is necessary to monitor
trends in sales channels amid the expansion of private brandproducts by some distribution companies and the reorganization of wholesale entities. The risk of price fluctuations in raw
materials still exists due to global food shortages.

Worldwide Pharmaceutical Market* (USD BN)

Taxation
Tobacco products are subject to excise or similar taxes
in addition to value-added tax in most countries as governments seek to secure their revenue or promote publichealth. Excise taxes were raised in various markets during
the past year, including for RRP*, and in general, tax
increases are passed onto prices. Therefore, repeated tax

The Japanese Frozen Food Market on a Consumption Basis*(JPY BN)

993.8

1,063.6

1,073.1

1,115.7

1,143.3

977.1

988.3

1,015.6

989.4

1,058.5

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

* Source: Japan Frozen Food Association

RRP Category Value (USD BN)

Top brands

Competition

Competition

Global competition to create innovative drugs is becoming
progressively more difficult because searching for new drug
targets has become harder while regulatory standards for new
drug approvals have become stricter.

TableMark is competing against major players like Maruha
Nichiro, Nichirei, Ajinomoto and Nissui as well as a multitude of mid- or small-scale producers. However, the industry players are slowly specializing according to eachcompany’s product categories.

BnU

Brand

We Own

2013

2014

2015

2016

2017

395.9

391.4

392.5

384.0

365.4

140.8

132.6

135.0

141.5

146.7

Pall Mall

105.7

110.1

109.3

108.2

118.3

L&M

98.6

98.7

103.2

102.4

97.1

62.7

66.8

71.0

71.5

71.1

Marlboro
Winston*Camel*

Rothmans

25.8

34.8

50.5

69.2

77.5

Cleopatra

53.7

56.2

59.3

65.9

68.7

83.7

79.1

77.3

76.2

68.6

MEVIUS

Source: JT estimate (2017 data).
Excluding China National Tobacco Corp (CNTC).
* Winston and Camel are also owned, respectively, by Imperial Brands Plc. and Reynolds
American Inc. in the USA.

Japan Tobacco Inc.

032

16.1

11.3

4.7

2016

Source: JT estimate (2018 data)

Annual Report 2018

In recent years, some companies have moved to reorganize
production bases with the aim of optimization, as well as
dealing with aging facilities and labor shortages. The development of value-added and new-value products has also
resulted in the creation and expansion of some new markets.

2017 Regional Composition*

7.2

2015

We are building an R&D-led business to create internationally competent original compounds. Therefore, we are competing with not only Japanese domestic makers but also
numerous foreign companies including global mega pharma and start-up companies.

2017

2018

North America 42.9%
Europe
22.5%
China
10.7%
Japan
7.4%
Others16.5%*C opyright©2019 IQVIA.
Created based on IQVIA World Review
Executive™ 2017.
Reprinted with permission

Japan Tobacco Inc.

033

Annual Report 2018

Review of Operations

International Tobacco BusinessResults for the fiscal year ended December 31, 2018

Global Flagship Brands were paramount to our robust
organic performance. GFB shipment volume grew for the
fourth consecutive year, up 2.3% to 266.4 billion cigarette
equivalent units, driven by share increases in both established and emerging markets. 64 markets reported GFB volume gains in 2018, of which 31 recorded double-digit
growth, including Brazil, the Czech Republic, Jordan,
Poland, Thailand and Turkey.

In Reduced-Risk Products, our presence and portfolio
steadily expanded, notably in the E-Vapor category. The successful launch of Logic Compact in the UK is testament toour consumer-centric investments in product developments
and commercial initiatives. Additional launches are underway, like recently in Canada, Romania and Russia.

2018 performance was outstanding. Total shipment
volume growth exceeded 7%, benefitting fromacquisitions and organic share progression in bothmature and emerging markets. This volume increase
was complemented by significant pricing gains,which were realized by leveraging the unparalleledequity of our Global Flagship Brands.

The international tobacco businessentered 2019 with strong businessfundamentals and positive momentum.
This gives me great confidence in ourability to continue growing throughstrategic investments in our people,
brands and capabilities.

We continued to deploy investments in a focusedand disciplined manner, strengthening ourcompetitiveness across selected markets andcategories. While the expansion efforts in
Reduced-Risk Products accelerated, as
demonstrated by the successful launch of Logic
Compact, conventional products remained thecore driver of our top- and bottom-line growth.

Eddy Pirard
Chief Executive Officer, JT International S.A.

2019 is set to be another successful year for theinternational tobacco business. Total volume isexpected to outperform the industry, supported by
the acquisitions in Russia and Bangladesh as well
as by our Global Flagship Brands expanding
further their consumer franchise. The pricing
environment remains robust, providing
opportunities for sustainable improvements. In
this context, core revenue and adjusted operating
profit are projected to continue growing at asustained pace.

Our talented employees are the cornerstone of the international tobacco business exceptional growth track record.
For the fifth consecutive year, the organization was awarded
Global Top Employer, with an unprecedented 58 offices in
53 countries certified in 2019. This successfully demonstrates our efforts to attract, retain, develop and reward talents across the value chain.

The continued progression of our Global Flagship Brands was
driven by Winston, Camel and LD, which more than compensated for the decline of MEVIUS, mainly attributable to thesevere industry contraction in Taiwan. Of particular note was
the performance of Winston, which grew volume by 6 billion
units, setting a record high of 150 billion units. Camel and LD
also performed strongly with Camel delivering its fifth consecutive year of volume growth, while LD regained momentum driven by the positive results in Jordan and Russia.

By consistently pursuing our strategic priorities, our brands
will further expand their consumer franchise in both conventional products and Reduced-Risk Products. With its
consumer-centric approach, the international tobacco business is strongly placed to continue growing sustainably in2019 and beyond.

Across our top 30 markets, the international tobacco business’ share of market and share of value achieved respectively 28.1% and 24.9%, growing 1.1 and 0.8 percentage
points versus prior year. Over the same period, GFB share ofmarket and share of value reached respectively 18.4% and14.4%, an increase of 0.7 and 0.4 percentage points.

Key Highlights
Total Shipment Volume

GFB Shipment Volume

(BnU)

427.6

(BnU)

Year-on-Year Change

Year-on-Year Change

+7.3%

266.4
+2.3%

Adjusted Operating Profit(USD MM)

11,330(USD MM)Year-on-Year Change

Year-on-Year Change

3,493+11.3%

398.5

Market share = +9.0
Industry = -13.2

427.6

2017

Organic

Acquisitions

2018

GFB Shipment Volume (BnU)

Adjusted Operating Profit (AOP): YoY Growth at Constant FX*

2018 Performance Review
Volume & ShareTotal shipment volume increased 7.3% to 427.6 billion cigarette equivalent units. This outstanding growth was fueledby the acquisitions in the Philippines, Indonesia andEthiopia, as well as the early benefits of Donskoy Tabak in
Russia and UDTC in Bangladesh.

In 2018, the international tobacco business recorded outstanding results, demonstrating once again the robustnessof its investment strategy. Total shipment volume exceeded
400 billion sticks for the first time since 2013, driven byrecent acquisitions. Organic performance was resilient, with
Global Flagship Brands driving share gains in many geographies. Currency-neutral core revenue and adjusted operating profit were above guidance, increasing by double-digits.

+33.4

-4.2

Roadmap to Sustainable Growth
The international tobacco business remains focused on prioritizing investments in conventional products in markets
that matter, strengthening its competitiveness in ReducedRisk Products as well as empowering and developing its talented people.

JTI Shipment Volume (BnU)+29.1

Core Revenue

+7.9%

239

250

257

260

266

2014

2015

2016

2017

2018

Market Share (top 30 markets)

13%

2014

The 2017 acquisitions in the Philippines, Indonesia andEthiopia, combined with the more recent ones in Russia
Japan Tobacco Inc.

driven by our continued market share progression, withgains in 22 of our top 30 markets.

and Bangladesh, paved the way for new growth opportunities while contributing strongly to our top- and bottom-line
performance in conventional products.

11%

2015

* Excluding 2017 one-time loss

034

Annual Report 2018

13%

2016

10%

2017

14%

2018

Organically, shipment volumes were strong and ahead of
the industry trend in several geographies. Excluding acquisitions, total shipment volume declined only 1.1%, outperforming an overall industry contraction estimated at 3.3%
across our top 30 markets.

+1.1pp27.0%

The international tobacco business grew volume in 63 markets, including Brazil, Germany, Iran, Italy, Jordan, Poland,
Spain, Thailand and Turkey. This positive performance wasJapan Tobacco Inc.

2017

035

JTI

+0.7pp

28.1%

17.7%

2018

2017

Annual Report 2018

18.4%

GFB

2018

Please be reminded that this section is intended
to explain the business operations of JT to
investors, but not to promote sales of tobacco
products or encourage smoking by consumers.

Review of Operations

Financials
Core revenue performance was strong, with a currencyneutral year-on-year increase of 12.2% fueled by positive
price/mix and volume growth. The overall pricing environment improved in 2018, particularly in the key markets ofRussia and the UK.

Expanding the Business Footprint
To complement our organic growth, two acquisitions broadened our business footprint.
In August 2018, the acquisition of Donskoy Tabak (DT) in
Russia was completed. The Greek manufacturer SEKAP,
owned by DT, was also part of the transaction. With the addition of DT, overall volume share in Russia increased toapproximately 40% and bolstered our leading position in theworld’s fourth largest cigarette market.

Our positive price/mix variance reached US$963 million,
supported by significant contributions from all regional clusters except South & West Europe, due to France. ExcludingFrance, South & West Europe generated a positive price/
mix contribution, reflecting gains in several markets, including Italy and Spain.

Global Flagship Brands
Among the world’s most iconic and best-known tobacco brands, our four GFBs are at the core of
our portfolio and investment strategy.

WinstonExcluding the impact of a one-time loss in the previous year,
currency-neutral adjusted operating profit increased 14.3%,
driven by strong top-line performance. Importantly, thisdouble-digit profit growth was achieved while continuing todeploy substantial business investments, notably behind
Reduced-Risk Products.

In November 2018, the acquisition of UDTC in Bangladesh
was also completed. As a result, our overall volume share
grew to about 20%, representing a strong number two position in the eighth largest cigarette market globally.

Winston is our leading brand. Launched in 1954, Winston became theworld’s second biggest cigarette brand as of 2007. Winston is now present inmore than 130 markets following the 2018 launches in Colombia, Guatemala
and Libya.

Consistent with our strategy, these investments accelerate our
expansion in markets that matter for conventional products.

In 2018, Winston’s volume grew 3.9% to 150 billion cigarette equivalent units,with 28 markets selling more than 1 billion cigarette equivalent units. Its strong
performance was driven by a comprehensive portfolio architecture comprisedof two sub-families – Core and XS.

2019 Outlook

Winston Core, of which the lead styles are Winston Blue and Red, is Winston’s
global bestseller. The XS family, which grew volume by more than 15% in2018, is a more progressive range with a refined taste signature and features
such as the LSS technology (Less Smoke Smell). Its growth was driven by theCompact line extensions and the success of its Flavor-on-Demand propositions
in many markets, including Russia.

2019 is forecast to deliver continued and sustainablegrowth by building on the strong business fundamentals
and positive momentum from the previous year.

In our two European clusters, combined currency-neutral
adjusted operating profit grew 15.8%, despite the competition-led tax absorption in France. CIS+ and Rest-of-theWorld adjusted operating profit increased 26.8% and23.4%, respectively, driven by pricing and the contribution
from acquisitions.

The most recent acquisitions in Russia and Bangladesh will
be important growth drivers in 2019 and beyond,generating tailwinds in terms of volume, core revenue andadjusted operating profit at constant currency.

2018 Key Highlights
Investments That MatterIn 2018, investments in both established and emerging markets continued to strengthen the business fundamentals andcompetitiveness of our conventional products. Investments
primarily focused on optimizing the GFB equity and portfolio, as well as strengthening distribution networks and trade
partnerships.

Total shipment volume is assumed to increase by about 4%,
benefitting from acquisitions. On an organic basis, thecontinued GFB volume growth is expected to outperform theindustry decline estimated at 4% across our top 30 markets.

Global sales

149.9
BnU

With approximately two-thirds of the 2019 planned pricing
already secured, robust core revenue and adjusted
operating profit growth, at constant currency, are expectedonce again.

In the key markets of Russia and the UK, top-line growth
returned, driven by the increased competitiveness of ourbrands. In emerging markets, such as Iran and thePhilippines, focused investments drove strong volume
growth and market share gains.

Camel
Camel has been the world’s most inspiring tobacco brand since 1913, a global
icon of creativity with over 100 years of tobacco experience. With its distinctive
taste signature, Camel is sold today in 110 markets following three new launches
in 2018: Egypt, Nicaragua and Vietnam. In 13 of these markets, Camel’s annual
shipment volumes exceeded 1 billion cigarette equivalent units.

Importantly, this strong financial performance will beachieved while expanding our Reduced-Risk Products’
presence with Logic Compact and while further investing in
our people, brands and capabilities. In parallel, strategic
assessments and initiatives across our value chain willcontinue to enhance our business agility.

In addition to efforts in conventional products, substantial
investments continued to be deployed behind Reduced-Risk
Products. Our leading positions in the European closed tanks
category consolidated, driven by Logic Pro as well as theintroduction of Logic Compact in the UK, where the productreceived very positive feedback from consumers and trade
partners. Throughout the year, our E-Vapor propositions wereintroduced in three new markets, expanding our global RRP
presence to 12 countries outside Japan by the end of 2018.

In 2018, Camel grew volume and share for the fifth consecutive year. The brandexceeded 54 billion cigarette equivalent units, increasing by 2.8% versus 2017, led
by double-digit volume growth in 27 markets. This positive volume performance
was driven by the strong contribution of the Czech Republic, Spain, Thailand,
Tunisia and Turkey.

2019 Guidance*
Industry
volume **GFBvolumeJTI
volumeCorerevenue

Overall, our focused investment strategy provided a morebalanced and competitive business base in the international
tobacco business, which will be paramount to fuel sustainable growth in 2019 and beyond.

+1%

+4%

+6%

-4%

Global sales

Last year, Camel continued to build relevance among adult smokers with new
propositions, such as Camel Caster in Vietnam. This initiative enabled the brand toprovide better consumer choice in one of the largest Asian markets. Camel also
increased its presence in the Compact category, offering the format in 15 markets,
better catering to evolving preferences of consumers.

BnU

Camel achieved record high market share in 20 geographies in 2018, with solid
growth momentum not only in its European strongholds (Belgium, the Czech
Republic, France, the Netherlands and Spain), but also in many emerging markets,
such as the Philippines and South Africa. As a result, Camel exited 2018 with a
3.9% share in our top 30 markets, up 0.2 percentage points versus prior year.

AOP

+9%

Winston grew share in 37 markets, achieving records in 29 of them, including
Iran, the Philippines, Russia and Spain. As a result, Winston further strengthened its market share across our top 30 markets, growing 0.4 percentage
points to 10.9%.

54.2* 2019 variance vs. prior year. Core revenue and AOP at constant currency.
** Based on JTI’s top 30 markets (RMC + Fine cut).

Japan Tobacco Inc.

036

Annual Report 2018

Japan Tobacco Inc.

037

Annual Report 2018

Please be reminded that this section is intended
to explain the business operations of JT to
investors, but not to promote sales of tobacco
products or encourage smoking by consumers.

Review of Operations

Reduced-Risk Products

Our fruitful research and development initiatives and ongoing scouting efforts were recently strengthened by a newpartnership with Plug-and-Play, a California-based leader inincubator technology platforms which is expected to bringinnovators and data experts together, with the aim to
explore and develop consumer-relevant features for the next
generation of products and services. This new initiative willfurther broaden our network to new sets of entrepreneurs
who can bring disruptive ideas that will ultimately boost the
future growth of Logic and Ploom.

The Reduced-Risk Products category continued to grow overthe course of 2018. The number of vaping consumers rosefrom 29 million in 2017 to approximately 50 million at the endof 2018, with an estimated Retail Sales Value net of taxes ofaround $16 billion for the overall category.
2018 was another important business-building year with oursteady expansion in the E-Vapor category. By the end of
2018, the Logic portfolio was available in 11 markets, which
together represent approximately 75% of the global RRP category retail value. Our deliberate, focused approach togeo-expansion, prioritizing high-potential markets, will continue in 2019 with new market launches.

LD

JTI

LD Corporate

CMYK
AW_LD_CMYK
AC

AF

LD is one of the top best-selling tobacco brands in the world and a key value
proposition globally. LD is now present in more than 50 countries following the2018 launches in Bolivia, Egypt, Morocco, Norway and Uzbekistan.

2016_05_18

In the highly competitive value segment, LD delivered 47 billion cigarette
equivalent units in 2018, an increase of 2.2% versus 2017. Main contributors
to volume increase were Jordan, Malaysia, Russia, Taiwan and the USA.
Modern propositions such as Flavor-on-Demand and Compact, grew by double digits, mostly in Eastern Europe.

Global sales

46.6

The brand achieved its highest ever share in 13 markets, including Canada,
Russia, Singapore and Taiwan. In Taiwan, despite the industry contraction, LD
reached a record share of market of 5.5% in the fourth quarter of 2018, up
three percentage points versus prior year. Overall, LD reached a 3.0% market
share in our top 30 markets, up 0.3 percentage points versus 2017.

BnU

MEVIUS
Launched as Mild Seven in 1977 and rebranded in 2013, MEVIUS is the
top-selling brand in Japan with over 30% market share. Internationally, MEVIUS
enjoys consumer popularity in several Asian markets, as demonstrated by therecord market share achieved in 2018 in Cambodia, Myanmar and Singapore.
For the full year of 2018, MEVIUS’ volume decreased by 11.7%, mainly due toindustry volume contraction in Taiwan and South Korea, driven by an excise
tax increase and RRP category growth, respectively. Excluding such geographies, MEVIUS recorded double-digit volume growth in several markets, suchas Cambodia and Myanmar.

Global sales

15.7

The brand continued to grow its share of the premium segment in its top Asianmarkets. In Taiwan, MEVIUS remained the number one brand with a share ofmarket of 18.4%, strengthening its leadership in premium by reaching a 62%
share of segment.

BnU

Japan Tobacco Inc.

038

Annual Report 2018

In 2018, Logic Compact, our new pocket-sized, high-performance device that provides high vapor volume and ultimate
convenience for the modern, design-conscious vaper, wasintroduced in the UK. Logic Compact comes in a range of different colors and flavors and its presence was recently
expanded to Belgium, Canada, Greece, Ireland, Italy,
Romania and Russia. Further market introductions of Logic
Compact will take place throughout the course of 2019.
In the T-Vapor category, we continued gathering consumer
insights with Ploom TECH in Canada, Switzerland and theUSA. Our T-Vapor portfolio for the international tobacco business will be shaped by mining the insights gathered in thesepilot markets and leveraging the important learnings from
Ploom TECH+ and Ploom S in Japan.
Significant efforts are being deployed and new capabilities
are being built to deeply understand what will drive consumer preference in Reduced-Risk Products. Beyond justlooking at a satisfying tobacco experience that has thepotential to reduce risk, consumers are also driven by otherimportant factors, such as external needs or the convenience of vaping in more situations, while others are conscious of social considerations, such as products with nosmoke smell. In certain markets, affordability and taste satisfaction primarily influence purchasing behavior. Since consumers are the ultimate catalysts for innovation, their needs
will continue to be at the heart of our product development
and commercialization efforts.
To handle product expansion in E-Vapor and T-Vapor, ourrobust supply chain centered in both China and Japan, wassupplemented by the opening in 2018 of in-house production facilities to manufacture liquids from our European
Flavor House in Gostkow, Poland.
2019 and upcoming years will continue to see relentlessefforts to develop new products with the potential to exceed
consumer expectations while reducing the risks associatedwith smoking. These developments will raise our futurecompetitiveness and expand our portfolio, which combinedwith secured capacity to meet demand, will drive share
growth in the Reduced-Risk Products category.

Japan Tobacco Inc.

039

Annual Report 2018

Please be reminded that this section is intended
to explain the business operations of JT to
investors, but not to promote sales of tobacco
products or encourage smoking by consumers.

Review of Operations

Japanese Domestic Tobacco BusinessResults for the fiscal year ended December 31, 2018

Cigarette industry volume declined 12.4% and JT
cigarette sales volume declined 11.7% year-onyear, due to the underlying trend (natural decline),
expansion of Reduced-Risk Products (RRP)* andthe impact of a price increase in October 2018.

We aim to return to profit growth, bymanaging RRP and cigarettes in a morecomprehensive manner. In parallel, it is
our strong intention to increase our
combined market share of RRP andcigarettes by offering consumers a varietyof options in each category.

Though JT cigarette market share contracted
briefly due to the price increase, our cigarettemarket share in December 2018 almost
recovered to the same level as before the priceincrease. For the full year, we achieved 61.8%
cigarette market share, an increase of 0.5
percentage points year-on-year led by the solid
performance of the core brands.
The overall RRP market size for 2018 was about
21% of the total tobacco industry volume (basedon shipment volume). We rolled-out Ploom TECH
nationwide in July 2018 and throughout 2018, wesold 2.8 billion cigarette equivalent units. Our
marketing and sales activities have been focusing
more on direct communication with consumers toshare the benefits of low temperature heatingproduct, and this approach has been working well.
We will continue this so that more consumers
recognize the benefits.

Share Performance

Roadmap to Sustainable Growth• In 2018, as a result of continuous investment in sales
promotion and brand equity enhancement with a focus
on MEVIUS, our cigarette market share improved, withboth JT and MEVIUS outperforming their results for2017 on a full-year basis.
–– 2018 cigarette market share: 61.8% (2017: 61.3%,+0.5 percentage points)• JT market share in RRP category increased due toPloom TECH’s nationwide roll-out in July 2018.
–– JT market share in RRP category in the fourth quarterof 2018 was about 10% (in convenience stores).

The Japanese domestic tobacco business aims to return tosustainable profit growth, by managing RRP and cigarettes
in a more comprehensive manner. In parallel, it is our strong
intention to increase our combined market share of RRP
and cigarettes by offering consumers various options ineach category.
As RRP is the pillar of our growth, although competition has
further intensified, we prioritize the allocation of resources
into this category. Our nationwide roll-out for Ploom TECH+
is planned in July 2019 and in September 2019 for Ploom S,
which will increase our product offerings. In order to bechosen by consumers, it is imperative to build awarenessand recognition for each product. We will strengthen marketing initiatives to enhance our competitiveness and win
the leading position.

Cigarette Market Share Evolution of JT and MEVIUS (%)

62.4

61.4

61.6

62.5

61.5

32.1

31.0

31.9

32.3

30.1

Oct-Dec
2017

Jan-Mar2018

Apr-Jun
2018

Jul-Sep
2018

Oct-Dec
2018

Chito Sasaki

For cigarettes, industry volume shows resiliency andremains solid. This category continues to be the platform of
profitability to support growth. We will enhance the equityof our core brands.
OutlookPresident, Japanese Domestic Tobacco Business, Tobacco Business

JT Cigarette Sales Volume (BnU)JT

In 2019, we forecast that our revenue and adjusted operating profit will increase by 6.5% and 2.9%, respectively. Thisis based on cigarette pricing and increased RRP sales volume with two new products that will more than offset a
decline in JT cigarette sales volume.

MEVIUS-11.7%

Performance Overview
Volume and Financial• Revenue and profit decreased due to cigarette industry
volume decline–– In 2018, JT cigarette sales volume decreased 11.7% to82.0 BnU mainly due to cigarette industry volume decline.
–– JT RRP sales volume reached 2.8 billion cigarette
equivalent units.
–– Core revenue decreased 1.4% to 582.4 billion yen
mainly because of JT cigarette sales volume decline.
–– Adjusted operating profit decreased 10.0% to 209.0
billion yen affected by revenue decline and increase inmarketing expense.

92.9

82.0

2017

2018

Core Revenue (JPY BN)
-1.4%

590.6

582.4

2017

2018

*RRP: Reduced-Risk Products with potential to reduce the risks associated with smoking

Adjusted Operating Profit (JPY BN)

Key Highlights-10.0%JT Cigarette
Sales Volume

Core Revenue

Adjusted
Operating Profit(BnU)(JPY BN)(JPY BN)-11.7%-1.4%-10.0%

82.0 582.4 209.0
Year-on-Year Change Year-on-Year Change

Year-on-Year Change

Japan Tobacco Inc.

040

Annual Report 2018

232.3

209.0

2017

2018

Japan Tobacco Inc.

041

Annual Report 2018

Please be reminded that this section is intended
to explain the business operations of JT to
investors, but not to promote sales of tobacco
products or encourage smoking by consumers.

Review of Operations

Tobacco Business Value Chain

Our core brands

Natural American Spirit

MEVIUS• The Natural American Spirit brand was born in the
USA in 1982, and introduced to Japan in 1996.

• Evolved in 2013 from Mild Seven, MEVIUS
has commanded the No. 1 share in theJapanese domestic cigarette market for morethan 30 years.

• JT Group completed the acquisition of the
Natural American Spirit non-US business inJanuary 2016 and has since been expanding its
markets including Japan, Germany, Italy,
Switzerland, the UK and Spain.

• Available in regular for smooth taste andmenthol, MEVIUS allows consumers to enjoy
premium high-quality products with 100%
natural menthol.

• The Natural American Spirit brand vision isunchanged even after its phenomenal
growth globally with the idea to provide themost premium, additive-free, all natural
tobacco product.

• The MEVIUS family comprises a line-up of 40
cigarette products as well as 6 capsule products
for Ploom TECH, 4 capsule products for Ploom
TECH+ and 3 stick products for Ploom S, JT’s
tobacco vapor products.

• The Natural American Spirit family comprises aline-up of 10 cigarette products as well as 3
Roll-your-own products.

R&D

Manufacturing

Create value for the business through innovationand quality• We focus on fundamental research and producttechnology development, taking advantage of ourglobal research platform, in close collaboration withother functions. In particular, our R&D activities focus on
these areas.
–– Develop products and analytical capabilities in line withmarket needs and our anticipation of regulatory trends–– Maintain existing products to comply withregulatory changes–– Develop new technologies and improve production
processes to maintain competitiveness andincrease efficiency–– Drive product innovation to enhance equity fromvarious aspects, including tobacco leaves, blends,
filters, printing techniques and packaging–– Develop RRP

Support top-line growth by delivering quality products• Our emphasis on product quality is increasing to meet
consumer expectations for innovative offerings. In
addition, we consistently pursue an optimal
manufacturing footprint which ensures efficient andtimely product deliveries to markets.
–– Strengthen our ability for business continuity in timesof emergency–– Ensure high quality of products and enhance flexibility inthe manufacturing process, overcoming complexity in
manufacturing due to an increase in number of products–– At the same time, seek efficiency by containing
cost increases through continuous improvement
and reviewing our manufacturing footprint for
further optimization
Marketing
Enhance equity of flagship brands• Our strategic focus is placed on our flagship brands andwe strive to enhance their equity through effective
communications with consumers.
–– Allocate appropriate resources to support GFB’s
equity building–– Implement responsible marketing programs, incompliance with applicable laws and regulations aswell as our internal global marketing principles

Procurement

Seven Stars

Winston• Launched in 1969, Seven Stars featured
Japan’s first domestically produced charcoal
filter in pursuit of better taste.

• First introduced in 1954 in the USA.
• In 2015, CABIN and CASTER were migrated
into Winston in Japan. Winston has three
types of taste, “Bitter”, “Straight” and “Sweet”,
in both the Regular and Menthol segments.

• Since its launch, Seven Stars has consistently
offered unique value in terms of taste, aroma
and product design.

• The Winston family comprises a line-up of
26 products.

• Seven Stars Original soft package with 14 mg
tar has remained the most sold product in theJapanese domestic cigarette market for 11
years through 2018.
• The Seven Stars family comprises a line-up of
8 products.

Japan Tobacco Inc.

042

Annual Report 2018

Ensure stable supply of quality tobacco leaf
• Tobacco leaf is the most important material for our
products, and we dedicate our efforts to strengthen
our capability to ensure a stable supply of quality leafin the long-term.
–– Increase the proportion of leaf from our vertical
integration bases in Africa, Brazil and the USA–– Enhance sustainability of tobacco farming by helping
farmers to improve productivity as well as taking
initiatives to support their communities–– Maintain good relationships with external suppliers toensure sufficient supply at competitive prices• With regard to non-tobacco materials, we aim to mitigate
cost increases due to design enhancements andinvestment to innovative products by, among others,
effectively managing procurement lot-size.

Japan Tobacco Inc.

Sales & Distribution
Expand product availability by leveraging our trade
marketing excellence• There are various sales channels for tobacco products
such as supermarkets, convenience stores, street andtrain station kiosks, small independent retailers andvending machines. Key channels are different dependingon the market and we develop win-win relationships withthem to increase the availability of our products.
–– Strengthen relationship with key accounts, leveraging
our trained sales forces–– Develop trade marketing initiatives for each market,
taking into account channel development as well as
consumer trends and competitors’ actions
043

Annual Report 2018

Review of Operations

Pharmaceutical BusinessPharmaceutical Business Value Chain

Results for the fiscal year ended December 31, 2018

In 2018, the pharmaceutical business grew bothrevenue and adjusted operating profit by 8.9%
and 18.0%, respectively. This result wasachieved by higher royalty revenues as well as
milestone revenue, thus contributing to JT
Group’s overall profit growth.

Revenue and adjusted operating profit
are forecast to decrease in 2019 with thetermination of exclusive rights
agreements for six Anti-HIV Drugs inJapan and a decline in HIV-related
royalty revenues accompanying weakersales of original JT compounds. As weface this challenging period, we willrebuild our business foundation and aim
to contribute to the Group’s mid- tolong-term sustainable profit growth bypromoting R&D for next-generation
strategic products and maximizing thevalue of each product.

Strategy• Promote R&D for next-generation strategic compounds
and seek optimum timing to license them out• Maximize the value of each product
Performance Overview• Both revenue and adjusted operating profit increased¥9.3 billion and ¥4.3 billion, respectively, driven by higher
royalty revenues from increased sales of original JT
compounds and milestone revenue.
• In-house development (2018 progress)–– Entered the clinical trial stage: JTT-662 (SGLT1
inhibitor) - Phase 1 (Overseas)–– Advanced to the next stage: JTT-751 (Oral ironreplacement) - Phase 3 (Japan)
please visit
https://www.jt.com/investors/results/S_information/
pharmaceuticals/pdf/2018/20190207_12.pdf
for further details

Muneaki Fujimoto
President, Pharmaceutical Business

Roadmap to Sustainable Growth
Key Highlights

In 2019, we will enter a challenging period as our forecast forrevenue and adjusted operating profit is expected todecrease 28.9% and 82.4%, respectively, due to the termination of the exclusive rights of six Anti-HIV Drugs in Japan anda decline of HIV-related royalty revenues following weakersales of original JT compounds.
However, our pipeline in non-virus areas is steadily growing
more robust. A New Drug Application was filed for JTE-052
Ointment (atopic dermatitis) in Japan on January 31, 2019. In
addition, JTZ-951 (anemia associated with chronic kidneydisease) and JTT-751 (iron-deficiency anemia/additional indication) are in Phase 3.

Adjusted Operating Profit(JPY BN)

114.0(JPY BN)+9.3

Year-on-Year Change+4.3

Year-on-Year Change

Revenue(JPY BN)

28.4

Manufacturing• We establish a sustainable supply chain that delivers
high quality products to our patients.
• Products marketed in Japan are mainly produced by Torii
Pharmaceutical to maximize intra-group synergies, while
outsourcing to contract manufacturers where appropriate.
• We have developed guidelines outlining how to conduct
annual inspections to confirm consistency between
government-registered and actual production methods.
To guarantee the product quality, we are now making
sure that our own factories and our contracted factories
fully adhere to these guidelines.

Torii will undertake the comprehensive reform of its business structure including optimization of organization, functions and workforce as well as a revised resource allocation
strategy. Furthermore, its new growth strategy is embeddedin the plan, with an emphasis on product value maximization, pursuit of in-licensing and further collaboration
between JT Group. Through these initiatives, Torii aims to
improve profitability and sustainably generate profit.
R&D• We continue to strengthen our R&D capability whichenables us to create innovative drugs by focusing ourresources on specific therapeutic areas.
• We have established in-house regulations on animal
testing, based on government legislation. Our
Institutional Animal Care and Use Committee ensuresthat we follow the 3R* concept. Our animal-testing
practices are certified by the Japan Health Sciences
Foundation, an external authority.

Sales & Promotion• Torii Pharmaceutical is marketing our products in Japan.
• Outside Japan, we receive royalties based on sales
performance from our license partners for thecompounds for which we license out the right to develop
and market.

* 3R: (1) Replacing laboratory animals with other research materials where possible;(2) Reducing the number of animals used; and (3) Refining tests so that animals do not
suffer unnecessary pain and distress.

Adjusted Operating Profit(JPY BN)+9.3

We will continue to enhance our R&D capability to discover
new drugs, maximize the value of each product, and explore
strategic in-licensing opportunities. With the aim of contributing to the Group’s mid- to long-term sustainable profit
growth, we are building a R&D-led business, aiming at firstin-class internationally competent compounds, to increase
our market presence.

+4.3

104.7

In addition, Torii Pharmaceutical Co., Ltd. announced its new
mid-term strategic plan on February 6, 2019. Under the plan,
Japan Tobacco Inc.

Revenue

Note: This diagram represents the value chain of products manufactured and/or developed by JT and sold and promoted by Torii Pharmaceutical.

2017

044

114.0

2018

Annual Report 2018

24.1

28.4

2017

2018

Yokohama Research Center (completed in January 2019)Japan Tobacco Inc.

045

Annual Report 2018

Review of Operations

Processed Food Business

Processed Food Business Value Chain

Results for the fiscal year ended December 31, 2018

In 2018, both revenue and adjusted operating
profit decreased. The positive performance of
staple food and seasoning products, as well as anincrease of prices of some products, could notoffset the lower sales of other products andhigher raw material costs. While the environment
remains challenging, we will achieve continuous
top-line growth through establishing theProcessed Food Business Planning Division
within JT in 2019. Under the new structure, we
continue to strive to provide high value-added
products by focusing on staple foods*.

In 2019, both revenue and adjusted
operating profit are forecast to grow due
to increasing sales of staple products andthe improvement of profitability throughproductivity enhancements in spite ofhigher raw material costs. We will focus
on staple foods, as well as pursue arobust operating base through optimizationof production to complement the Group’s
profit growth.

*Staple foods: Frozen noodles, frozen rice, packed cooked rice and frozen baked bread.

Strategy• Increase the attractiveness of our offerings with aparticular emphasis on staple food products with ourown expertise.
• Strive to develop high value-added products to respondto changing consumer needs.
• Minimize the negative impact of rising raw material costs.

Food Business

Revenue

Adjusted Operating Profit(JPY BN)

161.4(JPY BN)-1.8

Year-on-Year Change-1.3Year-on-Year Change

Revenue(JPY BN)

Sales & Distribution: Increase penetration to retail outlets• Enhance profitability through our initiatives to increase ourpresence in supermarkets and convenience stores, byoffering a wider range of products while also seeking
better shelf space.
• Our products are also sold to restaurants and other public
facilities. We are always willing to provide details about
our food products. On the product labels, we disclose thefactory where the products were made, as well as thecountry of origin of the main ingredients. We also havetoll-free numbers on our product labels for consumers tocall for extra information. In addition, in order to ensure
the products’ safety, we implement a system that records
information on each step of the value chain, starting fromraw materials procurement to the product sales, and also
can trace back our products if necessary.

Procurement: Ensure procurement of safe andquality raw materials

Key Highlights

We primarily engage in business concerning frozen andambient processed food, notably staple food products, seasonings including yeast extracts and oyster sauce, and bakery chain outlets mainly in the Tokyo metropolitan area.
• Revenue decreased 1.1% as the positive performance of
staple food and seasoning products could not offset thelower sales of other products.
• Adjusted operating profit declined 23.6% mainly due tohigher raw material costs.

achieve mid- to long-term sustainable profit growth focusedon continuous top-line growth.
With our desire of “cordially preparing food with care forthose who matter to us the most”, we are dedicated todelivering safe and high-quality food products to our consumers by thoroughly managing food safety.

Atsuhiro Kawamata

Performance Overview

Notes: T his diagram represents the value chain of products for frozen and ambient foods.
We do not deal directly with raw material producers such as farmers, who provide raw materials to the trading firms or to the contracted factories that supply us.

4.1
Adjusted Operating Profit(JPY BN)-1.8• Review of quality assurance certificates submitted byour suppliers.
• Inspections and monitoring of agrochemical residues
and regular inspection at processing plants, incompliance with JT Group’s internal standards, the Food
Sanitation Act and other relevant laws.
• Examination of safety of production sites for raw
materials sourced abroad.
• As for agricultural farms, inspections include soil andwater and extend to how products are cultivated andhow agrochemicals are handled. Breeding farms arealso inspected.

-1.3

Production: Prioritize safety and follow established quality control procedures
163.1

161.4

5.4
4.1

2017

2018

2017

2018

Roadmap to Sustainable Growth
Revenue for 2019 is forecast to increase 0.4% versus theprior year, due to increasing sales of staple products.
Adjusted operating profit is also expected to grow 21.3% or¥0.9 billion to ¥5.0 billion, led by the improvement of profitability through productivity enhancements in spite of higher
raw material costs. Under the new structure, we aim to
Japan Tobacco Inc.

046

Annual Report 2018

Reducing Our Environmental Impact• Thai Foods International, a JT group company focusing on
the manufacture and sale of seasonings, is building abiomass co-generation system that uses rice husks as fuel,in its Thai factory.
• This factory uses electricity procured from a local electriccompany, and once the system starts operating in 2019, it
is expected that purchased electricity usage and theresultant Scope 2* greenhouse gas (GHG) emissions could
be significantly reduced (by 7,000 tons of CO2e** annually).
• This project, which has been adopted by the Joint
Crediting Mechanism of the Ministry of Environment inJapan, will not only help us to address environmental
issues and reduce energy costs, but will contribute to
GHG emissions reduction in Thailand.

• JT Group is pursuing the adoption of the HACCP systemand FSSC22000 in our own factories and those of ourbusiness partners. Under the FSSC22000 standard,
continuous improvements are made following effective
rules to control sanitation and other key issues. These
rules are based on the HACCP concept, and theireffectiveness is tested using scientific evidence.
• All of JT Group’s 31 factories in and outside Japan haveachieved FSSC22000 certification, which is recognizedby the Global Food Safety Initiative, the food industry’s
global body that promotes food safety management. In
addition, all of the factories that are contracted to
manufacture frozen food products on our behalf havealso achieved the ISO22000 or FSSC22000 certification.

Japan Tobacco Inc.

* Scope 2 GHG emissions: Emissions relating to the consumption of purchased energy,
such as electricity, steam, or other energy sources.
** CO2e: “Carbon dioxide equivalent”emissions, a standard unit for measuring carbon dioxide footprints.

047

Annual Report 2018

Risk Factors

1 Disruptive tax increases

The JT Group operates diverse businesses,
namely tobacco, pharmaceutical and processed
food. In addition, we conduct our business on a
global basis, extending to Europe, CIS countries,
Africa, the Middle East and others. Due to thisdiversity and these changing environments, weare exposed to various risks.

Tobacco products are subject to excise or similar taxes in
addition to value-added tax. Excise taxes are increasing inmost markets where the JT Group operates as governments
seek to secure their revenue or promote public health.
In general, value-added tax is also increasing. As a generalprinciple, we fully pass on any tax increase to consumers
by adjusting our sales prices. In addition, to the extent
possible, we increase our prices more than the tax increase,considering the financial impact of an expected volume
decline. A tax increase within a reasonable range ismanageable through such a price increase as well as ourefforts to support the top-line and pursue efficiency. Most
governments are aware that a substantial tax increase orrepeated tax increases can reduce their revenue and theytake a rational approach.

Considering such circumstances, we have put in place arisk management framework. Under the framework,
relevant divisions are assigned to carefully monitor thedevelopment of events that may adversely impact us andprevent their materialization where possible.
When risks materialize, we promptly respond in orderto minimize their unfavorable impacts. In reviewing risks,
the magnitude of potential impact and likelihood of
occurrence are most prudently assessed among otherfactors. Material risks, which could have a significant
impact on our sustainable profit growth and business
continuity, are reported to the CEO together with therequest for approval to implement countermeasuresagainst them.
The following section describes certain risks which
potentially have a material impact on our business
operations and financial results, but is not intended to
be an exhaustive list of the risks we face. In addition, it ispossible that risks that are currently considered immaterial
or even unknown could turn out to be material in the
future, as the business environment changes.

However, in the past we have experienced tax increases insome markets that have disrupted our business.
Risk description and potential impact

Risk description and potential impact

A disruptive tax increase on tobacco products could resultin a large industry volume decline due to lower consumption
and, in many cases, increased illicit trade. In addition,
down-trading to lower priced products could be initiated or
accelerated. Our shipment volume, revenue and profit could
decrease due to these negative reactions by consumers.

An increase in illicit trade could reduce legitimate industry
volume, leading to a decline in our shipment volume,
revenue and profit. In addition, the industry bears the costto combat illicit trade, resulting in pressure on its earnings.
Furthermore, it is possible that low quality counterfeits andimproperly handled smuggled products damage thecredibility of genuine brands, as well as the reputation of
their owners.

• Promote the understanding of relevant authorities thata disruptive tax increase does not necessarily serve
their purpose.
• Optimize our product offerings to capture the potentialchanges in consumer preference.
• Enhance our geographical portfolio to limit the negative
impact of a disruptive tax increase in a specific market.
• Further improve efficiency to protect revenue
and earnings.
• If a disruptive tax increase takes place, find an optimal
price for each product which minimizes the unfavorable
influence in the market.

3 Tightening tobacco regulations

Illicit trade is a major concern not only for the tobacco
industry, but for wider society. For the tobacco industry, it
undermines legitimate tobacco business. For society, illicit
trade reduces excise revenue for the government, often
fuels organized crime, and may increase health concerns due
to poor manufacturing standards and improper producthandling. The tobacco industry has been fighting against
illicit trade, which takes the forms of contraband, counterfeit
and illicit whites.
Illegally traded products in a market tend to increase after a
substantial tax increase or a repeated tax increase. Regulatory
actions seeking to commoditize packages and products could
also trigger the acceleration of illicit trade because suchcommoditization could make counterfeit manufacturing
easier and detection of illicit products more difficult. The JT
Group takes a zero tolerance approach towards all thesecriminal activities with an emphasis on eliminating
contraband products.

Measures to address the riskThis section should be read together with the forwardlooking statements in this Annual Report.

2 Pressure from illicit trade

The tobacco industry is highly regulated in various
aspects, and regulations could influence the businessperformance of the JT Group and financial results. Among
the regulations on products, for example, we may incur
additional costs in order to comply with ingredients andpackaging requirements.
Furthermore, the regulatory attempt to commoditize
tobacco products could lead to an increase in illicit tradeand negatively influence our legitimate business.
Business activities of tobacco companies are also restricted.
With more prohibitive regulations on communication with
consumers, our ability to effectively market products
becomes further limited, and our top-line performance may
be adversely impacted.
As a responsible organization, we comply with applicablelaws and regulations wherever we operate. That said, we
believe that laws and regulations should differ country bycountry, reflecting legal, social and cultural background. We
endeavor to hold constructive dialogues with governments
and regulators for a reasonable and balanced approach
towards tobacco regulation.
Risk description and potential impact
Further tightening of tobacco regulations on marketing
activities could undermine our strategy for top-line growth
as we lose opportunities to enhance brand equity.
Moreover, certain regulations may impose additional
compliance costs on us. These may negatively influence
our volume, revenue and profit.

Measures to address the risk
• Engage with governments, regulatory bodies and law
enforcement agencies to eradicate illicit trade.
• Ensure we buy from and sell to only reputable business
partners following our rigorous compliance initiatives.
• Raise awareness among individual consumers of
the negative consequences of purchasing illegally
traded products.

Measures to address the risk
• Identify ongoing regulatory initiatives as early as possible
by promptly collecting accurate information.
• Endeavor to hold constructive dialogues withgovernments and regulators for reasonable and balanced
regulations that meet their objectives.
Regulation and Other Relevant Laws on p.64

Working together with authorities
JT International Holding B.V. and JT International S.A.,
two JT Group subsidiaries, have entered a cooperationagreement with the European Commission, theexecutive branch of the European Union (EU), and EU
Member States as part of efforts to combat illicit trade.
Under the terms of the agreement, we contributed
US$50 million annually in the first five years from its
execution and contribute US$15 million annually in thesubsequent ten years. This financial contribution is to be
used to support anti-smuggling and anti-counterfeiting
initiatives led by the EU or EU Member States.
In 2010, JTI-Macdonald Corp., our Canadiansubsidiary, also signed a similar agreement with
the Government and Provinces of Canada.
In Russia, the introduction of a tobacco products
track and trace system has been mandated since
March 2019, and we have completed preparations for
its introduction.

Japan Tobacco Inc.

048

Annual Report 2018

Japan Tobacco Inc.

049

Annual Report 2018

Risk Factors

4

one or more members of the JT Group were named as
defendant or for which JT may have certain indemnity
obligations pursuant to the agreement such as for JT’s
acquisition of RJR Nabisco Inc.’s overseas (non-US)
tobacco operations. JT and its subsidiaries, who are
defendants in such lawsuits, believe that we have valid
grounds to defend the claims in such lawsuits; however,
we cannot predict the outcome of any pending or
future litigation.

Country risks

The tobacco business of the JT Group has consistently
expanded our earnings base to secure long-term growth bymaking acquisitions, entering new markets and increasing
share in markets where we had limited presence.
Geographical expansion may increase our exposure tocountry risks. In any market where we operate, we may
face economic, political or social turmoil which may
negatively affect our operations and financial results.

In addition to these smoking and health-related cases, JT
and its subsidiaries may be a party to other lawsuits in the
future, such as product liability claims in the event of a
product quality problem.

Risk description and potential impact
Political instability, economic downturn, social unrest orother unfavorable developments in a certain market could
disrupt our business, leading to lower volume, revenue andprofit in the market.

Risk description and potential impact
A decision unfavorable to us could materially affect our
financial performance due to the payment of monetarycompensation. Moreover, critical media coverage of any
lawsuit may reduce social tolerance about our products
and lead to additional regulations. Such media coverage
may also prompt the filing of a number of similar lawsuits
against JT or its subsidiaries, resulting in increased
litigation costs.

Measures to address the risk
Avoid overdependence on a small number of markets assources of profits by expanding the pool of highly
profitable markets.

5I nstability in the procurementof key materials

Across its businesses, the JT Group procures raw andprocessed materials for product manufacturing.
In particular, we strive to procure key materials in therequired quantity and at reasonable costs. Our key
materials include agricultural products: most notably,
tobacco leaf for the tobacco business, and grains for theprocessed food business. Availability of agricultural
products is often affected by natural phenomena, such as
weather conditions. In addition, there is a growing concernthat agricultural production costs may rise, due to the highdemand in energy resources, global population increases,
and economic growth in emerging countries.

• Reinforce ability to procure key materials by building astrong relationship with suppliers. In the case of tobacco
leaf, further promote internal sourcing.
• Promote efficient use of materials by continuously
reviewing the manufacturing process and productspecifications where possible.

6

Risk description and potential impact
Natural disasters could cause damage to us as well as our
suppliers, trade partners and consumers, leading to
disruption of our business and negatively impacting
financial results.

U nfavorable developments
in litigation

Measures to address the risk
• Continuously review the Business Continuity Plan andrevise it as necessary.
• Carry out emergency drills to increase employees’
preparedness against disasters.
• Insure key assets such as buildings, machinery, equipment
and inventory to recover financial losses as appropriate.

JT and some of its subsidiaries are defendants in lawsuits
filed by plaintiffs seeking damages for harm allegedly
caused by smoking, the marketing of tobacco products, or
exposure to tobacco smoke. As of December 31, 2018, 21
smoking and health-related cases were pending in which
Japan Tobacco Inc.

050

Annual Report 2018

Fluctuations of exchange rates against Japanese yen affectour reported financial results. Reported financial results of
our international tobacco business in US dollars are similarly
influenced by the fluctuations of exchange rates against the
US dollar. In addition, we are exposed to the exchange rate
fluctuation risks when a Group company makes atransaction in a currency other than its reporting currency.

The effects of climate change could adversely affect our
results of operations by damaging the JT Group and ourGroup’s value chain.

Measures to address the risk
• Mitigate the risk through hedging activities such asderivative contracts, possession of interest-bearing debts
in a foreign currency and others.

Measures to address the risk

9 Currency fluctuations

We have developed a Business Continuity Plan to minimize
the impact of such disasters, with a particular emphasis on
the optimization of the global supply chain.

Risk description and potential impact

Risk description and potential impact• Continue to build well-organized teams coordinatingwith external legal counsel to defend ourselves against
these lawsuits.
• Continue legitimate and appropriate business operations.

The operations of the JT Group may be disturbed by natural
disasters such as earthquakes, typhoons, floods, volcanic
eruptions and others. Japan is one of the most important
markets for our businesses and subject in particular tovarious natural disasters. The Great East Japan Earthquake
was devastating. The impacts on us included casualties
among our employees, physical damage to our factories,and supply shortages of certain tobacco product materials.
Our tobacco business was forced to temporarily suspend
product shipment and limit shipment volume for an
extended period.

Measures to address the risk

Climate change due to global warming could cause various
damages, including flooding, landslide disasters caused
by abnormal weather conditions such as concentrated
torrential rains. Severe heat, heavy snowfall and drought
due to unseasonable weather changes, water resources,
and loss of biodiversity could also be expected to arise
from climate change.

Measures to address the risk

7 Natural disasters

Insufficient supply of key materials could lead to inability to
manufacture our products, subsequently resulting in theloss of revenue and profit. Furthermore, the increase inprocurement costs driven by higher production costs for
agricultural products would directly pressure our earnings.

at the time of the acquisition and at the time of suchtransaction.

• Efforts to reduce greenhouse gas emissions, efficient use
of water resources, and waste reduction in order toreduce environmental impact.
• Establish a system to better understand the impacts ofclimate change on businesses and respond appropriately,such as formulating a scientifically based plan to reducegreenhouse gas emissions (SBT: Science Based Target)and investigating scenario analyses.

Litigation on P.67

Risk description and potential impact

8 Climate change

10 Competition

The JT Group competes fiercely in both the domestic andinternational tobacco business with our competitors.
In the Japanese domestic tobacco market, import oftobacco products was deregulated in 1985, followed by
the provisional suspension of custom duties on imported
tobacco in 1987. Since then, competition has intensified
each year, as smokers’ preferences diversify and as ourcompetitors pursue aggressive promotional activities.

As the JT Group is operating globally, we are exposed to
the risks associated with currency fluctuations. The
reporting currency of our consolidated financial statements
is Japanese yen, while the financial statements of ourinternational subsidiaries are reported in other currencies
such as the Russian ruble, Euro, British pound, Taiwanesedollar, US dollar, and Swiss franc.

In the overseas tobacco markets, we expanded our own
business organically as well as through M&A, by acquiring thenon-US tobacco operations of RJR Nabisco Inc. and thereafter
acquiring Gallaher Ltd. As a result, we are in competition with
global players in the international tobacco business or withlocal competitors with strength in specific markets.

Therefore, exchange rate fluctuations of these currencies
against the Japanese yen influence our reported financial
results. As for the financial reporting of the international
tobacco business, JT International Holding B.V.
consolidates the financial results of the international
tobacco subsidiaries and reports its consolidated financial
statements in US dollars. We often communicate thefinancial performance of our international tobacco business
in US dollars, which is affected by exchange rate
fluctuations against the US dollar. In principle, we do nothedge these risks which arise from the translation offinancial statements.

Market share can fluctuate due to a number of factors,
including increasing regulations, rising health awareness,changes in smokers’ preferences or changes to economic
conditions of each market. It can also fluctuate fromcompetitors’ pricing strategies or strength of brand equity.
Moreover, market share can fluctuate in the short-term due
to new product launches by each market player and theaccompanying promotional activities.
Risk description and potential impact
Fluctuation of our market share may affect our businessperformance. In addition, price competition (price reductionsor brand repositioning, among others) aimed at increasing
market share, may negatively affect our profit margins.

However, we hedge against risks which arise when equity
denominated in each functional currency is translated into
Japanese yen to be consolidated by using foreign currencydenominated interest-bearing debts and part of these aredesignated as net investment hedges. In addition, many
companies make transactions in currencies other than theirreporting currencies for day-to-day operations. Such transactions
also involve the risk of exchange rate fluctuations. We
mitigate these transaction risks through hedging activities;
however, it is not possible to completely eliminate them.

Measures to address the risk
• Optimize our product portfolio by:––developing and providing products that can capturechanging consumer preferences and needs––placing brands with strong brand equity in each pricecategory• Provide product support by enhancing trade marketing
capability and effective promotional initiatives.
• Further improve efficiency to protect revenue
and earnings.
• Avoid overdependence on a small number of markets assources of profits by expanding the pool of highly
profitable markets.

Furthermore, if we liquidate or sell a Group subsidiary which
we acquired in a currency other than Japanese yen or impair asubstantial value of such a subsidiary, the gain or loss from thetransaction includes the currency fluctuation impact.
Specifically, the impact comes from the difference in theexchange rates of the relevant currency against Japanese yen
Japan Tobacco Inc.

051

Annual Report 2018

Corporate GovernanceDecision-Making, Business Execution, Supervision
Initiatives to enhance corporate governanceCorporate Governance at JT
Our belief is that corporate governance is the means for
conducting transparent, fair, timely and decisive decision-making for pursuing our management principle, the“4S model.” Specifically the 4S model aims “to fulfill our
responsibilities to our valued consumers, shareholders,
employees and the wider society, carefully considering therespective interests of these four key stakeholder groups,
and exceeding their expectations wherever we can.” We
have set out the “JT Corporate Governance Policy” andstrive to make enhancements based on its belief that it will
enable us to achieve mid- to long-term sustainable profit
growth and increase corporate value, which will contributeto the development of our stakeholders and eventually the
economy and society as a whole. We will continue to strive
to make enhancing corporate governance one of the key
challenges for its management.

Rigorous
supervisory andadvisory function

Quality andprompt decisionmaking

Efficient businessexecution

Set up theCompliance
Committee FY2000

Reduced number
of Directors
FY2000Introduced
Executive Officer
system
FY2001

Set up the Advisory
Committee*
FY2001

Promoted the delegation of businessexecution to the Executive Officers
FY2000, FY2008 and FY2011

Set up theCompensation
Advisory Panel
FY2006**

Invited Outside
Directors
FY2012

Set up the Advisory Panel on Nomination andCompensation 2019* Abolition of the Advisory Committee on June 30, 2014.
** Merger of the Compensation Advisory Panel into the Advisory Panel on Nomination andCompensation on March 20, 2019.

Our Corporate Governance System (As of March 20, 2019)
General Meeting of Shareholders
Selection or dismissal of members

Selection or dismissal of members

Accounting audit/Operating audit

Audit Report

Board ofDirectors

Lawyers

Accounting
audit

AdviceIntroduction of compliance-related mattersnine members(including three
Outside Directors)

ReportIndependent
Auditors

Selection or dismissal of members

Supervisionof theperformance

Operational Review
and Business
Assurance Division

Report/ProposalPresident andChief Executive
Officer

Review of thepolicy and therules relating topersonnel andcompensation for
Board Members

Advisory Panel on
Nomination andCompensation

JT Group
Compliance
Committee

Audit & Supervisory
Board
five members(including three Audit& Supervisory
Board Members)

General Meeting of Shareholders

The Japan Tobacco Inc. Act

A general meeting of shareholders resolves the matters
stipulated by law and our Articles of Incorporation. Under
the Companies Act, certain matters are required to beresolved at a shareholder meeting including, most notably,
the appointment and dismissal of the Directors, Audit &Supervisory Board Members and external accounting
auditors, dividend amount, loss compensation, as well
as change in the Articles of Incorporation. Our Articles ofIncorporation do not stipulate any additional matter to beresolved at our shareholders’ meeting other than matterslegally required. The Annual General Shareholders’ Meetingis held in March, and a special meeting of shareholders
shall be called by the Board of Directors, as necessary.
The President chairs the shareholders’ meetings.

JT was established pursuant to the Japan Tobacco, Inc.
Act (‘the JT Act’) for the purpose of managing businesses
related to the manufacturing, sale and imports of tobacco
products. The JT Act provides that the Government of Japan
must continue to hold over one-third of all of the issued
shares except for the class shares, which have no voting
right against all matters that can be resolved at ourshareholders’ meeting. The JT Act also states that theissuance of new shares and stock acquisition rights requires
the approval of the Minister of Finance. In the case of ashare-for-share exchange, the same approval is required forissuance of new shares, stock acquisition rights and bonds
with stock acquisition rights. Under the JT Act, subject tothe approval by the Minister of Finance, JT is allowed toengage in businesses other than manufacturing, sales andimports of tobacco products or tobacco-related business,
provided that our engagement in such businesses serves
the purpose of the Company. JT is also required to obtainapproval from the Minister of Finance for certain matters,
including the appointment or dismissal of Directors,
Executive Officers and Audit & Supervisory Board Members
as well as amendment to our Articles of Incorporation,
distribution of surplus (excluding loss compensation),merger, corporate split, or dissolution. In addition, within
three months after the end of each fiscal year, we are
required to issue a statement of financial position,a statement of income, and a business report to the
Minister of Finance.

Within the extent as permitted by law, requirements forresolutions at our shareholders’ meeting were loweredby amending our Articles of Incorporation. A resolution
at a general meeting of shareholders can be adopted by amajority of the voting rights present or represented at themeeting. A resolution for the appointment of the Company’s
Director and Audit & Supervisory Board Members additionallyrequire a quorum, which is one-third of the total numberof voting rights. A special resolution as stipulated under
Section 2, Article 309 of the Companies Act, such as
amendment to the Articles of Incorporation, requires thequorum of one-third of the total number of voting rights
and the approval of at least two-thirds of the voting rights
present or represented at the meeting. Certain matters
resolved at our shareholders’ meetings need further
approval by the Minister of Finance in Japan.

The supplementary provisions of the Reconstruction
Financing Act*, which came into effect on December 2,
2011 states that the Government shall study by the fiscal
year ending March 31, 2023 the possibility of full disposalof government-owned JT shares by reassessing theGovernment’s holding in JT shares considering theGovernment’s involvement in the tobacco-relatedindustries based on the Tobacco Business Act.

five members(including three
Outside Members)

Compliance Office

Auditor’s Office* Reconstruction Financing Act: Act on Special Measures for Securing Financial
Resources Necessary for Reconstruction from the Great East Japan Earthquake.

four members(including three
Outside Directors)
Internal
audit

Executive Officers
Accounting audit/Operating audit
Departments

Group
audit

Subsidiaries

The “JT Corporate Governance Policy” is available at: https://www.jt.com/about/corporate_governance/

Japan Tobacco Inc.

052

Annual Report 2018

Japan Tobacco Inc.

053

Annual Report 2018

Corporate GovernanceDecision-Making, Business Execution, Supervision

The Board of Directors• The number of Members of the Board in the Board of
Directors shall be fifteen (15) or less, within necessary andappropriate scope, composed of diverse people with ahigh-integrity sense of ethics as professionals, knowledge,
experience and skills.
• JT shall appoint two (2) or more Independent Outside
Members of the Board with qualities that will contribute toits sustainable profit growth and increase of corporate value
in the mid- to long-term from the viewpoint of strengthening
supervisory functions and transparency of business.

The Board of Directors assumes responsibility in making
decisions for important issues including the Group strategy
as well as supervising all the activities of the Group. In viewof the point that the Board of Directors determines company-wide management strategy and important matters andeffectively assumes roles and responsibilities as the body
exercising supervision over all business activities,
the concept concerning the composition of the Board of
Directors shall be set forth as follows.

A board meeting, in principle, is held every month anda special board meeting may be called, as necessary.
The Board of Directors decides those matters required tobe resolved by the Board of Directors under the Companies
Act, such as important business plans, disposal or acquisitionof important assets, significant amount of borrowings, andconclusion of important agreements. For the purpose of
supervising the Company’s activities, the Board of Directors
requires directors to deliver a report on the progress ofoperations at least on a quarterly basis. In the fiscal year

ended December 31, 2018, we had 15 board meetings to
discuss important issues including the management plan.
Members
9 (including three Independent Outside Directors)
The Directors marked with * are also the Executive Officers.

Yasutake Tango

Masamichi Terabatake*Mutsuo Iwai*

Naohiro Minami*

Kiyohide Hirowatari*

Kazuhito Yamashita*

Main Kohda

Koichiro Watanabe

Yukiko Nagashima

Chairman of the Board

Representative Director
and President, Chief
Executive Officer

Representative Directorand Executive Vice
President

Representative Directorand Executive Vice
President

Representative Directorand Executive Vice
President

Director

Outside Director of theCompany

Outside Director of theCompany

Outside Director of theCompany

Date of birth:
March 21, 1951
Term of office:2 years since March 2018
Number of shares held: 9,100

Date of birth:
November 26, 1965
Term of office:2 years since March 2018
Number of shares held: 19,000

Date of birth:
October 29, 1960
Term of office:2 years since March 2018
Number of shares held: 23,800

Date of birth:January 21, 1964
Term of office:2 years since March 2018
Number of shares held: 12,600

Date of birth:
November 11, 1965
Term of office:2 years since March 2018
Number of shares held: 5,800

Date of birth:
February 4, 1963
Term of office:1 year since March 2019
Number of shares held: 6,400

Date of birth:
April 25, 1951
Term of office:2 years since March 2018
Number of shares held: 0

Date of birth:
April 16, 1953
Term of office:2 years since March 2018
Number of shares held: 0

Date of birth:
April 4, 1961
Term of office:1 year since March 2019
Number of shares held: 0

April 1974
Entered Ministry of Finance

April 1989
Joined the Company

April 1986
Joined the Company

April 1989
Joined the Company

April 1986
Joined the Company

October 2006
Director-General of the
Financial Bureau

July 2005
Vice President,
Secretary’s Office

April 1983
Joined the Company(Japan Tobacco andSalt Public Corporation)

December 2005
Controller

July 2010
Vice President, Legal Division

April 1976
Joined The Dai-ichi MutualLife Insurance Company

July 2007
Deputy Vice Minister

July 2008
Vice President, Corporate
Strategy Division

June 2012
Senior Vice President,
Chief Legal Officer and Vice
President, Legal Division

January 2003
Member of Financial System
Council, Ministry of FinanceJapan

July 2001
Director, The Dai-ichi MutualLife Insurance Company

April 1985
Joined Recruit Co., Ltd.
(Current Recruit Holdings
Co., Ltd.)

July 2010
Deputy Chief Financial
Officer and Controller

May 2007
Vice President, Corporate,
Scientific & Regulatory Affairs
Division, Tobacco Business

September 1995
Started independently
as Novelist

July 2008
Director-General of the
Budget Bureau
July 2009
Administrative Vice Minister
December 2010
Corporate Auditor,
The Yomiuri Shimbun
Holdings
December 2012
Special Advisor to the
CabinetJune 2014
Chairman of the Boardof the Company(Current Position)
Significant Concurrent
Positions outside theCompany
Outside Director,
The Ogaki Kyoritsu Bank, Ltd.

June 2011
Senior Vice President, Chief
Strategy Officer and in
charge of Food Business,
Vice President, Corporate
Strategy Division

June 2003
Vice President,
Corporate Planning Division
July 2004
Vice President,
Corporate Strategy Division
June 2005
Senior Vice President andVice President, Food Business
Division, Food Business

March 2012
Senior Vice President,
Chief Strategy Officer andin charge of Food Business

June 2006
Member of the Board andExecutive Vice President,
President, Food Business

June 2012
Senior Vice President andChief Strategy Officer

June 2008
Executive Vice President,
Chief Strategy Officer

June 2013
Member of the Board
Executive Vice President,
JT International S.A.

June 2010
Member of the Board andSenior Vice President, Chief
Strategy Officer andPresident, Food Business

January 2018
President and Chief
Executive Officer
March 2018
Representative Director andPresident, Chief Executive
Officer (Current Position)

June 2011
Member of the Board
Executive Vice President,
JT International S.A.

June 2012
Senior Vice President,
Chief Financial Officer
and Controller
July 2012
Senior Vice President,
Chief Financial Officer
January 2018
Executive Vice President
March 2018
Representative Director andExecutive Vice President(Current Position)
Significant Concurrent
Positions outside theCompany
Supervisory Board Member,
JT International Holding B.V.

June 2013
Senior Executive Vice
President, Chief Strategy
OfficerJanuary 2016
Senior Executive Vice
President, President, Tobacco
Business
March 2016
Representative Director andExecutive Vice President(Current Position)
Significant Concurrent
Positions outside theCompany
Chairman and Managing
Director, JT International
Group Holding B.V.

Japan Tobacco Inc.

054

Annual Report 2018

July 2014
Senior Vice President,
Chief Legal Officer
January 2015
Senior Vice President,
Head of Tobacco Business
Planning Division,
Tobacco Business
January 2017
Senior Vice President,
Human Resources
January 2018
Executive Vice President
March 2018
Representative Director andExecutive Vice President(Current Position)

July 2009
Vice President, Corporate
Affairs Division, Tobacco
Business
June 2010
Senior Vice President, Chief
Corporate, Scientific &Regulatory Affairs Officer,
Tobacco Business
January 2015
Senior Vice President, Headof China Division, Tobacco
Business
January 2019
Senior Vice President,
Compliance, Sustainability
Management and General
Affairs
March 2019
Member of the Board(Current Position)

April 2004
Visiting professor,
Faculty of Economics,
Shiga University
March 2005
Member of the Council forTransport Policy, Ministry ofLand, Infrastructure,
Transport and Tourism
November 2006
Member of the Tax
Commission, Cabinet Office,
Government of Japan
June 2010
Member of the Board ofGovernors,
Japan Broadcasting
Corporation
June 2012
Outside Director of theCompany(Current Position)
Significant Concurrent
Positionsoutside the Company
Novelist
Outside Director,
LIXIL Group Corporation
Outside Director,
Japan Exchange Group, Inc.
Outside Member of theBoard, Mitsubishi Motors
Corporation

April 2004
Managing Director, The Dai-ichi
Mutual Life Insurance Company
July 2004
Managing Executive Officer,
The Dai-ichi Mutual Life
Insurance Company
July 2007
Director and Managing
Executive Officer, The Dai-ichi
Mutual Life Insurance Company
April 2008
Director and Senior Managing
Executive Officer, The Dai-ichi
Mutual Life Insurance Company
April 2010
Representative Director andPresident, The Dai-ichi Life
Insurance Company, Limited.
October 2016
Representative Director andPresident, Dai-ichi Life
Holdings, Inc.
April 2017
Representative Director andChairman of the Board,
Dai-ichi Life Holdings, Inc.
Representative Director andChairman of the Board, The
Dai-ichi Life Insurance
Company, Limited

April 2006
Corporate Executive Officer,
Recruit Co., Ltd.
January 2008
President andRepresentative Director,
Recruit Staffing Co., Ltd.
October 2012
Corporate Executive Officer,
Recruit Holdings Co., Ltd.
June 2016
Standing Audit andSupervisory Board Member,
Recruit Holdings Co., Ltd.
April 2018
Standing Audit andSupervisory Board Member,
Recruit Co., Ltd.
March 2019
Outside Director of theCompany(Current Position)
Significant Concurrent
Positions outside theCompany
Standing Audit andSupervisory Board Member,
Recruit Holdings Co., Ltd.
Standing Audit andSupervisory Board Member,
Recruit Co., Ltd.

March 2018
Outside Director of theCompany (Current Position)
Significant Concurrent
Positions outside theCompany
Representative Director andChairman of the Board,
Dai-ichi Life Holdings, Inc.
Representative Director andChairman of the Board, The
Dai-ichi Life Insurance
Company, Limited

Japan Tobacco Inc.

055

Annual Report 2018

Corporate GovernanceDecision-Making, Business Execution, SupervisionInterviews with
Outside Directors

potential, so I would like to continue to inject fresh air into
the company as an outsider.
Before starting an independent career as a novelist, I
worked for a US financial institution, where I often served
as an in-between for people with different business cultures
because of the nature of the company’s business. I feel thatthe questions I used to ask myself and the solutions that I
arrived at in those days have been useful when performing
my duties as outside director.
What is your view of JT’s governance system?
Director Watanabe

Main Kohda

Koichiro Watanabe

Outside Director of theCompany

Outside Director of theCompany

Japan Tobacco Inc. (JT) has been appointing Outside Directors with qualities that contribute toits sustainable profit growth and increase of corporate value in the mid- to long-term from theviewpoint of enhancing the supervisory functions and transparency of business. We asked Main
Kohda and Koichiro Watanabe, who have served as JT’s Outside Directors since 2012 and 2018,
respectively, about their view of JT’s corporate governance.

A governance system which is based on the 4S modeland which has the ability to change
In my view, JT’s governance system has the ability tochange. While doing business globally, JT has established a
new governance system under which the governance system of the Japanese parent company coordinates and collaborates with the group’s global governance system. Thisis a governance model which works successfully on a global scale while leveraging what is good about Japan and thestrengths of the Japanese market. In that respect, it is oneof the few successful models developed by Japanese companies. The ability to change is one of JT’s strengths thatcan be taken advantage of in order to continue to further
enhance governance in the future.

What do you think your role is as Outside Director?

Director Kohda

Director Kohda

Director WatanabeContinuing to inject fresh air in order to promote better
decision-making on how to cope with change and crisis

The resolve to overcome enables JT to move forwardand make bold decisions

JT is a company with an assiduous and conscientious culture, and it has the strength to move forward as an organization with solid unity. However, the company should
develop greater diversity if it is to better cope with change
and crisis. If different elements within a company shake itup when it is confronted with an external change, thecompany will emerge as a much stronger organization
after the dust has settled. Having served as outside director for around seven years, I believe that JT has significant

JT has been implementing M&A. Implementing M&A issomewhat like embracing a crisis. I believe that the driving
force of the M&A initiative is a sense of crisis. After the privatization of Japan Tobacco and Salt Public Corporationthat created JT, the company continued to be exposed to,but survived, several shockwaves, including the impacts ofthe elimination of tobacco import tariffs and the expiry of
the licensing contract for Marlboro.

Contributing to the pursuit of the 4S model by taking
advantage of the experience of working on both theinvestor and corporate sides
My career background in life insurance business means that
I was originally in a position responsible for calling foractions to enhance corporate governance as an institutional
investor based on the Stewardship Code. However, as aresult of the conversion of my company into a joint stockcompany and its stock listing in 2010, I also experienced
being in the position of being called on to enhance corporate governance as well as the position of calling for action.
Confronted with the responsibilities associated with these
two opposite positions as an insurance company’s president, I had to think hard about questions on business management, the enhancement of governance and sustainablecorporate growth.

Devoting effort to implementation is naturally essential, but
now is the time when an equal amount of effort should be
devoted to communication as well. The reality is that the
headwinds against JT have become that strong. Enhancing
public communication is what JT should do now.
Director Watanabe
JT should continue to realize sustainable growth andcultivate the ability to take advantage of change
As things stand now, JT’s management is surrounded byrisks. Change generates friction and friction creates progress. It is essential to consider what innovations to create
and, in a broader sense, how to cultivate the ability to takeadvantage of change through the approach of backcastingfrom the future. The Society 5.0 for SDGs initiative is avision of a desirable society that Japan has proposed inorder to enhance human elements, such as creativity basedon diversity, at a time when digitalization is proceeding further and social structures are undergoing dramatic changeof an unforeseen scale. This initiative has something to dowith JT’s management principle that explicitly incorporates
human elements in the form of the 4S model. I expect thatin a world aiming to realize Society 5.0, the ability to copewith change and the human resource capacity that JT has
until now developed can be more easily put to good use. To
realize sustainable growth, I would like JT to always be cognizant of what first step should be taken to create a business model that can cope with a new age. I am sure that
this is what JT has done until now, and RRP (Reduced-Risk
Products) can be promoted only when JT maintains thatviewpoint. Sustainable growth springs from the ability totake advantage of change.

Since then, JT has continued to turn change in the surrounding environment into opportunity while maintaining anappropriate sense of crisis and sense of responsibility toovercome the change. In my view, JT’s perpetual sense ofurgency gives it the energy to take action as an organization
to overcome difficulties and make bold decisions. JT may
pride itself on having taken advantage of crises and difficulties as opportunities to move forward.

In particular, going forward, although management emphasizing ROE is naturally important, I wonder whether thatapproach is really sufficient. I have the sense that an
approach like JT’s 4S model, as represented by the traditional Japanese concept of sanpo yoshi (benefits for all
three sides—business, customers and society) has been
becoming a global mainstream, particularly since the collapse of Lehman Brothers triggered the global financial crisis. I hope that my own experience will contribute to what
JT aims to achieve under the 4S model.
Japan Tobacco Inc.

make efforts to that end. I have the impression that JT is alittle too modest, and passive in reaching out to stakeholders. Since I took office as Outside Director, I have continued
to mention the need for JT to make increased efforts toenable stakeholders to more accurately understand the true
worth of JT’s various activities.

What are the JT Group's must-dos in order toincrease its corporate value?
Director Kohda
JT should enhance public communication to ensure
genuine understanding of its various activities
As the public’s view of the tobacco industry becomes morecritical year after year, there is a strong need to consider how
best to get stakeholders to understand the company and056

Annual Report 2018

Japan Tobacco Inc.

057

Annual Report 2018

Corporate GovernanceDecision-Making, Business Execution, Supervisionroles and responsibilities, including making requests todeliver reports to the Directors, Executive Officers andemployees, issuing an injunction to prevent illegal activities
by Directors, and representing the Company in case of litigation between any Director and the Company. In addition, theAudit & Supervisory Board has a right to dismiss the auditing firm which conducts accounting audit. The Audit &Supervisory Board Members’ report containing the results ofboth the accounting and operating audits is submitted tothe annual general meeting of shareholders.

The Audit & Supervisory Board
Entrusted by shareholders and ensured of its autonomy,
the Audit & Supervisory Board conducts accounting audits
as well as operating audits. Currently, we have five Audit& Supervisory Board Members including three Outside
Audit & Supervisory Board Members. Collectively, they haveexperience in management, legal, finance and accounting
among other areas. The Audit & Supervisory Board Members
have various statutory rights in order to accomplish their

If Directors and Executive Officers find any issue that may
cause a substantial damage to the Company, they are
obliged to report it to the Audit & Supervisory Board, alongwith other relevant matters that could affect the Company.
Audit & Supervisory Board Members are authorized to attend
the meetings of the Board of Directors and other important
meetings. Our Directors and Executive Officers respond in a
prompt and appropriate manner, when requested by Audit &Supervisory Board Members to deliver documents for theirinspection, to arrange field audits and to submit reports.
The Operational Review and Business Assurance Division,
which conducts internal audits, as well as the Compliance
Office, exchanges necessary information and works together
with Audit & Supervisory Board Members.

8. A person who receives a large amount of donation from
JT (if the recipient of such donation is a company or any
other form of organization, a person who belongs thereto)
9. A person who has fit any of the descriptions in 2 to 8
above in the recent past
10. A close relative of a person who fits any of the following
descriptions:a) A person who fits any of the descriptions in 2 to 8
above (if such descriptions apply to a company or
any other form of organization, a person who
performs important duties thereof)b) A Director, Audit & Supervisory Board Member,audit advisor, Executive Officer or employee of JT
or an affiliate or sister company of JTc) A person who has fit the descriptions in 1 or 2 in the
recent past

Members
5 (including three Outside Audit & Supervisory Board Members)

The Advisory Panel on Nomination and Compensation

Independence of Outside Directors and Outside
Audit & Supervisory Board Members
Ryoko Nagata

Hiroshi Yamamoto

Toru Mimura

Hiroshi Obayashi

Koji Yoshikuni

Standing Audit &Supervisory Board
MemberStanding Audit &Supervisory Board
MemberStanding Audit &Supervisory Board Member(Outside Audit &Supervisory Board Member)

Audit & Supervisory
Board Member (Outside
Audit & Supervisory
Board Member)

Audit & Supervisory
Board Member (Outside
Audit & Supervisory
Board Member)

Date of birth:
July 14, 1963
Term of office:4 years since March 2019
Number of shares held: 12,400

Date of birth:
November 29, 1963
Term of office:4 years since March 2019
Number of shares held: 0

Date of birth:
December 26, 1955
Term of office:4 years since March 2019
Number of shares held: 0

Date of birth:
June 17, 1947
Term of office:4 years since March 2019
Number of shares held: 0

Date of birth:
September 7, 1952
Term of office:4 years since March 2019
Number of shares held: 0

April 1987
Joined the Company

April 1987
Joined the Company

April 1970
Judicial Apprentice

April 2001
Vice President, Products
Division, Food Business
Division,
Food Business

July 2008
Vice President, NTM
Procurement Division,
Tobacco Business

April 1979
Entered Ministry of FinanceJuly 2010
Deputy Director-General of the
Planning and Coordination
Bureau, and Secretary-Generalof the Executive Bureau,
Certified Public Accountants andAuditing Oversight Board,
Financial Services Agency
July 2011
Director General, Kinki Local
Finance Bureau, Ministry of
FinanceJanuary 2012
Deputy Director-General,
Minister's Secretariat, Ministry of
DefenseSeptember 2012
Director General, Bureau of
Personnel and Education,
Ministry of Defense
July 2013
Director General, National
Institute for Defense Studies,
Ministry of Defense
July 2014
Director General, Bureau of
Finance and Equipment,
Ministry of Defense
October 2015
Vice-Minister of Defense forInternational Affairs, Ministry of
DefenseSeptember 2016
Chairman, Sompo Japan
Nipponkoa Research Institute Inc.
October 2017
Director, Eltes Co.,Ltd.
March 2018
Registered as Attorney at Law
March 2019
Standing Audit & Supervisory
Board Member of the Company(Current Position)
Significant Concurrent
Positions outside theCompany
Attorney at Law, Shiba
International Law Offices

April 1975
Joined Japan Broadcasting
Corporation

June 2008
Senior Vice President,
Head of Beverage Business
Division and Vice President,
Product Division, FoodBusiness Division, FoodBusiness
July 2008
Senior Vice President,
Head of Beverage Business,
Food Business
July 2010
Senior Vice President,
Head of Beverage Business
June 2013
Senior Vice President, CSR
January 2018
Senior Vice President,
Assistant to President
March 2018
Standing Audit & Supervisory
Board Member of theCompany (Current Position)

June 2012
Vice President, Operational
Review and Business
Assurance
March 2019
Standing Audit & Supervisory
Board Member of theCompany(Current Position)

Japan Tobacco Inc.

058

April 1972
Appointed as Public
Prosecutor
May 2001
Director-General of theRehabilitation Bureau,
Ministry of Justice
January 2002
Deputy Vice-Minister ofJustice, Ministry of Justice
June 2004
Director-General of the
Criminal Affairs Bureau,
Ministry of Justice
June 2006
Vice-Minister of Justice,
Ministry of Justice
July 2007
Superintending Prosecutor,
Sapporo High Public
Prosecutors’ Office
July 2008
Superintending Prosecutor,
Tokyo High Public
Prosecutors’ Office
June 2010
Prosecutor-General
March 2011
Registered as Attorney at Law
March 2015
Audit & Supervisory Board
Member of the Company(Current Position)
Significant Concurrent
Positions outside theCompany
Attorney at Law, Obayashi Law
OfficeOutside Audit & Supervisory
Board Members, Daiwa
Securities Co. Ltd.
Outside Director, Mitsubishi
Electric Corporation
Outside Audit & Supervisory
Board Members, Nippon Steel& Sumitomo Metal Corporation

Annual Report 2018

June 2003
Director Responsible forFinance of News Department,
Japan Broadcasting
Corporation
June 2005
Executive Director, Yokohama
Broadcasting Station, Japan
Broadcasting Corporation
June 2007
Chief of Secretariat for Boardof Governors, Japan
Broadcasting Corporation
February 2010
Senior Director, Japan
Broadcasting Corporation
April 2012
Executive Director, Japan
Broadcasting Corporation
April 2017
Vice President, the Graduate
School of Project Design(Current position)
Auditor, Hosei University(Current position)
March 2019
Audit & Supervisory Board
Member of the Company(Current Position)

The Advisory Panel on Nomination and Compensation is avoluntary advisory body to the Board of Directors, which was
newly established on March 20, 2019 by merging thefunctions of the existing Meeting for Talent Development andthe Compensation Advisory Panel. This panel was establishedto aim to further enhance objectiveness and transparency byplaying a role in supporting executive candidates, deliberating
the selection of candidates for the Directors and the Audit &Supervisory Board Members, deliberating the dismissal of
Executive Directors and Members of the Board who executethe business, and making reports after deliberating mattersrelated to remuneration of the Directors and the Executive
Officers, thereby enhancing the supervisory function of theBoard of Directors. The Advisory Panel on Nomination andCompensation consists of the Chairman of the Board, whochairs the panel, and three Independent Outside Directors.
The panel meets at least once a year.

JT reports to the securities exchange on which it is listed thatthe three Outside Directors and two Outside Audit &Supervisory Board Members are designated as Independent
Executives. We have a criteria list to assess theindependence of an Executive. Based on the criteria, theindependence of the four Executives has been confirmed.
From the viewpoint of strengthening the supervisory functions,
we have designated Ms. Main Kohda, Mr. Koichiro Watanabe,
Ms. Yukiko Nagashima, who are Outside Directors, and Mr.
Hiroshi Obayashi and Mr. Koji Yoshikuni, who are Outside
Audit & Supervisory Board Members as Independent Officers
as defined by financial instruments exchanges. Toru Mimura,Outside Audit & Supervisory Board Member, meets therequirements for Independent Executives stipulated by thefinancial instruments exchanges. However, since he has
worked at the Ministry of Finance in the past, he is notdesignated as an Independent Executive in light of our criteria
list for independence. More than seven years have elapsed
since he resigned from his post at the Ministry of Finance.

Support for Outside Directors and Outside Audit& Supervisory Board Members
We provide support to Outside Directors and Outside Audit &Supervisory Board Members. The Corporate Strategy Division
or Secretary Division explains the agendas for board meetingsin advance, submits requested documents and delivers necessary information to Outside Directors for them to contribute to
the quality of board discussion. As an independent body
entrusted by shareholders, the Audit & Supervisory Board is
expected to monitor the performance of the Directors andExecutive Officers, with an aim to underpin the Company’s
healthy and sustainable growth as well as increase its credibility. For Outside Audit & Supervisory Board Members to perform their expected roles, we are supporting them by making
necessary information available and allocating adequate
human resources to the Auditor Office which assists Audit &Supervisory Board Members.

Criteria List for Independence of An Executive
At the Board of Directors on April 26, 2012, the Company
established the Criteria for Evaluating the Independence ofOutside Executives. According to the Criteria, Independent
Directors/Audit & Supervisory Board Members must not fallunder any of the following categories.
1. A person who belongs or belonged to JT or an affiliate
or sister company of JT
2. A person who belongs to a company or any other formof organization of which JT is a major shareholder
3. A person who is a major shareholder of JT or who
belongs to a company or any other form of organization
which is a major shareholder of JT
4. A person who is a major supplier or customer of JT (ifthe supplier or customer is a company or any other formof organization, a person who belongs thereto)
5. A major creditor of JT including a major loan lender (ifthe creditor is a company or any other form oforganization, a person who belongs thereto)
6. A certified public accountant who serves as anaccounting auditor or an audit advisor of JT, or a person
who belongs to an auditing firm which serves as anaccounting auditor or an audit advisor of JT
7. A person who receives a large amount of fees from JT in
exchange for providing professional services for legal,financial and tax affairs or business consulting services(if the recipient of such fee is a company or any otherform of organization, a person who belongs thereto)
Japan Tobacco Inc.

Executive Officer System
JT employs the Executive Officer System to ensure effective
and efficient management by promptly responding to thechanging environment, and thus aims to increase its company value. Executive Officers are appointed by the Board of
Directors. At the same time, the Board assigns certain responsibilities and delegates relevant authorities to the Executive
Officers in accordance with the Rules Defining the Extent of
Responsibility and Authority. In addition, we have the structure for quick decision-making about plans and strategy relevant to all business execution except the matters which aresubmitted to the Board of Directors. This structure has been
established by an articulate decision-making process based on
the Rules Defining the Extent of Responsibility and Authority.
The list of Executive Officers on p. 68
059

Annual Report 2018

Corporate GovernanceInternal Control System & Risk Management System& Supervisory Board, for our Audit & Supervisory Board
Members to effectively perform their duties. JT works with
the Group companies to enhance the framework for compliance (including the reporting concerns system), reliablefinancial reporting, internal audit and risk management.

Overview
JT devotes its efforts to ensure appropriate business operation by reinforcing internal control such as compliance, internal audit and risk management among other matters. The
developments of these internal control focuses are reported
regularly to the Board of Directors. In addition, we have the
Auditor Office, a department dedicated to support the Audit
Internal Control Framework
The Board of Directors

External Auditors

ReportingReliable Financial Reporting

Management of Other Risks

In order to ensure the reliability of its financial reporting,
JT has introduced a relevant internal control system inaccordance with the Financial Instruments and Exchange
Act and other standards. In addition, a dedicated division
has been created which reviews the internal control system
and reports the result of the assessment. Reliability of our
financial reporting is confirmed by the external accounting
auditor who makes an assessment of our internal control
system based on the Internal Control Report we prepare.

In accordance with the Rules Defining the Extent of
Responsibility and Authority, management of other risks
is delegated to relevant divisions, which identify andmonitor the risks in their areas of responsibility. Significant
risks are reported to the CEO, together with the request for
approval to implement countermeasures against them,where necessary.
Risk factors on p. 48

Risk Management

Monitoring

Internal Audit System

Financial risk management
Crisis management/
Disaster response

Financial risks/Credit exposure

Compliance Policy andthe Compliance
Implementation Plan

Internal audit plan/Internal audit report

Internal control
reportInternal control
audit

JT has an Operational Review and Business Assurance
Division, which is thoroughly independent of other JT Groupdivisions and organizations engaging in operations. Under
such a capacity, it conducts internal audits and directly
reports to the CEO. The Operational Review and Business
Assurance Division has unlimited access to all activities,
records and employees Group-wide to accomplish its roles
and responsibilities. The head of the division is required toreport to the CEO the results of internal audits along with
their analysis and assessment, and also reports to the Boardof Directors. The head of the division has the right to contact
the management of JT and the Group companies regularly
and as frequently as needed.

JT has put in place the internal guidelines for financial risk
management and ensures that relevant reports are made to
the CEO and the Board of Directors on a quarterly basis via
the CFO.
Crisis Management and Disaster Control

Compliance

The Compliance Office is in charge of enhancing the compliance framework, while identifying any issues in the framework.
The Compliance Office also promotes compliance byconducting various training programs to Board Members
and employees.

A Code of Conduct has been created based on our internal
guidelines approved by the Board of Directors. Under the
Code of Conduct, all Directors and employees are expected
to fully comply with applicable laws, our Articles ofIncorporation, social norms and other compliance standards.
In addition, the Board of Directors has established a fair andeffective compliance framework as described below.

The JT Group has both internal and external hotlines throughwhich employees may consult or report any violations
or possible violations of the JT Group Code of Conduct.
The Compliance Office is responsible for investigating reported cases and implementing corrective measures
after discussing it with the divisions concerned. Significant
cases are reviewed by the JT Group Compliance Committee,
and further reported to the Board of Directors as necessary.

• Set up the JT Group Compliance Committee, which
reviews and discusses compliance-related matters,
reporting directly to the Board of Directors• Appoint an Executive Officer responsible for theCompliance Office• Discuss and approve the Annual Compliance Planas well as the Annual Compliance Action Plans• Report the status of implemented complianceinitiatives to the Board of Directors

Japan Tobacco Inc.

In order to deal with possible crises or disasters, JT has produced a manual for crisis management and disaster control
so that we can make a proper initial response. In the event ofa crisis or a disaster, a project team led by the President isimmediately assembled. In the project team, the Corporate
Strategy Division assumes the key role to support the CEO.
Under the leadership of the President, we respond promptly
and properly, ensuring close cooperation across the organization. Crisis or disaster incidents shall be reported to theBoard of Directors.

The JT Group Compliance Committee is headed by the
Chairman of the Board, with the majority of the members
consisting of external members. The JT Group Compliance
Committee met three times in the fiscal year ended
December 31, 2018, and discussed initiatives to promotecompliance throughout the Group among other matters.

060

Annual Report 2018

Japan Tobacco Inc.

061

Annual Report 2018

Corporate Governance

Executive Remuneration
billion yen and 240 million yen for all the Audit & Supervisory
Board Members combined. In addition, the ceiling for annual‘stock option grants’ for the Directors was approved at thesame shareholders’ meeting. The ceiling is 960 options in
number and 240 million yen in value. The number of thestock options granted to the Directors and the Executive
Officers who are not Directors is decided each year by the
Board of Directors.

Structure of Executive Remuneration
The Compensation Advisory Panel reviews and provides
advice on the policy, framework and calculation method for
remuneration of our Directors and Executive Officers in
response to inquiries. It also monitors whether our executive remuneration level is reasonable.
Based on the recommendation by the Compensation
Advisory Panel, the key policy for our executive remuneration is as follows:

The amount of remuneration for Directors is determined byresolution of the Board of Directors within the approved
upper limits, in light of deliberations by the Compensation
Advisory Panel. These processes are carried out after benchmarking is undertaken, based on third-party research, into
remuneration for corporate executives at major Japanesemanufacturers that operate globally and possess comparable
levels of size and profits with JT. The amount of remuneration
for Audit & Supervisory Board Members is benchmarked in
the same way, and determined through discussions among
Audit & Supervisory Board Members, within the approved
upper limits.

• Set the remuneration at an adequate level to retain
personnel with superior capabilities.
• Link the remuneration to company performance so as tomotivate executives to achieve their performance targets.
• Link the remuneration to company value in the mid- tolong-term.
• Ensure transparency by implementing an objective andquantitative framework.
In accordance with the above policy, remuneration for our
executive comprises:

In addition, we merged the function of Compensation
Advisory Panel into the Advisory Panel on Nomination andCompensation which was newly established on March 20,
2019. As a result, the functions of the Compensation
Advisory Panel described above will be assumed by theAdvisory Panel on Nomination and Compensation. During
the fiscal year ended December 31, 2018, the Compensation
Advisory Panel met 2 times to discuss the level of remuneration among other matters.

1. base salary paid monthly,
2. executive bonus linked to our business performancein the relevant year, and3. stock option* grants, the value of which is linked
to our mid- to long-term company value.
In 2007, we introduced a stock option program as an incentive linked to the mid- to long-term company value.

* Subscription rights to shares holder may exercise his/her subscription rights to shares
only if he/she loses his/her all position as Directors, Audit & Supervisory Board Members
and Executive Officers. We do not intend to change this exercise condition in the future.

Remuneration for Directors is structured as follows:

Total remuneration payments to the Directors and the Audit & Supervisory Board Members,
for the fiscal year ended December 31, 2018 are as follows:

Category

Total amount of remuneration and other payments
by type (million yen)
Total remunerationand other payments Basic
Director’s
Stock option(million yen)remuneration
bonus*
grantsNumber to be
paid (people)

Directors (excluding Outside Directors)

655

369

176

109

8

Audit & Supervisory Board Members (excluding
Outside Audit & Supervisory Board Members)

94

94

–

–

3

Outside Directors and Outside Audit& Supervisory Board Members

70

70

–

–

5

Total

818

533

176

109

16

* Amounts to be paid.

Total remuneration payments to the Directors and the Audit & Supervisory Board Members whose total remuneration exceeds
100 million yen for the fiscal year ended December 31, 2018 are as follows:
Amount of consolidated remuneration and otherpayments by type (million yen)
Name

Category

CompanyBasicremuneration

Director’s
bonus

Stock option
grantsTotal(million yen)

Masamichi Terabatake

Representative Director

JT

89

65

25

179

Mutsuo Iwai

Representative Director

JT

63

45

19

126

The stock options granted for the fiscal year ended December 31, 2018 are as follows:
Resolution dateJune 15, 2018

Positions and numberof people grants

Directors (excluding Outside Directors): 5 persons
Executive Officers (excluding persons serving as Directors): 18 persons

Number of shares

68,800 shares to Directors (excluding Outside Directors)
109,400 shares to Executive Officers (excluding persons serving as Directors)
Total 178,200 shares (200 shares per stock acquisition right)

Remuneration for the Directors who also serve as Executive
Officers comprises ‘base salary’, ‘executive bonus’and ‘stock option grants’. ‘Executive bonus’ is included,
as they are responsible for the achievement of assigned
annual targets through their day-to-day management.
The combined amount of ‘executive bonus’ at a 100% grantbasis and ‘stock option grants’ is targeted at approximately
80% of respective annual base salary. Excluding Outside
Directors, remuneration for the Directors not serving as
Executive Officers comprises ‘base salary’ and ‘stock option
grants’, as they focus on decision-making on the Groupstrategies in addition to supervision of businessand corporate activities. Remuneration for Outside Directors
consists solely of ‘base salary’ and does not include performance linked compensation from the perspectiveof sustaining their independence.
Remuneration for the Audit & Supervisory Board Members
is also composed of ‘base salary’ alone, in light of their
key responsibility to conduct audits.
The maximum amount of the annual aggregate remuneration
excluding ‘stock option grants’ for the Directors and Audit &Supervisory Board Members was approved at our 34th
Annual General Shareholders’ Meeting in March 2019. The
maximum remuneration for all the Directors combined is 1.2
Japan Tobacco Inc.

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Regulation and O ther Relevant L aws

The Tobacco Business
Regulation in the international markets

Although it is difficult to predict the content of future laws
and regulations relating to sales activities, marketing, packaging/labeling, contents and emissions of tobacco products, and smoking, the JT Group expects regulations likethe above and various new regulations will be spread
across Japan and other countries.

The regulatory environment for tobacco is getting stricter
year by year, in the wake of the Framework Convention on
Tobacco Control (“FCTC”), which came into force in February2005 (Government of Japan accepted it in June 2004).
The purpose of the FCTC is to continuously and substantively control the proliferation of smoking.

Regulation in JapanThe Tobacco Business Act, related acts and statutes, andvoluntary standards set forth the regulations for the saleand promotion activities of tobacco products in Japan that
include the indication of warning labels on tobacco productadvertisements and packages that urge caution over the
relationship between the consumption of tobacco products
and health.

Its provisions include price and tax measures to reduce
tobacco demand, non-price measures to reduce the demand
for tobacco (such as protection from exposure to tobaccosmoke, regulation of contents and emissions of tobacco
products, regulation of disclosure of tobacco products, regulations on packaging and labeling of tobacco products, regulations on tobacco advertising, promotion and sponsorship,
among others), and measures relating to the reduction of the
supply of tobacco (such as prevention of illicit trade, prohibition of sale of tobacco products to minors, among others). All
Parties to the FCTC are generally obligated to develop, implement, periodically update and review strategies, plans andprograms for tobacco control. However the content, scope,and method of specific controls undertaken in the Parties areultimately legislated by each Party. After entry into force of
the FCTC, the Conferences of the Parties (COP) are regularly
held and continue discussions of the topics such as those todevelop the protocols (for which additional ratification,
acceptance, accession and other are required to the FCTC
Parties) and guidelines in view of implementation of each
FCTC provision.

In November 2003, the Ordinance for Enforcement of the
Tobacco Business Act was revised including the wording of
the cautions over the relationship between the consumptionof tobacco products and health indicated on tobacco product packages and, starting July 2005, all tobacco products
sold in Japan have been in conformity to the revised regulations. In addition, the Japanese Minister of Finance has indicated a “Guideline for Advertising of Tobacco Products”
based on the Tobacco Business Act which, in March 2004,
was revised with tougher language. The Tobacco Institute ofJapan has established voluntary standards regarding theadvertising and sales promotion activities for tobacco products. All member companies, including JT, comply withthese standards. In December 2018, the Tobacco BusinessSubcommittee of the Fiscal System Council of the Ministryof Finance compiled a report entitled “Revision of
Restrictions on Cautionary Statements and Advertising
Regulations.” According to these guidelines, it is appropriate to completely switch to a new labeling method by July
1, 2020, such as by adding and revising the wording of thecautions based on the latest scientific findings and expanding the area of the wording for the cautions to 50% or moreof tobacco product packages. Regarding advertising regulations, the industry is required to revise voluntary standards
based on the Advertising Guidelines, which will be reviewed
in the future. For example, the industry is required to takemore effective measures to prevent Internet advertisingfrom targeting minors, and to impose new restrictions on
the size and methods of posting in-store advertising. We
intend to comply with the industry’s uniform standards inthe future.

As examples of specific regulations undertaken in eachcountry, in Russia, an important market for the JT Group,
the comprehensive tobacco control law, which includes aretail display ban, restrictions on sales of tobacco products
in certain retail stores, a ban on advertising, sponsorshipand promotions, the introduction of minimal pricing, a ban
on smoking in public places, and anti-illicit trade measures,
was adopted in February 2013 and has gradually been
implemented since June 2013.
In addition, in the EU, the ‘EU Tobacco Product Directive (EUTPD)’ was revised from the earlier Directive, promulgated inJuly 2001, and entered into force in May 2014. The revised
Directive includes, among others, strengthening of packaging and labeling regulations, restrictions on the use of additives including menthol for cigarettes and fine cut,regulations related to electronic cigarettes, and anti-illicit
trade measures. Each Member State has legislated theirnational laws based on the revised Directive.

Self-regulation on marketing

Importers and wholesalers of tobacco products mustregister with the Minister of Finance and, retailers of
tobacco products must obtain the license of the Ministerof Finance. The retailers of tobacco products are
required to sell the tobacco products manufactured by
JT and imported tobacco products at the fixed retailprice which is approved by the Minister of Finance. The
Minister of Finance must approve the filed retail sales
prices unless otherwise considered unfairly prejudicial
to consumers. The Tobacco Business Act requires JT
to annually enter into purchase contracts with tobacco
growers regarding the aggregate cultivation area for
specific varieties of leaf tobacco and the prices for leaf
tobacco by variety and grade. JT must purchase all leaf
tobacco produced pursuant to such contracts, except for
any not suited for the manufacture of tobacco products.
When JT decides the aggregate cultivation area and theprices of leaf tobacco for its contracts with tobacco
growers, it is required to respect the opinion of the Leaf
Tobacco Deliberative Council (hatabako shingi kai),
which consists of members appointed by JT with theapproval of the Minister of Finance from among therepresentatives of domestic leaf tobacco growers andacademic appointees. Much like many other agricultural
products in Japan, production costs for domestically grownleaf tobacco are higher than those of foreign-grownleaf tobacco to the extent that the purchasing price forthe former (before re-drying) is approximately threetimes that of the latter (after re-drying).

JT Global Marketing Principles
The JT Group complies with all regulations of the respective
countries in which we operate. At the same time,
we pursue our business based on the “JT Global
Marketing Principles (the Principles)”. The Principles
place importance on responsible marketing of tobacco
products and outline our thoughts on advertisingand promotions or health warnings, among others.
Moreover, we recognize that youth smoking
prevention is an issue which must be addressed bysociety as a whole. Based on the Principles, we govern
our business and marketing activities, while working
with government and other relevant organizations
to take steps towards preventing youth smoking.
For further details, please refer to the JT Group websites:
https://www.jt.com/about/division/tobacco/marketing/

In November 2003, the Ordinance for Enforcement of
the Tobacco Business Act was revised and the wordingof warnings concerning tobacco consumption andhealth indicated on the tobacco product package waschanged. In addition, the Ordinance stipulated thatwhen wording like “mild” and “light” is used on the
package, they must be accompanied by a warning thatclarifies that such words do not mean that the risk totheir health is lower than other tobacco products so
as to prevent consumers from misunderstanding therelationship between the consumption of tobacco
products and health. JT has been adhering to this rulesince July 1, 2005.

Furthermore, from the perspective of preventing passive
smoking, the Health Promotion Law was amended in July
2018, and will be enforced in stages by April 2020. Despite
the exceptional measures for eating and drinking establishments, the number of facilities that apply full smoking cessation may increase at the discretion of facility managers. In
addition, an increasing number of municipalities have established their own ordinances to prevent passive smoking,and we expect these trends to continue in the future.

Furthermore, the Australian government has introduced
plain packaging regulation which prohibits displaying logos
and brand images on the tobacco packages except only fordisplaying product names in the prescribed color, font, fontsize, and font color in December 2012. Similar regulations
have also been introduced in France, UK, Norway, Ireland
and New Zealand and have been legislated or been in thediscussion in some other countries.

Japan Tobacco Inc.

Tobacco Business Act

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Japan Tobacco Inc.

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Litigation

Regulation and Other Relevant Laws

The Pharmaceutical Business

The Processed Food Business

The pharmaceutical industry operates in a highly regulated
environment. In many countries, R&D, manufacturing andsales promotion activities are strictly regulated. Moreover, in
recent years, the approval process for new drugs has beentightening due to the increased requirements to promote
public health and safety. Compared with the past, pharmaceutical companies are now required to spend more time
examining pharmaceutical safety issues and conducting agreater number of clinical trials on subjects to collect moredata on the efficacy of new compounds. Consequently, clinical trials are growing in scale, cost and time. Meanwhile,the standards governing the reliability and quantity of
research data have been globally harmonized, creating amore efficient and reasonable development process thatallows data to be utilized internationally.

As a producer and seller of food products, the JT Group’s
processed food business is subject to regulations mainly
under the Food Safety Basic Act, the Food Sanitation Act
and the Food Labeling Act.
The Food Safety Basic Act requires food-related companies
to take necessary measures to ensure food safety in eachprocess of the supply chain, as well as to make efforts toprovide accurate information about foods and food-related
goods in an appropriate manner.
The Food Sanitation Act concentrates on prevention of sanitary problems arising from consumption of food and beverages. This Act requires food companies to take necessary
measures under their own responsibility to ensure the safety of food, additives, appliances and packages. The measures discussed in the Act include the acquisition ofknowledge and skills, assurance of the safety of raw materials and voluntary inspection. The Food Labeling Act sets thestandards for the labeling of food that is intended for saleand defines the labeling requirements such as allergens,expiration date, materials or origin. Persons and others
engaged in food-related business must comply with thestandards in preparing their product labels.

In Japan, the marketing of pharmaceutical products
is subject to the supervision of the Ministry of Health,
Labor and Welfare, or MHLW, primarily under the Act
on Securing Quality, Efficacy and Safety of Pharmaceuticals,
Medical Devices, Regenerative and Cellular Therapy
Products, Gene Therapy Products, and Cosmetics, whilepart of its supervisory authority is undertaken by therelevant prefecture. Under the act, in order to conduct themarketing business of pharmaceuticals, a person is required
to obtain from the relevant prefecture a renewable, generally
five-year marketing business license. In addition, under theact, in order to market pharmaceuticals, it is necessary toobtain marketing approval from the MHLW for each kindof product.

The JT Group is striving to establish a high level of foodsafety control from the above-mentioned four perspectives– “food safety,” “food defense,” “food quality” and “foodcommunication” – in addition to complying with theselaws and regulations and ensuring thorough awarenessabout them.

The national health insurance system covers virtually
the entire Japanese population. To sell a pharmaceuticalproduct in Japan, a marketing business license holderof pharmaceutical products must first have a new pharmaceutical product listed on the National Health Insurance
Pharmaceutical Price List for coverage under the national
health insurance system. The drug pricing reform package
would then apply, which includes mandating annual drug
price revisions, limiting the number of price maintenancepremium drugs and requiring a price reduction of long-listed drugs according to replacement rate.

Japan Tobacco Inc.

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In recent decades, numerous, large-scale, smoking andhealth-related cases have been brought against tobacco
product manufacturers in the USA, and some of the cases
initially resulted in verdicts with massive damage awards.
JT and its subsidiaries are not defendants in any of theselawsuits, nor are they subject to any indemnity claims withrespect to them. The tobacco business which JT acquired
from RJR Nabisco Inc. in 1999 and the Natural American
Spirit business which JT acquired from the Reynolds
American Inc. group of companies in January 2016 did notinclude brands in the USA, and even now, our historic andcurrent tobacco business scale in the USA remains small.
Accordingly, we consider potential exposure to smoking
and health-related litigation in the USA to be low, and wethus believe that litigation in the USA will not materiallyaffect our businesses in the near future.

JT and/or some of its subsidiaries are defendants inlawsuits filed by plaintiffs seeking damages for harmallegedly caused by smoking, the marketing of tobacco
products, or exposure to tobacco smoke. As of the fiscal
year-end date, there were a total of 21 smoking andhealth-related cases pending in which one or more membersof the JT Group were named as a defendant or for which JT
may have certain indemnity obligations pursuant to theagreement such as for JT’s acquisition of RJR Nabisco Inc.’soverseas (non-US) tobacco operations. We believe it ispossible that other similar smoking and health-related
lawsuits may be filed in the future.
In addition, JT and some of its subsidiaries are also
defendants in lawsuits other than the smoking and healthrelated cases. Please refer to the consolidated financial
statements (Contingencies – Contingent Liabilities) for major
lawsuits to which JT and some of its subsidiaries are named
as defendants. Similar lawsuits involving us may be filed andcontested in courts in the future.

Following the 2015 acquisition of Logic Technology
Development LLC, JT Group operates an e-cigarettebusiness in the USA. We are not aware of any related ongoing litigation alleging chronic effects on health associatedwith e-cigarette use. However, cases were filed against
e-cigarette manufacturers in the USA alleging harm caused
to consumers by misleading representations and advertising
for which plaintiffs are seeking damages and/or demanding
health warnings. Neither JT nor any of its subsidiaries are aparty to these cases as of December 31, 2018.

To date, we have never lost a case or paid any settlement
award in connection with smoking and health-related litigation. However, we are unable to predict the outcomeof currently pending or future lawsuits. If a court rulingis unfavorable for us, in such cases whether lawsuits are
smoking and health related or not, our financial results, production, sales and imports/exports of tobacco products may
be adversely affected.

As a tobacco product manufacturer, we continue to monitor
closely the developments and trends of litigation involving
tobacco companies in the USA, Canada, and elsewhere,with particular interest and attention.

As of the fiscal year-end date, there are 10 ongoinghealth-care cost recovery cases in Canada pending against
JTI-Macdonald Corp. and JT’s indemnitees (RJR Nabisco
Inc.’s affiliates), brought by Canadian provinces. In addition,
there are 8 pending class actions in Canada, of which
6 are currently dormant, where plaintiffs are seeking damages
for harm allegedly caused by smoking of cigarettes.
Damages claimed in some of these cases reach sums inthe multi-billion dollar range. We will continue to take allappropriate actions to defend such claims vigorously,
and believe there are a number of valid defenses.

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The Board of Directors, Audit & Supervisory Board, and Executive Officers

Members of the JTI Executive Committee

As of March 20, 2019

As of January 1, 2019

The Board of Directors

Executive Officers

Chairman of the Board

President

Senior Vice Presidents

Yasutake Tango

Masamichi Terabatake
Chief Executive Officer

Kenji Ogura
Leaf Procurement, Tobacco Business

Executive Vice Presidents

Hiroyuki Ikuma
Quality Assurance, Tobacco Business

Representative Directors
Masamichi Terabatake
Mutsuo Iwai
Naohiro Minami
Kiyohide Hirowatari

Directors
Kazuhito Yamashita
Main Kohda*
Koichiro Watanabe*
Yukiko Nagashima**Outside Directors under the Companies Act of Japan.

The Audit &Supervisory Board
Standing Audit & Supervisory
Board Members
Ryoko Nagata
Hiroshi Yamamoto
Toru Mimura**

Audit & Supervisory Board
Members

Mutsuo Iwai
President, Tobacco Business
Naohiro Minami
Chief Financial Officer and Communications
Kiyohide Hirowatari
Legal, Corporate Strategy, Digitalization,
Human Resources, Operation Review &Business Assurance, PharmaceuticalBusiness and Food Business

Senior Vice Presidents
Kazuhito Yamashita
Compliance, Sustainability Management
and General Affairs
Chito Sasaki
President, Japanese Domestic Tobacco
Business, Tobacco Business
Junichi Fukuchi
Tobacco Business Planning, Corporate,
Scientific & Regulatory Affairs,
Tobacco Business
Eiichi Kiyokawa
Sales, Tobacco BusinessYasuhiro Nakajima
RRP Development, Tobacco Business
Shuichi Hirosue
Marketing, Tobacco Business
Hiroyuki Miki
R&D, Tobacco BusinessAkihiro Koyanagi
Manufacturing, Tobacco Business
Toru Oguchi
Head of China Division,
Tobacco Business

Vassilis Vovos
Senior Vice President, Finance, IT,
and Chief Financial Officer

Antoine Ernst
Senior Vice President,
Chief Transformation Officer

Koji Shimayoshi
Deputy CEO and Executive Vice
President, Business Development
and Corporate Strategy

Howard Parks
Senior Vice President, Human Resources
and Chief Compliance Officer

Stefan Fitz
Regional President, Western Europe

Roland Kostantos
Chief Operating Officer

Daniel Torras
Senior Vice President, Reduced-Risk Products

Eddy Pirard
President and Chief Executive Officer

Suzanne Wise
Senior Vice President, Corporate Development
Wade WrightSenior Vice President,
Legal and Regulatory Affairs
Bilgehan Anlas
Regional President, Middle East,
Near East, Africa, Turkey and Worldwide
Duty-Free
Yves Barbier
Senior Vice President, Marketing and Sales

Muneaki Fujimoto
President, Pharmaceutical Business
Shigenori Ohkawa
Head of Central Pharmaceutical
Research Institute,
Pharmaceutical Business
Atsuhiro Kawamata
Food BusinessYuki Maeda
Corporate Strategy

Koji Yoshikuni**

Takehiko Tsutsui
Business Development**Outside Audit & Supervisory Board Members
under the Companies Act of Japan.

Kei Nakano
Communications
Takehisa Shibayama
Digitalization
Takanori Kikuchi
General Affairs
Chigusa Ogawa
Sustainability Management
Koichi Mori
Human Resources

Japan Tobacco Inc.

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Annual Report 2018

Japan Tobacco Inc.

069

Hiroyuki Miki
Senior Vice President, Research andDevelopment, Chief Quality Officer
Jorge da Motta
Regional President, Asia PacificHaruhiko Yamada
Legal

Hiroshi Obayashi**Marchant Kuys
Regional President, Americas

Annual Report 2018

Andrew Newton
Senior Vice President, Global Supply Chain
Kevin Tomlinson
Regional President, Eastern Europe

Financial Review

Analysis of the Results
Results for the fiscal year ended December 31, 2018
Revenue1

Billions of yen
2,139.7

2017

Profit3

Billions of yen
392.4

2017
+74.8

International Tobacco

Profit decreased ¥6.7 billion or 1.7% year-on-year to ¥385.7
billion.

+3.9

Operating profit

Japanese Domestic Tobacco–5.3

Financial income/financial cost

Pharmaceutical+9.3

Income tax–2.3

Processed Food

–1.8

Profit attributable tonon-controlling interests+2.6

Others–0.7

2018• Financial costs increased (reducing profit in the graph)mainly due to foreign exchange loss caused by weaker
emerging market currencies and the increase of interest
expenses resulted from funding acquisitions.
• Income tax expenses increased (reducing profit in thegraph) due to growth in profit before income tax.

–10.9

385.7

2,216.02018

Revenue by Business Segment• An increase in royalty revenue in the pharmaceuticalbusiness also added to revenue growth.
• These benefits were partially offset by the negative
currency movements caused by weaker emerging market
currencies and the contraction of cigarette sales volume
in the Japanese domestic tobacco business.

• Revenue grew ¥76.3 billion or 3.6% year-on-year to¥2,216.0 billion.
• Driven by pricing benefits and volume contribution led byacquisitions in the international tobacco business, as wellas increased RRP contribution combined with a positive
cigarette price/mix in the Japanese domestic tobacco
business.

Revenue
Japanese Domestic Tobacco
Core revenue4
International Tobacco
Core revenue5

Adjusted Operating Profit2/Operating Profit

Billions of yen

Pharmaceutical
Processed Food
Others585.3

2017 Adjusted Operating Profit
International Tobacco: Business momentum(at constant FX)

Adjusted Operating Profit and Operating Profit by Business Segment
Billions of yen
2017

2018

2,139.7
626.8
590.6
1,237.6
1,177.0
104.7
163.1
7.5

2,216.0
621.4
582.4
1,312.3
1,250.7
114.0
161.4
6.8

Billions of yen

Consolidated: Operating profit
Japanese Domestic Tobacco
International Tobacco
Pharmaceutical
Processed Food
Others/Elimination
Adjustments, total6
Japanese Domestic Tobacco
International Tobacco+75.0International Tobacco: Local currency vs.
USD FX effect

–35.2
–6.5

International Tobacco: USD vs. Yen FX effect–23.3

Japanese Domestic Tobacco+4.3

Pharmaceutical
Processed Food

–1.3

Others

–2.8

Pharmaceutical

Average Exchange Rate

Processed Food

2017

2018

USD/JPY112.16110.44

USD/RUB

58.35

62.68

Japanese Domestic Tobacco

USD/GBP

0.78

0.75

International Tobacco

USD/EUR

0.89

0.85

Pharmaceutical

Others/Elimination
Consolidated: Adjusted operating profit

Processed Food
Others/Elimination

2018

561.1
215.8
325.6
24.1
5.4
(9.8)
(24.2)(16.4)(25.7)
—
0.0
18.0
585.3
232.3
351.3
24.1
5.4
(27.8)

565.0
192.5
339.5
26.3
2.9
3.8
(30.5)(16.5)(45.0)
(2.1)
(1.2)
34.4
595.5
209.0
384.5
28.4
4.1
(30.6)• For analysis of revenue, core revenue and adjusted
operating profit of each business segment, please refer tothe “Review of Operations.”

595.5

2018 Adjusted Operating Profit

2017

–30.5

Adjustment total
565.0

2018 Operating Profit

Adjusted operating profit increased ¥10.2 billion or 1.7%
year-on-year to ¥595.5 billion.

• In the pharmaceutical business, despite increased R&D
investment, adjusted operating profit grew, driven by therevenue growth.

• In the international tobacco business, adjusted operating
profit, both including or excluding the impact of the
one-time loss in the previous year, increased driven byrevenue growth despite negative currency movements
and investments to strengthen the business in themarkets where we made acquisitions.
• In the Japanese domestic tobacco business, adjusted
operating profit declined due to the negative cigarettevolume contribution and increase of sales promotion
expenses, partially offset by an increase in RRP-related
profit, and a favorable cigarette price/mix variance.

Japan Tobacco Inc.

Adjusted operating profit at constant foreign currency
increased 8.9% year-on-year.

1. Excludes tobacco excise taxes and agency transactions. In addition, from 2018, in accordance with the application of IFRS 15, certain items formerly treated as
selling, general and administrative expenses are accounted for as reductions of revenue.
2. Adjusted operating profit = Operating profit + amortization cost of acquired intangibles arising from business acquisitions + adjusted items (income and costs).*
3. Profit attributable to owners of the parent
4. Excludes revenue from distribution of imported tobacco in the Japanese domestic tobacco business, among other factors, but includes revenue from domestic duty
free and the China business, as well as RRP-related revenue.
5. Excludes revenues from distribution, contract manufacturing and other peripheral businesses, but includes revenue from waterpipe tobacco and RRP.
6. Amortization cost of acquired intangibles arising from business acquisitions ± adjusted items (income and costs).** Adjusted items (income and costs) = Impairment losses on goodwill ± restructuring income and costs ± others

Operating profit increased 0.7% year-on-year to ¥565.0 billion driven by growth in adjusted operating profit andincrease in the sale of real estate-related assets. This was
despite an increase in trademark amortization expenses
related to acquisitions.

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Financial Review

Analysis of the Results
Results for the fiscal year ended December 31, 2018

Consolidated Statement of Financial Position (Assets)

Billions of yen
5,221.5

December 31, 2017

–3.4

Cash and cash equivalents
Trade and other receivables+25.4

Inventory

+36.3
+13.2

Property, plant and equipment+117.2

Goodwill+20.0

TrademarkAdjusted operating profit

Having acquired RJR Nabisco’s non-US tobacco operation in1999 and Gallaher Group Plc. in the UK in 2007, the JT Grouphas been growing steadily as a global company with operations
in more than 70 countries and products sold in more than 130
countries and regions around the world. In this context, the JT
Group has adopted IFRS from the year ended March 31, 2012 to
improve international comparability of financial information incapital markets and to diversify the Group’s sources of financing
through international capital markets.

In order to provide useful comparative information on
our business performance, adjusted operating profit is presented as operating profit plus amortization cost of acquired
intangibles arising from business acquisitions and adjusted
items (income and costs). Adjusted items (income and costs)
are impairment losses on goodwill and restructuring income
and costs, and other items.
Furthermore, for the international tobacco business, adjusted
operating profit at constant rates of exchange which excludes
foreign exchange effects, is also presented as additional
information. Adjusted operating profit at constant exchange
rate for a relevant period in the international ­tobacco business is calculated using the foreign exchange rates of theprior year.

From 2018, in accordance with the application of IFRS 15,
certain items formerly treated as selling, general and administrative expenses are accounted for as reductions of revenue
or cost of sales.

+31.2

Other assets
5,461.4

December 31, 2018

• Total assets increased ¥239.9 billion to ¥5,461.4 billion,
mainly due to the increase in goodwill, trademark andother assets, which is related to the acquisitions in theinternational tobacco business.
Consolidated Statement of Financial Position (Debt and Equity)
December 31, 2017

1. Significant Accounting Policies

Billions of yen

For further details of significant accounting policies, pleaserefer to Note 3 to the consolidated financial statements.

3. Analysis of Consolidated Financial Results for 2018

2. Non-GAAP Financial Measures(1) Consolidated financial results

The JT Group discloses certain additional financial measuresthat are not required or defined under IFRS. These measures
help grasp the underlying performance of each business andare used for internal performance management. We believethat they are useful information for users of our financial
statements to assess the Group’s performance.

For analysis of ‘Revenue’, ‘Adjusted operating profit’,‘Operating profit’ and ‘Profit attributable to owners of theparent company’ from continuing operations, please refer topage 70 and 71. For analysis of ‘Assets’, ‘Debt’ and ‘Equity’,please refer to page 72. For analysis of financial results bybusiness segment, please refer to ‘Review of Operations’.

For our international tobacco business, its consolidated
financial statements reported in US dollars are internallyreviewed and therefore revenue and adjusted operating profit
are externally communicated in US dollars. These non-GAAP
financial measures should be treated as supplementary information, rather than alternative measures to corresponding
financial numbers prepared in accordance with IFRS.

(2) Results and plans of capital expenditures

5,221.5–15.2

Trade and other payables+750+278.2

Bonds

–50.7

Borrowings+26.0

Income tax payables

Core revenue+143.2Other liabilities+124.1Retained earnings–247.0Exchange differences ontranslation of foreign operations–18.7

Other equity total

Capital expenditures include outlays on property, plantand equipment such as land, buildings, and structures;
machinery; vehicles and others; and intangible assets
such as goodwill, trademark, software, and others that arenecessary for enhancing the productivity of our factories andother facilities; strengthening our competitiveness,and operating in various business fields.
In 2018, total capital expenditures amounted to ¥159.8 billion.

For the tobacco business, core revenue is disclosed additionally as a breakdown of revenue. Specifically, the core revenue for the Japanese domestic tobacco business excludes
revenue from distribution of imported tobacco, among otherfactors, but includes revenue from domestic duty free andthe China business, as well as RRP related revenue.

Capital ExpenditureBillions of yen

Total

5,461.4

December 31, 2018

Core revenue for the international tobacco business excludes
the revenue from distribution, contract manufacturing andother peripheral businesses, but includes revenue fromwaterpipe tobacco and RRP.

• Total liabilities increased ¥381.5 billion to ¥2,761.0 billion
mainly due to an increase in bonds to fund acquisitions in
the international tobacco business.
• Total equity decreased ¥141.6 billion to ¥2,700.4 billion
mainly because of a decrease in the exchange differenceson translation of foreign operations.

Japan Tobacco Inc.

Japanese Domestic Tobacco
International Tobacco
Pharmaceutical
Processed Food
Others/Elimination

072

Annual Report 2018

Japan Tobacco Inc.

073

Annual Report 2018

2017

2018

140.9
51.5
68.4
6.2
10.4
4.3

159.8
55.4
75.7
11.3
12.7
4.6

Financial Review

The year-end dividend related to 2017 (record date ofDecember 31, 2017) and the interim dividends for 2018
(record date of June 30, 2018) are recorded in the financial
statements for 2018. For more details, please refer toNote 24 to the consolidated financial statements “Dividends”.

In the Japanese domestic tobacco business, capital expenditures amounted to ¥55.4 billion which was mainly spent on
the RRP-related manufacturing facilities. In the international
tobacco business, capital expenditures amounted to ¥75.7
billion which was spent on factory manufacturing facilities.
In the pharmaceutical business, capital expenditures
amounted to ¥11.3 billion which was primarily spent on theconstruction of a joint facility of Toxicology ResearchLaboratories and Pharmaceutical Frontier ResearchLaboratories. In the processed food business, capital expenditures amounted to ¥12.7 billion, which was spent on constructing new buildings and facilities to enhance andmaintain production capacity and the optimal production
system. These capital expenditures were internally fundedthrough cash generated by operations and borrowings.

5. Capital Management
The JT Group’s management principle is pursuit of the
4S model: we strive to fulfill our responsibilities to our valued
consumers, shareholders, employees and the wider society,carefully considering the respective interests of these four
key stakeholder groups, and exceeding their expectations
wherever we can. The JT Group believes that sustainableprofit growth in the mid- to long-term based on this principle
will increase the JT Group’s value in the mid- to long-term,
and is consequently in the best interest of all stakeholders,
including our shareholders.

Plans for new installations and disposal of facilities
Regarding the mid- to long-term resource allocation of the
JT Group, we will place top priority on business investmentsthat will lead to sustainable profit growth in the mid- to longterm based on our management principles. We position theinternational tobacco and Japanese domestic tobacco as thecore business and profit growth engine, and place top priority on business investments that will lead to their sustainableprofit growth. Meanwhile, regarding the pharmaceuticalbusiness and processed food business, we will strive tostrengthen foundations that will lead to future profit contribution, and we will make investments to that end. Based on
this policy, we plan capital expenditures ­totaling ¥156.0 billion
for 2019.

As its financial policy, JT Group maintains a solid balance
sheet. This provides the capacity to withstand any adversity
arising out of a volatile environment, such as an economiccrisis. It also allows for sufficient flexibility to capture attractive investment opportunities. JT Group monitors financial
indicators in order to maintain a well-balanced capital structure that ensures an appropriate return on equity and a solidbalance sheet for future investment. We monitor credit­ratings for a solid balance sheet, and ROE (return on equity)for profitability, while focusing on changes in the domestic
and overseas environment.
The JT Group manages net interest-bearing debt, where cash
and cash equivalents are deducted from interest-bearing
debt, and capital (the part attributable to owners of the parent
company). The amounts as of each year-end are as follows:

As JT and JT Group companies have wide-ranging plans forcapital expenditure, figures are disclosed by segment. Our
actual capital expenditures may differ significantly from theplanned figures mentioned above as a result of a number offactors, including those discussed in ‘Risk Factors’.

Share buy-back(2) External financing

As of December 31, 2018 JT held 208,576,641 commonshares as treasury stock, amounting to 10.43% of the total
number of shares issued.

Short-term working capital needs are basically financed
through short-term borrowings from financial institutionsor through commercial paper, or a combination of both. Midto long-term capital needs are financed through long-termborrowings from financial institutions, bonds, equity, ora combination of those previously stated.

A repurchase of our shares requires cash outlays. In order torepurchase our shares in a flexible manner, we amended the
Articles of Incorporation at the general meeting of shareholders held on June 24, 2004 so that JT could repurchaseshares based on a resolution made by the Board of Directors.
We may continue to hold the repurchased shares as treasury
stock or use them for other purposes. Stock repurchase provides our management with an additional option for increasing flexibility and speed in capital management in order toadopt to a rapidly changing business environment.

We continue to diversify our financing methods and correspondent financial institutions to secure stable and efficientfunding sources through activities such as the establishmentof committed facilities. The condition of Group-wide external
debt is reported to the CEO and the Board of Directors of JT
on a regular basis.
(3) External investments

In addition, JT Group announced a share buyback programof up to ¥50 billion or 23 million shares, based on the resolution made by the Board of Directors on February 7, 2019. The
buyback program will be from February 8, 2019 to April 22,
2019 by purchase on the stock exchange via trust bank.

Our financial investments are always made taking into
account safety, liquidity and optimal yield. Speculative dealings in pursuit of profit margin are not allowed. The results ofthe financial investment are reported to the CEO and theBoard of Directors of JT on a regular basis.

6. Financial Activities

7. Results of Cash Flows of 2018 and 2017

Our Group Treasury Division provides Group-wide support toenable secure and efficient financing activities. JT Group is
exposed to financial risks (credit risks, liquidity risks, foreignexchange risks, interest rate risks, and market price fluctuation
risks). Treasury operations are conducted pursuant to a set ofGroup-wide financial risk management policies and results
are reported to the CEO and the Board of Directors of JT ona regular basis. For more details on financial risk management, please refer to “(2) Financial Risk Management” andto “(8) Market Price Fluctuation Risk” of Note 34 to thec­onsolidated financial statements “Financial Instruments”.

Cash and cash equivalents at the end of 2018 decreased by¥3.4 billion from the end of 2017 to ¥282.1 billion. Cash andcash equivalents at the end of 2017 were ¥285.5 billion.
Cash flows from (used in) operating activities
Net cash flows from operating activities during 2018
were ¥461.4 billion. The main factors were the generation ofa stable cash inflow from the tobacco business. Net cash flows
from operating activities were ¥419.2 billion for 2017.

Capital Management
Billions of yen
As of
As of
Dec. 31, Dec. 31,
2018
2017

4. Dividends
The year-end dividends for 2018 were ¥75 per share.
The total annual dividends per share, including the interim
dividends per share of ¥75, were ¥150 per share, witha ¥10 increase of dividend per share year-on-year.

Net interest-bearing debt

755.8
(285.5)
470.3

987.6
(282.1)
705.5

Capital (equity attributable to ownersof the parent company)

2,761.7

2,630.6

Interest-bearing debt
Cash and cash equivalents

The year-end dividends related to the current year arer­ecognized in the following year for accounting purposes.

Cash flows from (used in) investing activities(1) Cash Management Systems

Net cash flows used in investing activities during 2018 were¥383.3 billion. This was mainly due to the acquisitions andan increase in property, plant and equipment in Russia and
Bangladesh in the international tobacco business. Net cash
flows used in investing activities were ¥352.6 billion for 2017.

To maximize the Group’s overall cash efficiency, we give
first priority to utilizing internal financing mainly by the
Cash Management Systems (CMS) within our Group,
where legally permissible and economically viable.

Cash flows from (used in) financing activities
Net cash flows used in financing activities during 2018 were¥62.4 billion. Bonds issued in 2018 partially offset theincrease in dividends per share and repayments of borrowings. Net cash flows used in financing activities were ¥77.0
billion for 2017.

Capital Expenditure Plan
2019 (Billions of yen)

Main purpose of investing

Japanese Domestic Tobacco

Internally funded

Manufacturing and related facilities

Same as above

5.0

Maintenance and reinforcement of
R&D

Same as above

8.0

Facility investment for optimal
production system

Same as above

57.0
International Tobacco

80.0

Pharmaceutical
Processed FoodJapan Tobacco Inc.

Funding

Investment for RRP-related andimprovement of productspecification

074

Annual Report 2018

Japan Tobacco Inc.

075

Annual Report 2018

Financial Review

8. Liquidity

Ratings Japan K.K. (S&P), and AA by Rating and Investment
Information Inc. (R&I), with a “negative" outlook from
Moody’s, a “negative" outlook from S&P and a “stable”­outlook from R&I.

We have historically had, and expect to continue to have,significant cash flows from operating activities. We expectthat cash generated from operating activities will continue tobe stable and cover funds needed for ordinary businessactivities. On December 31, 2018, we had approximately¥478.5 billion committed facilities for both domestic andinternational major financial institutions, of which 100% wasunused. In addition, we have a domestic commercial paper
program, uncommitted facilities, a domestic bond shelf registration and EMTN program.

These ratings are affected by a number of factors such as
developments in our major markets, our business strategies
and general economic trends that are beyond control.
The ratings may be withdrawn or revised at any time.
Each rating should be evaluated separately from other ratings. Under the Japan Tobacco Inc. Act, the bondholders of
JT can enjoy statutory preferential rights over unsecured
creditors in seeking repayment, with the exception of national and local taxes and other statutory obligations.

(1) Long-term debt
Bonds issued (including the current portion) as of December
31, 2017 and December 31, 2018 accounted for ¥332.2 billionand ¥610.4 billion respectively and long-term borrowings asloans from financial institutions (including the current portion)accounted for ¥71.9 billion and ¥129.3 billion respectively.
Long-term lease obligations accounted for ¥9.3 billion as ofDecember 31, 2017 and ¥8.8 billion as of December 31,
2018. Maturities of interest bearing debts are shown in thetable below.

(2) Short-term debt
Short-term borrowings totaled ¥274.2 billion as of December
31, 2017 and ¥166.0 billion as of December 31, 2018.
Commercial paper totaled ¥72.0 billion as of December 31,
2018.
Short-term lease obligations totaled ¥1.3 billion as ofDecember 31, 2017 and ¥1.0 billion as of December 31, 2018.

As of December 31, 2018, our long-term debt was rated Aa3
by Moody’s Japan K.K. (Moody’s), AA- by Standard & Poor’s

Liquidity
Billions of yen

Book Value

Due within
1 yearDue after
1 yearthrough
2 years

Short-term borrowings as loans

166.0

166.0

—

—

—

—

—

Short-term lease obligations

1.0

1.0

—

—

—

—

—

Commercial paper

72.0

72.2

—

—

—

—

—

Long-term borrowings asloans (current portion)

12.4

12.4

—

—

—

—

—

Bonds (current portion)

—

—

—

—

—

—

—

Long-term borrowings as loans

116.9

—

12.0

11.6

41.6

11.6

40.3

Bonds

610.4

—

80.0

83.3

30.0

118.3

302.2

8.8

—

0.8

0.7

0.4

0.2

6.7

987.6

251.6

92.8

95.5

72.0

130.0

349.2

Year ended December 31, 2018

Long-term lease obligations
Total

Japan Tobacco Inc.

076

Due after
2 yearthrough
3 years

Due after
3 yearthrough
4 years

Due after
4 yearthrough
5 years

Due after
5 years

Annual Report 2018

Japan Tobacco Inc.

077

Annual Report 2018

Consolidated Financial Statements

Consolidated Statement of Financial Position
Japan Tobacco Inc. and Consolidated Subsidiaries
As of December 31, 2017 and 2018
Millions of yen

Assets2017

2018

Current assets

Millions of yen

Liabilities and equity

2017

2018

¥  395,733
398,182
46,452
6,906
13,028618,322
1,478,623¥  380,516
250,466
72,4494,486
6,078
716,190
1,430,185

346,955
11,013
330,762
4,005
120,779
87,319900,833

727,314
10,067
321,838
3,780
179,274
88,4971,330,770

2,379,456

2,760,955

100,000
736,400(443,636)(167,338)
2,536,262
2,761,687
80,3402,842,027

100,000
736,400(442,829)(423,357)
2,660,381
2,630,594
69,8512,700,445¥5,221,484¥5,461,400

Liabilities¥  285,486
431,199
612,954
14,016
361,715
1,705,370
2,396
1,707,767

Cash and cash equivalents (Note 7)
Trade and other receivables (Note 8)Inventories (Note 9)
Other financial assets (Note 10)
Other current assets (Note 11)
Subtotal
Non-current assets held-for-sale (Note 12)
Total current assets¥  282,063
456,591649,238
35,633385,872
1,809,396
10
1,809,406

Current liabilities
Trade and other payables (Note 18)
Bonds and borrowings (Note 19)
Income tax payables
Other financial liabilities (Note 19)
Provisions (Note 20)
Other current liabilities (Note 21)
Total current liabilities
Non-current liabilities
Bonds and borrowings (Note 19)

Non-current assets

Other financial liabilities (Note 19)

Property, plant and equipment (Note 13)
Goodwill (Notes 14, 38)
Intangible assets (Note 14)
Investment property (Note 16)
Retirement benefit assets(Note 22)
Investments accounted for using the equity method
Other financial assets (Note 10)
Deferred tax assets (Note 17)
Total non-current assets

745,607
1,891,210
479,175
16,70051,377
81,253
114,970
133,425
3,513,717

758,841
2,008,416
503,076
17,55857,14066,807
115,046
125,109
3,651,993¥5,221,484¥5,461,400

Retirement benefit liabilities (Note 22)
Provisions (Note 20)
Other non-current liabilities (Note 21)
Deferred tax liabilities (Note 17)
Total non-current liabilities
Total liabilities
EquityShare capital (Note 23)

Total assets

Capital surplus (Note 23)
Treasury shares (Note 23)
Other components of equity (Note 23)
Retained earnings
Equity attributable to owners of the parent company
Non-controlling interests
Total equity
Total liabilities and equity

Japan Tobacco Inc.

078

Annual Report 2018

Japan Tobacco Inc.

079

Annual Report 2018

Consolidated Statement of Income

Consolidated Statement of Comprehensive Income

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2017 and 2018

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2017 and 2018
Millions of yen

Revenue (Notes 6, 25)
Cost of sales (Notes 14, 22)
Gross profit
Other operating income (Note 26)
Share of profit in investments accounted for using the equity method
Selling, general and administrative expenses (Notes 12, 13, 14, 16, 22, 27, 33, 38)
Operating profit (Note 6)
Financial income (Notes 28, 34)
Financial costs (Notes 22, 28, 34)
Profit before income taxes
Income taxes (Note 17)
Profit for the period

2017

2018

¥2,139,653(843,558)
1,296,094¥2,215,962(933,034)
1,282,928

45,7246,194(786,911)
561,101

48,532
3,931(770,407)
564,984

4,780(27,349)
538,532

5,754(39,252)
531,486(141,783)¥  396,749(144,055)¥  387,431

Millions of yen

Profit for the period¥  392,409
4,340¥  396,749

Owners of the parent company
Non-controlling interests
Profit for the period¥  385,677
1,755¥  387,431¥   219.10
218.97

Basic (Yen) (Note 30)
Diluted (Yen) (Note 30)

Net gain (loss) on revaluation of financial assets measured at fair value
through other comprehensive income (Notes 29, 34)
Remeasurements of defined benefit plans (Notes 22, 29)
Total of items that will not be reclassified to profit or loss

Exchange differences on translation of foreign operations (Notes 29, 34)
Net gain (loss) on derivatives designated as cash flow hedges (Notes 29, 34)
Total of items that may be reclassified subsequently to profit or loss
Other comprehensive income (loss), net of taxes

Owners of the parent company
Non-controlling interests

Millions of yen

Amortization cost of acquired intangibles arising from business acquisitions
Adjustment items (income)
Adjustment items (costs)
Adjusted operating profit (Note 6)

Japan Tobacco Inc.

080

Annual Report 20182018

¥561,101
50,414(37,569)
11,354¥585,300¥564,984
61,772(40,447)
9,154¥595,463(8,215)(3,195)(11,410)

128,073(54)
128,019(247,731)
1,012(246,719)

157,449¥554,198(258,129)¥129,302¥549,309
4,889¥554,198¥128,340
962¥129,302

Attributable to:

Reconciliation from “Operating profit” to “Adjusted operating profit”

Operating profit

9,402
20,02829,430Items that may be reclassified subsequently to profit or loss:¥  215.31
215.202017¥387,431

Items that will not be reclassified to profit or loss:

Comprehensive income (loss) for the period

Earnings per share2018¥396,749

Other comprehensive income

Comprehensive income (loss) for the period

Attributable to:

2017

Japan Tobacco Inc.

081

Annual Report 2018

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2017 and 2018

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2017 and 2018
Millions of yen

Millions of yen
Equity attributable to owners of the parent company
Other components of equity

As of January 1, 2017
Profit for the period
Other comprehensive income (loss)

Comprehensive income (loss) for the period
Acquisition of treasury shares (Note 23)
Disposal of treasury shares (Note 23)
Share-based payments (Note 33)
Dividends (Note 24)
Changes in the scope of consolidation
Changes in the ownership interest in a subsidiary without a lossof control
Transfer from other components of equity to retained earnings
Other increase (decrease)

Total transactions with the owners
As of December 31, 2017
Profit for the period
Other comprehensive income (loss)

Comprehensive income (loss) for the period
Acquisition of treasury shares (Note 23)
Disposal of treasury shares (Note 23)
Share-based payments (Note 33)
Dividends (Note 24)
Changes in the scope of consolidation
Changes in the ownership interest in a subsidiary without a lossof control
Transfer from other components of equity to retained earnings
Other increase (decrease)

Total transactions with the owners
As of December 31, 2018

Net gain (loss)
on derivatives
designated as
cash flow hedges

Net gain (loss)
on revaluation offinancial assets
measured at fairvalue throughother comprehensive income

Share capital

Capital surplus

Treasury shares

Subscription
rights to shares

Exchangedifferences ontranslation offoreign
operations¥100,000
—
—
—
—
—
—
—
—

¥736,400
—
—
—
—
—
—
—
—

¥(443,822)
—
—
—
(1)
187
—
—
—

¥1,794
—
—
—
—
(166)
336
—
—

¥(335,642)—
127,758
127,758—————¥  440
—
(54)
(54)
—
—
—
—
—

¥29,854
—
9,276
9,276
—
—
—
—
—

—
—
—
—
100,000
—
—
—
—
—
—
—
—

—
—
—
—
736,400
—
—
—
—
—
—
—
—

—
—
—
186
(443,636)
—
—
—
(0)
807
—
—
—

—
—
—
170
1,964
—
—
—
—
(691)
274
—
—

—
—
—
—
(207,884)—(247,034)(247,034)
—
—
—
—
—

—
—
(475)
(475)
(88)
—
1,012
1,012
—
—
—
—
—

—
(461)
—
(461)
38,670—(8,239)(8,239)
—
—
—
—
—

—
—
—
—
¥100,000————¥736,400———
807¥(442,829)

—
—
—
(417)
¥1,547————¥(454,918)

—
—
(480)
(480)
¥  443

—
(860)
—
(860)
¥29,570
Millions of yen

Equity attributable to owners of the parent company
Other components of equity

As of January 1, 2017
Profit for the period
Other comprehensive income (loss)

Comprehensive income (loss) for the period
Acquisition of treasury shares (Note 23)
Disposal of treasury shares (Note 23)
Share-based payments (Note 33)
Dividends (Note 24)
Changes in the scope of consolidation
Changes in the ownership interest in a subsidiary without a lossof control
Transfer from other components of equity to retained earnings
Other increase (decrease)

Total transactions with the owners
As of December 31, 2017
Profit for the period
Other comprehensive income (loss)

Comprehensive income (loss) for the period
Acquisition of treasury shares (Note 23)
Disposal of treasury shares (Note 23)
Share-based payments (Note 33)
Dividends (Note 24)
Changes in the scope of consolidation
Changes in the ownership interest in a subsidiary without a lossof control
Transfer from other components of equity to retained earnings
Other increase (decrease)

Total transactions with the owners
As of December 31, 2018
Japan Tobacco Inc.

Remeasurementsof defined
benefit plans

Total

Retainedearnings

Total

Non-controllinginterests

Total equity¥    ——
19,91919,919—————¥(303,554)—
156,900
156,900
—
(166)
336
—
—

¥2,367,067
392,409—392,409—(21)—(243,572)—¥2,456,091
392,409
156,900
549,309(1)
0336(243,572)—¥71,950
4,340
550
4,889
—
—
5
(1,547)4,884¥2,528,041
396,749
157,449
554,198(1)0341(245,119)
4,884—(19,919)—(19,919)——(3,075)(3,075)
—
—
—
—
—

—
(20,380)(475)(20,684)(167,338)—(257,337)(257,337)
—
(691)
274
—
—

(1)
20,380—(223,214)2,536,262
385,677—
385,677—(116)
2(259,724)
—

(1)
—
(475)
(243,713)
2,761,687
385,677(257,337)
128,340(0)0275(259,724)
—

159
—
—
3,501
80,340
1,755
(792)
962
—
—
36
(1,914)
139

158
—
(475)
(240,212)
2,842,027
387,431(258,129)
129,302(0)0311(261,638)
139

—
3,075
—
3,075
¥    —

—
2,215
(480)
1,318
¥(423,357)

495(2,215)—(261,558)¥2,660,381

495
—
(480)
(259,433)¥2,630,594(9,713)——(11,452)¥69,851(9,218)—(480)(270,885)¥2,700,445082

Annual Report 2018

Cash flows from operating activities
Profit before income taxes
Depreciation and amortization
Impairment losses
Reversal of impairment losses on investments in associates
Interest and dividend income
Interest expense
Share of profit in investments accounted for using the equity method(Gains) losses on sale and disposal of property, plant and equipment, intangible assets
and investment property(Increase) decrease in trade and other receivables(Increase) decrease in inventories
Increase (decrease) in trade and other payables
Increase (decrease) in retirement benefit liabilities(Increase) decrease in prepaid tobacco excise taxes
Increase (decrease) in tobacco excise tax payables
Increase (decrease) in consumption tax payables
Other
SubtotalInterest and dividends received
Interest paid
Income taxes paid
Net cash flows from operating activities
Cash flows from investing activities
Purchase of securities
Proceeds from sale and redemption of securities
Purchase of property, plant and equipment
Proceeds from sale of investment property
Purchase of intangible assets
Payments into time deposits
Proceeds from withdrawal of time deposits
Payments for business combinations (Note 38)
Purchase of investments in associates
Other
Net cash flows from investing activities
Cash flows from financing activities
Dividends paid to owners of the parent company (Note 24)
Dividends paid to non-controlling interests
Capital contribution from non-controlling interests
Increase (decrease) in short-term borrowings and commercial paper (Note 32)
Proceeds from long-term borrowings (Note 32)
Repayments of long-term borrowings (Note 32)
Proceeds from issuance of bonds (Note 32)
Redemption of bonds (Note 32)
Proceeds from sale and leaseback transactions
Repayments of finance lease obligations (Note 32)
Acquisition of treasury shares
Payments for acquisition of interests in subsidiaries from non-controlling interests
Other
Net cash flows from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at the end of the period (Note 7)

Japan Tobacco Inc.

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Annual Report 2018

2017

2018

¥538,532
145,407
3,427(8,848)(4,381)
11,604(6,194)¥531,486
158,671
8,454—(5,751)
16,343(3,931)(21,221)(28,810)(41,102)
15,655(15,296)(10,281)(60,250)
1,117
12,228531,587
11,250(11,035)(112,591)
419,212(34,905)(30,818)(53,058)(4,618)(8,864)(36,662)
53,408(11,026)
8,969
587,697
11,743(13,685)(124,366)
461,389(11,479)
4,893(123,726)
21,195(16,412)(84)
101(212,707)(5,253)(9,160)(352,632)(36,705)
10,159(138,605)
46,868(20,205)(878)
812(247,632)—
2,878(383,307)(243,552)(1,502)
15
116,371
70,861(669)—(20,000)
2,819(1,373)(1)—
0(77,032)(10,452)
294,157
1,782¥285,486(259,671)(1,747)
109(133,849)
59,135(2,710)341,516(54,086)—(1,637)(0)(9,421)
0(62,360)
15,721
285,486(19,145)¥282,063

Notes to Consolidated Financial Statements
Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2017 and 2018
1. Reporting Entity
Japan Tobacco Inc. (hereinafter referred to as the “Company”) isa joint stock corporation under the Companies Act of Japan, pursuant to the Japan Tobacco Inc. Act, with its principal places of business located in Japan since its incorporation. The addresses of theCompany’s registered head office and principal business offices areavailable on the Company’s website (https://www.jt.com/).

The details of businesses and principal business activities of
the Company and its subsidiaries (hereinafter referred to as the“Group”) are stated in “6. Operating Segments.”
The Group’s consolidated financial statements for the year
ended December 31, 2018 were approved on March 20, 2019by Masamichi Terabatake, President and Chief Executive Officer.

2. Basis of Preparation(1)

Compliance with IFRS

(3)The Group’s consolidated financial statements are prepared inaccordance with International Financial Reporting Standards(hereinafter referred to as “IFRS”).

(2)

Functional Currency and Presentation Currency

The Group’s consolidated financial statements are presented inJapanese yen, which is the functional currency of the Company.
The units are in millions of yen, and figures less than one million
yen are rounded to the nearest million yen.

Basis of Measurement

Except for the financial instruments, stated in “3. Significant
Accounting Policies,” the Group’s consolidated financial statements
are prepared on the historical cost basis.

3. Significant Accounting Policies(1)

Basis of Consolidation
C. Joint Arrangements
A joint arrangement is a contractual arrangement in which two
or more parties have joint control. Depending upon the rights andobligations of the parties to the arrangement, the Group classifies
a joint arrangement into a joint operation whereby the Group hasrights to the assets and obligations for the liabilities relating to thearrangement, and a joint venture whereby the Group has rights
to the net assets of the arrangement only. The Group recognizes
the assets, liabilities, revenues and expenses relating to its interestin a joint operation while a joint venture is accounted for using
the equity method.

The consolidated financial statements include financial statementsof the Company and its subsidiaries, and interests in investments inassociates and joint arrangements.
A. Subsidiaries
A subsidiary is an entity that is controlled by the Group and theGroup has control over the entity if it is exposed, or has rights, tovariable returns from its involvement with the investee and has theability to affect those returns through its power over the investee.
The acquisition date of a subsidiary is the date on which the Groupobtains control of the subsidiary, and the subsidiary is included in
the consolidation from the date of acquisition until the date on
which the Group loses control.
In cases where the accounting policies applied by a subsidiaryare different from those applied by the Group, adjustments are
made to the subsidiary’s financial statements, if necessary.
All intergroup balances, transactions, income and expenses
are eliminated on consolidation.
Comprehensive income for ­subsidiaries is attributed to owners of
the parent company and non-controlling interests even if this resultsin the non-controlling interests having a deficit balance.

(2)

B. Associates
An associate is an entity over which the Group has significant influence. The Group has significant influence over the entity if it has thepower to participate in the financial and operating policy decisionsof the investee but it does not have control or joint control over theinvestee. Investments in associates are accounted for using theequity method from the date on which the Group has the significant
influence until the date on which it ceases to have the significant
influence.

Japan Tobacco Inc.

Business Combination

Business combinations are accounted for using the acquisition
method. Consideration transferred in a business combination ismeasured as the sum of the acquisition-date fair value of the assets
transferred, the liabilities assumed and equity instruments issued by
the Company in exchange for control over an acquiree. Any excessof the consideration of acquisition over the fair value of identifiable
assets and liabilities is recognized as goodwill in the consolidated
statement of financial position. If the consideration of acquisition islower than the fair value of the identifiable assets and liabilities, thedifference is immediately recognized as profit in the consolidated
statement of income. If the amount of initial accounting for a business combination is not determined by the end of the reporting
period in which the combination occurs, the provisional amounts
for the items for which the accounting is incomplete are reported
and are adjusted during the measurement period, which is one
year from the acquisition date. Acquisition-related costs incurred
are recognized as expenses. The additional acquisition of non-­controlling interests after obtaining control is accounted for as a

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capital transaction. Any difference between the amount by which
the non-controlling interests are adjusted and the fair value of theconsideration paid or received is recognized directly in retained
earnings and no goodwill is recognized with respect to suchtransaction.

(3)

All financial assets are measured at fair value plus transaction
costs that are attributable to the financial assets, except for the caseof being classified in the category of financial assets measured atfair value through profit or loss.
(ii) Subsequent Measurement
After initial recognition, financial assets are measured based on thefollowing classifications:(a) Financial Assets Measured at Amortized Cost
Financial assets measured at amortized cost are measured at­amortized cost using the effective interest method.
(b) Other Financial Assets
Financial assets other than those measured at amortized cost aremeasured at fair value.
Changes in the fair value of financial assets measured at fairvalue are recognized as profit or loss.
However, changes in the fair value of equity instruments

Foreign Currency Translation

Consolidated financial statements of the Group are presented inJapanese yen, which is the functional currency of the Company.
Each company in the Group specifies its own functional currency
and measures transactions based on it.
Foreign currency transactions are translated into the functional
currency at the rates of exchange prevailing at the dates of transactions or an approximation of the rate. Monetary assets and liabilities
denominated in foreign currencies are translated into the functional
currency at the rates of exchange prevailing at year end. Differences
arising from the translation and settlement are recognized as profit
or loss. However, exchange differences arising from the translationof financial instruments designated as hedging instruments for net
investment in foreign operations (foreign subsidiaries), financial
assets measured at fair value through other comprehensive income,and cash flow hedges are recognized as other comprehensive income.
The assets and liabilities of foreign operations are translated into
Japanese yen at the rates of exchange prevailing at year end, while
income and expenses of foreign operations are translated into
Japanese yen at the rates of exchange prevailing at the dates oftransactions or an approximation of the rate. The resulting translation differences are recognized as other comprehensive income. In
cases where foreign operations are disposed of, the cumulative
amount of translation differences related to the foreign operations is
recognized as profit or loss in the period of disposition.

(4)­ esignated as measured at fair value through other comprehensivedincome are recognized as other comprehensive income and theamount in other comprehensive income is transferred to retained
earnings when equity instruments are derecognized or the decline
in its fair value compared to its acquisition cost is significant.
Dividends on the financial assets are recognized in profit or loss
for the year.
(iii) Derecognition
Financial assets are derecognized when the rights to receive­benefits from them expire or are transferred, or when substantially
all the risks and rewards of the ownership are transferred.
B. Impairment of Financial Assets
With respect to financial assets measured at amortized cost, theGroup recognizes an allowance for doubtful accounts for expectedcredit losses. The expected credit losses are calculated based on
historical loss experience or future recoverable amounts.
An allowance for doubtful accounts for trade receivables isalways recognized in an amount equal to the full lifetime expectedcredit losses. In principle, with respect to financial assets except for
trade receivables, an allowance for doubtful accounts is measured
at an amount equal to the 12-month expected credit losses.
However, the allowance for doubtful accounts is measured at an
amount equal to the full lifetime expected credit losses if a credit
risk on the financial asset has increased significantly since initialrecognition.
The Group assesses whether a credit risk on a financial asset has
increased significantly based on a change of the default risk considering past due information, financial difficulties of obligors or downgrades of the internal credit rating.
The Group assesses a whole or part of the financial asset which
is deemed extremely difficult to be collected as a default and recognizes it as a credit-impaired financial asset. If the Group reasonably
determines that a whole or part of the financial asset is uncollectible, the carrying amounts of financial assets are written-off directly.
The expected credit losses on trade receivables which are notassessed as credit-impaired financial assets are measured collectively by an asset group consisting of a number of homogeneous
counterparties.

Financial Instruments

A. Financial Assets(i) Initial Recognition and Measurement
Financial assets are classified into financial assets measured at fairvalue through profit or loss, fair value through other comprehensive
income, and amortized cost. The Group determines the classification at initial recognition.
Financial assets are classified as financial assets measured
at amortized cost if both of the following conditions are met.
Otherwise, they are classified as financial assets measured atfair value.
• The asset is held within a business model whose objective is tohold assets in order to collect contractual cash flows• The contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal andinterest on the principal amount outstanding
For financial assets measured at fair value, each equity instrument is designated as measured at fair value through profit or loss
or as measured at fair value through other comprehensive income,
except for equity instruments held for trading purposes that must
be measured at fair value through profit or loss. Such designations
are applied consistently.

Japan Tobacco Inc.

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An allowance for doubtful accounts for financial assets is recognized in profit or loss. If an event which causes a reduction in theallowance for doubtful accounts occurs, a reversal of an allowancefor doubtful accounts is recognized in profit or loss.

and hedges of net investment in foreign operations are recognizedas other comprehensive income in the consolidated statement ofcomprehensive income.
At the inception of the hedge, the Group formally designatesand documents the hedging relationship to which hedge accounting
is applied and the objectives and strategies of risk management forundertaking the hedge. The documentation includes identificationof the hedging instruments, the hedged items, the nature of therisks being hedged and how the hedging relationship’s effectivenessis assessed. These hedges are assessed on an ongoing basis todetermine whether the hedging relationship is effective prospectively, even though it is expected that there is an economic relationship between the hedged item and the hedging instrument, that theeffect of credit risk does not dominate the value changes that result
from that economic relationship, and that the hedge ratio of thehedging relationship is the same as that resulting from the quantityof the hedged item that the Group actually hedges and the quantityof the hedging instrument that the Group actually uses to hedge
that quantity of the hedged item.
If a hedging relationship ceases to meet the hedge effectivenessrequirement relating to the hedge ratio due to changes in an economic relationship between the hedged item and the hedging
instrument but the risk management objective remains the same,the Group would adjust the hedge ratio so that it meets the qualifying criteria again. The Group discontinues hedge accounting forthe portion that does not meet the requirement when the hedging
relationship ceases to meet the qualifying criteria even after adjusting the hedge ratio.
Hedges that meet the stringent requirements for hedge accounting are classified in the following categories and accounted for inaccordance with IFRS 9 “Financial Instruments.”(i) Fair Value Hedge
The gain or loss on the hedging instrument is recognized as profit
or loss in the consolidated statement of income. However, changes
in the fair value of the hedging instrument are recognized as othercomprehensive income in the consolidated statement of comprehensive income if the hedging instrument hedges an equity instrument designated as at fair value through other comprehensive
income. Regarding the hedging gain or loss on the hedged item,the carrying amount of the hedged item is adjusted and the change
is recognized as profit or loss in the consolidated statement ofincome. However, changes in the fair value of an equity instrument
which the Group elected to present in other comprehensive income
are recognized as other comprehensive income.
(ii) Cash Flow Hedge
The effective portion of gains or losses on hedging instruments is
recognized as other comprehensive income in the consolidated
statement of comprehensive income, while the ineffective portionis recognized immediately as profit or loss in the consolidated

C. Financial Liabilities(i) Initial Recognition and Measurement
Financial liabilities are classified into financial liabilities measured
at fair value through profit or loss and financial liabilities measured
at amortized cost. The Group determines the classification at initialrecognition.
All financial liabilities are measured at fair value at initial recog­
nition. However, financial liabilities measured at amortized cost
are measured at cost after deducting transaction costs that are
directly attributable to the financial liabilities.
(ii) Subsequent Measurement
After initial recognition, financial liabilities are measured based on
the following classifications:(a) Financial Liabilities Measured at Fair Value through Profit or Loss
Financial liabilities measured at fair value through profit or loss
include financial liabilities held for trading and financial liabilities
designated as measured at fair value through profit or loss at initialrecognition.
(b) Financial Liabilities Measured at Amortized Cost
After initial recognition, financial liabilities measured at amortizedcost are measured at amortized cost using the effective interest
method. Amortization under the effective interest method and gains
or losses on derecognition are recognized as profit or loss in the
consolidated statement of income.
After initial recognition, financial guarantee contracts are­ easured at the higher of:m• The amount of an allowance for doubtful accounts calculated inaccordance with “B Impairment of Financial Assets” above, and• The amount initially measured less cumulative revenue recognized inaccordance with IFRS 15 “Revenue from Contracts with Customers.”(iii) Derecognition
Financial liabilities are derecognized when the obligation is­discharged, canceled or expired.
D. Offsetting of Financial Instruments
Financial assets and financial liabilities are offset and presented
as a net amount in the consolidated statement of financial position
only when there is a legally enforceable right to set off the recognized amounts and the Group intends either to settle on a net basis
or to realize the asset and settle the liability simultaneously.
E. Derivatives and Hedge Accounting
The Group utilizes derivatives, including forward foreign exchange
contracts and interest rate swap contracts, to hedge foreignexchange and interest rate risks. These derivatives are initially­statement of income.
The amounts of hedging instruments recognized in other­comprehensive income are reclassified to profit or loss when thetransactions of the hedged items affect profit or loss. In cases
where hedged items result in the recognition of non-financial assets
or liabilities, the amounts recognized as other comprehensive­ easured at fair value when the contract is entered into, and aremsubsequently remeasured at fair value. Changes in the fair valueof derivatives are recognized as profit or loss in the consolidated
statement of income. However, the gains or losses on the hedging
instrument relating to the effective portion of cash flow hedges

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Except for assets that are not subject to depreciation such as
land, assets are depreciated using the straight-line method overtheir estimated useful lives. The estimated useful lives of major
asset items are as follows:• Buildings and structures: 38 to 50 years• Machinery and vehicles: 10 to 15 years
The estimated useful lives and depreciation method are reviewed
at each year end and if there are any changes made to the estimated useful lives and depreciation method, such changes areapplied prospectively as changes in estimate.

income are accounted for as adjustments to the original carrying
amount of non-financial assets or liabilities.
If the hedged future cash flows are no longer expected to occur,
any related cumulative gain or loss that has been recognized inequity as other comprehensive income is reclassified to profit orloss. If the hedged future cash flows are still expected to occur,amounts that have been recognized in other comprehensive income
are continued to be recognized in other comprehensive income until
the future cash flows occur.
(iii) Hedge of Net Investment in Foreign Operations
Translation differences resulting from the hedge of net investment inforeign operations are accounted for similarly to a cash flow hedge.
The effective portion of gains or losses on hedging instruments is
recognized as other comprehensive income in the ­consolidated
statement of comprehensive income, while the ineffective portion isrecognized as profit or loss in the consolidated statement ofincome. At the time of the disposal of the foreign operations, any
related cumulative gain or loss that has been recognized in equity
as other comprehensive income is reclassified to profit or loss.

(8)

F. Fair Value of Financial Instruments
Fair value of financial instruments that are traded in active financial
markets at year end refers to quoted prices or dealer quotations.
If there is no active market, fair value of financial instruments isdetermined using appropriate valuation models.

(5)

B. Intangible Assets
Intangible assets are measured by using the cost model and arestated at cost less accumulated amortization and accumulated
impairment losses.
Intangible assets acquired separately are measured at cost at
the initial recognition, and the costs of intangible assets acquired
through business combinations are recognized at fair value at theacquisition date. Expenditures on internally generated intangible
assets are recognized as expense in the period when incurred,
except for development expenses that satisfy the capitalization
criteria.
Intangible assets with finite useful lives are amortized using
the straight-line method over their estimated useful lives and aretested for impairment whenever there is any indication of impairment. The estimated useful lives and amortization method of intangible assets with finite useful lives are reviewed at each year end,
and the effect of any changes in estimate would be accounted foron a prospective basis.
The estimated useful lives of major intangible assets with finite
useful lives are as follows:• Trademarks: 10 to 20 years

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, demand deposits, and short-term investments that are readily convertible to known
amounts of cash and subject to insignificant risk of change in value
and due within three months from the date of acquisition.

(6)

Inventories

The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to theirpresent location and condition.
Inventories are measured at the lower of cost or net realizablevalue, and the costs are determined by using the weighted-averagemethod. Net realizable value is determined as the estimated selling
price in the ordinary course of business less the estimated costs ofcompletion and estimated costs necessary to make the sale.
Leaf tobacco which is stored for more than 12 months before
being used for production is included in current assets since it isheld within the normal operating cycle.

(7)• Software:
5 years
Intangible assets with indefinite useful lives and intangible
assets that are not ready to use are not amortized, but they aretested for impairment individually or by cash-generating unit
­annually or whenever there is any indication of impairment.

Property, Plant and Equipment

Property, plant and equipment is measured by using the cost modeland is stated at cost less accumulated depreciation and accumulated impairment losses.
The acquisition cost includes any costs directly attributable to theacquisition of the asset and dismantlement, removal and restoration
costs, as well as borrowing costs eligible for capitalization.

Japan Tobacco Inc.

Goodwill and Intangible Assets

A. Goodwill
Goodwill is stated at acquisition cost less accumulated impairment
losses.
Goodwill is not amortized. It is allocated to cash-generating units
that are identified according to locations and types of businesses
and tested for impairment annually or whenever there is any indication of impairment. Impairment losses on goodwill are recognizedin the consolidated statement of income and no subsequent reversal is made.

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Annual Report 2018

(9)Leaseslower of the estimated recoverable amount or the carrying amount(net of depreciation) that would have been determined if no impairment losses had been recognized in prior years.

Leases are classified as finance leases whenever substantially all
the risks and rewards incidental to ownership are transferred to
the Group. All other leases are classified as operating leases.
In finance lease transactions, leased assets and lease obligations
are recognized in the consolidated statement of financial positionat the lower of the fair value of the leased property or the present
value of the minimum lease payments, each determined at the
inception of the lease. Lease payments are apportioned between
the financial cost and the reduction in the lease obligations basedon the effective interest method. Financial costs are recognized in
the consolidated statement of income. Leased assets are depreciated using the straight-line method over their estimated useful lives
or lease terms, whichever is shorter.
In operating lease transactions, lease payments are recognized
as an expense using the straight-line method over the lease terms in
the consolidated statement of income. Contingent rents are recognized as an expense in the period when they are incurred.
Determining whether an arrangement is, or contains, a lease isbased on the substance of the arrangement in accordance withIFRIC 4 “Determining Whether an Arrangement Contains a Lease,”even if the arrangement does not take the legal form of a lease.

(12)		 Non-current Assets Held-for-Sale
An asset or asset group for which the value is expected to be recovered through a sales transaction rather than through continuing use
is classified into a non-current asset or disposal group held-for-salewhen the following conditions are met: it is highly probable that theasset or asset group will be sold within one year, the asset or asset
group is available for immediate sale in its present condition, and
the Group management commits to the sale plan. In such cases,
the non-current asset is not depreciated or amortized and is measured at the lower of its carrying amount or its fair value less costsof disposal.

(13)		 Post-employment Benefits
The Group sponsors defined benefit plans and defined contributionplans as employee retirement benefit plans.
The Company is obligated to bear pension expenses for a mutual
assistance association incurred with respect to services in or before
June 1956 (prior to the enforcement of the Act on the Mutual Aid
Association of Public Corporation Employees). Such obligations
are calculated and included in liabilities related to the retirement
benefits.
For each plan, the Group calculates the present value of defined
benefit obligations, related current service cost and past service
cost using the projected unit credit method. For a discount rate,
a discount period is determined based on the period until the
expected date of benefit payment in each year, and the ­discountrate is determined by reference to market yields for the period corresponding to the discount period at the end of the year on highquality corporate bonds or government bonds. Liabilities or assets
for defined benefit plans are calculated by the present value of thedefined benefit obligation, deducting the fair value of any plan
assets (including adjustments for the asset ceiling for defined benefit plans and minimum funding requirements, if necessary).
Expected interest costs and interest income are recognized as financial costs.
Remeasurements of defined benefit plans are recognized infull as other comprehensive income in the period when they are
incurred and transferred to retained earnings immediately. Past
service costs are recognized as profit or loss in the period whenincurred.
The cost for retirement benefits for defined contribution plans is
recognized as an expense at the time of contribution.

(10)		 Investment Property
Investment property is property held to earn rentals or for capital
appreciation or both.
Investment property is measured by using the cost model and isstated at cost less accumulated depreciation and accumulated
impairment losses.

(11)		 Impairment of Non-financial Assets
The Group assesses for each year whether there is any indicationthat an asset may be impaired. If any such indication exists, or incases where the impairment test is required to be performed eachyear, the recoverable amount of the asset is estimated. In cases thatthe recoverable amount cannot be estimated for each asset, it isestimated by the cash-generating unit to which the asset belongs.
The recoverable amount of an asset or a cash-generating unit isdetermined at the higher of its fair value less costs of disposal or its
value in use. If the carrying amount of the asset or cash-generating
unit exceeds the recoverable amount, impairment losses are recognized and the carrying amount is reduced to the recoverable
amount. In determining the value in use, estimated future cash
flows are discounted to the present value, using pretax discountrates that reflect current market assessments of the time value ofmoney and the risks specific to the asset. In determining the fairvalue less costs of disposal, the Group uses an appropriate valuation model supported by available fair value indicators.
The Group assesses whether there is any indication that an
impairment loss recognized in prior years for an asset other than
goodwill may no longer exist or may have decreased, such as any
changes in assumptions used for the determination of the recoverable amount. If any such indication exists, the recoverable amountof the asset or cash-generating unit is estimated. In cases that therecoverable amount exceeds the carrying amount of the asset or
cash-generating unit, impairment losses are reversed up to theJapan Tobacco Inc.

(14)		 Share-based Payments
The Group has a share option plan as an equity-settled share-based
payment plan. Share options are estimated at fair value at grant
date and are recognized as an expense over the vesting period in
the consolidated statement of income after considering the numberof share options that are expected to be eventually vested. The
corresponding amount is recognized as an increase in equity in the
consolidated statement of financial position.

088

Annual Report 2018(15)		 Provisions(17)		 Government Grants

The Group has present obligations (legal or constructive) resulting
from past events and recognizes provisions when it is probable thatthe obligations are required to be settled and the amount of theobligations can be estimated reliably.
Where the effect of the time value of money is material, theamount of provisions is measured at the present value of the expenditures expected to be required to settle the obligations. In calculating the present value, the Group uses the pretax discount rate
reflecting current market assessments of the time value of money
and the risks specific to the liability.
In accordance with IAS 37 “Provisions, Contingent Liabilities andContingent Assets,” the Group recognizes a provision for restructuring when it has a detailed formal plan for the restructuring and has
raised a valid expectation in those affected that it will carry out the
restructuring by starting to implement that plan or announcing its
main scheme to those affected by it. Restructuring provisions
include only the direct expenditures arising from the restructuring,which meet both of the following criteria:• necessarily entailed by the restructuring;• not associated with the ongoing activities of the entity.

Government grants are recognized at fair value when there is areasonable assurance that the Group will comply with the conditions attached to them and receive the grants.
In the case that the government grants are related to expense
items, they are recognized in profit or loss on a systematic basis
over the period in which the related costs for which the grants
are intended to compensate are recognized. With regard to government grants for assets, the amount of the grants is deducted fromthe acquisition cost of the assets.

(18)		 Borrowing Costs
With respect to assets that necessarily take a substantial periodof time to get ready for their intended use or sale, the borrowing
costs that are directly attributable to the acquisition, construction
or production of the assets are capitalized as part of the acquisition
cost of the assets. Other borrowing costs are recognized as an
expense in the period when they are incurred.

(19)		 Income Taxes
Income taxes in the consolidated statement of income are presented as the total of current income taxes and deferred income
taxes.
Current income taxes are measured at the amount that is
expected to be paid to or refunded from the taxation authorities.
For the calculation of the tax amount, the Group uses the tax rates
and tax laws that have been enacted or substantively enacted by
the end of the year. The current income taxes are recognized in
profit or loss, except for taxes arising from items that are recognizedin other comprehensive income or directly in equity and taxes arising from business combinations.
Deferred income taxes are calculated based on the temporary
differences between the tax base for assets and liabilities and thecarrying amount at year end. Deferred tax assets are recognized for
deductible temporary differences, carryforward of unused tax credits and unused tax losses to the extent that it is probable that futuretaxable profit will be available against which they can be utilized.
Deferred tax liabilities are recognized for ­taxable temporary
differences.
The deferred tax assets or liabilities are not recognized for thefollowing temporary differences:• the initial recognition of goodwill• the initial recognition of assets or liabilities in transactions that are
not business combinations and at the time of transaction, affectneither accounting profit nor taxable profit or tax loss
• deductible temporary differences arising from investments in
subsidiaries and associates, and interests in joint ventures to theextent that it is probable that the timing of the reversal of thetemporary difference in the foreseeable future and it is not probable that future taxable profits will be available against which they
can be utilized(16)		 Revenue
A. Revenue from Contracts with Customers
Revenue is recognized based on the following five-step approach.
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligationsin the contract
Step 5: Recognize revenue when the entity satisfies a performanceobligation
The Group mainly engages in the sale of tobacco products, prescription drugs, and processed foods. Revenue is recognized upondelivery of the products because the customer obtains control ofthe products upon delivery, by which the Group evaluates that theperformance obligation is satisfied. Revenue is measured at theconsideration promised in a contract with a customer, less discounts, rebates and taxes, including consumption tax.
The tobacco excise taxes and other transactions in which the Groupis involved as an agency are excluded from revenue. The amount after
deducting the tobacco excise taxes and other transactions is presented
as “Revenue” in the consolidated statement of income.
B. Interest Income
Interest income is recognized using the effective interest rate
method.
C. Dividend Income
Dividend income is recognized when the shareholders’ right toreceive payment is established.

Japan Tobacco Inc.

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Annual Report 2018

(24)		 Adjusted Financial Measures• taxable temporary differences arising from investments in subsidiaries and associates, and interests in joint ventures to the extent
that the timing of the reversal of the temporary difference is controlled and that it is probable the temporary difference will notreverse in the foreseeable future.
Deferred tax assets and liabilities are measured at the tax rates
that are expected to apply to the year when the asset is realized or
the liability is settled, based on tax rates that have been enacted or
substantively enacted by year end.
In the year ended December 31, 2018, the Company and certain
domestic subsidiaries applied for approval of the adoption of theconsolidated taxation system, and it is to be adopted from thefollowing year. Therefore, from the year ended December 31, 2018,
deferred tax assets and liabilities are accounted for assuming the
adoption of the consolidated taxation system.

The adjusted financial measures are calculated by adding certain
adjustment items to the non-adjusted financial data or by deducting
the items from the non-adjusted financial data.
The adjustment items are determined by management’s judgment, taking into consideration the nature and frequency of theincome and costs such that they provide effective comparative
information on the Group performance and that they reflect theway of managing our business appropriately. Adjusted financial
measures are presented in the consolidated statement of incomeand “6. Operating Segments.”
The adjusted financial measures are not defined under IFRS andare not comparable with equivalent indicators for other entities.
(Changes in Accounting Policies)
The Group has adopted the following new accounting standards,
amended standards and new interpretations from the year ended
December 31, 2018.

(20)		 Treasury Shares
Treasury shares are recognized at cost and deducted from equity.
No gain or loss is recognized on the purchase, sale or cancellationof the treasury shares. Any difference between the carrying amountand the consideration paid is recognized in capital surplus.

IFRS(21)		 Earnings per Share
Basic earnings per share are calculated by dividing profit or loss
attributable to ordinary shareholders of the parent company by theweighted-average number of ordinary shares outstanding during theyear, adjusted by the number of treasury shares. Diluted earnings
per share are calculated by adjusting the effects of dilutive potential
ordinary shares.

IFRS
9Financial
Instruments

IFRS
15

Revenue fromContracts with
Customers

Limited changes to classification andmeasurement of financial assets, andintroduction of an expected credit loss
impairment model
Amendments to accounting treatment
for recognizing revenue

The effect of adopting IFRS 9 on the consolidated financial statements is immaterial.
In adopting IFRS 15, the Group used a transition method bywhich the cumulative effect of initially applying this Standard wasrecognized at the date of initial application.
As a result of identification of performance obligations undercontracts with customers based on the five-step approach stated in“(16) Revenue A. Revenue from Contracts with Customers,” thesales promotion and other expenses paid by the Group to customers, which have been previously accounted for as selling, generaland administrative expenses, are partially deducted from revenue
from the year ended December 31, 2018. In addition, shipping andwarehousing expenses and other expenses necessary for satisfying
performance obligations that have been previously accounted for as
selling, general and administrative expenses are accounted for as
cost of sales from the year ended December 31, 2018.
As a result, compared to the application of the former accounting standard, “Revenue” and “Selling, general and administrative
expenses” decreased by ¥10,944 million and ¥70,905 million
respectively, and “Cost of sales” increased by ¥59,962 million on
the consolidated statement of income for the year ended December
31, 2018. The above effects include promotion expenses (¥9,028
million) accounted for as reductions in revenue, as well as shipping
and warehousing expenses (¥28,000 million) accounted for as costof sales.
These changes have no effect on operating profit and profit forthe period.

(22)		Dividends
Dividend distributions to the shareholders of the Company are recognized as liabilities in the period in which, for year end dividends,
the Annual Shareholders’ Meeting approves the distribution and, forinterim dividends, the Board of Directors approves the distribution.

(23)		Contingencies
A. Contingent Liabilities
The Group discloses contingent liabilities in the notes to consolidated financial statements if it has possible obligations at year end,
whose existence cannot be confirmed at that date, or if the obligations do not meet the recognition criteria of a provision described in“20. Provisions.”
B. Contingent Assets
The Group discloses contingent assets in the notes to consolidated
financial statements if an inflow of future economic benefits to theGroup is probable, but not virtually certain at year end.

Japan Tobacco Inc.

Description of new standards and amendments

090

Annual Report 2018

4. Significant Accounting Estimates and Judgments
B. Post-employment Benefits
The Group has various types of retirement benefit plans, including
defined benefit plans. In addition, the mutual pension benefits planof the Company is one of the public pension systems under thejurisdiction of the government of Japan and the Company is legallyobligated to bear a part of the pension costs of the plan.
The present value of defined benefit obligations on each of theseplans and the related service costs are calculated based on actuarial
assumptions. These actuarial assumptions require estimates andjudgments on variables, such as discount rates and inflation rate.
The Group obtains advice from external pension actuaries withrespect to the appropriateness of these actuarial assumptions
including these variables.
The actuarial assumptions are determined based on the best
estimates and judgments made by management; however, there isa possibility that these assumptions may be affected by changes in
uncertain future economic conditions, or by the publication or theamendment of related laws, which may have a material impact on
the consolidated financial statements in future periods.
These actuarial assumptions and the related sensitivity analysis
are described in “22. Employee Benefits.”

Preparation of consolidated financial statements of the Grouprequires management estimates and assumptions in order to­measure income, expenses, assets and liabilities, and disclose­contingencies as of the year end. These estimates and assumptions
are based on the best judgment of management in light of historicalexperience and various factors deemed to be reasonable as of theyear end. Given their nature, actual results may differ from thoseestimates and assumptions.
The estimates and assumptions are continuously reviewed bymanagement. The effects of a change in estimates and assumptions
are recognized in the period of the change or the period of thechange and future periods.
Among the above estimates and assumptions, the following are
items that may have a material effect on the amounts recognized in
the consolidated financial statements of the Group:
A. Impairment of Property, Plant and Equipment, Goodwill,
Intangible Assets and Investment Properties
With regard to property, plant and equipment, goodwill, intangible
assets and investment properties, if there is any indication that therecoverable amount declines below the carrying amounts of theassets, the Group performs an impairment test.
The important indications include significant changes withadverse effect on the results of past or projected business performance, significant changes in the use of acquired assets or in overall business strategy, and significant deteriorations in industry trends
and economic trends. With regard to goodwill, an impairment test
is conducted at least once a year, regardless of any indication of
impairment, in order to ensure that the recoverable amount exceeds
the carrying amount.
The impairment test is performed by comparing the carrying
amount and the recoverable amount of assets. If the recoverable
amount declines below the carrying amount, impairment losses arerecognized. The recoverable amount is mainly calculated based on
the discounted cash flow model. Certain assumptions are made forthe useful lives and the future cash flows of the assets, discountrates and long-term growth rates. These assumptions are based on
the best estimates and judgments made by management; however,there is a possibility that these assumptions may be affected bychanges in uncertain future economic conditions, which may havea material impact on the consolidated financial statements in future
periods.
The method for calculating the recoverable amount is describedin “13. Property, Plant and Equipment,” “14. Goodwill andIntangible Assets” and “16. Investment Property.” With regard to
goodwill, the sensitivity analysis is described in “14. Goodwill andIntangible Assets.”

Japan Tobacco Inc.

C. Provisions
The Group recognizes various provisions, including provisions for
asset retirement obligations and restructuring, in the consolidated
statement of financial position.
These provisions are recognized based on the best estimates ofthe expenditures required to settle the obligations taking risks anduncertainty related to the obligations into account as of the year end.
Expenditures required to settle the obligations are calculated
by taking possible results into account comprehensively; however,they may be affected by the occurrence of unexpected events orchanges in conditions which may have a material impact on the
consolidated financial statements in future periods.
The nature and amount of recognized provisions are describedin “20. Provisions.”
D. Income Taxes
The Group operates business activities around the world, and it
recognizes current tax liabilities and income taxes as the estimatedamounts to be paid to the tax authorities, based on the estimationin accordance with their laws and regulations.
Calculating current tax liabilities and income taxes requires estimates and judgment on various factors, including the interpretationof tax regulations by taxable entities and the tax authority in thejurisdiction or the experience of past tax audits.
Therefore, there may be differences between the amountr­ecognized as tax liabilities and income taxes and the amount of
actual tax liabilities and income taxes. These differences may havea material impact on the consolidated financial statements in future
periods.

091

Annual Report 2018

In addition, deferred tax assets are recognized to the extent that
it is probable that taxable income will be available against which
deductible temporary differences can be utilized.
In recognizing the deferred tax assets, when judging the possibility of the future taxable income, we reasonably estimate the timing
and amount of future taxable income based on the business plan.
The timing when taxable income arises and the amount of suchincome may be affected by changes in uncertain future economic
conditions. Therefore, this may have a material impact on the consolidated financial statements in future periods.

The content and amount related to income taxes are described in“17. Income Taxes.”
E. Contingencies
With regard to contingencies, any items that may have a material
impact on business in the future are disclosed in light of all the available
evidence as of the year end and by taking into account the probabilityof these contingencies and their impact on financial reporting.
The content of contingencies is described in “39. Contingencies.”

5. New Accounting Standards Not Yet Adopted by the GroupBy the date of approval of the consolidated financial statements,
new accounting standards, amended standards and new interpre­
tations that have been issued, but have not been early adopted by
the Group are as follows.
The implications from adoption of these standards and interpretations are assessed by the Group; however, we evaluate that noneof them will have a material impact on our operating results andfinancial condition.
In relation to adoption of IFRS 16 “Leases,” operating lease
payments are previously recognized as expenses using the straightline method over the lease term in “Cost of sales” and “Selling,

IFRS

IFRS 3Business Combinations

general and administrative expenses” without recognizing as assets
and obligations in the consolidated statement of financial position.
Operating lease payments will be recognized as right-of-use assets
and lease liabilities in the consolidated statement of financial position. The amount of depreciation would be recognized in “Cost of
sales” and “Selling, general and administrative expenses” and theamount of interest cost would be recognized in “Financial costs.”
Due to adoption of the standard, “Assets” and “Liabilities” in the
consolidated statement of financial position are expected toincrease by ¥39,033 million. There will be immaterial impact on
operating profit and profit for the period from this change.

6. Operating Segments(1)

Outline of Reportable Segments

Business” manufactures and sells tobacco products overseas
mainly through JT International S.A., which controls manufacturing
and sales operations. The “Pharmaceutical Business” consists ofresearch and development, and the manufacture and sale of prescription drugs. The “Processed Food Business” consists of the
manufacture and sale of frozen and ambient processed foods,
bakery products and seasonings.

The reportable segments of the Group are determined based on
the operating segments that are components of the Group forwhich separate financial information is available and are evaluatedregularly by the Board of Directors in deciding how to allocate
resources and in assessing performance.
The Group is mainly engaged in the manufacture and sale oftobacco products, prescription drugs and processed foods. With
respect to tobacco products, operations are managed separately
for domestic and overseas markets. The reportable segments of
the Group are composed of four segments: “Domestic Tobacco
Business,” “International Tobacco Business,” “PharmaceuticalBusiness,” and “Processed Food Business.” They are determinedby types of products, ­characteristics, and markets.
The “Domestic Tobacco Business” manufactures and sells
tobacco products in domestic areas (which include duty-free shops
in Japan and markets in China, Hong Kong, and Macau where theCompany’s China Division operates). The “International Tobacco(2)

Revenues and Performances ofReportable Segments

Revenues and performances of reportable segments are as follows.
The Board of Directors assesses the segment performance anddetermines resource allocation after reviewing revenues andadjusted operating profit. Since financial income, financial costs andincome taxes are managed by the Group head office, these income
and expenses are excluded from segment performance.
Transactions within the segments are based mainly on prevailingmarket prices.

Year ended December 31, 2017
Millions of yen
Reportable Segments
Domestic
TobaccoInternational
TobaccoPharmaceuticals

Processed
Food

Total

Other (Note 2)

Elimination¥626,758
8,558¥635,315¥1,237,577
31,465¥1,269,042¥104,714—¥104,714¥163,138
22¥163,159¥2,132,187
40,045¥2,172,232¥   7,466
7,543¥ 15,008¥    — ¥2,139,653(47,588)—¥(47,588) ¥2,139,653¥232,275¥  351,302¥ 24,094¥  5,397¥  613,069¥(28,156) ¥    388

Consolidated

Revenue

Mandatory adoption(From the year beginning)

To be adopted
by the Group

Description of new standards and amendments

External revenue (Note 3)

January 1, 2019Year ending
December 2019

Clarifying accounting treatment for previously held interests in a joint
operation

Intersegment revenue

January 1, 2020

Year ending
December 2020

Amendments to definition of “business”

Total revenue
Segment profit (loss)Adjusted operating profit (Note 1)¥  585,300

IFRS 9Financial Instruments

January 1, 2019Year ending
December 2019

Amendments to classification of financial assets included in prepayment features

IFRS 11

Joint Arrangements

January 1, 2019Year ending
December 2019

Clarifying accounting treatment for previously held interests in a joint
operation¥ 56,001¥    76,098¥  5,120¥  6,137¥  143,355¥   2,288

IFRS 16

LeasesJanuary 1, 2019Year ending
December 2019

Amendments to accounting treatment for lease arrangements

Impairment losses on other thanfinancial assets

53

2,599

—

286

2,938

489

—

3,427

IFRS 17

Insurance Contracts

January 1, 2021

Year ending
December 2021

Amendments to accounting treatment for insurance contracts

IAS 1

Presentation of Financial January 1, 2020
Statements

Year ending
December 2020

Amendments to definition of “materiality”

Reversal of impairment losses
on other than financial assets

—

455

—

—

455

—

—

455

IAS 8

Accounting Policies,
Changes in Accounting
Estimates and Errors

January 1, 2020

Year ending
December 2020

Amendments to definition of “materiality”

22
51,5496,102
68,427—6,230

17
10,4246,140
136,631

53
4,838

—
(564)

6,194
140,905

IAS 12

Income Taxes

January 1, 2019Year ending
December 2019

Clarifying accounting treatment for income tax consequences ofdividends

IAS 19

Employee Benefits

January 1, 2019Year ending
December 2019

Clarifying treatment on a defined benefit plan curtailment or settlement

IAS 23

Borrowing Costs

January 1, 2019Year ending
December 2019

Clarifying the method for calculating the borrowing costs eligible forcapitalization

IAS 28Investments in
Associates and Joint
Ventures

January 1, 2019Year ending
December 2019

Clarifying accounting treatment for impairment loss of investments inassociates and joint ventures

IFRIC 23

Uncertainty over Income January 1, 2019
Tax Treatments

Year ending
December 2019

Clarifying accounting treatment for uncertainty over income tax treatments

IFRS 10

Sale or Contribution ofAssets between an
Investor and its
Associate or Joint
VentureNot yetdetermined

Amendments to accounting treatment for sale or contribution of assets
between an investor and its associate or joint venture

IAS 28

Not yet determinedJapan Tobacco Inc.

092

Other items
Depreciation and amortization

Share of profit (loss) in investments
accounted for using the equity method
Capital expenditures

Annual Report 2018

Japan Tobacco Inc.

093

Annual Report 2018¥   (237) ¥  145,407

Year ended December 31, 2018Year ended December 31, 2018
Millions of yen

Millions of yen

Reportable Segments
Domestic
TobaccoInternational
TobaccoPharmaceuticals

Processed
Food

Total

Reportable Segments
Other (Note 2)

Elimination

Consolidated

Revenue

Adjusted operating profit(Note 1)

¥621,426
7,976¥629,403¥1,312,342
27,637¥1,339,979¥113,992—¥113,992¥161,387
1¥161,388¥2,209,147
35,615¥2,244,762¥   6,815
5,737¥ 12,553¥— ¥2,215,962(41,353)—¥(41,353) ¥2,215,962

Amortization cost of acquired­intangibles arising frombusiness acquisitions¥208,977¥  384,524¥ 28,438¥  4,123¥  626,062¥(30,440)¥   (159) ¥  595,463

Adjustment items (costs) (Note 5)¥ 55,044¥   89,887¥  5,071¥  6,708¥  156,710¥   2,193¥   (233) ¥  158,671

Impairment losses on other thanfinancial assets

—

5,336

2,141

146

7,623

831

—

8,454

Reversal of impairment losses
on other than financial assets

—

692

—

—

692

—

—

692

35
55,444

3,849
75,727—
11,333

11
12,7493,895
155,253

36
4,844

—
(289)

3,931
159,808

External revenue (Note 3)
Intersegment revenue
Total revenue
Segment profit (loss)Adjusted operating profit (Note 1)

Adjustment items (income) (Note 4)
Operating profit (loss)

Other items
Depreciation and amortization

Share of profit (loss) in investments
accounted for using the equity
methodCapital expenditures

Domestic
TobaccoInternational
TobaccoPharmaceuticals

Processed
Food

Total

Other (Note 2)

Elimination

Consolidated¥208,977¥384,524¥28,438¥4,123¥626,062¥(30,440)¥(159)¥595,463(16,245)9(288)¥192,453(45,527)
1,711(1,195)¥339,514——(2,141)¥26,297—37(1,240)¥2,919(61,772)
1,757(4,864)¥561,183—
38,691(4,290)¥  3,960———¥(159)(61,772)
40,447(9,154)¥564,984
5,754(39,252)¥531,486

Financial income
Financial costs
Profit before income taxes(Note 1) For adjusted operating profit, amortization cost of acquired intangibles arising from business acquisitions, and adjustment items (income and costs) areexcluded from operating profit (loss).
(Note 2)	“Other” includes business activities relating to rent of real estate and corporate expenses relating to corporate communication and operation of thehead office.
(Note 3)	Core revenue as part of the “Domestic Tobacco Business” and the “International Tobacco Business” is as follows:
Millions of yen

Domestic Tobacco
Reconciliation from “Adjusted operating profit” to “Profit before income taxes”
Year ended December 31, 2017

International Tobacco

2017

2018

¥  590,605
1,176,956¥  582,379
1,250,719(Note 4) The breakdown of “Adjustment items (income)” is as follows:
Millions of yen

Millions of yen

Reportable Segments
Domestic
TobaccoAdjusted operating profit(Note 1)

Amortization cost of acquired­intangibles arising frombusiness acquisitions
Adjustment items (income) (Note 4)
Adjustment items (costs) (Note 5)
Operating profit (loss)

International
TobaccoPharmaceuticals

Processed
Food

Total

Other (Note 2)

Elimination

Consolidated¥232,275¥351,302¥24,094¥5,397¥613,069¥(28,156)¥388¥585,300(16,245)6(197)¥215,839(34,170)
16,723(8,272)¥325,584———¥24,094——(20)¥5,377(50,414)
16,729(8,489)¥570,894—
20,840(2,865)¥(10,181)

—
—
—
¥388

(50,414)37,569(11,354)¥561,101
4,780(27,349)¥538,532

Restructuring incomes
Reversal of impairment losses on investments in associates
Gains on remeasurement related to the business combination
Other

Financial income
Financial costs
Profit before income taxes

Adjustment items (income)

2017

2018

¥21,645
8,848
5,042
2,034
¥37,569¥39,284——
1,163¥40,447

		Restructuring incomes for the year ended December 31, 2017 and 2018 mainly relate to gains on sale of real estate. The breakdown of restructuringincomes is described in “26. Other Operating Income.”(Note 5) The breakdown of “Adjustment items (costs)” is as follows:
Millions of yen

Restructuring costs
Other
Adjustment items (costs)

2017

2018

¥ 8,398
2,956¥11,354¥7,934
1,220¥9,154

			Restructuring costs for the year ended December 31, 2017 mainly relate to rationalization of the production and distribution system in some markets inthe “International Tobacco Business.” Restructuring costs for the year ended December 31, 2018 mainly relate to disposal of real estate, businessstructure reform in the “Pharmaceutical Business” and rationalization of the production and distribution system in some markets in the “International
Tobacco Business.”			  Restructuring costs included in “Cost of sales” were ¥84 million and ¥13 million, and those costs included in “Selling, general and administrative
expenses” were ¥8,314 million and ¥7,921 million for the years ended December 31, 2017 and 2018, respectively. The breakdown of restructuringcosts included in “Selling, general and administrative expenses” is described in “27. Selling, General and Administrative Expenses.” Other for the year
ended December 31, 2018 mainly relates to settlement of the litigation in September 2018.

Japan Tobacco Inc.

094

Annual Report 2018

Japan Tobacco Inc.

095

Annual Report 2018

(3)9. Inventories

Geographic Information

The regional breakdown of non-current assets as of December 31 is as follows:

The breakdown of “Inventories” as of December 31 is as follows:
Millions of yen

Non-current Assets
Millions of yen

JapanOverseas
Consolidated

2017

2018

¥  830,838
2,301,854¥3,132,692¥  835,386
2,452,505¥3,287,891(Note) Non-current assets, exclusive of financial instruments, deferred tax assets and retirement benefits assets, are segmented by the location of the assets.

The regional breakdown of external revenue for each year is as follows:
External Revenue
Millions of yen

JapanOverseas
Consolidated

2017

2018

¥  831,216
1,308,437¥2,139,653¥  822,070
1,393,892¥2,215,962

Leaf tobacco (Note 2)
Other
Total

(1) The breakdown of “Other financial assets” as of December 31 is as follows:
Millions of yen

Derivative assets

Time deposits

The “International Tobacco Business” of the Group sells products to the Megapolis Group that engages in distribution and wholesale b­ usinessin Russia and other countries. The external revenues from the Megapolis Group were ¥248,881 million (11.6% of consolidated revenue) for
the year ended December 31, 2017 and ¥249,797 million (11.3% of consolidated revenue) for the year ended December 31, 2018.

Other
Allowance for doubtful accounts
Total
Current assets
Non-current assets

7. Cash and Cash Equivalents

Total

The breakdown of “Cash and cash equivalents” as of December 31 is as follows:
Millions of yen

Cash and deposits
Short-term investments
Total

2017

2018

¥215,885
69,601¥285,486¥234,263
47,800¥282,063¥209,491
364,084
75,662¥649,238

10. Other Financial Assets

Debt securities

Major Customers Information

2018¥193,179
352,803
66,971¥612,954(Note 1) For imported tobacco products (merchandise) that are sold by TS Network Co., Ltd., a subsidiary of the Company, commissions solely from wholesale
are included in revenue. The amount of imported tobacco products (merchandise) that the company holds as of December 31 of each year is included
in inventories and presented as “Merchandise and finished goods.”(Note 2) Leaf tobacco includes those products that will be used after 12 months from the end of each year, but they are included in inventories since they areheld within the normal operating cycle.

Equity securities(Note) Revenue is segmented by the sales destination.

(4)

Merchandise and finished goods (Note 1)

2017

2017

2018

¥  5,97877,642
11,352977
39,607(6,569)¥128,987¥ 14,016
114,970¥128,987¥  8,653
64,684
26,816979
55,656(6,108)¥150,679¥ 35,633
115,046¥150,679

Other financial assets are presented net of allowance for doubtful accounts in the consolidated statement of financial position.
Derivative assets are classified as financial assets measured at fair value through profit or loss excluding those to which hedge accounting is applied, equity securities are classified as financial assets measured at fair value through other comprehensive income, and time
deposits and debt securities are classified as financial assets measured at amortized cost.
(2) Names of major securities held as financial assets measured at fair value through other comprehensive income and their fair values as ofDecember 31 are as follows:

Cash and cash equivalents are classified as financial assets measured at amortized cost.

Millions of yen“ Cash and cash equivalents” includes cash and cash equivalents of ¥24,772 million (IRR 18,595 billion) as of December 31, 2018 held by
the Group’s Iranian subsidiaries. Due to international sanctions and other factors imposed on Iran, the subsidiaries’ ability to remit funds
outside of Iran is restricted.

Company name

KT&G Corporation
Seven & i Holdings Co., Ltd.
DOUTOR•NICHIRES Holdings Co., Ltd.

8. Trade and Other Receivables

Central Japan Railway Company
OKAMURA CORPORATIONThe breakdown of “Trade and other receivables” as of December 31 is as follows:
Millions of yen

Note and account receivables
Other
Allowance for doubtful accounts
Total

2017

2018

¥439,562
15,226(23,589)¥431,199¥449,863
8,378(1,650)¥456,591

KATO SANGYO CO., LTD.

096

Annual Report 20182018

¥35,141
4,005
3,715
2,018
1,986
2,325

¥28,904
4,091
2,681
2,317
1,710
1,709

Equity securities are held mainly for strengthening relationships with investees. Therefore, they are designated as financial assets­measured at fair value through other comprehensive income.

Trade and other receivables are presented net of allowance for doubtful accounts in the consolidated statement of financial position.
Trade and other receivables are classified as financial assets measured at amortized cost.

Japan Tobacco Inc.

2017

Japan Tobacco Inc.

097

Annual Report 2018

In order to pursue the efficiency of assets held and to use them effectively, sales of financial assets measured at fair value through othercomprehensive income have been carried out (derecognition).
The fair value at the time of sale and cumulative gain or loss that is recognized in equity through other comprehensive income for eachyear is as follows:

13. Property, Plant and Equipment(1)

Schedule of Property, Plant and Equipment

The schedules of the carrying amount, acquisition cost, and accumulated depreciation and accumulated impairment losses of “Property,
plant and equipment” are as follows:

Millions of yen

Fair Value
Cumulative gain or loss recognized in equity as other comprehensive income(Note)

20172018¥1,545(461)¥2,241(860)(Note) The figure represents the amount transferred to retained earnings.
The cumulative gain or loss recognized in equity as other comprehensive income is transferred to retained earnings when an equity instrument is sold or
the decline in its fair value compared to its acquisition cost is significant.

Millions of yen
Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total¥344,237
17,833
12,401(1,721)(2,250)(15,813)
(699)
—
(581)
3,230
6,610
363,245
18,972
7,275(3,211)(1,945)(16,647)(1,561)
248(764)(14,716)
11,691¥362,586¥246,192
43,586
14,424(5)—(48,717)(1,108)451(4,685)
5,056
23,894
279,088
56,901
8,498
(0)
(4)
(50,794)(3,442)432(3,221)(22,895)
24,025¥288,587¥44,193
15,071315(6)—(14,634)(46)
3(1,011)
1,002
1,486
46,373
14,873107(3)—(14,987)
(86)
—
(773)
(2,162)
991¥44,333¥46,213
38,647
1,599
—
—
—
(37)
—
(17)
(226)
(29,277)
56,902
48,735
21
—
—
—
(131)
12
(82)
(4,208)(37,913)¥63,335¥680,835
115,137
28,739(1,732)(2,250)(79,164)(1,891)455(6,295)
9,061
2,712
745,607
139,480
15,902(3,215)(1,949)(82,428)(5,220)692(4,841)(43,981)(1,206)¥758,841

Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total¥643,073
664,779
671,434¥693,378
761,581773,836¥147,223
156,169
152,793¥46,21356,90263,443¥1,529,888
1,639,431
1,661,505

Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

As of January 1, 2017

¥298,836¥447,187¥103,030

As of December 31, 2017

301,534
308,847

482,493
485,249

109,797
108,460¥——

Carrying Amount

As of January 1, 2017
Individual acquisition
Acquisition through business combinations
Transfer to investment property
Transfer to non-current assets held-for-sale

11. Other Current Assets

Depreciation
Impairment losses

The breakdown of “Other current assets” as of December 31 is as follows:
Millions of yen

Prepaid tobacco excise taxes
Prepaid expenses
Consumption tax receivables
Other
Total

2017

2018

¥297,332
19,33919,49625,547¥361,715¥308,815
21,262
17,177
38,618¥385,872

Reversal of impairment losses
Sale or disposal
Exchange differences on translation of foreign operations
Other
As of December 31, 2017
Individual acquisition
Acquisition through business combinations
Transfer to investment property
Transfer to non-current assets held-for-sale

12. Non-current Assets Held-for-Sale

Depreciation
Impairment losses

The breakdown of “Non-current assets held-for-sale” as of December 31 is as follows:

Reversal of impairment losses

Breakdown of Major Assets

Sale or disposal
Millions of yen
2017

2018

¥1,453943¥2,396¥ 4
6¥ 10

Non-current assets held-for-sale
Property, plant and equipment
Investment property
Total

Exchange differences on translation of foreign operations
Other
As of December 31, 2018

Millions of yen
Acquisition Cost

“Non-current assets held-for-sale” are mainly idle properties which are currently actively marketed for sale.
With regard to such assets and assets sold, impairment losses of ¥518 million and ¥74 million are r­ ecognized in “Selling, general andadministrative expenses” in the consolidated statement of income for the years ended December 31, 2017 and 2018, respectively.

As of January 1, 2017
As of December 31, 2017
As of December 31, 2018

Millions of yen
Accumulated Depreciation and Accumulated Impairment Losses

As of December 31, 2018

107

Total

¥849,053
893,824902,664

The carrying amount of property, plant and equipment as of December 31 includes the carrying amount of the following leased assets:
Millions of yen

As of January 1, 2017
As of December 31, 2017
As of December 31, 2018

Japan Tobacco Inc.

098

Annual Report 2018

Japan Tobacco Inc.

Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Total¥6,5386,509
6,386¥1,201
4,669
5,846

¥  7
11
271

¥ 7,746
11,18912,503099

Annual Report 2018

(2)Impairment Losses

The recoverable amounts of these assets are calculated mainlyby their values in use, which are set at “zero.”
Impairment losses recognized in the year ended December 31,
2018 represent the losses incurred to reduce the carrying amounts
to the recoverable amounts of the buildings, structures, machineryand vehicles, such as due to the decision of individual demolition.
The recoverable amounts of these assets are calculated mainlyby their values in use.

The grouping of property, plant and equipment for impairment testis the smallest cash-generating unit that independently generates
cash inflow.
The Group recognized impairment losses of ¥1,891 million forthe year ended December 31, 2017, and ¥5,220 million for the year
ended December 31, 2018 in “Selling, general and administrative
expenses” in the consolidated statement of income.
Impairment losses recognized in the year ended December 31,
2017 represent the losses incurred to reduce the carrying amounts to
the recoverable amounts of the buildings, structures, machinery andvehicles, such as due to the decision of closing down of a factory.

14. Goodwill and Intangible Assets(1)

Schedule of Goodwill and Intangible Assets

The schedules of carrying amount, acquisition cost, and accumulated amortization and accumulated impairment losses of “Goodwill” and“Intangible assets” are as follows:
Millions of yen
Carrying Amount

As of January 1, 2017
Individual acquisition
Acquisition through business combinations
Amortization (Note)
Impairment losses
Sale or disposal
Exchange differences on translation of foreign operations
Other
As of December 31, 2017
Individual acquisition
Acquisition through business combinations
Amortization (Note)
Impairment losses
Reversal of impairment losses
Sale or disposal
Exchange differences on translation of foreign operations
Other
As of December 31, 2018

Goodwill

Trademarks

Software

Other

Total

¥1,601,987—
202,144———
87,080—1,891,210—
279,606————(162,240)(161)¥2,008,416¥364,896
257
71,450(46,786)(940)—
12,410—401,286
188
104,833(57,539)——(70)(27,423)—¥421,276¥27,078
7,724—(12,808)
(75)
(89)
(153)
1,546
23,223
10,831
163(11,242)
(17)
0
(124)
(271)
9,355
¥31,919¥31,996
17,482
12,831(6,079)
(4)
(43)
(108)
(1,409)54,6668,970
6,758(6,888)(2,389)—(1,556)(1,099)(8,579)¥49,882¥2,025,957
25,462
286,425(65,673)(1,019)(132)
99,229136
2,370,385
19,990391,360(75,669)(2,406)0(1,750)(191,033)
615¥2,511,492(Note) The amortization of intangible assets is included in “Cost of sales” and “Selling, general and administrative expenses” in the consolidated statementof income.

Millions of yen
Acquisition Cost

As of January 1, 2017
As of December 31, 2017
As of December 31, 2018

Goodwill

Trademarks

Software

Other

Total

¥1,601,987
1,891,210
2,008,416¥  928,876
1,028,189
1,078,596¥137,761
142,531
157,191¥ 96,994
126,263
94,698¥2,765,618
3,188,192
3,338,901

Goodwill

Trademarks

Software

Other

Total

¥—
—
—

¥563,981
626,903657,320¥110,683
119,308
125,272¥64,997
71,59744,817¥739,661
817,808
827,409(2)

Material Goodwill and Intangible Assets

B. International Tobacco Cash-generating Unit
The recoverable amount is calculated by the value in use based on
the three-year business plan that was prepared by reflecting pastexperiences and external information and that was approved bymanagement. After the three-year business plan, the Group setsa growth rate from 8.1% in the fourth year (2017: 6.4%) to 3.0% in
the ninth year (2017: 2.8%), and the same growth rate as the ninth
year from the tenth year as a continued growth rate for inflation.
The discount rate before taxes is 9.9% (2017: 9.8%). The value in
use sufficiently exceeds the carrying amount of the cash-generating
unit. Therefore, even in cases where the discount rate and growthrate used in calculating the value in use fluctuate within reasonable
ranges, the Group assumes that the value in use will not becomeless than the carrying amount.

Goodwill and intangible assets recognized in the consolidated statement of financial position are mainly composed of goodwill andtrademarks in the JTIH Group. The carrying amounts of goodwill asof December 31, 2017 and 2018 were ¥1,599,950 million and¥1,717,156 million, respectively. The carrying amounts of trademarks as of December 31, 2017 and 2018 were ¥269,453 millionand ¥305,997 million, respectively.
The majority of goodwill and trademark in the JTIH Group wasrecognized as a result of the acquisitions of RJR Nabisco’s non-U.S.
tobacco operations in 1999 and Gallaher in 2007.
Other than the above, goodwill and trademark in Domestic
Tobacco business were recognized as a result of the acquisition of
Natural American Spirit’s non-U.S. tobacco operations in 2016. The
carrying amounts of goodwill as of December 31, 2017 and 2018
were ¥265,891 million and ¥265,891 million, respectively. The carrying amounts of trademarks as of December 31, 2017 and 2018
were ¥131,822 million and ¥115,274 million, respectively.
The trademarks are amortized using the straight-line method andthe remaining amortization period is mainly from 7 to 8 years.

(3)

C. Processed Food Cash-generating Unit
The recoverable amount is calculated by the value in use based on
the three-year business plan that was prepared by reflecting pastexperiences and external information and that was approved bymanagement. After the three-year business plan, the Group setsa growth rate from 1.2% in the fourth year (2017: 1.6%) to 1.2% in
the ninth year (2017: 1.0%), and the same growth rate as the ninth
year from the tenth year as a continued growth rate for inflation.
The discount rate before taxes is 4.0% (2017: 3.9%). The value in
use sufficiently exceeds the carrying amount of the cash-generating
unit. Therefore, even in cases where the discount rate and growthrate used in calculating the value in use fluctuate within reasonable
ranges, the Group assumes that the value in use will not becomeless than the carrying amount.

Impairment Test for Goodwill

For the year ended December 31, 2018, the carrying amount of
the majority of goodwill is allocated to the domestic tobacco cashgenerating unit of ¥265,891 million (¥265,891 million for the year
ended December 31, 2017), the international tobacco cash-generating
unit of ¥1,717,156 million (¥1,599,950 million for the year ended
December 31, 2017) and the processed food cash-generating unitof ¥25,368 million (¥25,368 million for the year ended December 31,2017). Details of the result of impairment tests are as follows:(4)
A. Domestic Tobacco Cash-generating Unit
The recoverable amount is calculated by the value in use based on
the three-year business plan that was prepared by reflecting pastexperiences and external information and that was approved bymanagement. After the three-year business plan, given the current
domestic tobacco market situation, the Group calculates the value
in use by using cash flows with a growth rate of 0% conservatively.
For the previous year, the Group decreased a growth rate from 3.9%in the fourth year to 0% in the ninth year gradually, and calculated
the value in use from the tenth year by using the same cash flows
as the ninth year.
The discount rate before taxes is 4.9% (2017: 4.9%). The value in
use sufficiently exceeds the carrying amount of the cash-generating
unit. Therefore, even in cases where the discount rate and growthrate used in calculating the value in use fluctuate within reasonable
ranges, the Group assumes that the value in use will not becomeless than the carrying amount.

Impairment Losses

Goodwill is allocated to cash-generating units that are identified
according to locations and types of businesses. The groupingof intangible assets for impairment test is the smallest cash-­generating unit that independently generates cash inflow.
The Group recognized impairment losses of ¥1,019 million forthe year ended December 31, 2017, and ¥2,406 million for the year
ended December 31, 2018 in “Selling, general and administrative
expenses” in the consolidated statement of income.
Impairment losses recognized in the year ended December 31,
2018 represent the losses incurred to reduce the carrying amounts
to the recoverable amounts of software and other intangible assets
since the recoverable amounts were lower than the carrying amounts.
The recoverable amounts of these assets are calculated mainlyby their values in use.

Millions of yen
Accumulated Amortization and Accumulated Impairment Losses

As of January 1, 2017
As of December 31, 2017
As of December 31, 2018

Japan Tobacco Inc.

100

Annual Report 2018

Japan Tobacco Inc.

101

Annual Report 2018

15. Lease Transactions

16. Investment Property(1)

The Group leases factory sites, vehicles and other assets as a lessee. Some of the lease contracts have renewal options or escalation
clauses. There are no restrictions on additional debt and further leasing imposed by the lease arrangements.

(1)

Schedule of Investment Property

The schedule of the carrying amount of “Investment property” for each year is as follows:
Millions of yen

Present Value of Finance Lease Obligations

The total of future minimum lease payments for leased assets recognized based on the finance lease contracts, their present value andfuture financial costs as of December 31 are as follows:
Millions of yen
2017

2018

¥ 1,630284
1,346¥ 1,305263
1,042

Not later than 1 year
Total of future minimum lease payments
Future financial costs
Present value

2017

2018

Acquisition cost as of December 31¥18,184305
1,732—(2,777)
(570)
—
(162)
6
(17)
¥16,700¥51,245
33,06145,768¥16,700
338
3,215
139
(1,171)
(573)
(754)
(303)
(6)
(28)
¥17,558¥45,768
29,06838,355

Accumulated depreciation and accumulated impairment losses
as of December 31

29,06820,797

As of January 1
Expenditure after acquisition
Transfer from property, plant and equipment
Acquisition by business combination
Transfer to non-current assets held-for-sale
Depreciation
Impairment losses
Sale or disposal
Exchange differences on translation of foreign operations

Later than 1 year and not later than five years

3,305
1,191
2,114

3,503
1,203
2,300

Total of future minimum lease payments
Future financial costs
Present value
Later than 5 years

8,790
2,139
6,651

9,626
2,605
7,021

Total of future minimum lease payments
Future financial costs
Present value
Total

Present value(2)13,401
3,593
9,807

14,760
4,092
10,667

Total of future minimum lease payments
Future financial costs

Future Minimum Lease Payments under Non-cancellable Operating Leases

The total of future minimum lease payments under non-cancellable operating leases as of December 31 is as follows:
Millions of yen

Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total

(3)

2017

2018

¥ 8,059
10,7199,217¥27,995¥11,841
15,87014,696¥42,407

Other
As of December 31
Acquisition cost as of January 1
Accumulated depreciation and accumulated impairment losses as of January 1(2)

Fair Value

The fair value of investment property is determined based on a valuation conducted by an external real estate appraiser. The valuation ismade in accordance with the appraisal standards of the country where the investment property is located and based on market evidenceof transaction prices for similar assets.
The fair value hierarchy of investment property is categorized from Level 1 to Level 3 as follows:
Level 1: Fair value measured at the quoted price in the active market
Level 2: Fair value that is calculated using the observable price other than categorized in Level 1 directly or indirectly
Level 3: Fair value that is calculated based on valuation techniques which include inputs that are not based on observable market data
The fair value of investment property based on the fair value hierarchy as of December 31 is as follows:
Millions of yen
As of December 31, 2017

Investment property

Level 1

Level 2

Level 3Total¥     —

¥34,646¥1,921¥36,567

Total of Minimum Lease Payments and Contingent Rents

Millions of yen

The total of minimum lease payments and contingent rents of operating lease contracts recognized as an expense for each year is
as follows:

As of December 31, 2018

Millions of yen

Total of minimum lease payments
Contingent rents

Japan Tobacco Inc.

102

Annual Report 2018

2017

2018

¥10,220
1,135¥13,445
1,188

Investment property

Japan Tobacco Inc.

103

Level 1

Level 2

Level 3Total¥     —

¥34,678¥2,485¥37,164

Annual Report 2018

(3)Impairment Losses

Impairment losses recognized for the year ended December 31,
2018 represent the difference between the recoverable amount andthe carrying amount of land and buildings as idle properties were
decided individual demolition. The recoverable amount is calculated
based on value in use basis, which is “zero” for buildings due to thedecision of demolition, and the recoverable amount of other properties is calculated by the fair value less costs of disposal.

The grouping of investment properties for impairment test is basedon the smallest cash-generating unit that independently generates
cash inflow. Impairment test for idle properties is ­carried out
individually.
The Group recognized impairment losses of ¥754 million for theyear ended December 31, 2018 in “Selling, general and administrative expenses” in the consolidated statement of income.

Year ended December 31, 2018
Millions of yen

Deferred Tax Assets

Fixed assets (Note 2)
Retirement benefits
Carryforward of unused tax losses
Other
Subtotal

17. Income Taxes(1)

Valuation allowance
Total

Deferred Tax Assets and Deferred Tax Liabilities

As ofJanuary 1, 2018

Recognized in
profit or loss

Recognized in othercomprehensive
income¥124,709
73,621
55,22874,433327,991(65,374)¥262,617¥(10,763)(1,563)(589)
13,522607(1,012)¥   (406)

¥   —
1,731
—
(2,043)(312)(1,248)¥(1,560)

As ofJanuary 1, 2018

Recognized in
profit or loss

Recognized in othercomprehensive
incomeOther (Note 1)

As ofDecember 31, 2018

¥ (84,705)(9,244)(122,563)¥(216,511)¥5,971(1,530)(5,001)¥ (559)

¥ —
(254)
4,337
¥4,083¥(12,944)
902
5,529¥ (6,513)¥ (91,678)(10,125)(117,697)¥(219,500)

Other (Note 1)

As ofDecember 31, 2018¥(1,436)(1,543)(1,513)(1,697)(6,188)
1,648¥(4,540)¥112,509
72,24853,126
84,215322,098(65,986)¥256,112

The breakdown and schedule of “Deferred tax assets” and “Deferred tax liabilities” by major causes of their occurrence for each year are as follows:
Millions of yen

Year ended December 31, 2017
Millions of yen

Deferred Tax Assets

Fixed assets (Note 2)
Retirement benefits
Carryforward of unused tax losses
Other
Subtotal
Valuation allowance
Total

As of
January 1, 2017

Recognized in
profit or loss

Recognized in othercomprehensive
incomeOther (Note 1)

As ofDecember 31, 2017

¥136,713
79,94053,13575,971
345,760(61,231)¥284,528¥(15,864)(6,395)399(4,222)(26,082)(1,527)¥(27,609)¥ —(2,135)—(177)(2,312)(269)¥(2,581)¥ 3,859
2,211
1,694
2,860
10,625(2,347)¥ 8,278¥124,709
73,621
55,22874,433327,991(65,374)¥262,617

As ofJanuary 1, 2017

Recognized in
profit or loss

Recognized in othercomprehensive
incomeOther (Note 1)

As ofDecember 31, 2017

¥ (73,805)(4,506)(111,260)¥(189,572)¥ 1,677(232)(3,539)¥(2,093)¥ —(3,971)(5,196)¥(9,167)¥(12,577)(534)(2,568)¥(15,679)¥ (84,705)(9,244)(122,563)¥(216,511)

Millions of yen

Deferred Tax Liabilities

Fixed assets (Note 2)
Retirement benefits
Other
Total

Deferred Tax Liabilities

Fixed assets (Note 2)
Retirement benefits
Other
Total

(Note 1) “Other” includes exchange differences on translation of foreign operations and acquisition through business combinations.
(Note 2) “Fixed assets” include property, plant and equipment, goodwill, intangible assets and investment property.

The deferred tax assets are recognized for the amount considered to be recoverable on deductible temporary differences, carryforward of unused tax losses and tax credits by taking taxable
temporary differences and future taxable profits plan into account.
The carryforward of unused tax losses, for which the deferred tax
assets are not recognized, was ¥46,809 million (including ¥11,903
million, for which the carryforward expires after five years) as of(2)

December 31, 2017, and ¥44,610 million (including ¥15,696 million,
for which the carryforward expires after five years) as of December
31, 2018. Tax credits, for which the deferred tax assets are notrecognized, were ¥5,185 million (including ¥4,810 million, for which
the carryforward expires after five years) as of December 31, 2017,and ¥5,417 million (including ¥5,183 million, for which the carryforward expires after five years) as of December 31, 2018.

Income Taxes

The breakdown of “Income taxes” for each year is as follows:
Millions of yen

Current income taxes
Deferred income taxes
Total income taxes

2017

2018

¥112,081
29,702¥141,783¥143,090
965¥144,055

Deferred income taxes decreased by ¥801 million and increased by ¥96 million for the years ended December 31, 2017 and 2018,
respectively, due to the effect of changes in tax rates in Japan and other countries.

Japan Tobacco Inc.

104

Annual Report 2018

Japan Tobacco Inc.

105

Annual Report 2018

(3)Reconciliation of the Effective Tax Rate

(Note) The summary of the issuing conditions of the bonds is as follows:

The breakdown of major items that caused differences between the effective statutory tax rate and the average actual tax rate for each year
is as follows:
The Company is subject mainly to corporate tax, inhabitant tax and enterprise tax, and the effective statutory tax rate for each year calculated based on these taxes was 30.66%. Foreign subsidiaries are subject to income taxes at their locations.
%

Effective statutory tax rate
Different tax rates applied to foreign subsidiaries
Non-deductible expenses
Valuation allowance
Withholding tax in foreign countries
Tax contingencies
Other
Average actual tax rate

2017

2018

30.66
(8.86)
0.95
1.54
1.29
1.26
(0.52)
26.33

30.66(9.57)
1.13
0.95
1.50
2.32
0.11
27.10

18. Trade and Other Payables

Millions of yen

Accounts payable
Other payables
Other
Total

2018

¥218,378
66,864110,491¥395,733¥197,426
68,246
114,844¥380,516

Trade and other payables are classified as financial liabilities measured at amortized cost.

19. Bonds and Borrowings (Including Other Financial Liabilities)(1)

Breakdown of Financial Liabilities

%

As of
December 31, 2018

Interest
rate

Collateral

Name of bondDate of issuanceJapan Tobacco Inc.

8th domestic
straight bondDecember 9, 2010

20,00020,0001.300

Yes

December 9,
2020

Japan Tobacco Inc.

9th domestic
straight bondJuly 15, 2015

60,00060,0000.217

Yes

July 15, 2020

Japan Tobacco Inc.

10th domestic
straight bondJuly 15, 2015

30,00030,0000.358

Yes

July 15, 2022

Japan Tobacco Inc.

11th domestic
straight bondJuly 15, 2015

25,00025,0000.599

Yes

July 15, 2025

Japan Tobacco Inc.

12th domestic
straight bondSeptember 10,
2018—

60,0000.110

Yes

September 8,
2023

Japan Tobacco Inc.

13th domestic
straight bondSeptember 10,
2018—

30,0000.355

Yes

September 8,
2028

Japan Tobacco Inc.

14th domestic
straight bondSeptember 10,
2018—

10,0000.758

Yes

September 10,
2038

Japan Tobacco Inc.

Straight bondin USD

July 23, 2013

—

2.100

Yes

July 23, 2018

Japan Tobacco Inc.

Straight bondin USD

April 13, 2016

Yes

April 13, 2021

Straight bondin USD

April 13, 2016

2.800

Yes

April 13, 2026

JT International
Financial Services B.V.

Straight bondin USD

September 28,
2018

3.500

No

September 28,
2023

JT International
Financial Services B.V.

Straight bondin USD

September 28,
2018

—

3.875

No

September 28,
2028

JT International
Financial Services B.V.

Straight bondin EUR

September 28,
2018

—

1.125

No

September 28,
2025

JT International
Financial Services B.V.

Straight bondin GBP

September 28,
2018—83,116[USD 750 mil.]
55,268[USD 500 mil.]
57,871[USD 525 mil.]
54,827[USD 500 mil.]
69,134[EUR 550 mil.]
55,228[GBP 400 mil.]
610,444(—)

2.000

Japan Tobacco Inc.

56,451(56,451)[USD 500 mil.]
84,556[USD 750 mil.]
56,235[USD 500 mil.]
—

2.750

No

September 28,
2033

332,242(56,451)

Total

The breakdown of “Bonds and borrowings” and “Other financial liabilities” as of December 31 is as follows:
Millions of yen

Derivative liabilities
Short-term borrowings
Commercial paper
Current portion of long-term borrowings
Current portion of bonds (Note)
Long-term borrowings
Bonds (Note)
Other
Total
Current liabilities
Non-current liabilities
Total

Japan Tobacco Inc.

106

Annual Report 2018

2017

2018

Due

¥  5,425
274,233
66,808690
56,451
71,164
275,791
12,494¥763,056¥405,088
357,968¥763,056¥  3,176
165,985
72,03812,443—116,870
610,444
11,377¥992,334¥254,953
737,381¥992,334—————
2020–2028——

Date of maturity

Company

The breakdown of “Trade and other payables” as of December 31 is as follows:
2017

Millions of yen
As ofDecember 31, 2017

(Note 1) The figure in parentheses ( ) represents the amount of the current portion of the bond.
(Note 2) The figure in parentheses [ ] represents the amount of foreign currency-denominated bond.

Derivative liabilities are classified as financial liabilities measured at fair value through profit or loss excluding those to which hedge
accounting is applied, and bonds and borrowings are classified as financial liabilities measured at amortized cost.
There are no financial covenants that have a significant impact on the bonds and borrowings of the Group.

(2)

Assets Pledged as Collateral for Liabilities

A. Pursuant to the provisions of Article 6 of the Japan Tobacco Inc. Act, the Company’s properties are pledged as general collateral forbonds issued by the Company. Bondholders are entitled to claim satisfaction in preference to unsecured creditors of the Company properties (with the exception of national and local taxes and certain other statutory obligations).
B. Assets pledged as collateral by some subsidiaries are ¥1,097 million and ¥2,138 million as of December 31, 2017 and 2018, respectively.
Their corresponding debts are ¥241 million and ¥71 million as of December 31, 2017 and 2018, respectively.

Japan Tobacco Inc.

107

Annual Report 2018

20. Provisions

21. Other Liabilities

The breakdown and schedule of “Provisions” for each year are as follows:

The breakdown of “Other current liabilities” and “Other non-current liabilities” as of December 31 is as follows:
Millions of yen

Year ended December 31, 2017
Millions of yen
Asset retirement
provisions

Restructuringprovisions

Provisions forsales rebates

Other
provisions

Total¥3,348
169
40
(94)
(1)
—
¥3,463¥ —3,463¥3,463¥9,124
5,709—(6,829)(1,350)418¥7,074¥6,739335¥7,074¥3,4593,312—(3,459)——¥3,312¥3,312—¥3,312¥1,021
2,443
—
(135)
(178)
34
¥3,185¥2,977208¥3,185¥16,952
11,633
40(10,516)(1,529)453¥17,033¥13,028
4,005¥17,033

As of January 1, 2017
Provisions
Interest cost associated with passage of time
Provisions used
Provisions reversed
Exchange differences on translation of foreign operations
As of December 31, 2017
Current liabilities
Non-current liabilities
Total

Tobacco excise tax payables
Tobacco special excise tax payables
Tobacco local excise tax payables
Consumption tax payables
Bonus to employees
Employees’ unused paid vacations liabilities
Other
Total
Current liabilities
Non-current liabilities
Total

2017

2018

¥265,343
11,989167,420
103,51131,412
18,741
140,685¥739,101¥618,322
120,779¥739,101¥297,728
10,562
163,704
95,781
38,977
19,130269,582¥895,464¥716,190
179,274¥895,464

22. Employee Benefits
Year ended December 31, 2018
Millions of yen
Asset retirement
provisions

Restructuringprovisions

Provisions forsales rebates

Other
provisions

Total¥3,463
157
29
(70)
—
—
¥3,579¥ —3,579¥3,579¥7,074
1,657—(7,590)(686)(133)¥  322¥  30912¥  322¥3,312
3,668—(3,312)——¥3,668¥3,668—¥3,668¥3,185657—(309)(1,058)(185)¥2,289¥2,101189¥2,289¥17,0336,138
29(11,280)(1,744)(318)¥ 9,858¥ 6,0783,780¥ 9,858

As of January 1, 2018
Provisions
Interest cost associated with passage of time
Provisions used
Provisions reversed
Exchange differences on translation of foreign operations
As of December 31, 2018
Current liabilities
Non-current liabilities
Total
A. Asset Retirement Provisions
In order to settle the obligation of restoring and of removing­hazardous substances from plant facilities and premises that theGroup uses, the probable amount to be paid in the future is recognized based on past performances. These expenses are expected
to be paid after one year or more; however, they may be affectedby future business plans.

Business.” The timing of the payment may be affected by futurebusiness plans.
C. Provisions for Sales Rebates
These provisions are for contracts which reward the customers withdiscounts when the sales volume or sales amount in a given period
exceeds a specified volume or amount and correspond to “Refund
liabilities” in IFRS 15 “Revenue from Contracts with Customers.”
They are expected to be paid within one year.

B. Restructuring Provisions
These provisions are mainly related to business integration andmeasures for the rationalization of the “International Tobacco

Japan Tobacco Inc.

108

Annual Report 2018

(1)

Post-employment Benefits

The Group’s main defined benefit plans expose the Group to
actuarial risks, such as investment risk, interest rate risk, inflation
risk, and longevity risk.

The Group sponsors funded or unfunded defined benefit plans anddefined contribution plans as employee retirement benefit plans.
The benefits of defined benefit plans are predetermined based on
conditions, such as points employees have gained in compensationfor each year of service, the payment rate, years of service, andaverage salaries in their final years of service before retirement.
The Company is obligated to bear pension costs for a mutual
assistance association incurred with respect to services in or before
June 1956 (prior to enforcement of the Act on the Mutual Aid
Association of Public Corporation Employees). Such obligations arerecognized as liabilities at their present value using the actuarial
valuation method and are included in retirement benefit liabilities.
Special termination benefits may be provided to employeeson their early retirements under certain circumstances.
The Company and its subsidiary transferred a portion of theirpension plans from a defined benefit plan to a defined contribution
plan as of April 1, 2018.
The funded defined benefit plans are administrated by the Groupor the fund that is legally separated from the Group in accordancewith statutory requirements. The Group, or the board of the pension
fund and the trustee of the plan, are required by law to act in thebest interests of the plan participants, and are responsible for managing the plan assets in accordance with the designated investment
strategy.

Japan Tobacco Inc.

(i) Investment risk
The present value of the defined benefit obligations is calculatedusing a discount rate set with reference to a yield on high quality
corporate bonds or government bonds. If the return on the plan
assets is below this yield, there is a possibility that the plan isunderfunded.
(ii) Interest rate risk
A decrease in a yield on high quality corporate bonds or government bonds will increase the present value of the defined benefit
obligations. However, this will be partially offset by an increasein the fair value of the debt instruments (plan assets).
(iii) Inflation risk
The level of benefit for certain defined benefit plans of the Groupis linked to inflation. Accordingly, a rise in inflation will increase
the present value of the defined benefit obligations.
(iv) Longevity risk
Some defined benefit plans of the Group provide a lifetime annuity,and the Group is obligated to provide pension benefits to the plan
participants for the rest of their lives after their retirements. The
present value of the defined benefit obligations is calculated byreference to the best estimate of the mortality of plan participants
during or after employment. An increase in average life expectancyof the plan participants will increase the defined ­benefit obligations.

109

Annual Report 2018

A. Schedule of Defined Benefit Obligations
The schedule of the defined benefit obligations is as follows:

B. Schedule of Plan Assets
The schedule of the plan assets is as follows:
Millions of yen
Millions of yen

As of January 1, 2017 (Notes 1, 2)
Current service cost
Past service cost and settlement
Interest expense
Contributions by plan participants

Japan (Note 3)

Overseas

Total¥260,122
10,978
(222)
1,213
—

¥516,875
9,408(8,263)
11,272
1,470¥776,997
20,386(8,485)
12,485
1,470

2
27
(714)
(21,435)—
1
249,972
10,214(26,868)
1,049—(4,437)248(3,608)(26,974)
32,8701,554
530,4159,348
450
10,646
1,675(4,435)276(4,322)(48,410)32,8701,554
780,386
19,562(26,418)
11,695
1,675

(249)
(85)
3,350
(21,159)——¥216,223(1,189)(9,860)
1,255(23,942)(34,097)263¥484,964(1,438)(9,946)
4,605(45,101)(34,097)263¥701,187

Remeasurement gains and losses:
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Benefits paid
Exchange differences on translation of foreign operations
Other
As of December 31, 2017 (Notes 1, 2)
Current service cost
Past service cost and settlement
Interest expense
Contributions by plan participantsRemeasurement gains and losses:
Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Benefits paid
Exchange differences on translation of foreign operations
Other
As of December 31, 2018 (Notes 1, 2)(Note 1) The Group’s weighted-average duration of the defined benefit obligations is 7.1 years for Japan and 15.1 years for overseas (2017: 7.7 years for Japanand 15.7 years for overseas).
(Note 2) The Group’s breakdown of the defined benefit obligation by plan participant is as follows:
Millions of yen
As of December 31, 2018

As of December 31, 2017

Deferred members
Pensioners
Total

Interest income

Japan

Overseas

Total

Japan

Overseas

Total¥163,592
15,102
71,278¥249,972¥184,639
73,182
272,594¥530,415¥348,231
88,284
343,872¥780,386¥140,274
13,15862,792¥216,223¥158,329
74,678251,957¥484,964¥298,603
87,836
314,748¥701,187(Note 3) The schedule of mutual pension benefits obligations included in the category of Japan is as follows:
Millions of yen

As of January 1
Interest expense
Remeasurement gains and losses
Benefits paid
As of December 31

Japan Tobacco Inc.

110

Annual Report 2018

2017

2018

¥48,607146(1,081)(5,387)¥42,284¥42,284
127(875)(4,861)¥36,675

Overseas

Total¥93,571456¥373,696
8,424¥467,267
8,879

1,223
1,690
—
(6,943)—89,998322(22,481)

16,43010,172
1,470(22,174)
22,986
411,004
8,460—

17,653
11,862
1,470(29,116)
22,986
501,002
8,782(22,481)

(31)
1,159
—
(6,180)—¥62,788(11,420)
10,885
1,675(19,163)(27,738)¥373,702(11,451)
12,044
1,675(25,343)(27,738)¥436,489

Remeasurement gains and losses:
Return on plan assets (excluding amounts included in interest income)Contributions by the employer (Notes 1, 2)
Contributions by plan participants
Benefits paid

Actuarial gains and losses arising from changes in demographic assumptions

Active members

As of January 1, 2017

Japan

Exchange differences on translation of foreign operations
As of December 31, 2017
Interest income
Decrease due to settlement
Remeasurement gains and losses:
Return on plan assets (excluding amounts included in interest income)Contributions by the employer (Notes 1, 2)
Contributions by plan participants
Benefits paid
Exchange differences on translation of foreign operations
As of December 31, 2018

(Note 1) Pursuant to laws and regulations, the Group and the pension fund review the financial condition of the pension plan regularly and recalculate contributions for allocating future benefit and keeping the balance of the pension financing when the plan is underfunded.
(Note 2) The Group plans to pay contributions of ¥6,300 million in the year ending December 31, 2019.

C. Reconciliation of Defined Benefit Obligations and Plan Assets
The reconciliation of the defined benefit obligations and plan assets to the net defined benefit liabilities (assets) recognized in the consolidated statement of financial position as of December 31 is as follows:
As of December 31, 2017
Millions of yen
JapanOverseas

Total¥ 87,999(89,998)(1,998)161,973¥382,679(411,004)(28,325)
147,736¥470,678(501,002)(30,324)
309,709

Retirement benefit assets¥159,974¥164,793(4,818)¥119,411¥165,969(46,558)¥279,385¥330,762(51,377)

Net defined benefit liabilities (assets) recognized in the consolidated statement offinancial position¥159,974¥119,411¥279,385

Present value of the funded defined benefit obligations
Fair value of the plan assets
SubtotalPresent value of the unfunded defined benefit obligations
Net defined benefit liabilities (assets) recognized in the consolidated statement offinancial position
Retirement benefit liabilities

Japan Tobacco Inc.

111

Annual Report 2018

As of December 31, 2018

Total
Millions of yen
JapanOverseas

Total¥ 60,453(62,788)(2,334)
155,770¥343,304(373,702)(30,398)
141,660¥403,757(436,489)(32,732)
297,430Retirement benefit assets¥153,435¥158,297(4,861)¥111,262¥163,541(52,279)¥264,697¥321,838(57,140)

Net defined benefit liabilities (assets) recognized in the consolidated statement offinancial position¥153,435¥111,262¥264,697

Present value of the funded defined benefit obligations
Fair value of the plan assets
SubtotalPresent value of the unfunded defined benefit obligations
Net defined benefit liabilities (assets) recognized in the consolidated statement offinancial position
Retirement benefit liabilities

Millions of yen
As of December 31, 2018

As of December 31, 2017Market price inan active market

Cash and cash equivalents
Equity instruments
Debt instruments
Real estate
General account of life insurance companies (Note)
Other
Total

Market price inan active market

QuotedUnquoted

Total

QuotedUnquoted

Total¥ 42,058
69,664284,236
10,035—
18,620¥424,612¥       —
—
5,593
258
61,241
9,297¥76,389¥ 42,058
69,664
289,829
10,293
61,241
27,916¥501,002¥ 22,452
50,908287,497
11,581—
9,414¥381,852

¥   —
—
5,134
65
40,3099,129¥54,637¥ 22,452
50,908292,631
11,64640,30918,543¥436,489(Note) A certain interest rate and principal for the general account of life insurance are guaranteed by life insurance companies.

D. Major Breakdown of Plan Assets
The breakdown of plan assets by major category as of December 31 is as follows:Japan
Millions of yen
As of December 31, 2018

As of December 31, 2017Market price inan active market

Cash and cash equivalents
Equity instruments
Japan
Overseas
Debt instruments
Japan
Overseas
General account of life insurance companies (Note)
Other
Total

Market price inan active market

QuotedUnquoted

Total

QuotedUnquoted

Total¥12,243
3,939
2,065
1,874
10,512
9,220
1,292
—
1,433
¥28,127¥     ———————
61,241
629¥61,870¥12,243
3,939
2,065
1,874
10,512
9,220
1,292
61,241
2,062¥89,998¥ 7,183
3,052
1,530
1,523
10,388
9,147
1,242
—
1,208
¥21,832

¥   —
—
—
—
—
—
—
40,309646¥40,956¥ 7,183
3,052
1,530
1,523
10,3889,147
1,242
40,3091,855¥62,788

Millions of yen

QuotedUnited Kingdom
North America
Other
Debt instruments
United Kingdom
North America
Other
Real estate
Other
Total

E. Matters Related to Actuarial Assumptions
The major items of actuarial assumptions as of December 31 are as follows:%
As of December 31, 2017

Unquoted¥ 29,815
65,725
5,093
23,487
37,144
273,724
185,60746,723
41,394
10,035
17,187¥396,485

Japan Tobacco Inc.

¥     —
—
—
—
—
5,593
—
—
5,593
258
8,667
¥14,519112

Market price inan active market
Total¥ 29,815
65,725
5,093
23,487
37,144
279,317
185,60746,723
46,988
10,29325,854¥411,004

Annual Report 2018

Inflation rate

As of December 31, 2018

Japan

Overseas

Japan

Overseas

0.5
—

2.1
2.4

0.5
—

2.2
2.4

As of December 31, 2018

As of December 31, 2017Market price inan active market

Equity instruments(Overseas)
The investment strategy for the foreign subsidiaries’ funded pension
plans is decided properly by the trustee of the plan or the management of overseas subsidiaries according to local legislation. The
Company’s objective for the foreign subsidiaries’ funded pension
plans is to manage risks arising from its defined benefit obligation,and meanwhile to achieve a return on assets in excess of the movement in the value of the defined benefit obligation.
The majority of the plan assets have been allocated to liability
matching bonds and the remaining parts of the plan assets aremainly invested in equities targeting long-term return.

Discount rate

Overseas

Cash and cash equivalents

The investment strategy for the Group’s major plans is as follows:(Japan)The Company’s pension fund is managed in accordance with theinternal policy for securing stable profits in the middle- and longterm in order to ensure the redemption of the plan liability.
Concretely, by setting a target rate of return and composition ratioof plan assets by asset category within the risk tolerance that isannually assessed, the Company invests plan assets consistently
with the composition ratio. When reviewing the composition ratio,
the Company considers introducing an asset investment which
has a high correlation with the liability.
In the case where an unexpected situation occurs in the market
environment, it is temporarily allowed to make an adjustment on theweight of risk assets complying with the policy.

Quoted¥ 15,269
47,856
3,871
17,53926,445277,109
195,193
39,58342,333
11,5818,206¥360,021

Unquoted

¥   —
—
—
—
—
5,134
—
0
5,134
65
8,482
¥13,681

As of December 31, 2017
Years

Total

¥ 15,269
47,856
3,871
17,53926,445282,242
195,193
39,58347,466
11,646
16,688¥373,702

Japan

Overseas

Males

Females

Males

Females23.6 (Note 2)

29.3 (Note 2)

21.9 (Note 3)
23.2 (Note 4)

24.2 (Note 3)
25.5 (Note 4)

Average life expectancy at retirement (Note 1)
Current pensioners
Future pensioners

Japan Tobacco Inc.

113

Annual Report 2018

As of December 31, 2018Year ended December 31, 2018
Years
Japan
Males

Females

Males

Females22.0 (Note 3)
23.4 (Note 4)

24.2 (Note 3)
25.5 (Note 4)

Average life expectancy at retirement (Note 1)
Current pensioners

23.6

Future pensioners(Note 2)

29.3

(Note 2)

(Note 1) The average life expectancies underlie the values of the defined benefit obligations on major plans. Assumptions regarding future mortality rate arebased on published statistics and mortality tables.
(Note 2) Life expectancy for a pensioner currently aged 60. Regardless of the plan participant's current age, the Group performs actuarial calculations based on
the assumption that life expectancy remains the same.
(Note 3) Life expectancy for a pensioner currently aged 65.
(Note 4) Life expectancy at the age of 65 for an active member currently aged 50.
(Note 5) The valuation of defined benefit obligations reflects a judgment on uncertain future events. The sensitivities of defined benefit obligations due tochanges in major assumptions as of December 31 are as follows. Each of these sensitivities assumes that other variables remain fixed; however, infact, they do not always change independently. Negative figures show a decrease in pension plan obligations, while positive figures show an increase.

Millions of yen
As of December 31, 2017

Discount rate
Inflation rateJapan

Overseas

Japan

Overseas

Increase by 0.5%¥(9,259)
9,971
—
—
4,956
(4,794)¥(39,316)
44,18826,909(25,490)
17,777(18,423)¥(7,192)
7,711
—
—
4,420
(4,267)¥(34,758)
38,49623,889(22,326)
16,812(16,915)

Increase by 0.5%
Decrease by 0.5%

Mortality rate

As of December 31, 2018

Change in assumptions

Decrease by 0.5%

Extended 1 year
Shortened 1 year

Millions of yen

Overseas

Current service cost
Past service cost and gains and losses on settlement
Interest expense (income)Defined benefit cost through profit or loss
Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Return on plan assets (excluding amounts included in interest income)Defined benefit cost through other comprehensive income
Total of defined benefit cost

Overseas

Total¥10,214(4,388)
727
6,553
(249)
(85)
3,350
31
¥ 3,047¥ 9,600¥ 9,348450
2,186
11,985(1,189)(9,860)1,255
11,420¥ 1,626¥13,611¥19,562(3,937)
2,913
18,538(1,438)(9,946)
4,605
11,451¥ 4,673¥23,210(Note 1) The net amount of interest expense and interest income is included in “Financial costs.” Other expenses are included in “Cost of sales” and “Selling, general andadministrative expenses.”(Note 2) Contributions to the defined contribution plans were ¥7,383 million for the year ended December 31, 2017 and ¥11,517 million for the year ended
December 31, 2018 and were not included in the table above.

(2)

Other Employee Benefit Expenses

The employee benefit expenses other than post-employment benefits that are included in the consolidated statement of income for eachyear are as follows:
Millions of yen

Remuneration and salary
Bonus to employees
Legal welfare expenses

F. Breakdown of Defined Benefit Cost
The breakdown of defined benefit cost for each year is as follows:Japan

Welfare expenses
Termination benefits

2017

2018

¥221,896
60,274
43,19237,3991,577¥236,971
67,37944,53539,086(304)

Year ended December 31, 2017
Millions of yen

Current service cost
Past service cost and gains and losses on settlement
Interest expense (income)Defined benefit cost through profit or loss
Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Return on plan assets (excluding amounts included in interest income)Defined benefit cost through other comprehensive income
Total of defined benefit costJapan

Overseas

Total¥10,978(222)
757
11,5142
27(714)(1,223)¥ (1,908)¥ 9,605¥   9,408(8,263)
2,849
3,993(4,437)248(3,608)(16,430)¥(24,226)¥(20,233)¥ 20,386(8,485)
3,605
15,507(4,435)276(4,322)(17,653)¥(26,135)¥(10,628)

23. Equity and Other Equity Items(1)

Share Capital and Capital Surplus

A. Authorized Shares
The number of authorized shares as of December 31, 2017 and 2018 is 8,000,000 thousand ordinary shares.
B. Fully Paid Issued Shares
The schedule of the number of issued shares and share capital is as follows:
Thousands ofshares

As of January 1, 2017
Increase (decrease)
As of December 31, 2017
Increase (decrease)
As of December 31, 2018

Share capital

Capital surplus

2,000,000—
2,000,000—
2,000,000¥100,000—
100,000—¥100,000¥736,400—
736,400—¥736,400(Note) The shares issued by the Company are non-par value ordinary shares that have no restriction on any content of rights.

Japan Tobacco Inc.

114

Annual Report 2018

Japan Tobacco Inc.

115

Millions of yen

Number of ordinary
issued shares

Annual Report 2018

(2)Treasury SharesYear ended December 31, 2018

The schedule of the number of treasury shares and its amount as of each year end is as follows:
Class of shares

Thousands ofsharesMillions of yen

Number of shares

Amount209,044(88)
208,957(380)
208,577¥443,822(186)
443,636(807)¥442,829

As of January 1, 2017
Increase (decrease) (Note 2)
As of December 31, 2017
Increase (decrease) (Note 2)
As of December 31, 2018

(Note 1) The Company adopts share option plans and utilizes treasury shares for delivery of shares due to its exercise. Contract conditions and amounts aredescribed in “33. Share-based Payments.”(Note 2) Purchases of shares less than one unit are 0 thousand shares for the year ended December 31, 2017 and 0 thousand shares for the year ended
December 31, 2018. The number of shares delivered upon exercise of share options is 88 thousand shares for the year ended December 31, 2017 and
380 thousand shares for the year ended December 31, 2018.

Millions of yen

Yen

Total dividends

Dividends per share

Basis date

Effective date

(Resolution)
Annual Shareholders’ Meeting(March 27, 2018)

Ordinary shares¥125,373¥70

December 31, 2017

March 28, 2018

Board of Directors(August 1, 2018)

Ordinary shares

134,35175

June 30, 2018

September 3, 2018

Basis date

Effective date

December 31, 2017

March 28, 2018

Basis date

Effective date

December 31, 2018

March 22, 2019

Dividends for which the effective date falls in the following year are as follows:Year ended December 31, 2017Class of shares

Millions of yen

Yen

Total dividends

Dividends per share¥125,373¥70(Resolution)(3)

Other Components of Equity

D. Net Gain (Loss) on Revaluation of Financial Assets Measured
at Fair Value through Other Comprehensive Income
This is the valuation difference in the fair value of financial assets
measured at fair value through other comprehensive income.

A. Subscription Rights to Shares
The Company adopts share option plans and issues subscription
rights to shares based on the Companies Act. Contract conditions
and amount are described in “33. Share-based Payments.”

E. Remeasurements of Defined Benefit Plans
Remeasurements of defined benefit plans comprise actuarial gains
and losses, the return on plan assets excluding amounts included
in interest income, and any change in the effect of the asset ceilingexcluding amounts included in interest income. In addition, actuarial
gains and losses are the effects of differences between the actuarial
assumptions at the beginning of the year and what has actuallyoccurred, and the effects of changes in actuarial assumptions.
Remeasurements are recognized as other comprehensive income
when they occur and are transferred immediately from other components of equity to retained earnings.

B. Exchange Differences on Translation of Foreign Operations
Exchange differences on translation of foreign operations are composed of foreign currency translation difference that occurs when
consolidating financial statements of foreign subsidiaries preparedin foreign currencies, and the effective portion of net gain (loss) on
the hedging instruments designated as hedge of net investment.
C. Net Gain (Loss) on Derivatives Designated as Cash Flow
HedgesThe Group uses derivatives for hedging to avoid the risk of­fluctuation in future cash flows. This is the effective portion ofchanges in the fair value of hedging instruments designated as
cash flow hedges.

Annual Shareholders’ Meeting(March 27, 2018)

Ordinary sharesYear ended December 31, 2018
Class of shares

Millions of yen

Yen

Total dividends

Dividends per share¥134,357¥75(Resolution)
Annual Shareholders’ Meeting(March 20, 2019)

Ordinary shares

25. Revenue(1)

Disaggregation of Revenue

The disaggregation of “Revenue” for the year ended December 31, 2018 is as follows. The amounts are presented after eliminations ofintercompany transactions.
Year ended December 31, 2018
Millions of yen
Reportable Segments

24. DividendsCore revenue from tobacco business

Dividends paid for each year are as follows:

Other

Year ended December 31, 2017Class of shares

Millions of yen

Yen

Total dividends

Dividends per share

Basis date

Effective date

(Resolution)
Annual Shareholders’ Meeting(March 24, 2017)

Ordinary shares¥118,203¥66

December 31, 2016

March 27, 2017

Board of Directors(August 2, 2017)

Ordinary shares

125,369

70

June 30, 2017

September 1, 2017

Japan Tobacco Inc.

116

Annual Report 2018

Domestic
TobaccoInternational
TobaccoPharmaceuticals

Processed
Food

Other

Consolidated¥582,379
39,047¥621,426¥1,250,719
61,622¥1,312,342¥     —
113,992¥113,992¥     —
161,387¥161,387

¥   —
6,815
¥6,815¥1,833,098
382,864¥2,215,962

A. Domestic and International Tobacco Businesses
Domestic and international tobacco businesses engage in the saleof tobacco products.
Revenue from sales of products is recognized upon delivery of
the products because the customer obtains control of the products
upon delivery, by which the Group evaluates that the performanceobligation is satisfied. Revenue is measured at the consideration
promised in a contract with a customer, less discounts, rebates andtaxes, including consumption tax. In addition, where the Groupmakes payments to the customer, except the case when consideration payable to the customer is a payment for a distinct product orJapan Tobacco Inc.

service from the customer, revenue is measured at the amountwhich is consideration promised with the customer, less consideration payable to the customer.
Considerations for transactions are received mainly within one
year from satisfying their performance obligations and includes nosignificant financing components.
The tobacco excise taxes and other transactions in which theGroup is involved as an agency are excluded from revenue. The
inflow of economic benefits after deducting the tobacco excise
taxes and other transactions is presented as “Revenue” in the consolidated statement of income.

117

Annual Report 2018

B. Pharmaceutical BusinessPharmaceutical business mainly engages in the sale of prescription
drugs and licensing.
Revenue from sales of products is recognized upon delivery of
the products because the customer obtains control of the products
upon delivery, by which the Group evaluates that the performanceobligation is satisfied. Revenue is measured at the consideration
promised in a contract with a customer, less discounts, rebates andtaxes, including consumption tax. In addition, where the Groupmakes payments to the customer, except the case when consideration payable to the customer is a payment for a distinct product orservice from the customer, revenue is measured at the amountwhich is consideration promised with the customer, less consideration payable to the customer.
Revenue from licensing is generated by licensing out the rights
to develop and market of each compound to licensees in the development stage, and the Group receives upfront income, milestone
revenue and sales-based royalties. Upfront income is recognized at
the time the customer obtains control of the license. Milestone
revenue is recognized at the time the milestone agreed between theparties such as the progress of development is achieved. Salesbased royalties are measured based on the Group’s licensees’ sales,
and recognized by taking into consideration the timing ofoccurrence.
Considerations for transactions are received mainly within one
year from satisfying their performance obligations and includes nosignificant financial component.

(3)

C. Processed Foods Business
Processed foods business engages in the sale of frozen and ambient processed foods, bakery products and seasonings.
Revenue from sales of products is recognized upon delivery of
the products because the customer obtains control of the products
upon delivery, by which the Group evaluates that the performanceobligation is satisfied. Revenue is measured at the consideration
promised in a contract with a customer, less discounts, rebates andtaxes, including consumption tax. In addition, where the Groupmakes payments to the customer, except the case when consideration payable to the customer is a payment for a distinct product orservice from the customer, revenue is measured at the amountwhich is consideration promised with the customer, less consideration payable to the customer.
Considerations for transactions are received mainly within one
year from satisfying their performance obligations and includes nosignificant financial component.
Transactions in which the Group is involved as an agency are
excluded from revenue. The inflow of economic benefits after
deducting these transactions is presented as “Revenue” in the
consolidated statement of income.

(2)

Transaction Price Allocated to the Remaining
Performance Obligations

The Group uses the practical expedient and does not disclose information on the remaining performance obligations because it has no
significant transactions with initial expected contractual terms
exceeding one year. There are no significant amounts of considerations from contracts with customers that are not included in­transaction prices.

Gross Turnover

The reconciliation from “Gross turnover” to “Revenue” for each year is as follows:
Millions of yen

Gross turnoverTobacco excise taxes and agency transaction amount
Revenue

2017

2018

¥ 7,286,883(5,147,230)¥ 2,139,653¥ 7,532,248(5,316,285)¥ 2,215,962

The tobacco excise taxes and other transactions in which the Group is involved as an agency are excluded from revenue. The inflow of
economic benefits after deducting the tobacco excise taxes and other transactions is presented as “Revenue” in the c­ onsolidated statementof income.
Gross turnover is an item that the Group discloses voluntarily and is not “Revenue” as defined by IFRS.

26. Other Operating Income
The breakdown of “Other operating income” for each year is as follows:
Millions of yen

Gain on sale of property, plant and equipment, intangible assets
and investment properties (Notes 1, 2)
Reversal of impairment losses on investments in associates
Other (Note 2)
Total

118

Annual Report 20182018

¥24,025
8,848
12,851¥45,724¥39,402—9,129¥48,532(Note 1) The amount of gain on sale for the year ended December 31, 2018 mainly relates to the sale of the old plant sites.
(Note 2) The amount of restructuring incomes included in each account is as follows:
Millions of yen

Gain on sale of property, plant and equipment, intangible assets
and investment properties
Other
Total

2017

2018

¥21,616
29¥21,645¥38,559725¥39,284

27. Selling, General and Administrative Expenses
The breakdown of “Selling, general and administrative expenses” for each year is as follows:
Millions of yen

Advertising expenses
Promotion expenses
Commission
Employee benefit expenses (Note 2)
Research and development expenses (Note 1)
Depreciation and amortization
Impairment losses on other than financial assets (Note 2)
Losses on sale and disposal of property, plant and equipment, intangible assets,
and investment property (Note 2)
Other (Note 2)
Total

2017

2018

¥ 24,413
112,21254,458254,045
60,60081,2983,427¥ 29,111
106,199
52,749268,956
65,37787,926
8,454

4,848
191,610¥786,911

8,845
142,790¥770,407(Note 1) All research and development expenses are included in “Selling, general and administrative expenses.”(Note 2) The amount of restructuring costs included in each account is as follows:
Millions of yen

Employee benefit expenses
Impairment losses on other than financial assets
Losses on sale and disposal of property, plant and equipment, intangible assets,
and investment property
Other
Total

Japan Tobacco Inc.

2017

Japan Tobacco Inc.

119

Annual Report 2018

2017

2018

¥1,5781,554¥    24
3,105

1,224
3,957
¥8,314

3,262
1,530¥7,921

28. Financial Income and Financial Costs

Year ended December 31, 2018

The breakdown of “Financial income” and “Financial costs” for each year is as follows:

Millions of yen
Millions of yen

Financial Income

2017

2018

¥1,814¥2,056

Dividend income
Financial assets measured at fair value through other comprehensive income
Interest income

Amount arising

Reclassification
adjustments

Before tax
effects

Tax effects

Net oftax effects¥ (11,703)(4,673)¥ (16,375)

¥  —
—
¥  —

¥ (11,703)(4,673)¥ (16,375)¥ 3,488
1,478¥ 4,965¥  (8,215)(3,195)¥ (11,410)¥(244,898)
1,138¥(230)
236¥(245,128)
1,374¥(2,603)(363)¥(247,731)
1,012¥(243,760)¥(260,135)¥    6¥    6¥(243,754)¥(260,129)¥(2,965)¥ 2,000¥(246,719)¥(258,129)

Items that will not be reclassified to profit or loss
Net gain (loss) on revaluation of financial assets measured
at fair value through other comprehensive income
Remeasurements of defined benefit plans

Financial assets measured at amortized cost

3,695
2
¥5,754

2,567
399¥4,780

Deposits and bonds
Other
Total

Millions of yen
Financial Costs

Total of items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations
Net gain (loss) on derivatives designated as cash flow hedges
Total of items that may be reclassified subsequently to profit
or loss

2018

2017

Interest expenses

Total

Financial liabilities measured at amortized cost

¥16,267
77
15,9742,913
4,022¥39,252¥11,51787
11,257
3,605
882¥27,349

Bonds and borrowings (Note 2)
OtherForeign exchange losses (Note 1)
Employee benefit expenses (Note 3)
Other
Total

(Note 1) Valuation gain (loss) of currency derivatives is included in foreign exchange losses.
(Note 2) Valuation gain (loss) of interest rate derivatives is included in interest expenses.
(Note 3) The employee benefit expenses are the net amount of interest cost and interest income related to employee benefits.

30. Earnings per Share(1)

Basis of Calculating Basic Earnings per Share

A. Profit Attributable to Ordinary Shareholders of the Parent Company
Millions of yen

Profit for the period attributable to owners of the parent company
Profit not attributable to ordinary shareholders of the parent company
Profit for the period used for calculation of basic earnings per share

29. Other Comprehensive Income
Amount arising during the year, reclassification adjustments to profit or loss and tax effects for each component of “Other comprehensive
income” for each year are as follows:Year ended December 31, 2017

2017

2018

¥392,409—¥392,409

385,677—
385,677

B. Weighted-average Number of Ordinary Shares Outstanding During the Period
Thousands of shares

Weighted-average number of shares during the period

2017

2018

1,790,995

1,791,296

Millions of yen
Amount arising

Reclassification
adjustments

Before tax
effects

Tax effects

Net oftax effects(2)

Basis of Calculating Diluted Earnings per Share

A. Profit Attributable to Diluted Ordinary Shareholders

Items that will not be reclassified to profit or loss
Net gain (loss) on revaluation of financial assets measured
at fair value through other comprehensive income

Millions of yen¥ 13,518
26,135¥ 39,653

Remeasurements of defined benefit plans
Total of items that will not be reclassified to profit or loss

¥   —
—
¥   —

¥ 13,518
26,135¥ 39,653¥ (4,116)(6,107)¥(10,223)¥  9,402
20,028¥ 29,430

Profit for the period used for calculation of basic earnings per share
Adjustment
Profit for the period used for calculation of diluted earnings per share

2017

2018

¥392,409(0)¥392,409¥385,677—¥385,677

Items that may be reclassified subsequently to profit or loss

¥130,167(532)

Exchange differences on translation of foreign operations
Net gain (loss) on derivatives designated as cash flow hedges
Total of items that may be reclassified subsequently to profit
or loss¥129,634¥169,287

Total¥(341)
455
¥ 115
¥ 115

¥129,826(77)¥129,749¥169,402¥ (1,753)23¥ (1,730)¥(11,952)¥128,073(54)¥128,019¥157,449

B. Weighted-average Number of Diluted Ordinary Shares Outstanding During the Period
Thousands of shares

Weighted-average number of ordinary shares during the period
Increased number of ordinary shares under subscription rights to shares
Weighted-average number of diluted ordinary shares during the period

Japan Tobacco Inc.

120

Annual Report 2018

Japan Tobacco Inc.

121

Annual Report 2018

2017

2018

1,790,995
1,042
1,792,037

1,791,296
863
1,792,159

31. Non-cash Transactions(2)

Changes in the Number of Share Options of the Company

Significant Non-cash Transactions
The amount of assets acquired under finance leases was ¥3,599 million for the year ended December 31, 2017 and ¥1,041 million for theyear ended December 31, 2018.

SharesBalance as of January 1

32. Reconciliation of Liabilities Arising from Financing Activities

GrantedReconciliation of liabilities arising from financing activities for each year is as follows:

ExercisedTransferredYear ended December 31, 2017

Balance as of December 31
Millions of yen
Non-cash changes

Short-term borrowings and commercial paper
Long-term borrowings (Note 1)
Bonds (Note 1)
Finance lease obligations
Derivatives (Note 2)
Total

As of
January 1,
2017¥187,949
1,449
358,158
7,701(3,052)¥552,205

Cash flows

Acquisition
throughbusiness
combinations

Foreignexchange
movement

Fair valuechanges

Other

As of
December31, 2017¥116,371
70,191(20,000)(1,373)—¥165,189¥35,349131—324—¥35,804¥ 1,37382(6,086)416—¥(4,214)

¥ —
—
—
—
562
¥562

¥   —
—
169
3,599
—
¥3,768¥341,041
71,854332,242
10,667(2,490)¥753,314

Exercisable balance as of December 31

Millions of yen

Directors

Executive
Officers

Total

275,800
53,000——328,800—

701,000
89,400(88,000)—
702,400
378,800

976,800
142,400(88,000)—
1,031,200
378,800

Directors

Executive
Officers

Total

328,800
68,800—(202,200)
195,400—

702,400
109,400(380,000)
202,200
634,000
239,600

1,031,200
178,200(380,000)—
829,400
239,600(Note 1) The number of share options is presented as the number of underlying shares.
(Note 2) All share options are granted with an exercise price of ¥1 per share.
(Note 3) Share options are granted to 5 directors and 19 executive officers for the year ended December 31, 2017, and 5 directors and 18 executive officers forthe year ended December 31, 2018.
“Transferred” included in the “Changes in the Number of Share Options” represents the number of share options for persons granted whose management position changed during the period.
(Note 4) The weighted-average fair values per share of share options granted during the period were ¥2,411 and ¥1,500 for the years ended December 31, 2017and 2018, respectively.
(Note 5) The weighted-average share prices of share options at the time of exercise during the period were ¥3,810 and ¥3,086 for the years ended December 31,
2017 and 2018, respectively.
(Note 6) The weighted-average remaining contract years of unexercised share options at the end of each period were 25.0 years and 25.4 years for the years
ended December 31, 2017 and 2018, respectively.

(3)Year ended December 31, 2018

2018

2017

Method of Measuring Fair Value of Share Options Granted During the Period of the Company

A. Valuation Model
Black-Scholes Model

Non-cash changes

Short-term borrowings and commercial paper
Long-term borrowings(Note 1)

Bonds (Note 1)
Finance lease obligations
Derivatives (Note 2)
Total

As of
January 1,
2018¥341,041
71,854332,242
10,667(2,490)¥753,314

Cash flows

Acquisition
throughbusiness
combinations

Foreignexchange
movement

Fair valuechanges

Other

As of
December31, 2018¥(133,849)
56,425285,136(1,637)2,294¥ 208,370¥49,137
1,795———¥50,932¥(19,586)(764)(7,346)(264)—¥(27,960)

¥ —
—
—
—
196
¥196

¥1,280
2
413
1,041
—
¥2,736¥238,023
129,313
610,444
9,807—¥987,588(Note 1) Current portion is included.
(Note 2) Derivatives are held for the purpose of hedging bonds.

Share priceVolatility of share price (Note 1)
Estimated remaining period (Note 2)
Estimated dividends (Note 3)
Risk free interest rate (Note 4)

The Company and Torii Pharmaceutical adopt share option plans.
Share options are granted by the resolutions of the Board of
Directors based on the approvals at the Annual Shareholders’Meeting.
The outline of the share option plan of the Company is asfollows:

Conditions related to the exercise of share options are as follows:
A. The subscription rights to shares become exercisable when aholder of a subscription right to shares no longer holds a position
as a director, an audit & supervisory board member or an executive officer. In the subscription rights to shares allocation contract
with holders of such rights, it is provided for that the rights
become exercisable from the date following the date on which
they no longer hold their positions.
B. In the case where any holders of subscription rights to shares
waive such rights, they cannot exercise them.

Share Option Contract Conditions of
the Company

Positions of persons granted: Directors and Executive
Officers
Settlement: Issuance of shares
Effective period of granted share option : 30 years after the date of
grant
Vesting conditions: NoneJapan Tobacco Inc.

122

Annual Report 2018

2017

2018

¥3,95031.9%
15 years¥130/share
0.32%¥3,01331.7%
15 years¥140/share
0.26%(Note 1) Calculated based on daily share prices quoted for the past 15 years.
(Note 2) Because of the difficulty of a reasonable estimation due to insufficient data, the remaining period is estimated based on the assumption that shareoption rights would be ­exercised at a midpoint of the exercise period.
(Note 3) Based on the latest dividends paid.
(Note 4) The yield on government bonds for a period of the expected remaining period.

(4)

33. Share-based Payments(1)

B. Main Assumptions and Estimation

Share-based Payment Expenses

The costs for share options included in “Selling, general and administrative expenses” in the consolidated statement of income were ¥341
million and ¥275 million for the years ended December 31, 2017 and 2018, respectively.

34. Financial Instruments(1)

Capital Management

the mid- to long-term, and is consequently in the best interest of all
stakeholders, including our shareholders.
For that reason, as its financial policy, the Group maintains
a strong financial base that secures stability in the case of changes
in business environment such as economic crises, and flexibility
enabling expeditious responses to business investment
opportunities.

The Group’s management principle is pursuit of the “4S” model:balancing the interests of consumers, shareholders, employees andwider society, and fulfilling our responsibilities towards them, aiming
to exceed their expectations.
The Group believes that sustainable profit growth in the mid- tolong-term based on this principle will increase the Group’s value inJapan Tobacco Inc.

123

Annual Report 2018

The Group manages net interest-bearing debt, where cash and cash equivalents are deducted from interest-bearing debt, and capital(the part attributable to the owners of the parent company). The amounts as of December 31 are as follows:

The analysis of the aging of financial assets that are past due but not impaired as of December 31, 2017 is as follows:
The financial assets include amounts considered recoverable by credit insurance and collateral.

Millions of yen

Interest-bearing debt
Cash and cash equivalents
Net interest-bearing debt
Capital (equity attributable to owners of the parent company)(3)

There are specific rules for shares of the Company under theJapan Tobacco Inc. Act, as follows:
The Japanese government shall hold more than one-third of all of
the shares issued by the Company (excluding the type of shares, forwhich it is stipulated that voting rights may not be exercised on any
matters that can be resolved by the Annual Shareholders’ Meeting)(Article 2 (1)).
In cases where the Company intends to solicit persons to subscribe for shares to be issued or subscription rights to shares orwhere the Company intends to deliver shares (excluding treasury
shares), subscription rights to shares (excluding subscription rightto own shares) or bonds with subscription rights to shares (excluding
bonds with subscription rights to shares) when exchanging withshares, the Company shall obtain the approval of the Minister ofFinance (Article 2 (2)).
Disposal of shares owned by the Japanese government shall bewithin the limits on the number of shares decided by the Diet in therelevant annual budget (Article 3).
The Group monitors financial indicators in order to maintain awell-balanced capital structure that ensures an appropriate returnon equity and a stable and flexible financial condition for future
investment. We monitor credit ratings for financial stability andflexibility, and ROE (return on equity) for profitability, while focusing
on changes in the domestic and overseas environment.

(2)

2018

¥  755,804(285,486)
470,318
2,761,687¥  987,588(282,063)
705,526
2,630,594

Credit Risk

Receivables, such as note and account receivables, acquired fromthe operating activities of the Group are exposed to customer
credit risk.
The Group holds mainly debt securities for surplus investment
and equity securities of customers and suppliers to strengthen
relationships with them; those securities are exposed to the issuer’s
credit risk. In addition, through derivative transactions that theGroup conducts in order to hedge foreign exchange fluctuation risks
and interest rate fluctuation risks, we are exposed to the credit riskof the financial institutions which are counterparties to thesetransactions.
In principle, the Group sets credit lines or transaction conditions
with respect to trade receivables for counterparties based on theCredit Management Guidelines in order to control the credit risk
relating to counterparties. In addition, the receivable balances ofcounterparties with high credit risk are monitored. The Treasury
Division of the Company regularly monitors the status of the occurrence and collection of bad debts, and reports them to the president
and the Board of Directors of the Company.
With regard to the investment of cash surpluses and derivatives,
the Group invests in debt securities and other financial instrumentswith a certain credit rating and transacts with financial institutions
with a high credit rating in principle in order to prevent credit risks
from occurring and based on the Group Financial Operation Basic
Policy. In addition, the Treasury Division of the Company regularly
monitors the performance of these transactions and reports theresults to the president and the Board of Directors of the Company.
The maximum exposure pertaining to credit risks for financial
assets is the carrying amount after considering impairment in
the consolidated financial statements.
There is no excessive concentration of the credit risks to certain
counterparties.

Financial Risk Management

The Group is exposed to financial risks (credit risk, liquidity risk,
foreign exchange risk, interest rate risk, and market price fluctuationrisk) in the process of its management activities and it manages
risks based on a specific policy in order to avoid or reduce said
risks. The results of risk management are regularly reported by theTreasury Division to the president and the Board of Directors of
the Company.
The Group policy limits derivatives to transactions for the­purpose of mitigating risks from transactions based on actual
demand. Therefore, we do not transact derivatives for speculation
purposes or trading purposes.

Japan Tobacco Inc.

2017

124

Annual Report 2018

As of December 31, 2017
Millions of yen
Total¥6,347

Trade and other receivables

Amount past due
Within 30 days

Over 30 days,
within 60 days

Over 60 days,
within 90 days

Over 90 days

¥4,724

¥814

¥214

¥595

The Group reviews collectability of trade receivables depending on the credit conditions of counterparties and recognizes allowance for
doubtful accounts. The schedule of the allowance for doubtful accounts is as follows.
The amounts of the allowance for doubtful accounts for the year ended December 31, 2017 are recognized based on IAS 39.
Millions of yen
2017¥ 8,436
22,090
(780)
(127)
539
¥30,158

As of January 1, 2017
Addition
Decrease (intended use)
Decrease (reversal)
Other
As of December 31, 2017

Millions of yen
Tradereceivables¥23,589228(19,537)(591)(2,040)¥ 1,650

As of January 1, 2018
Addition
Decrease (intended use)
Decrease (reversal)
Other
As of December 31, 2018

Other financial assets
Measured at an amount equal to
the full lifetime expectedcredit losses

Measured at an
amount equal
to the12-month
expected
credit losses

Noncredit-impaired
financial assets

Credit-impaired
financial assets

Total

¥—
—
—
—
—
¥—

¥317
13
(3)
(58)
—
¥269

¥6,252
906
(117)
(979)
(223)
¥5,839¥30,158
1,147(19,656)(1,628)(2,263)¥ 7,758(Note) There is no significant change in the carrying amounts of financial assets which affects the change in the allowance for doubtful accounts for the year
ended December 31, 2018.

(4)

Liquidity Risk

plan and the Treasury Division of the Company regularly monitorsand collects information on the balance of liquidity-in‑hand andinterest-bearing debt and reports it to the president and the Boardof Directors of the Company. In addition, the Group keeps necessary
credit facilities to manage liquidity risk by having commitment lines
with several financial institutions.

The Group raises funds by borrowings, commercial paper andbonds; however, these liabilities are exposed to the liquidity risk that
we would not be able to repay liabilities on the due date due to thedeterioration of the financing environment.
In accordance with the Group Financial Operation Basic Policy,
the Group establishes a finance plan based on the annual businessJapan Tobacco Inc.

125

Annual Report 2018

The financial liability balance (including derivative financial instruments) by maturity as of December 31 is as follows:
As of December 31, 2017
Millions of yen

Carrying
amountContractual
cash flow

Due within
one year

Due after
one yearthrough
two years

Due after
two years
throughthree years

Due after
three years
throughfour years

Due after
four years
throughfive years

Due after
five years

Non-derivative financial liabilities¥  395,733
274,233
Commercial paper
66,808Current portion of long-term borrowings
690
Long-term borrowings
71,164Current portion of bonds
56,451
Bonds
275,791
Subtotal
1,140,870
Trade and other payables

Short-term borrowings¥  395,733
274,233
66,808690
71,16456,500276,250
1,141,378¥395,733
274,233
66,808690—
56,500—793,964

¥  —
—
—
—
386
—
—
386

¥     ————
201—
80,00080,201¥     ————
117—
84,75084,867¥     ————
30,119—30,00060,119¥      ———
—40,341—
81,500121,841

5,425
5,425
¥1,146,803

5,425
5,425
¥799,389

—
—
¥386

—
—
¥80,201——¥84,867——¥60,119——¥121,841

Due after
one yearthrough
two years

Due after
two years
throughthree years

Due after
three years
throughfour years

Due after
four years
throughfive years

Derivative financial liabilities
Foreign exchange forward contract
Subtotal
Total

5,425
5,425
¥1,146,295

As of December 31, 2018
Millions of yen

Carrying
amountContractual
cash flow

Due within
one year¥  380,516
165,985
Commercial paper
72,038Current portion of long-term borrowings
12,443Long-term borrowings
116,870
Bonds
610,444
Subtotal
1,358,297¥  380,516
165,985
72,15012,443
117,006
613,773
1,361,873¥380,516
165,985
72,15012,443——631,094¥————
11,95680,00091,956¥————
11,60883,25094,858¥————41,61030,00071,610¥————11,576
118,275
129,851

¥

3,176
3,176
¥1,365,049

3,176
3,176
¥634,270——¥91,956——¥94,858——¥71,610——¥129,851——¥342,505

Due after
five years

Non-derivative financial liabilities
Trade and other payables

Short-term borrowings————
40,257302,248
342,505transactions, including the payment and receipt of dividends, incurrencies that are different from each functional currency of
the Group.
(ii) The risk that the equity of the Group is influenced by foreignexchange fluctuation when equity denominated in each functional currency of the Group is translated into Japanese yen
and consolidated.
(iii) The risk that the profit or loss of the Group is influenced byforeign exchange fluctuation when profit or loss denominatedin each functional currency of the Group is translated into
Japanese yen and consolidated.
The Group hedges against risk (i) using derivatives or foreign
currency-denominated interest-bearing debts for example, when
future cash flow is projected or when receivables and payables
are fixed, and some of them are designated as cash flow hedges.
The Group hedges against risk (ii) using foreign currency-­
denominated interest-bearing debts for example, and part of theseare designated as net investment hedges. The Group does nothedge against risk (iii) in principle.
In order to mitigate risks mentioned above resulting from theforeign exchange fluctuation, in accordance with the Group
Financial Operation Basic Policy, and under the supervision of the
Financial Risk Management Committee of the Company, the Groupestablishes and implements a foreign currency hedge policy, taking
into consideration the impact on the Group’s performance and thecurrent conditions of the foreign exchange market in a comprehensive manner. The Treasury Division of the Company regularly reports
the performances to the president and the Board of Directors of
the Company.

The impact from the translation of functional currencydenominated financial instruments, and assets, liabilities, income
and expenses of foreign operations into Japanese yen is notincluded. Also, it is based on the assumption that currencies otherthan the currencies used for the calculation do not fluctuate.
Millions of yen

Profit before income taxes

(6)

2017

2018

¥(9,473)¥(2,725)

Interest Rate Risk

Interest rate risk within the Group arises from interest-bearing debts
after deducting cash equivalents. Borrowings and bonds with floating rates are exposed to interest rate fluctuation risk.
In order to reduce the interest rate fluctuation risk related toborrowings and bonds, in accordance with the Group Financial
Operation Basic Policy, and under the supervision of the Financial
Risk Management Committee of the Company, the Group establishes and implements an interest rate hedging policy, taking into
consideration the impact on the Group’s performance and the­ urrent condition of the interest rates in a comprehensive manner.
c
The Treasury Division of the Company reports the performances
to the president and the Board of Directors of the Company.
Interest Rate Sensitivity Analysis
In cases where the interest rate of financial instruments held by theGroup as of each year end increases by 100bp, the impact on profit
before income taxes in the consolidated statement of income is asfollows:
The analysis is subject to financial instruments affected by interest rate fluctuation and based on the assumption that other factors,
including the impacts of foreign exchange fluctuation, are constant.

Foreign Exchange Sensitivity Analysis
In cases where each currency other than the functional currency
that denominates the financial instruments held by the Group asof each year end increases by 10% in value against the functional
currency, the impact on profit before income taxes in the consolidated statement of income is as follows:

Millions of yen

Profit before income taxes

2017

2018

¥(2,593)¥(955)

Derivative financial liabilities
Foreign exchange forward contract
Subtotal
Total

3,176
3,176
¥1,361,472(7)

Hedging Transactions

The Group’s policy for hedging transactions is stated in “3. Significant Accounting Policies.”
A. Cash Flow Hedges
The details of hedging instruments designated as cash flow hedges are as follows:

The total of commitment lines and withdrawal as of December 31 are as follows:
Millions of yen

Total committed line of credit
Withdrawing
Unused balance

2017

2018

¥601,580
114,130¥487,450¥478,531—¥478,531

As of December 31, 2017
Carrying amount (Note)(Millions of yen)Contract amountOver one year

AssetsLiabilities

Average rate, etc.

USD 338 mil.

USD        —

¥  176¥414¥109.75

USD 175 mil.

USD        —

2,490

—

0.24%

Foreign exchange risk

(5)

Foreign Exchange Risk(i) The risk where the profit or loss and cash flow in each functional
currency of the Group is influenced by foreign exchange fluctuation as a result of external transactions and intergroup

The Group operates businesses globally and, therefore, is exposedto the following risks due to foreign exchange fluctuation:

Foreign exchange forward contract
JPY/USD
Interest rate risk
Cross currency swap
Fixed rate receipt and fixed rate payment

Japan Tobacco Inc.

126

Annual Report 2018

Japan Tobacco Inc.

127

Annual Report 2018

As of December 31, 2018

The schedule of net gains (losses) on hedging instrument designated as hedge of net investment in foreign operations is as follows:
Millions of yen

Carrying amount(Millions of yen)
(Note)

Contract amountOver one year

AssetsLiabilities

Average rate, etc.

Foreign exchange risk

USD 638 mil.
CNY 49 mil.

JPY/CNY

USD        —CNY        —¥1,329—¥613
8¥109.21¥15.92(Note) Carrying amounts of derivatives are presented as “Other financial assets” or “Other financial liabilities” in the consolidated statement of financial position,and the portion with over one year maturity is classified as “Non-current assets” or “Non-current liabilities.”

The schedule of net gains (losses) on hedging instrument designated as cash flow hedges is as follows:
Millions of yen
Effective portion of changes
in the fair value of cash flow hedges

As of January 1, 2017

Foreignexchange risk

Interest
rate risk

Total¥  367¥ 73¥  440

Other comprehensive income

30
(155)
39
(475)
(195)

Amount arising (Note 1)
Reclassification adjustments (Note 2)
Tax effects
Other
As of December 31, 2017

(562)
611
(15)
—
106

(532)
455
23
(475)
(88)

Other comprehensive income
Amount arising2018¥ 8,784¥10,793

3,763(1,753)¥10,793

9,652(2,603)¥17,842

Other comprehensive income

Foreign exchange forward contract
JPY/USD

As of January 1

2017

1,334
194
(410)
(480)
¥  443(Note 1)

Reclassification adjustments (Note 2)
Tax effects
Other
As of December 31, 2018

(196)
42
47
—
¥ —

1,138
236
(363)
(480)
¥  443(Note 1) The change in value of the hedged item used as the basis for recognizing hedge ineffectiveness approximates the change in fair value of the hedging
instrument.
(Note 2) The amount, which is reclassified when the hedged item affects profit or loss, is recognized in “Revenue,” “Financial income” or “Financial costs” in the
consolidated statement of income. The amount of hedge ineffectiveness is immaterial.

Amount arising (Note 1)
Tax effects
As of December 31(Note 1) The change in value of the hedged item used as the basis for recognizing hedge ineffectiveness approximates the change in fair value of thehedging instrument.
(Note 2) Net gain arising from the hedging instruments for which hedge accounting is discontinued were ¥16,936 million and ¥17,505 million as ofDecember 31, 2017 and 2018 respectively those which are included in the exchange differences on translation of foreign operations.

(8)Market Price Fluctuation Risk

With respect to securities, the Group regularly assesses the fair value and financial conditions of the issuers, and each relevant department
reviews the portfolio held by taking into account the relationship with counterparty entities as necessary.

(9)

Fair Value of Financial Instruments

The fair value hierarchy of financial instruments is categorized from Level 1 to Level 3 as follows:
Level 1: Fair value measured at the quoted price in the active market
Level 2: Fair value that is calculated using the observable price other than categorized in Level 1 directly or indirectly
Level 3: Fair value that is calculated based on valuation techniques which include inputs that are not based on observable market data
A. Financial Instruments Measured at Amortized Cost
The carrying amount and fair value hierarchy of financial instruments measured at amortized cost as of December 31 are as follows:
As of December 31, 2017
Millions of yen
Fair value
Carrying amount

Level 1

Level 2

Level 3

Total

¥ 71,854
332,242¥      —331,998¥      ——

¥71,829—¥ 71,829
331,998

Long-term borrowings (Note)
Bonds (Note)
As of December 31, 2018

B. Hedge of Net Investment in Foreign Operations
The details of hedging instruments designated as hedge of net investment are mainly as follows:

Millions of yen
Fair value

As of December 31, 2017

Over one year

AssetsLiabilities

Average rate, etc.

USD 1,575 mil.

USD 1,250 mil.

¥   —

¥177,467¥107.36

Level 3

Total

¥129,313
610,444¥     —
606,495¥     ——

¥129,978—¥129,978606,495(Note) Current portion is included.

With regard to short-term financial assets and short-term financial liabilities measured at amortized cost, their fair value approximatesthe carrying amount.
The fair value of long-term borrowings is calculated based on the present value which is obtained by discounting the total of the p­ rincipal
and interest by the interest rate assumed in a case where the same loan is newly made.

Carrying amount (Note)(Millions of yen)

Bonds in GBP

Level 2

Bonds

Contract amount

As of December 31, 2018

Bonds in USD

Level 1Long-term borrowings (Note)

Carrying amount (Note)(Millions of yen)

Bonds in USD

Carrying amountContract amountOver one year

AssetsLiabilities

Average rate, etc.

USD 1,250 mil.
GBP 400 mil.

USD 1,250 mil.
GBP 400 mil.

¥ ——¥138,384
55,216¥109.41
$0.76

516
67

338
—

a0.012$0.033Foreign exchange forward contract
EUR / RUB
USD / TWD

RUB 19,973 mil.
TWD 6,113 mil.

RUB
TWD

—
—

(Note) Carrying amounts of bonds are presented as “Bonds and borrowings” in the consolidated statement of financial position, and the portion with over one year
maturity is classified as “Non-current liabilities.” Carrying amounts of derivatives are presented as “Other financial assets” or “Other financial liabilities” in the
consolidated statement of financial position, and the portion with over one year maturity is classified as “Non-current assets” or “Non-current liabilities.”

Japan Tobacco Inc.

128

Annual Report 2018

Japan Tobacco Inc.

129

Annual Report 2018

(2)B. Financial Instruments Measured at Fair Value
The fair value hierarchy of financial instruments measured at fair value as of December 31 is as follows:

Remuneration for Directors and Audit and Supervisory Board Members

Remuneration for directors and audit and supervisory board members for each year is as follows:
Millions of yen

As of December 31, 2017
Millions of yen

Derivative assets
Equity securities
Other
Total
Derivative liabilities
Total

Level 1

Level 2

Level 3 (Note)

Total

¥ —
71,859408¥72,267¥ —¥ —¥5,978——¥5,978¥5,425¥5,425

¥ —
5,783
3,559
¥9,342¥ —¥ —¥ 5,978
77,642
3,967¥87,587¥ 5,425¥ 5,425

Remuneration and bonuses
Share-based payments
Total

Millions of yen

Derivative assets
Equity securities
Other
Total
Derivative liabilities
Total

Level 1

Level 2

Level 3¥—58,847401¥59,248¥—¥—¥ 8,653—
11,025¥19,677¥ 3,176¥ 3,176

¥

Total

—
5,837
4,514
¥10,351¥—¥—¥ 8,653
64,684
15,940¥89,277¥ 3,176¥ 3,176(Note) The schedule of financial instruments that are classified in Level 3 is as follows:
Millions of yen

As of January 1

2017

2018

¥7,202¥ 9,342

391
914
995
(159)
—
¥9,342(341)(1003)
2,270
(81)
164
¥10,351

Total gain (loss)
Profit or loss (Note 1)
Other comprehensive income (Note 2)
Purchases
Sales
Other
As of December 31(Note 1) Gains and losses included in profit or loss for the years ended December 31, 2017 and 2018 are related to financial assets measured at fair value
through profit or loss as of the year end. These gains and losses are included in “Financial income” and “Financial costs.”(Note 2) Gains and losses included in other comprehensive income for the years ended December 31, 2017 and 2018 are related to financial assets measured atfair value through other comprehensive income as of the year end. These gains and losses are included in “Net gain (loss) on revaluation of f­inancial
assets measured at fair value through other comprehensive income.”

35. Related Parties(1)

Based on the Japan Tobacco Inc. Act, the Japanese government
shall hold more than one-third of all of the shares issued by theCompany (excluding the type of shares, for which it is stipulated thatvoting rights may not be exercised on any matters that can be
resolved by Annual Shareholders’ Meeting). As of December 31,
2018, the Japanese government held 33.35% of all outstanding
shares of the Company.

Japan Tobacco Inc.

Related-party Transactions

Annual Report 2018

¥795
109
¥904

(The composition of the Group)
The composition of the Group by reportable segment as of December 31 is as follows:
2017

2018

Number ofsubsidiaries

Number of entities
accounted for using
the equity method (Note)

Number ofsubsidiaries

Number of entities
accounted for using
the equity method (Note)

Reportable Segments

13
156
2
28
11
210

2
5
—
3
3
13

13
166
2
29
14
224

1
5
—
3
2
11

Domestic Tobacco
International Tobacco
Pharmaceuticals
Processed Food
Other
Total
(Note) No associates or joint ventures are considered to be material to the Group.

There is no significant change in the composition of the Group for the year ended December 31, 2018.
Regarding the restrictions on the ability to use the assets of the Group, please refer to “7. Cash and Cash Equivalents.”

37. Commitments(1)

Commitments for the Acquisition of Assets

Commitments for the acquisition of assets as of December 31 are as follows:
Millions of yen

Acquisition of property, plant and equipment
Acquisition of intangible assets
Total

(2)

Procurement of Domestic Leaf Tobacco

Japan Tobacco Inc.

2017

2018

¥74,732
3,103¥77,835¥54,030
3,127¥57,157

type of tobacco and the prices by type and quality of tobacco leaf.
Under the contracts, the Company is obligated to purchase all
domestic leaf tobacco produced pursuant to such contracts, except
for any domestic leaf tobacco not suited for the manufacture of
tobacco products.

With regard to the procurement of domestic leaf tobacco by theCompany, based on the Tobacco Business Act, the Company enters
into purchase contracts with domestic leaf tobacco growers every
year, and the contracts determine the area under cultivation by

Related-party transactions are conducted under the same conditions
as regular business transactions.
The Group’s revenue from CJSC TK Megapolis, the local Russian
distribution affiliate, was ¥216,852 million and ¥216,913 million forthe years ended December 31, 2017 and 2018, respectively. The
Group held trade receivables of ¥49,097 million and ¥44,436 million
from CJSC TK Megapolis as of December 31, 2017 and 2018,
respectively.

130

2018

¥540
120
¥660

36. Subsidiaries, Associates and Others

As of December 31, 2018
(Note)

2017131

Annual Report 2018

38. Business Combinations

(1)

(2)

Acquisition of the Tobacco Company in Russia

B. Financial Impact on the Group
Since the acquisition date, the acquired business has contributed toconsolidated revenue of ¥12,682 million and consolidated operating
profit of ¥304 million.
It is assumed that had the business been acquired on January 1,
2018, total consolidated revenue would have increased by ¥22,253
million to ¥2,238,215 million, and total consolidated operating profit
would have decreased by ¥1,893 million to ¥563,091 million(Unaudited).
The above operating profit includes the amortization of trademarks acquired from the business combinations, etc.

A. Summary of the Business Combination
On July 31, 2018, the Group acquired 100% of the outstanding
shares of JSC Donskoy Tabak (“DT”), a company operating tobacco
business in Russia (Note).
DT has well-established brands such as "Donskoy Tabak", "Kiss"and "Play" in the value segment, the largest and growing pricesegment in Russia.
The purpose of this acquisition is to expand brand portfolio in thevalue segment and strengthen a distribution and sales network in
the Russian tobacco market, a cornerstone of the Group’s earnings
growth.

C. Consideration and Details (Total of the Acquisition)
The consideration is ¥163,127 million and paid fully in cash.
Out of the total consideration, ¥134,644 million has been paid asof the year end and ¥28,484 million will be paid after the year end.

(Note) The acquisition also includes purchases of 100% of the outstanding
shares of JSC Pereslavl-Tabak and 94.97% of the outstanding shares of
Syneteristiki Kapnoviomihania Ellados Sekap S.A.

Acquisition of the Tobacco Business in
Bangladesh

B. Financial Impact on the Group
Since the acquisition date, the acquired business has contributed toconsolidated revenue of ¥1,345 million and consolidated operating
loss of ¥454 million.
It is assumed that had the business been acquired on January 1,
2018, total consolidated revenue would have increased by ¥23,802
million to ¥2,239,765 million, and total consolidated operating profit
would have decreased by ¥727 million to ¥564,257 million (Unaudited).
The above operating profit includes the amortization of trademarks acquired from the business combination, etc.

A. Summary of the Business Combination
On November 29, 2018, the Group acquired the tobacco businessof Akij Group ("Akij"), a tobacco business in Bangladesh.
Akij has well-established brands such as “Navy” and “Sheikh” inthe value and base segments, together covering majority of the
Bangladeshi tobacco market.
The purpose of this acquisition is to expand the presence in
Bangladesh which is large and growing market.
(Note) The Group acquired 100% of the outstanding shares of United Dhaka
Tobacco Company Limited, the entity taking over the tobacco businessassets of Akij, as well as all tobacco related trademarks and design
rights from Akij.

C. Consideration and Details (Total of the Acquisition)
The consideration is ¥174,019 million and paid fully in cash.
Out of the total consideration, ¥111,066 million has been paid asof the year end and ¥62,953 million will be paid after the year end.

D. Net Cash Outflow for the Business Combination (Total of the Acquisition)
Millions of yen
Net cash outflow forthe business combination

D. Net Cash Outflow for the Business Combination (Total of the Acquisition)
Millions of yen
Net cash outflow forthe business combination¥163,127(293)¥162,834

Cash consideration
Cash and cash equivalents in subsidiaries acquired
Net cash outflow for the business combination¥174,019(388)¥173,632

Cash consideration
Cash and cash equivalents in subsidiaries acquired
Net cash outflow for the business combination
E. Fair Values of the Assets Acquired and Liabilities Assumed

Millions of yen
Fair value

E. Fair Values of the Assets Acquired and Liabilities Assumed
Millions of yen
Fair value

Current assets
Trademarks
Non-current assets
Total assets¥ 44,762
60,353
9,707¥114,822

Current liabilities
Non-current liabilities
Total liabilities¥ 75,909
44,494¥120,403(13)¥168,696

Non-controlling interests
Goodwill
Goodwill represents future economic benefits for integration
synergies including enhanced business scale.
Fair value of assets acquired and liabilities assumed are provisional amounts recognized at the acquisition date and may change
during the measurement period (one year from the acquisition date).

Japan Tobacco Inc.

Transaction costs of ¥369 million are expensed as incurred andrecognized in “Selling, general and administrative expense.”132

Annual Report 2018

Current assets
Trademarks
Non-current assets
Total assets¥ 15,725
43,49816,468¥ 75,691

Current liabilities
Non-current liabilities
Total liabilities¥  5,149
4,665¥  9,814

Goodwill¥108,142(3)

Goodwill represents future economic benefits for integration
synergies including enhanced business scale.
Fair value of assets acquired and liabilities assumed are provisional amounts recognized at the acquisition date and may change
during the measurement period (one year from the acquisition date).
Transaction costs of ¥516 million are expensed as incurred andrecognized in “Selling, general and administrative expense.”

Japan Tobacco Inc.

Other Acquisitions

The information on the business combinations other than the above
for the year ended December 31, 2018, is omitted as it is immaterial
both individually and in the aggregate.

133

Annual Report 2018

39. Contingencies

Contingent Liabilities

defendants are jointly and severally liable, and a total amount ofapproximately ¥374.3 billion (approximately CAD 4.6 billion) in punitive damages, to be divided among all the defendants based on
their respective market shares.
The Quebec Superior Court published the first instance judgmentin favor of the plaintiffs in June 2015. In June 2015, JTI-Mac andother tobacco manufacturers appealed the judgment to the Quebec
Court of Appeal, and the appeal on the merits was heard and concluded in November 2016.
In March 2019, the Quebec Court of Appeal dismissed the appeal
of defendants by substantively upholding the first instance judgment
and ordering a punitive damage award against the appellants ofapproximately ¥13.1 billion (approximately CAD 161 million), in
which the share of the total damage award against JTI-Mac isapproximately ¥1.3 billion (approximately CAD 15 million).
Canada Quebec Class Action (Conseil Québécois sur le tabac etla santé):This class action was brought in November 1998 against three
Canadian tobacco manufacturers including JTI-Mac. Plaintiffs wereseeking a total of approximately ¥1,013.9 billion (approximately CAD
12.4 billion) in compensatory damages, an amount for which all thedefendants are jointly and severally liable, and a total amount ofapproximately ¥66.1 billion (approximately CAD 0.8 billion) in punitive damages, to be divided among all the defendants based on
their respective market shares.
The Quebec Superior Court published the first instance judgmentin favor of the plaintiffs in June 2015. In June 2015, JTI-Mac andother tobacco manufacturers appealed the judgment to the Quebec
Court of Appeal, and the appeal on the merits was heard and concluded in November 2016.
In March 2019, the Quebec Court of Appeal dismissed the appealof the defendants by substantively upholding the first instance judgment and ordering a compensatory damage award jointly and severally against the defendants of approximately ¥1,102.9 billion(approximately CAD 13.5 billion), in which the share of the total
damage award against JTI-Mac is approximately ¥143.4 billion(approximately CAD 1.8 billion), and a punitive damage award ofapproximately ¥3 million (approximately CAD 0.04 million) per
defendants.
The Quebec Court of Appeal rendered one judgment for bothclass actions against the defendants and ordered them to make an
initial deposit of approximately ¥94.7 billion (approximately CAD 1.2
billion), in which the share of JTI-Mac is approximately ¥11.9 billion(approximately CAD 145 million).
Canada Saskatchewan Class Action (Adams):
This class action was brought against tobacco industry members
including JTI-Mac and the Company’s indemnitees in June 2009.
Plaintiffs are seeking unspecified compensatory and punitive damages on behalf of class members who allege to be or have been
addicted to nicotine contained in cigarettes manufactured by the
defendants. The preliminary motions are pending. The case is­currently dormant.

The Company and some of its subsidiaries are defendants in legal
proceedings. Provisions are not accounted for in matters where it
is not practicable to reasonably estimate the final outcomes.
The Company and some of its subsidiaries, who are defendants
in such legal proceedings, believe that our defenses asserted inthese proceedings are based on substantial evidence and implement the system for the response to action with the assistance of
external lawyers.
(1) Smoking and Health Related Litigation
The Company and some of its subsidiaries are defendants in­lawsuits filed by plaintiffs seeking damages for harm allegedly
caused by smoking, the marketing of tobacco products, or exposure
to tobacco smoke. As of December 31, 2018, there were a total of
21 smoking and health related cases pending in which one or moremembers of the Group were named as a defendant or for which theCompany may have certain indemnity obligations pursuant to theagreement such as for the Company’s acquisition of RJR Nabisco
Inc.’s overseas (non-U.S.) tobacco operations.
The major ongoing smoking and health related cases are
as follows:
On March 8, 2019, JTI-Macdonald Corp. (hereinafter referred toas “JTI-Mac”), the Company’s Canadian subsidiary, filed for protection from its creditors under the Companies’ Creditors Arrangement
Act (CCAA). The Ontario Superior Court has granted the CCAA
application and extended protection in favor of JTI-Mac. All of the
below Canadian matters against JTI-Mac have been stayed by the
court order. JTI-Mac carries on business in the ordinary course
under the CCAA.
A. Individual Claim
There is one individual case brought against the Company’s indemnitee in South Africa.
South Africa Individual Claim (Joselowitz):
The individual claim was brought against the Company’s indemnitee
in South Africa in October 2000. Plaintiff seeks compensatory andpunitive damages, alleging that the Company’s indemnitee marketed products which it knew to be dangerous to health, manipulated nicotine content to foster addiction, failed to comply with
South African labeling requirements and participated in a clandestine worldwide operation to encourage children to smoke. This casehas been dormant since February 2001.
In addition, there is one individual case (which is currently­dormant) brought against the Company’s subsidiary in Ireland.
B. Class Actions
There are eight ongoing class actions in Canada against theCompany’s subsidiary and/or indemnitees.

Canada Quebec Class Action (Cecilia Letourneau):This class action was brought in September 1998 against three
Canadian tobacco manufacturers including JTI-Mac. Plaintiffs wereseeking a total of approximately ¥374.3 billion (approximately CAD
4.6 billion) in compensatory damages, an amount for which all theJapan Tobacco Inc.

134

Annual Report 2018

Canada Manitoba Class Action (Kunta):
This class action was brought against tobacco industry members
including JTI-Mac and the Company’s indemnitees in June 2009.
Plaintiffs are seeking unspecified compensatory and punitive damages on behalf of class members who allege to be or have been
addicted to nicotine contained in cigarettes manufactured by the
defendants. The statement of claim was served on the Company’s
indemnitees but not on JTI-Mac. The case is currently dormant.
Canada Nova Scotia Class Action (Semple):
This class action was brought against tobacco industry members
including JTI-Mac and the Company’s indemnitees in June 2009.
Plaintiffs are seeking unspecified compensatory and punitive damages on behalf of class members who allege to be or have been
addicted to nicotine contained in cigarettes manufactured by the
defendants. The statement of claim was served on the Company’s
indemnitees but not on JTI-Mac. The case is currently dormant.
Canada British Columbia Class Action (Bourassa):
This class action was brought against tobacco industry members
including JTI-Mac and the Company’s indemnitees in June 2010.
Plaintiffs are seeking unspecified compensatory and punitive damages for class members. The preliminary motions are pending.
The case is currently dormant.
Canada British Columbia Class Action (McDermid):
This class action was brought against tobacco industry members
including JTI-Mac and the Company’s indemnitees in June 2010.
Plaintiffs are seeking unspecified compensatory and punitive damages for class members. The preliminary motions are pending.
The case is currently dormant.
Canada Ontario Class Action (Jacklin):This class action was brought against tobacco industry members
including JTI-Mac and the Company’s indemnitees in June 2012.
Plaintiffs are seeking unspecified compensatory and punitive damages for class members. The preliminary motions are pending.
The case is currently dormant.
In addition, there is one class action brought in Israel against an
indemnitee of the Company’s subsidiary.
C. Health-Care Cost Recovery Litigation
There are 10 ongoing health-care cost recovery cases in Canada
pending against the Company’s subsidiary and indemnitees broughtby all the Canadian provinces (except three Canadian territories).
These provinces filed lawsuits under their own provincial legislation
which was enacted exclusively for the purpose of authorizing theprovincial government to file a direct action against tobacco manufacturers to recoup the health-care costs the government has allegedly incurred and will incur, resulting from “tobacco related wrongs.”
Canada British Columbia Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province ofBritish Columbia in January 2001 against tobacco industry members
including JTI-Mac and the Company’s indemnitees based on its
provincial legislation, the “Tobacco Damages and Health-Care Costs
Recovery Act.” The claim amount is unspecified. In 2001, several
defendants challenged the legislation’s constitutionality, which was
ultimately rejected by the Supreme Court of Canada in September
2005. The action remains pending in the first instance. The pre-trial
process is ongoing. A trial date is not yet scheduled.

Japan Tobacco Inc.

Canada New Brunswick Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province of
New Brunswick in March 2008 against tobacco industry members
including JTI-Mac and the Company’s indemnitees based on legislation similar to that introduced in the Province of British Columbia.
The claim amount is unspecified. The trial is set to begin in
November 2019.
Canada Ontario Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Provinceof Ontario in September 2009 against tobacco industry members
including JTI-Mac and the Company’s indemnitees based on legislation similar to that introduced in the Province of British Columbia.
The statement of claim contains allegations of joint and several
liabilities among all the defendants but does not specify any individual amount or percentages within the total claimed amount of¥4,076.0 billion (CAD 50.0 billion). The pre-trial process is ongoing.
A trial date is not yet scheduled.
Canada Newfoundland and Labrador Health-Care Cost Recovery
Litigation:
This health-care cost recovery litigation was filed by the Province ofNewfoundland and Labrador in February 2011 against tobacco
industry members including JTI-Mac and the Company’s indemnitees based on legislation similar to that introduced in the Provinceof British Columbia. The claim amount is unspecified. The pre-trial
process is ongoing. A trial date is not yet scheduled.
Canada Manitoba Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province ofManitoba in May 2012 against tobacco industry members including
JTI-Mac and the Company's indemnitees based on legislation similar
to that introduced in the Province of British Columbia. The claim
amount is unspecified. The pre-trial process is ongoing. A trial dateis not yet scheduled.
Canada Quebec Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province ofQuebec in June 2012 against tobacco industry members including
JTI-Mac and the Company's indemnitees based on legislation similar
to that introduced in the Province of British Columbia. The statementof claim contains allegations of joint and several liabilities among
all the defendants but does not specify any individual amount orpercentages within the total amount of the claim approximately¥4,944.8 billion (approximately CAD 60.7 billion). The pre-trial­process is ongoing. A trial date is not yet scheduled.
Canada Alberta Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province ofAlberta in June 2012 against tobacco industry members including
JTI-Mac and the Company's indemnitees based on legislation similar
to that introduced in the Province of British Columbia. The statementof claim contains allegations of joint and several liabilities among all
the defendants but does not specify any individual amount or percentages within the total claimed amount of at least ¥815.2 billion(CAD 10.0 billion). The pre-trial process is ongoing. A trial date is not
yet scheduled.
Canada Saskatchewan Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province of
Saskatchewan in June 2012 against tobacco industry members

135

Annual Report 2018

including JTI-Mac and the Company’s indemnitees based on legislation similar to that introduced in the Province of British Columbia.
The claim amount is unspecified. The pre-trial process is ongoing.
A trial date is not yet scheduled.
Canada Prince Edward Island Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province ofPrince Edward Island in September 2012 against tobacco industry
members including JTI-Mac and the Company’s indemnitees basedon legislation similar to that introduced in the Province of British
Columbia. The claim amount is unspecified. The pre-trial process isongoing. A trial date is not yet scheduled.
Canada Nova Scotia Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province ofNova Scotia in January 2015 against tobacco industry members

including JTI-Mac and the Company’s indemnitees based on legislation similar to that introduced in the Province of British Columbia.
The claim amount is unspecified. The pre-trial process is ongoing.
A trial date is not yet scheduled.
(2) Other Legal Proceedings
The Company and some of its subsidiaries are also engaged inother legal proceedings such as commercial and tax disputes.
(Note) The amount of damages sought denominated in foreign currencies istranslated into Japanese yen at the rates as of December 31, 2018.

40. Subsequent Events
As part of the shareholder return based on our shareholder return
policy, the Company’s Board of Directors made a resolution on
February 7, 2019 for the Company to acquire its own shares according to the particulars stated below pursuant to the provision of Article
156 of the Companies Act, as applied by replacing the relevant terms
pursuant to the Act’s provision of Article 165, paragraph 3.

b. Number of shares to be acquired
Up to 23,000,000 sharesc. Total payment amount to acquire shares
Up to ¥50,000 million
d. Period of share acquisition
From February 8, 2019 to April 22, 2019e. Method of acquisition
Purchase on the stock exchange via a trust banka. Class of shares to be acquired
Common stock

Consolidated Supplementary Information
A. Quarterly Information for the Year ended December 31, 2018
Millions of yen
Q1
January 1, 2018 toMarch 31, 2018

Q2
January 1, 2018 toJune 30, 2018

Q3
January 1, 2018 toSeptember 30, 20182018
January 1, 2018 to
December 31, 2018

¥515,050
139,891¥1,075,271
290,367¥1,675,819
449,402¥2,215,962
531,486

104,01158.07

216,093120.64

332,686
185.73385,677215.31

Q1January 1, 2018 toMarch 31, 2018

Q2
April 1, 2018
to June 30, 2018

Q3
July 1, 2018
to September 30, 2018

Q4
October 1, 2018
to December 31, 2018

¥58.07¥62.57¥65.09¥29.58

Revenue
Profit before income taxes for the period (year)
Profit attributable to owners of the parent
company for the period (year)
Basic earnings per share for the period (year) (yen)Basic earnings per share for the quarter (yen)B. Significant Lawsuits
The significant lawsuits of the Group are as stated in “39. Contingencies” in the notes to consolidated financial statements.

Japan Tobacco Inc.

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Annual Report 2018

Japan Tobacco Inc.

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Glossar y of Terms

Unless otherwise stated, terms and numbers reported in this glossary are in accordance with IFRS.

Adjusted Operating Profit: Operating profit + Amortization
cost of acquired intangibles arising from business acquisitions + Adjusted items (income and costs).*

FCF (Free Cash Flow): The sum of cash flows from operating activities and investing activities but excluding the following items:

JPY BN: Billion Japanese Yen.

• Cash flows from operating activities: interest received,
dividends received, interest paid and the tax effectrelated to these items.
• Cash flows from investing activities: purchase ofinvestment securities (both short-term and long-term),
payments into time deposits, proceeds from sale orredemption of investment securities (both short-termand long-term), proceeds from withdrawal of time
deposits and other investing activities not for business
operation purposes.

Reduced-Risk Products (RRP): Products with potential toreduce the risks associated with smoking.

Profit: Profit attributable to owners of the Parent.
RMC: Ready-Made Cigarettes*A djusted items (income and costs) = impairment losses on goodwill ±restructuring income and costs ± others

BnU: Billion Units.
Constant Exchange Rates: Constant exchange rates arecomputed by restating current year results at the previous
year’s foreign currency exchange rate. Results at constantrates of exchange should be considered in addition to, not asa substitute for, results reported in accordance with IFRS.
Contraband: Genuine products smuggled from abroad thatare diverted from the legitimate supply chain and sold in acountry other than the intended retail market without payment of domestic duty in that country.

In FY2014, the Company and its subsidiaries with fiscal
year-ends other than December 31 changed their fiscal
year-ends to December 31.

Core Revenue (Japanese Domestic Tobacco Business):
Excludes revenue from distribution of imported tobacco in
the Japanese domestic tobacco business, among others,
but includes revenue from domestic duty free, the China
business and Reduced-Risk Products such as Ploom TECH
device and capsules.

For the purpose of fair comparison of business performance, we are providing figures for the twelve-month period from January 1, 2014 to December 31, 2014
(Like-for-Like basis) with regard to all business segments incontinuing operations.

Counterfeit: Fake products appearing to be genuine brandproducts protected by intellectual property rights. Counterfeit
products are manufactured without authorization from therights’ owners and with the intent to copy the genuine brandto deceive the consumer. They are also sold without duties
being paid.

GFB: Global Flagship Brands (Winston, Camel, MEVIUS, LD).
IFRS: International Financial Reporting Standards.
Illicit Whites: Tobacco products manufactured legitimately
but without any product flow control measures afterwards
and, smuggled and sold in another market.

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Annual Report 2018

Cigarette Sales Volume(Japanese Domestic Tobacco Business): Excludes sales
volume of domestic duty free, the China business andReduced-Risk Products.

Results for Nine Months ended December 31, 2014
(Reported Basis): For domestic businesses: consolidated
nine-month results from April 1 to December 31, 2014.

Total Shipment Volume(International Tobacco Business): Includes fine cut,
cigars, pipe tobacco, snus and kretek, but excluding contract manufactured products, waterpipe tobacco andReduced-Risk Products.

For international business: consolidated twelve-monthresults from January 1 to December 31, 2014.
Jan
Mar

Apr
Jun

Jul
Sep

Oct JanDec Mar

Apr
Jun

Jul
Sep

Oct
Dec

Domestic
International

USD MM: Million US dollars.
FY2014

The fiscal year-end for international business continued to
be December 31 as before, hence the Group consolidated
financial results of international business for the twelvemonth period from January 1, 2014 to December 31, 2014
into the Group’s consolidated financial results for the ninemonths ended December 31, 2014 (Reported basis).

TableMark: References to ‘TableMark’ are to TableMark
Co. Ltd.

Restated: See ‘Constant Exchange Rates’.

FY2014: Results for the fiscal year ended December 31, 2014.

Core Revenue (International Tobacco Business): Includes
revenues from waterpipe tobacco and Reduced-Risk
Products, but excludes revenues from distribution, contract
manufacturing and other peripheral businesses.

Japan Tobacco Inc.

Revenue: Excluding tobacco excise taxes and revenue fromagent transactions.

2015

Results of Jan-Dec 2014 (Like-for-Like Basis): For the purpose of fair comparison of business performance, we areproviding figures with regard to all business segments incontinuing operations for January to December, 2014.
Jan
Mar

Apr
Jun

Jul
Sep

Oct JanDec Mar

Apr
Jun

Jul
Sep

Oct
Dec

Domestic
International
Jan-Dec 20142015

• Revenue, operating profit, adjusted operating profit fromcontinuing operations and profit attributed to owners of
the parent company from continuing and discontinued
operations combined for January to December 2014
were disclosed in the 2015 Annual Securities Report,
which was audited.

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Shareholder Information

As of December 31, 2018

Stock Price Chart
Principal Shareholders

Common Stock
Note: A 200 for 1 stock split was completed on July 1, 2012.
Authorized:

8,000,000,000

Issued:2,000,000,000

Name

Share Registrar
Mitsubishi UFJ Trust and Banking Corporation
4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo

Master Trust Bank of Japan, Ltd. (Trust Account)

91,137,400

Japan Trustee Services Bank, Ltd. (Trust Account)

68,848,700

Trust & Custody Services Bank, Ltd. as trustee forMizuho Bank, Ltd.
Retirement Benefit Trust Account re-entrusted by
Mizuho Trust and Banking Co., Ltd.

Listing
Tokyo Stock Exchange: First Section
Composition of Shareholders (excluding treasury stock)

Minister of Finance

37.2%

Financial institutions22.3%

Individuals and others

13.3%

Securities companies

3.6%

Other Japanese companies

1.3%

Foreign institutions, etc.

22.3%

(Yen)

(Points)
All Time High
February 1, 2016: ¥4,850

666,926,200

Minister of Finance394,994

Number of shareholders:Shares held

23,660,000

State Street Bank and Trust Company 505223(Standing proxy: Mizuho Bank, Ltd., Settlement
Sales Department)

23,351,971

Japan Trustee Services Bank, Ltd. (Trust Account 5)

22,744,400

5,000

5,000

4,500

4,500

4,000

4,000

3,500

3,500

3,000

3,000

2,500

2,500

2,000

2,000

1,500

1,500

1,000

SSBTC Client Omnibus Account(Standing proxy: Hongkong and Shanghai Banking
Corporation Limited, Tokyo Branch)

22,178,610

94.10 95.3

Japan Trustee Services Bank, Ltd. (Trust Account 9)

All Time Low
April 7, 2003: ¥644
(Pre-split: ¥128,800)

500

96.3

97.3

98.3

99.3

00.3

01.3

02.3

03.3

04.3

1,000

Reference
TOPIX (right)

500

05.3

06.3

07.3

08.3

09.3

10.3

11.3

12.3

13.3

21,978,900
Note: Due to a 5 for 1 stock split on April 1, 2006, and a 200 for 1 stock split on July 1, 2012, stock prices reflect post-split levels.

State Street Bank West Client-Treaty 505234(Standing proxy: Mizuho Bank, Ltd., Settlement
Sales Department)

20,542,232

JP Morgan Chase Bank 385151(Standing proxy: Mizuho Bank, Ltd., Settlement
Sales Department)

20,367,542

Corporate Data

Head Office2-1, Toranomon 2-chome,
Minato-ku, Tokyo 105-8422, Japan
Tel: 81-3-3582-3111
Fax: 81-3-5572-1441
URL: https://www.jt.com/

Government Offerings of JT Shares
1st Offering

MethodOffering by Bids

Offering by non-Bids

Offer price(Pricing date)

Bid price: From ¥1,362,000 to ¥2,110,000
Weighted average price: ¥1,438,000(August 29, 1994)¥1,438,000(August 31, 1994)

Number ofshares offered

229,920 shares

164,356 shares

Offer term

From August 15 to 18, 1994

From September 2 to 8, 1994

JT International S.A.
8, rue Kazem Radjavi
1202 Geneva
Switzerland
Tel: +41 (0)22-703-0777
Fax: +41 (0)22-703-0789
URL: https://www.jti.com/

Date of Establishment
April 1, 1985
Paid-in Capital¥100 billion

Note:
Listing date: October 27, 1994
Exchange: First Section of Tokyo Stock Exchange
2nd and 3rd, 4th Offering

MethodOffer price(Pricing date)
Number ofshares offered
Offer term

2nd Offering

3rd Offering

4th Offering

Offering by Book-Building formula

Offering by Book-Building formula

Offering by Book-Building formula¥815,000(June 17, 1996)
Japan: 237,390 shares,
International: 35,000 shares(Total: 272,390 shares)¥843,000(June 7, 2004)
Japan: 198,334 shares,
International: 91,000 shares(Total: 289,334 shares)¥2,949(March 11, 2013)
Japan: 145,625,500 shares,
International: 107,636,300 shares(Total: 253,261,800 shares)

From June 18 to 19, 1996

From June 8 to 10, 2004

From March 12 to 13, 2013

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14.3

14.12

15.12

16.12

17.12

18.12