Japan Tobacco Inc.
Annual Report FY2016
Year ended December 31, 2016

Contents

Management001 Financial Highlights
002 At a Glance004	Consolidated Five-year
Financial Summary006	Message from the
Chairman and CEO
008	CEO Business Review
010	Management Principle,
Strategic Framework
and Resource Allocation
012	Business Plan 2017013	Role and Target of
Each Business014	Performance Measures
Operations & Analysis
017 Industry Overview
017 Tobacco Business
019 Pharmaceutical Business
019 Processed Food Business
020 Review of Operations
020	Message from the Presidentof Tobacco Business022	International Tobacco Business028	Japanese Domestic
Tobacco Business
032 Pharmaceutical Business
036 Processed Food Business
038 Risk Factors
042 JT Group and Sustainability
044	Special Feature: From tobacco
leaves to consumers

Unless the context indicates otherwise, referencesin 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” areto JTI Holding B.V., our consolidated subsidiary, and its
consolidated subsidiaries. References to “TableMark”
are to TableMark Holdings Co., Ltd., TableMark Co., Ltd.
and its group companies. References to “Japan TobaccoInc.” are only to Japan Tobacco Inc. and references to“JT International 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 ofJapan) that performs certain supervisory functions
through its monitoring and audit activities within theoverall scheme of corporate governance pursuant to
the Companies Act of Japan. References to “audit &supervisory board member” are to a member ormembers of an audit & supervisory board, also
referred to in Japanese as “kansayaku” (asdefined in the Companies Act of Japan).
Forward-looking statements
This report contains forward-looking statements. Thesestatements appear in a number of places in this reportand include statements regarding the intent, belief, or
current and future expectations of our management

Corporate Information
047 Environmental, Socialand Governance Initiatives
048 Corporate Governance060 History of the JT Group064	Regulation and Other
Relevant Laws
067 Litigation
068	Members of the Board, Audit
and Supervisory Board Members
and Executive Officers
069	Members of the JTI
Executive Committee
069 Corporate Data
Shareholder Information
070 Shareholder Information
Financial Information
074 Financial Review
082	Consolidated Financial Statements
088	Notes to Consolidated Financial
Statements
141 Independent Auditor’s report
142 Glossary of Terms

with respect to our business, financial condition andresults of operations. In some cases, you can identify
forward-looking statements by terms 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 similar terminology. Thesestatements are not guarantees of future performanceand are subject to various risks and uncertainties.
Actual results, performance or achievements, or thoseof the industries in which we operate, may differ
materially from any future results, performanceor achievements expressed or implied by theseforward-looking statements.
In addition, these forward-looking statements arenecessarily dependent upon assumptions, estimatesand data that may be incorrect or imprecise andinvolve known and unknown risks and uncertainties.
Forward-looking statements regarding operating
results are particularly subject to a variety ofassumptions, some or all of which may not be realized.
Risks, uncertainties or other factors that could
cause actual results to differ materially from thoseexpressed in any forward-looking statement include,
without limitation:

1.	decrease in demand for tobacco products in
key markets;
2.	restrictions on promoting, marketing, packaging,labeling and usage of tobacco products in markets
in which we operate;
3.	increases in excise, consumption or other taxes on
tobacco products in markets in which we operate;
4.	litigation around the world alleging adverse healthand financial effects resulting from, or relating to,tobacco products;
5.	our ability to realize anticipated results of ouracquisition or other similar investments;
6.	competition in markets in which we operate or into
which we seek to expand;7.	deterioration in economic conditions in areas thatmatter to us;
8.	economic, regulatory and political changes, suchas nationalization, terrorism, wars and civil unrest,
in countries in which we operate;
9.	fluctuations in foreign exchange rates and the costsof raw materials; and10. catastrophes, including natural disasters.

Financial Highlights

ADJUSTED OPERATING PROFIT

586.8(JPY BN)-

6.4%

YEAR-ON-YEAR CHANGE

11.3%

+

YEAR-ON-YEAR CHANGE ATCONSTANT EXCHANGE RATESDIVIDEND PER SHARE

130
(JPY)

10.2%

+

YEAR-ON-YEAR CHANGE

Results of FY2016 and FY2015

In FY2015, the JT Group withdrew frombeverage business, which has been classified
as discontinued operations accordingly.
Consequently, profit (loss) and some items
from continuing operations and discontinued
operations are presented separately for the
results of FY2015.
To provide a fair business performancecomparison with the results of FY2016,
we offer the figures and analysis with a focus
on the continuing operations of FY2015.

Factsheets available at:www.jt.com/investors/results/
fact_sheet/index.html

Japan Tobacco Inc. Annual Report 2016

001

At a Glance
Our businesses
FY2016: Results for the fiscal year ended December 31, 2016

The JT Group is a leading international tobacco company
with operations in over 70 countries. Our products are soldin over 120 countries and our internationally recognizedbrands include Winston, Camel, MEVIUS and LD.
We are also active in pharmaceutical and processed foodbusinesses and we expect them to establish a foundation for
future profit contribution, as we strive for sustainable growth.

International Tobacco Business
The international tobacco businessis the JT Group’s profit growthengine, generating around 60% of theconsolidated profit1. Going forward,
we expect it will further increase its
contribution, enabling the JT Groupto continue delivering sustainableprofit growth in the mid- to long-term.
Our brand portfolio is competitive
and well-balanced, allowing us tocapture down-traders and up-traders.
We have structured our portfolio
into three broad categories including
ready-made cigarettes, fine cut
and emerging products.

Japanese Domestic Tobacco BusinessResults for FY2016:
Double-digit profit growthat constant exchange rates
while delivering on committed
investments toward seeding
initiatives and emerging products.
Key drivers:• Total and GFB volume growth• Market share gains across ourfootprint• Contribution from acquisitions• Robust pricing• Long-term commitment
to investing ina. Brand equity
b. Emerging Markets, andc. Emerging Products• Approximately 27,000 dedicatedemployees

1. Consolidated	
profit: consolidated adjusted
operating profit.

GLOBAL BRAND RANKING*We are the market leader in Japan,
which is one of the largest markets
in the world, with more than 60%
ready-made cigarette market
share mainly driven by MEVIUS.
Our Japanese domestic tobacco
business continues to be a significant
profit contributor to the JT Group,
generating about 40% of ourconsolidated profit1.
During 2016, we have further
enhanced our brand portfolio throughthe acquisition of Natural American
Spirit business outside the UnitedStates. In addition, we launched
Ploom TECH in Fukuoka and throughour on-line store for test marketingin March. Moreover, the retail priceof MEVIUS was revised in April.
Results for FY2016:
Achieved 2.4% year-on-year
profit growth.

FURTHER STRENGTHENEDBRAND PORTFOLIO

Share of Price Segment**
for JT Key brands

#2

#6

#12

#13
Prestige#1* By brand owner
Source: JT estimate (2016 data, as of July 2017);
Excluding China National Tobacco Corp

002Japan Tobacco Inc. Annual Report 2016

Premium#1

Management
Financial Highlights
At a GlanceConsolidated Five-year Financial SummaryMessage from the Chairman and CEOCEO Business Review
Management Principle, Strategic Framework
and Resource Allocation
Business Plan 2017
Role and Target of Each Business
Performance Measures

001
002
004
006
008
010
012
013
014

Revenue breakdown by business segment
Processed food

OthersPharmaceutical

International tobacco

7.7%

0.4%

4.1%

56.0%

Japanese domestic tobacco

31.9%

Composition of JT SOM2 as of 2016

MEVIUS
WinstonSeven Stars
Natural American Spirit
Pianissimo
Peace
HOPE
OthersPharmaceutical Business

Processed Food Business

JT Group’s pharmaceuticalbusiness focuses on the researchand development, production andsale of prescription pharmaceuticalproducts. Its mission is to build
world-class, unique research anddevelopment capabilities andreinforce its market presence
through innovative drugs.
JT concentrates on research anddevelopment activities mainlyon the fields of metabolic diseases;
viral infection; and autoimmune/
inflammatory diseases, while Torii
Pharmaceutical Co., Ltd. is incharge of manufacturing as well
as sales and promotion in thedomestic market.

With Group company TableMarkCo., Ltd. taking a central role,
the processed food business is
primarily engaged in businessconcerning frozen and ambient
processed food, mainly staple foodproducts such as frozen noodles,frozen rice, packed cooked riceand frozen baked bread, andseasonings including yeast
extracts and oyster sauce.

Results for FY2016:
Earnings increased and achieveda record high profit.

Results for FY2016:
Achieved profit growth forthe fourth consecutive year.

We have solidified its No. 3 positionin the frozen food industry withseveral top-selling products
within respective categories,
such as frozen Udon noodles
and frozen Okonomiyaki.

2. SOM: Share of market.

Sub-premium+#1

Sub-premium#2** 2016 results

Japan Tobacco Inc. Annual Report 2016003

Consolidated Five-Year Financial Summary
Japan Tobacco Inc. and Consolidated Subsidiaries
FY2016: Results for the fiscal year ended December 31, 2016

In FY2015, the JT Group withdrew from beverage business, which has been classified as discontinued operations
accordingly. Consequently, profit (loss) and some items from continuing operations and discontinued operations
are presented separately for the results of FY2015.
To provide a fair business performance comparison with the results of FY2016, we offer the figures with a focus on
the continuing operations of FY2015.
Billions of yen
FY2013(IFRS)

Revenue (Note 1)

2,120.2

2,399.8

2,259.2

2,252.9

2,143.3

International Tobacco

1,010.7

1,270.0

1,328.0

1,317.2

1,199.2

For the year:2014(Jan-Dec)

FY2015(IFRS)FY2016(IFRS)FY2012(IFRS)(Continuing operations)Japanese Domestic Tobacco

687.1

710.3

687.4

677.3

684.2

Pharmaceutical

53.2

64.4

65.8

75.6

87.2

Beverage

185.5

184.5

–

–

–

Processed Food

168.7

156.9

161.2

165.8

164.1

Others

15.0

13.6

16.9

17.0

8.6

International Tobacco

943.1

1,200.7

1,258.2

1,252.5

1,138.8

Japanese Domestic Tobacco

654.0

676.2

649.8

642.2

649.7

Operating profit (Note 3)

532.2

648.3

572.6

565.2

593.3

International Tobacco

289.4

376.4

379.5

346.9

301.8

Japanese Domestic Tobacco

241.3

258.1

181.5

249.2

244.1

PharmaceuticalCore revenue (Note 2)(16.2)

(9.0)

(7.3)

(2.3)

9.7

Beverage

2.3

(2.1)

–

–

–

Processed Food

(5.8)

(0.2)

(1.2)

3.2

5.0

Others

21.2

25.0

20.2

(31.8)

32.7

Adjusted EBITDA/Adjusted Operating Profit (Note 3)

622.0

641.8

661.0

626.7

586.8

International Tobacco

343.2

410.8

447.1

394.4

336.2

Japanese Domestic Tobacco

281.3

257.7

238.7

254.1

260.2

Pharmaceutical(12.7)

(9.0)

(7.3)

(2.3)

9.7

Beverage

12.4

(2.1)

–

–

–

Processed Food

7.4

0.6

1.4

2.7

5.0

Others(9.6)(16.2)(18.9)(22.2)(24.4)

Depreciation and amortization (Note 3)

116.5

132.9

128.6

133.1

140.8

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

343.6

428.0

391.4

398.5

421.7

Free cash flow (FCF)* (Note 5)

316.0

212.6

455.4*

386.7*(316.2)* Results from continuing operations and discontinued operations combined for both FY2015 and Jan-Dec 2014.

004

Japan Tobacco Inc. Annual Report 2016

Management

FY2016: Results for the fiscal year ended December 31, 2016

Billions of yen
Consolidated(Continuing and discontinued operations combined)

FY2012(IFRS)FY2013(IFRS)FY2014(IFRS)FY2015(IFRS)FY2016(IFRS)

3,852.6
327.2
1,960.1
1,892.4

4,616.8375.9
2,020.7
2,596.1

4,704.7
228.2
2,082.2
2,622.5

4,558.2
255.3
2,036.7
2,521.5

4,744.4
555.3
2,216.3
2,528.0

20.0%
13.5%

19.9%
15.0%

14.4%
10.8%

19.5%
14.8%

17.2%
12.4%

180.98235.35

199.56270.37235.33993.9868
37.6%

1,378.57
96
40.8%

1,395.74
100
50.1%

1,369.06
118
53.2%**

1,371.39
130
55.2%

At year-end:
AssetsInterest-bearing Debts (Note 6)
Liabilities
EquityMajor Financial Ratios
ROE (Note 7)
ROA (Note 8)
Amounts per share: (in yen)
Diluted EPS (Notes 9/10)
Book value per share (attributable to owners of the parent
company) (Note 10)
Dividend per share (Note 10)
Dividend payout ratio (Note 11)** Payout ratio for FY2015 is based on basic EPS from continuing operations.

Notes:
1.		E xcluding tobacco excise taxes and revenue from agent transactions.
2.		E xcluding revenue from distribution business of imported tobacco, among others,in the Japanese domestic tobacco business, in addition to the distribution, private
label, contract manufacturing, and other peripheral businesses in the International
tobacco business.
3.		(FY2012) Adjusted EBITDA = Operating profit + depreciation and amortization± adjusted items (income and costs)**adjusted items (income and costs) = impairment losses on goodwill ± restructuringincome and costs ± others(Since FY2013) Adjusted operating profit = Operating profit + amortization costof acquired intangibles arising from business acquisitions + adjusted items(income and costs)**adjusted items (income and costs) = impairment losses on goodwill ± restructuringincome 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 the parent company.

5.		FCF = (cash flows from operating activities + cash flows from investing activities)
excluding the following items:
From “cash flows from operating activities”: Interests and dividends received,
and their tax effect/interest paid and its tax effect.
From “cash flows from investing activities”: Purchase of securities/proceeds fromsale and redemption of securities/payments into time deposits/Proceeds fromwithdrawal of time deposits/others (but not business-related investment securities,
which are included in the investment 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 beginning and endingbalance of the period.)9.		 Based on profit (attributable to owners of the parent company).
10.	A 200-for-one share split is done, effective as of July 1, 2012.
11. Based on profit (attributable to owners of the parent company).
12. Financial data disclosed herein are basically rounded.

Japan Tobacco Inc. Annual Report 2016005

Message from the Chairman and CEO

Yasutake Tango
Chairman of the Board

Mitsuomi Koizumi
President, CEO and Representative Director

All Businesses Contributed to the Profit Growthof the JT GroupWe are very pleased to inform you that the JT Group
achieved profit growth again. 2016 was a year in which
we experienced various unforeseen developments aroundthe world, including the U.K. referendum on Brexit andthe U.S. presidential election. Looking at our industry,
our operating environment was challenged, influenced
by underlying economic stagnation and huge currency
volatility, as well as tighter regulations, repeated excise
tax hikes and intensifying competition in various countries.

006

Despite these difficulties, all businesses – the tobacco,
pharmaceutical and processed food businesses – grewprofit in 2016. In particular, the pharmaceutical andprocessed food businesses combined made meaningful
contributions to the Group’s profit growth. We have
implemented the business portfolio strategy witha long-term view, and it proves to be effective.

Japan Tobacco Inc. Annual Report 2016

Management

In the international tobacco business, our business basewas reinforced with shipment volume increases, notably
in Europe and seeding markets driven by share of market
increase as well as contribution from acquired thenwell-integrated businesses. Our success in startingto build or enhancing our presence in markets where
we have been seeding represents solid progress inour strategic pursuit of geographical expansion. These
new markets will complement existing markets such as
Europe and Russia where we have already established
our foundation. As our key strategy to ensure future
profit expansion, we remain committed to investingin geographical expansion, brand equity enhancement
and emerging products development.
In the Japanese domestic tobacco business, we increased
our profit mainly driven by pricing of MEVIUS, whilebuilding a complete brand portfolio through the acquisitionof Natural American Spirit business outside the UnitedStates. With regards to T-Vapor initiatives, we havelaunched Ploom TECH and have been making steadyprogress in taking advantage of this promising opportunity.
The JT Group grew adjusted operating profit at constantcurrency by 11.3%, exceeding the mid- to long-termtarget of mid to high single-digit growth rate. We areproud of this robust result, and even more so as the strong
performance was accomplished despite the challenges
and without compromising investment for the future.
Shareholder Return
In allocating resources, the JT Group seeks a balance
between investment in our business for sustainable
future profit growth and shareholder return. Under thisapproach, we will strive to improve our shareholder
return based on the mid- to long-term profit growth
outlook while maintaining a solid balance sheet that willallow us to respond to various changes in our operating
environment. Specifically, we aim to deliver a sustainable
and stable increase in dividend per share. Our dividendfor 2016 was 130 yen per share, up by two yen from theinitial forecast, and we plan to pay 140 yen for 2017,
representing a 10 yen rise. This robust dividend increasereflects our confidence in the Group profit growth
confirmed in our Business Plan 2017, a three-yearbusiness plan through 2019.

4S ModelOur management principle is based on the 4S model.
Under the 4S model, we strive to fulfill our responsibilities
to our valued consumers, shareholders, employees andthe wider society, carefully considering the respective
interests of these four key stakeholder groups, andexceeding their expectations wherever we can.
As part of our pursuit of the 4S model, we continue
to carry out a variety of sustainability initiatives. In
2016 the JT Group made notable achievements in thisarea. Reinforcing corporate governance has been andwill continue to be prioritized as an engagement by the
management. In February, we clarified our approachon this matter by setting out JT Corporate Governance
Policies. Moreover, in September, we announced the
JT Group Human Rights Policy, further promoting ourhuman rights due diligence process.
Meanwhile, the JT Group was selected as a member ofthe Dow Jones Sustainability Asia/Pacific Index, which
is a worldwide index for socially responsible investment,
for the third consecutive year. In addition, the JT Groupwas identified by the CDP, an international NGO, as a
global leader for its actions and strategies in response
to climate change and was put on the A-list of thehighest performers for the first time. We have beenencouraged by the fact that our CSR activities are
increasingly recognized, and reaffirm our futurecontribution to realize a sustainable society.
Toward Further Growth
We firmly believe that another strong profit growth in2016 was built on the business investments we havecontinuously and aggressively made. Looking forward,
we will continue to invest in our businesses with the aimof delivering profit growth over the mid- to long-term.
We will face uncertainty given the tightening regulations
in Europe, intensifying competition in CIS+ andunpredictable foreign exchange movements. However,the JT Group is well prepared and will respond tochanges in the operating environment with the aim
to further grow profit.

As for share buyback, we will decide whether toimplement it or not after reviewing the mid-term
outlook for the Group’s operating environment
and financial position.

Japan Tobacco Inc. Annual Report 2016007

CEO Business Review

Mitsuomi Koizumi
President, CEO and Representative Director

We delivered strong
business performance in2016, as all businesses
contributed to the profit
growth of the JT Group.
We will continue ourbusiness investment andachieve mid- to long-term
profit growth.

008

Strong business performance
The JT group has set the goal of achieving a mid tohigh single-digit growth rate in adjusted operating profit
at constant currency over the mid- to long-term. So far,
we have consistently exceeded this profit growth target.
In 2016, we also achieved growth of 11.3% year-on-year
in adjusted operating profit excluding the foreignexchange impact, higher than the target of mid to highsingle-digit growth rate. As expected, all businesses —the tobacco, pharmaceutical and processed foodbusinesses — grew their profits, leading to thestrong Group performance.

Japan Tobacco Inc. Annual Report 2016

Management

Business results by segment
In the tobacco business, we continued to emphasize
three strategic pillars — quality top-line growth,competitive cost base and robust business foundation— amid drastic changes in the operating environment.
Thus, the international and Japanese domestic tobacco
businesses together drove the Group’s profit growth.
In the international tobacco business, total shipment
volume and shipment volume of Global Flagship Brands(GFBs) recorded year-on-year growth of 1.2% and 3.7%
respectively, driven by the increases in European markets,
including Italy, France and Spain, and seeding markets
where our nascent business is growing through intensive
investment as well as contribution from acquired thenwell-integrated businesses. The expanded businessscale in new and seeding markets and their incremental
contributions are evidence that our continuous efforts
toward geographical expansion are starting to pay off.
As for the performance of our brands, our global shipment
volume of Winston reached a record high last year.
Aiming to further reinforce our business, we will continue
investment in brand equity building. Pricing continued
to drive the profit growth in the international tobacco
business, supported by the shipment volume increase.
As a result, currency-neutral adjusted operating profit
grew 13.4% year-on-year. Our 2016 undertakings were
not limited to top-line performance, but we also
addressed optimization of our manufacturing footprints
in anticipation of changes in the operating environment.
We moved on the restructuring of factories in Europe andRussia as planned, and a new factory in Taiwan started
its operation. We will continuously strive to strengthen
cost competitiveness.
In the Japanese domestic tobacco business, we achieved
profit growth in line with our expectation despite a steep
decrease in ready-made cigarette demand due to theimpact of T-Vapor category as well as a general declining
trend. In January 2016, we completed the acquisitionof Natural American Spirit business outside the UnitedStates, and since then, we have been executing thestrategy based on the business plan for this brand.
During the year, Natural American Spirit grew bothvolume and market share as its momentum remained
strong. The addition of Natural American Spirit has
allowed us to offer a well-balanced and compelling brandportfolio to our consumers. In April 2016, we increased
the price of MEVIUS. After a temporary drop triggeredby the price increase, MEVIUS market share has beensteadily recovering, reaffirming the strong brand equityof the brand. Driven by these initiatives, our adjusted
operating profit of this business increased 2.4%
year-on-year, overcoming the difficult situations.
The pharmaceutical and processed food businesses
have been expected to complement the JT Group’s
profit growth, and we have been consistently investingin these businesses for them to fulfill this role. In
the pharmaceutical business, the increase in royalty
revenue related to anti-HIV drugs Stribild and Genvoya
made significant contributions to a substantial profit
improvement. As a result, the pharmaceutical business
reported a profit in 2016, and more importantly has
established a foundation which enables sustainableprofit generation. The processed food business also
made a contribution to the Group, growing its profit
for the fourth consecutive year. With the strong
performance and contribution by the pharmaceuticaland processed food businesses, we are increasingly
confident in our business portfolio strategy.
Toward mid- to long-term profit growth
In 2017, the operating environment will continue to be
uncertain and challenging. The international tobacco
business will face a full introduction of new regulations
in Europe and intensifying competition in the low pricesegment, mainly in CIS+, while the increasing presenceof the T-Vapor category and accelerated cigarette
industry contraction will affect our performance in Japan.
Nonetheless, the JT Group plans to grow its adjusted
operating profit on a currency neutral basis. Reflecting
the harsh situation of the Japanese domestic tobacco
business, the projected growth rate of 3.4% represents
a slow-down compared to the historical trajectory, butthere will be no change in our goal of achieving mid
to high single-digit profit growth rate over the mid- tolong-term. In particular, we will focus on strengthening
the business foundation of our T-Vapor operations in Japan
including the production capacity expansion for Ploom
TECH so that we can fight back in 2018 and beyond.
Over the next three years, we may enter a new era inwhich conventional business wisdom does not apply.
However, we have a history of weathering difficulties
and achieving sustainable growth, which leverages ourability to respond to change and to commit to business
investment. Our track record speaks volumes. Thus,
we will prioritize business investment for the future
and continue to strive for sustainable growth.

Japan Tobacco Inc. Annual Report 2016009

Management Principle, Strategic Framework
and Resource Allocation

Management Principle
The “4S” model, our management principle, is themost shared value among JT Group employees
across businesses and countries.

• For our consumers, we will offer superior products
which meet or even go beyond their evolving needs.
To achieve that, we will make the most of JT Group’s
diversity to enhance our capacity in innovation.

Shareholders• For our shareholders, we intend to strike an optimalbalance between profit growth and shareholder
returns. This means that we will enhance ourshareholder returns based on our profit growth
outlook in the mid- to long-term.

Consumers

Employees

The “4S” model is JT Group’s core competency.
Our decision-making has been and will continue to be
based on this management principle. To strive to fulfill
our responsibilities to our valued stakeholders andexceed their expectations;SocietyThe ‘’4S’’ model – We strive to fulfill our responsibilities
to our valued consumers, shareholders, employees andthe wider society, carefully considering the respective
interests of these four key stakeholder groups, andexceeding their expectations wherever we can.

• For our employees, we will further evolve to
become an attractive and respected company
so that employees feel proud to be a part of it.
For that, we will highly value the employees witha strong sense of commitment to deliverables andproperly reward their accomplishments.
• The growth of the JT Group is dependent onsustainability of society. We will continue tocontribute to society and in doing so enhance
our company value.

Strategic Framework
Our track record proves that our strategy is right, and we believe that it will continue to underpin thestrong performance of the JT Group.

010

Quality
top-line growth

Among the strategic pillars, the JT Group places a particular emphasis
on quality top-line growth, which is indispensable for sustainable growth.
We aim to grow top-line by consistently offering innovative products.

Competitive
cost base

We continue to strive for further cost base improvement, while investingfor future sustainable growth.

Robust businessfoundation

The business environment surrounding the JT Group has been changing
fast. In order to respond to and even take advantage of the changes,
we encourage each employee and organization to challenge the statusquo for continuous improvement.

Japan Tobacco Inc. Annual Report 2016

Management

Resource Allocation
First, we grow profit through business investment.
Then, use this profit to return cash to our shareholders.
Business investment and capital policy
The JT Group is a growth company. Investing for both
external and organic growth, we historically increased
profit, and eventually corporate value. We believethat opportunities exist to expand the earnings base,especially for tobacco business. Our investment will
mainly focus on this core business to fuel its growth.
As we expect pharmaceutical and processed foodbusinesses to further contribute to the Group profit
in the future, we will allocate our funds to best utilize
existing assets and further improve their profitability.
Shareholder Return
We believe that maintaining a solid balance sheet isessential for the JT Group as it will provide us the groundto continue aggressively pursuing business investment
opportunities and cope with any adversity arising out ofthe volatile environment. At the same time, as we alreadymentioned, we intend to strike an optimal balance between
profit growth and shareholder returns. This means that
we will enhance our shareholder returns based on our
profit growth outlook in the mid-to long-term. In particular,
we will deliver sustainable and steady increase of dividend
per share. Dividend payout ratio is not an indicator forour management target, although it will be taken into
consideration when deciding the dividend amounts. As
for share buy-back, we will consider it after scrutinizing
the mid- to long-term expectations on the Company’sbusiness environment as well as financial achievements
and position, among other factors.
We will continue to monitor the trend amongst the
global FMCG companies that have a stakeholder model
similar to our 4S model and that have achieved strong
business growth.

Under the Japan Tobacco Inc. law, we are subject
to the restriction in issuing new shares. Given thecircumstance, we plan to maintain a strong balance
sheet for debt financing and not to cancel treasury
stock. With sufficient debt capacity, we can consider
share repurchase when the Government, who holds
over one-third of our outstanding shares, releases
them, in whole or in part, in the future.

Dividend Per Share (JPY)

140
130
118
96

100

68

FY2012FY2013

FY2014FY2015FY2016FY2017
Forecast

Japan Tobacco Inc. Annual Report 2016011

Business Plan 2017

The JT Group’s Business Plan covers a three-year period,and is rolled over annually to reflect the changes in ourbusiness environment including economics, geopolitics
and competition. By leveraging and enhancing our ability toadapt to changes, we will achieve sustainable profit growth.
Group profit target:• Annual average growth rate of adjusted operating
profit at constant currency over mid- to long-term:–– Mid to high single-digit
Shareholder return policy:• Aim to enhance shareholder returns considering
the Company’s mid- to long-term profit growthtrend, while maintaining a solid balance sheet*–– Deliver consistent dividend per share growth–– Consider implementing share buy-back, whichtakes into account the Company’s mid-term
operating environment and financial outlook–– Continue to closely monitor shareholder returnsof global FMCG companies***	As its financial policy, the Company maintains strong financial base that securesstability in case of changes in business environment such as economic crises, andflexibility enabling expeditious responses to business investment opportunities.
**	T he Company monitors global FMCG companies which have a stakeholder model
similar to our “4S”model, and have realized strong business growth.

Forecast for FY2017• Adjusted operating profit is forecast to grow 3.4%
at constant currency. International tobacco business,the profit growth engine, is expected to grow its
currency neutral adjusted operating profit at 9.1%,
driven by initiatives for cost competitiveness resulting
mainly from the optimization of the manufacturing
footprint. Top-line will remain almost the sameas previous year, but the initiatives for costcompetitiveness will pay off and contribute to our
profit growth of 9.1%. Japanese domestic tobacco
business is projected to decrease adjusted operating
profit at 6.2% due to cigarette industry volume decline
by continuing expansion of T-Vapor category.
• On a reported basis, adjusted operating profit isforecast to be the same level as the previous year.
We expect the negative exchange impact to continue,
although it will ease compared to 2016. The stronger
Russian ruble and the depreciation of Japanese
yen will have positive impact, while weaker local
currencies such as the British pound, the Euroand the Turkish lira will have a negative impact.
• Based on the shareholder return policy, we plan
to offer annual dividend per share of 140 yen,representing 7.7% increase year-on-year.

Adjusted Operating Profit (JPY BN)+3.4%

Dividend Per Share (JPY)

+0.0%

+20.2

-24.5

+7.7%

+4.5
140

586.8

FY2016

012

607.0

Business
momentum

FY2017
Forecast
at current
currency

Local
currency
vs. USDFX effects

JPY vs. USD
FX effects

587.0

130

FY2017
Forecast

FY2016

Japan Tobacco Inc. Annual Report 2016

FY2017
Forecast

Management

Role and Target of Each BusinessIn view of Business Plan 2017, the mid-to long-term roleand target of each business are as follows.

Tobacco Business
Grow adjusted operating profit at mid to high single-digit rate per annum over themid- to long-term as the core business and profit growth engine of the JT Group.

International Tobacco Business

022

Continue to strengthen its role as the Group’s profit
growth engine.

Japanese Domestic Tobacco Business

028

Maintain its highly competitive platformof profitability.

• Prioritize quality top-line growth–– Strengthen our brand equity with focus on core brands–– Grow or maintain market share in existing key markets• Continue to improve the cost base
• Strengthen the business base–– Broaden geographical earnings base–– Develop emerging products category

Pharmaceutical Business

032

Aim to make stable profit contribution to the
JT Group through R&D promotion for the next
generation of strategic compounds and value
maximization of each product.

Processed Food Business

036

Achieve operating profit margin on par with industry
average, aiming to make further profit contribution
to the JT Group.

Japan Tobacco Inc. Annual Report 2016013

Performance Measures
FY2016: Results for the fiscal year ended December 31, 2016

In our Business Plan 2017, target is set for adjusted
Operating Profit growth rate at constant exchange
rates. While it is a mid- to long-term target, we also
monitor the performance measures annually.

Tobacco Sales Volume

GFB Shipment Volume

International tobacco (BnU)

Japanese domestic tobacco (BnU)

GFB Shipment Volume (BnU)

398.0

393.9

398.7

112.4

109.2

106.2

262.2

273.6

283.7

FY2014FY2015FY2016

2014
Jan-Dec

FY2015FY2016FY2014FY2015FY2016

1.2%+

to 398.7 BnU

For the international tobacco
business, total shipment volume
includes fine cut, cigars, pipe
tobacco and snus, but excludes
contract manufactured products,
waterpipe tobacco products
and emerging products.

-2.8% year-on-year

106.2BnU

For Japanese domestic tobacco,
total sales volume excludes sales
volume of Japanese domestic
duty free, the Chinese businessand emerging products.

In our strategic framework to achieve adjusted Operating
Profit growth, the JT Group places a particular emphasison “quality top-line growth”, while, at the same time,
focusing on building a “competitive cost base” and“robust business foundation”.
In line with our strategic emphasis, the measures toreview our business performance are skewed towards
top-line related indicators. As for shareholder return,
we will deliver sustainable and steady increase ofdividend per share.

3.7%

+

to 283.7 BnU

Shipment volume of GFBs,
namely Winston, Camel,
MEVIUS, LD, B&H, Silk Cut,
Glamour, Sobranie andNatural American Spirit
in the international
tobacco business.

Revenue
Revenue (JPY BN)

2,259.2

2,252.9

2,143.3

2014
Jan-Dec

FY2015FY2016-4.9% to2,143.3BN

JPY

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

Note: The figures were the results fromcontinuing operations only.

014Japan Tobacco Inc. Annual Report 2016

Management

Core Revenue
International tobacco (US$ MM)

Japanese domestic tobacco (JPY BN)

+877
-725
11,911

10,338FY2014FY2015

11,215Business

8.5%

FY2016 atconstant
currency

FX

10,490

649.8

642.2

649.7

FY2016

2014
Jan-Dec

FY2015FY2016

For the international tobacco business,
US dollar-based core revenue includes
revenue from waterpipe tobacco
products and emerging products, but
excludes revenues from distribution,
contract manufacturing and otherperipheral businesses.

+

at constant exchange
rates to US$11,215MM

Adjusted Operating Profit

2014
Jan-Dec

FY2015Business

11.3%

at constant exchange rates
to JPY 697.5 BN

JPY-110.7697.5+-6.4% including currency impact to

For the Japanese domestic tobacco
business, core revenue excludes
revenue from distribution of imported
tobacco in Japan, among others,
but includes revenue from domestic
duty free, the China business andemerging products such as Ploom
TECH device and capsules.

Dividend Per Share (JPY)

+70.8

626.7

to JPY 649.7BN

Dividend Per Share

Adjusted Operating Profit (JPY BN)

661.0

1.2%

+

586.8BNFY2016at constantcurrency

FX

586.8

100

118

130

FY2016FY2014FY2015FY2016+12 yen to

Adjusted operating profit is calculated
as follows: Adjusted operating profit =Operating profit + Amortization costof acquired intangibles arising frombusiness acquisitions + Adjustment
items (income and costs)*
	Adjustment items (income and costs) are
impairment losses on goodwill, restructuring
related income and costs and others.

*

130yenThe sum of interim andyear-end dividends per share,
the record dates of which fallin the relevant fiscal year.

Note: The figures were the results from continuing operations only.

Japan Tobacco Inc. Annual Report 2016015

Operations
and Analysis
016

Japan Tobacco Inc. Annual Report 2016

Operations & Analysis
Industry Overview
Review of Operations
Risk Factors
JT Group and Sustainability
Special FeatureIndustry Overview

017
020
038
042
044

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

Tobacco BusinessTobacco industry
Market dynamics
There are many types of tobacco
products available in today’s
marketplace. Cigarettes remain themost popular choice for consumers,
while fine-cut, cigars, pipe tobacco,snuff, chewing tobacco and waterpipe
tobacco continue to draw consumers’interest, with some of theseproduct categories increasing
their volumes worldwide.
In addition, the next generation of
emerging products such as vapor
products has become widely popular.
Especially the market size of ‘E-Vapor’
products or ‘Electronic Cigarettes’(e-cigarettes) has been expanding
at a fast rate in markets such as the
U.S. and Europe, reaching global salesof approximately US$10 billion in 2016.
The products use vaporized liquid
solutions often containing nicotine,and vapor is inhaled to offer
a different experience. As E-Vapor
products do not use tobacco leaf,
they were not regulated or taxed as
tobacco products, however, regulation
or taxation of E-Vapor products isbeing developed in some markets.
Another type of emerging products
referred to as ‘T-Vapor’ or ‘Tobaccovapor’ has been growing particularly
in Japan. Unlike E-Vapor, T-Vapor
products use tobacco leaf andare therefore taxed and regulated
as tobacco products in principle.
Although the T-Vapor market isstill in its making, we expect further
innovation and product offerings
will drive growth in this category,as market players take keen interestin this new growing market.
Approximately 5.5 trillion cigarettes
are consumed around the world,
reaching global sales of approximately
US$700 billion in 2016. China is by
far the largest market, accounting
for over 40% of global consumption,
but it is almost exclusively operated
by a state monopoly. Indonesia,
Russia, the U.S. and Japan are thenext four largest markets, according toa survey conducted in 2017*.

In general, the market dynamics
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 in thesemarkets. Consumers are inclined toseek more value as they feel tobacco
products become less affordable
in the context of limited growth ofdisposable income. Recently, thesetrends have been observed in EU
countries, resulting in industry
contraction and down-tradingin many markets.
In emerging markets, on the other hand,
total consumption tends to increase,driven by population growth andeconomic development, particularly
in Asia, the Middle East and Africa.
As their disposable income increases,
consumers look for quality and trade
up to products in higher price bands.
Overall, when we exclude China,
global industry volume has beenslightly decreasing according
to a survey conducted in 2017*.
However, more importantly, industry
value continues to grow even in thecurrent difficult operating environment,
mainly driven by price increases. This isa sign of the resilience of the industry.
These trends – decline in volume andincrease in value – are expected tocontinue in the years ahead.
* Source: JT estimate (2016 data, as of July 2017).

Top market players

Philip Morris International Inc.
British American Tobacco Plc.
Japan Tobacco Inc.
Imperial Brands Plc.**

2012
25.0
18.0
14.1
6.7

2013
24.6
18.2
14.2
6.5

2014
24.6
18.5
13.9
6.4

Share of market (%)
2015
2016
24.8
24.6
19.2
19.4
14.1
14.4
6.7
6.6

2014
2,549.5
314.3
316.2
270.6
186.2
94.7
83.2
80.6
95.9
82.3

Billion units
2015
2016
2,489.5
2,350.5
320.4
316.1
292.5
278.4
269.9
263.4
182.3
173.9
103.2
105.5
86.4
90.0
83.4
86.1
88.1
84.9
79.4
79.1

Source: JT estimate (2016 data, as of July 2017).
Excluding China National Tobacco Corp (CNTC).
**
Company name changed to Imperial Brands Plc. as of February 2016.

Top 10 countries by volume

Country

China
Indonesia
RussiaU.S.
Japan
TurkeyEgypt
Bangladesh
India
Philippines

2012
2,461.6
302.5
370.8
292.7
197.4
95.3
77.6
76.3
102.1
102.5

2013
2,490.5
308.3
346.3
279.5
194.1
91.7
80.2
78.6
100.9
86.7

Source: JT estimate (2016 data, as of July 2017).

Japan Tobacco Inc. Annual Report 2016017

Industry Overview continued

extended health warnings, minimum
packaging requirements or
restrictions on the use of additives,among others. We expect to see
EU member states complying withthese restrictions by May 2017.
These moves to commoditize
tobacco products will undermine
fair competition among tobacco
manufacturers trying to meetincreasingly diverse consumer
preferences. Worse, they could
result in an undesired increasein illicit trade, as commoditized
products with less uniquenessare easier to counterfeit and moredifficult to detect when smuggled.

Regulations
The regulatory environment
continues to be more restrictive forthe tobacco industry. Restrictions on
promotions and advertisements are
the most common around the world.
An increasing number of markets
are introducing bans on smoking
in public places and promoting
larger health warnings on productpackaging, in some cases withpictorial health warnings. There arealso some markets where displaying
tobacco products at retail storesis banned.

Recently, new standards or frameworks
for reduced risk claims have been
established in a few countries suchas the U.S. and part of Europe.
In order to gain official approval
from governments, activities indeveloping reduced risk claims
have been intensified among major
global tobacco manufacturers.

Recent regulations are focusing
more on the product itself. Plainpackaging, or branding ban, hasbeen introduced in some 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, the European
Tobacco Product Directive adopted

TaxationsTobacco products are subject toexcise or similar taxes in addition tovalue-added tax in most of countries
as governments seek to secure theirrevenue or promote public health.
Excise taxes were raised in various
markets during the past year, andin general, tax increases are passed
onto prices. Therefore, repeated tax
increases in a short period of time,or steep tax increases, could leadto a decline in industry volume.
Often, tax increases coincide withan increase in illicit trade, which
could, in turn, affect our business.
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 andpreferences continue to diversify,
a strong portfolio with establishedbrands is increasingly importantto support market share gains.
Therefore, major global companies
are focusing on brand equity
enhancement to strengthen theirbrand portfolios by introducing
innovative products. Competitionin the vapor products category
has been intensifying as recently
the products have subsequently
been launched in many markets.
In addition to the pursuit of organic
growth, M&A is an effective way
to supplement growth opportunities
in this industry.

*	Source: JT estimate (2016 data, as of July 2017).
**	The company name of Imperial Tobacco Group Plc. waschanged to Imperial Brands Plc. as of February 2016.

Top brands

Brand

Company

Marlboro• Philip Morris International Inc.
Winston• Japan Tobacco Inc.
Pall Mall• British American Tobacco Plc.
L&M
• Philip Morris International Inc.
Mevius• Japan Tobacco Inc.
Camel
• Japan Tobacco Inc.
Rothmans• British American Tobacco Plc.
Cleopatra• Eastern Co SAE
Gudang Garam • Gudang Garam Tbk PT.
Kent• British American Tobacco Plc.

• Altria Group Inc.
• Reynolds American Inc.***• Reynolds American Inc.
• Altria Group Inc.
• Reynolds American Inc.

2012
414.1
135.0
102.5
96.0
84.4
62.9
20.8
52.5
62.3
63.6

Source: JT estimate (2016 data, as of July 2017).
Excluding China National Tobacco Corp (CNTC).
*** Brand owned by Imperial Brands Plc. from 2015.

018

Japan Tobacco Inc. Annual Report 2016

2013
395.9
140.8
105.7
98.6
83.7
62.7
25.8
53.7
64.1
61.8

2014
391.4
132.6
110.1
98.7
79.1
66.8
34.8
56.2
66.5
60.2

Billion units
2015
2016
392.5
385.8
135.0
141.5
109.3
108.2
103.2
102.5
77.3
76.2
71.0
71.3
50.5
69.2
59.3
65.9
66.1
64.8
62.0
62.6

Operations & Analysis

Worldwide Pharmaceutical Market* (USD BN)

963.4

964.4

993.6

1,061.3

1,072.0

2011

2012

2013

2014

2015

2015 Regional Composition*
North America 42.6%
Europe 22.2%
China 10.7%
Japan 7.6%
Others 16.9%

PharmaceuticalMarket dynamics
The global pharmaceutical market
continues to grow, reaching salesof approximately US$1,072 billion
in 2015*. North America, the largest
market in the world, shows more than
10% growth over the previous year.
In emerging countries, demand
for modern medicine is also rapidly
growing due to multiple factors,
including growing consciousnessof health, increase in population,and development of public healthcare
systems, among others. Facing a
rapidly aging society and a fiscal deficit,
the governments in these markets try
to contain healthcare costs throughwider promotion of generic drugs.
In addition, patents of commerciallysuccessful drugs have been expiring
during recent years, which accelerates
the global trend of industry consolidation.

* Copyright©2016 Quintiles IMS.
Created based on IMS World Review Executive 2016.
Reprinted with permission.

Processed Food
Market dynamics
JT’s processed food business is
operated by our subsidiary TableMarkCo., Ltd. (TableMark) which plays
a main role. TableMark focuses
on frozen food products, such asfrozen noodles, frozen rice and frozen
baked bread, ambient processed food
represented by packed cooked rice,seasoning business utilizing our yeast
technology and bakery business.
The size of the Japanese frozen foodmarket in 2015 on a consumption
basis including imports was ¥1,015.6
billion, up 2.8% year-on-year.
Regarding the domestic productionof frozen food, the production
monetary amount increased mainly
as manufacturers amended the retailprices to adjust the increase in raw
material costs.

Mature markets take majority ofshares in global pharmaceuticalmarkets. North America is the largest
market and accounts for approx. 43%of the worldwide market, followed by
Europe and Japan, representing 22%
and 8%, respectively*.
For the Japanese processedfood industry, we expected tosee additional price-increases inimported raw materials and pricesof raw materials remaining at highlevels, mainly due to current weaker
yen effect. The processed foodbusiness is also significantly
impacted by the development in thewholesale and retail sales channels,
particularly by their consolidation.
We will continue to monitor thedevelopment of these channels,
especially in the area of M&A.
Competition
TableMark is competing against
major players like Maruha Nichiro,
Nichirei, Ajinomoto and Nissui aswell as a multitude of mid-or smallscale producers. We are seeing apolarization of retailers as well as
reorganization and oligopolizationof the wholesale sector led bysogo-shosha, the general trading

In Japan, the main market for ourpharmaceutical business, original
drugs comprise the majority of themarket in terms of net sales. The
Japanese generic drug market sharefor prescription drugs is still small
compared with that in the U.S.
and Europe. However, its market
size has been expanding more
recently due in part to government
promotion of generic drugs in order
to control medical care expenses.
In Japan, the Government determines
the price of pharmaceutical productswith revisions being made every two
years. In April 2016, the latest roundof price revisions led to an industrywide reduction of drug prices by
7.8% on average.
Competition
The pharmaceutical industry ishighly competitive worldwide.
Our pharmaceutical businessfocuses on building a R&D-led
operational platform. Based on
this platform, original compounds
are developed and marketed asleading products in major global
markets. As such, we facecompetition with Japanese andmultinational pharmaceuticalcompanies.
companies, resulting in stronger
price negotiation power against
manufacturers. We are also seeing
an increase in private label brands.
Japanese Frozen Food Market (JPY BN)

859.3

899.2

977.1

988.3

1,015.6

2011

2012

2013

2014

2015

Source: Japan Frozen Food Association.

2015 Share of Market by Frozen Food Manufacturer
Maruha Nichiro 22.2%
Nichirei 21.8%
Table Mark 11.8%
Ajinomoto 11.0%
Nissui 8.3%
Others 24.9%
Source: The Nikkei Business Daily.

Japan Tobacco Inc. Annual Report 2016019

Review of Operations
Message from the President of Tobacco Business

Mutsuo Iwai
President, Tobacco BusinessTo strengthen the operationof our tobacco business, weestablished “Global Tobacco
Strategic Committee” andappointed “President, Japanese
Tobacco Business” as ofJanuary 1, 2017. Under this neworganization structure, we will
overcome present and futurechallenges. Our tobacco business,
Japanese and international
tobacco businesses as a whole,will remain committed toachieving our target of mid tohigh single-digit profit growthrate over mid- to long-term.

We will continuously strive to achievesustainable growth of the Group’s
Tobacco Business under the neworganization structure.

“Global Tobacco Strategic
Committee” is an advisory committee
for the President of the Tobacco
Business and is composed of JT and
JTI Executives. Its principal objective
is to facilitate future growth strategyof the Group’s Tobacco Business.
The Committee will discuss themid- to long-term growth strategies
for the overall tobacco businessincluding resource allocation related
to business investments and provide
advice and recommendations to the
President of the Tobacco Business.

“President, Japanese Tobacco
Business” was appointed to be fullyin charge of the Japanese domestic
tobacco business, reporting directly
to the President of the Tobacco
Business, in order to acceleratebusiness decision-making.
Meanwhile, by delegating the majorroles and responsibilities for theoperations in Japan, the Presidentof the Tobacco Business will beable to better facilitate the overallmanagement of tobacco business.

Members of the Committee will be:• President, Tobacco Business (Chairman),• President, Japanese Tobacco Business,• Head of Tobacco Business Planning
Division,• JTI Chief Executive Officer,• JTI Deputy Chief Executive Officer,• JTI Chief Operating Officer etc.

Tobacco Business Organization Chart
Position in bold is newly established

As of January 1, 2017
JT CEOJT Deputy CEO

President,
Tobacco Business020

AdviceRecommendation

President,
Japanese Tobacco
Business

JTI CEO

Japanese Tobacco
Business

International
Tobacco BusinessJapan Tobacco Inc. Annual Report 2016

Global Tobacco
Strategic Committee

Operations & Analysis

Tobacco Business Value Chain

R&D
Create value for thebusiness throughinnovation and quality

Procurement
Ensure stable supplyof quality tobacco leaf

Manufacturing
Support top-line growth bydelivering quality products

Marketing
Enhance equityof flagship brands

Sales &
Distribution
Expand product availability
by leveraging our trade
marketing excellence

We focus on fundamental researchand product technology development,
taking advantage of our global researchplatform, in close collaboration withother functions. In particular, focus
areas in our R&D activities are:• Develop products and analyticalcapabilities in line with market needs
and our anticipation of regulatory trends.

Tobacco leaf is the most importantmaterial for our products, and we
dedicate our efforts to strengthen ourcapability to ensure a stable supplyof quality leaf in the long-term.
• Increase the proportion of leaf
from our vertical integration bases
in Africa, Brazil and the U.S.
• Enhance sustainability of tobacco
farming by helping farmers to improve
productivity as well as taking initiatives
to support their communities.

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 and timely
product deliveries to markets.
• Strengthen our ability for business
continuity in times of emergency.
Our strategic focus is placed on
our flagship brands and we strive toenhance their equity through effective
communications with consumers.

Message from the Presidentof Tobacco BusinessInternational Tobacco Business
Japanese Domestic Tobacco Business
Pharmaceutical Business
Processed Food Business

020
022
028
032
036

• Maintain existing products tocomply with regulatory changes.
• Develop new technologies andimprove production processes
to maintain competitivenessand increase efficiency.
• Drive product innovation to enhanceequity from various aspects, including
tobacco leaves, blends, filters, printing
techniques and packaging.
• Develop emerging products.

• Maintain good relationships withexternal suppliers to ensure sufficient
supply at competitive prices.
With regard to non-tobacco materials,
we aim to mitigate cost increases due
to design enhancements and investment
in innovative products by, among others,
effectively managing procurement lot-size.

• Ensure high quality of products
and enhance flexibility in the
manufacturing process, overcoming
complexity in manufacturing due toan increase in number of products.
• At the same time, seek efficiency
by containing cost increases throughcontinuous improvement andreviewing of manufacturing footprint
for further optimization.

• Implement responsible marketing
programs, in compliance withapplicable laws and regulations
as well as our internal global
marketing principles.

• Allocate appropriate resources
to support GFB’s equity building.

There are various sales channels for
tobacco products such as supermarkets,convenience stores, street and train
station kiosks, small independent
retailers and vending machines. Key
channels are different depending on
the market and we develop win-win
relationships with them 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 accountthe channel development as wellas consumer trends andcompetitors’ actions.

Japan Tobacco Inc. Annual Report 2016021

Review of Operations continued

International Tobacco Business
FY2016: Results for the fiscal year ended December 31, 2016

Thomas A. McCoy
President and Chief Executive Officer, JT International

2016 was our sixth consecutive
year of double-digit profit growthat constant currency. We wereonce again the fastest growing
tobacco company, further
strengthening our businessfundamentals, competitivenessand our role as the profit growthengine of the JT Group.
Share gains, together with benefits
from acquisitions, enabled JTI
to achieve a total shipment
volume growth of 1.2%, our best
performance since 2012. In addition,
our Global Flagship Brands, now
including Natural American Spirit,grew volume for the second
consecutive year.
This positive volume combinedwith robust pricing across all clusters
drove core revenue and adjusted
operating profit growth at constantcurrency. Importantly, this solid
top and bottom-line performance
was achieved while continuing ourstrategic investments behind Global
Flagship Brands, seeding markets andemerging products; investments thatare strengthening the business andpaving the way for continued growthover the mid to long-term period.
In seeding markets our strategic
investments are paying off, withstrong GFB volume growth driving asignificant year-on-year core revenue
increase at constant currency.
We plan to continue investingin these initiatives going forward
to increase their contribution
to revenue and profit growth.

022

The core mission of JTI is tobe the profit growth engine of
the JT Group.

We also invested further toward our
vision to become a global leader inemerging products. Following theacquisition of Logic in 2015, JTI
became a leading E-Vapor player inthe key markets of the USA, the UK
and France. And we continued ourinternational expansion.
For 2017, the operating environmentis expected to remain challenging,primarily due to regulatory changes
in Europe and continued pricecompetition mainly in CIS+. Despite
these anticipated challenges, JTI
is targeting another year of strong
earnings growth and we are confident
that we will continue to deliver
sustainable growth over the long term.
Our strategies
The core mission of JTI is to be the profit
growth engine of the JT Group. Using
the “4S” model as guiding principle, JTI
has developed a clear and actionablestrategic growth agenda.
JTI’s strategic growth agenda sets
out three key priorities:• Organic growth in markets where
JTI’s presence is established.
• Expansion of our geographic
footprint in emerging markets
for future growth.
• Develop a leadership positionin emerging products.
Our key strategic drivers are:• Build and nurture
outstanding brands.
• Enhance productivity
continuously.
• Maintain focus on responsibility
and credibility.
• Strengthen human resources
as a cornerstone of growth.

Japan Tobacco Inc. Annual Report 2016

Total Shipment Volume

398.7
(BnU)

1.2%

+

Year-On-Year Change

Global Shipment Volume

283.7
(BnU)

3.7%

+

Year-On-Year ChangeCore Revenue

10,490(US$ MM)

1.5%+

Year-On-Year Change

8.5%

+

Year-On-Year Change
At Constant Currency

Adjusted Operating Profit

3,095(US$ MM)-

5.0%

Year-On-Year Change

13.4%

+

Year-On-Year Change
At Constant Currency

Operations & Analysis

We believe the combination of thesestrategic initiatives and continuous
improvement provide the rightbalance between short-term
profitability and sustainablelong-term growth.
In line with our “4S” Model to deliver
long-term sustainable growth, ourcompany goal is to be the mostsuccessful and responsible tobaccocompany in the world. As a result,
we have developed a Responsible
Business Framework, which defines
12 relevant business topics to support
this goal. Action plans are now being
implemented and include, but are notlimited to: respecting human rights
across our value chain; developing
reduced-risk products; and building
sustainable supply chains.
2016 Performance Review
Volume & ShareTotal shipment volume grew 1.2% to398.7 billion cigarette equivalent units,
our best performance since 2012. This
positive achievement was supported
by acquisitions and favorable tradeinventory adjustments, mainly in thefirst quarter.
The performance in South & West
Europe and North & Central Europe
was strong, driven by continued
market share gains fully offsetting
the impact of industry contraction,
notably in the UK. In these two
European clusters, our fine cut
volume increased 8.1%, led by
France, Germany, Hungary, Italy,
Spain, Switzerland and the UK. In
Rest-of-the-World, total volume wasup significantly driven by positive
performance in seeding markets andsupported by our acquisition in Iran.
The industry volume contraction
across the CIS+ cluster and lower
market share resulted in total
volume declining.
GFB shipment volume increased 3.7%
to 283.7 billion cigarette equivalent
units, including the addition of two
billion cigarette equivalent units fromNatural American Spirit. This second
consecutive year of volume growth
was driven by the strong equity of ourportfolio, and most notably Winston,Camel and Mevius. As a result, GFB
mix in our total shipment volume
grew to 71.2%, an increase of 1.7
percentage points versus prior year.

We also gained market share in finecut, notably driven by growth in the
key markets of France, Italy, Spainand the UK, as well as the additionof Natural American Spirit.

Looking into the clusters, GFB
volume was very strong, increasingat mid-single digit growth rate inSouth & West Europe and doubledigit growth rate in North & Central
Europe and Rest-of-the-World. In
CIS+, GFB market share gains could
not offset the GFB volume decline
due to industry volume contraction.

Importantly, across our Top40 markets,
we grew total and GFB share of value
to 23.6% and 17.0%, respectively.
Financials
Core revenue grew 8.5% at constantcurrency driven by robust price/mix
and shipment volume growth. Price/
mix contribution increased by US$721
million. All clusters contributed to theprice/mix increase, notably driven by
Russia, Turkey and the UK. The South& West Europe cluster generated
US$45 million in price/mix, combinedwith US$77 million from North &Central Europe, US$289 million
from CIS+ and US$310 million
from Rest-of-the-World.

BnU

South North
Rest&&
ofWest Central
the- Total
Europe Europe CIS+ World
JTI
Total
shipment
volumeGFB
shipment
volume65.2

54.2 141.4 137.9 398.7

58.6

33.6 107.1

84.4 283.7

Overall as a company we grew total
and GFB share of market. Across our
Top40 markets, JTI’s market share
grew to 25.7%, a 0.3 percentage
point increase versus prior year,
including gains in the key markets
of France, Italy, Spain and Taiwan.

Cluster breakdown

35%

36%

22%

CIS+

26%

Our GFB market share in our Top40
markets was up 0.7 percentage points
to 18.2% as GFBs continued to gain
share in France, Italy, Russia, Spain,
Taiwan and the UK demonstrating
once again the strength of our
GFB portfolio and the value of ourcontinued equity building investments.

35%
14%

24%
21%

Rest-ofthe-World

31%

16%

19%

21%

Shipment
volumeCore
Revenue(reported)

Adjusted
Operating
Profit(reported)

North &
Central Europe
South &
West Europe

Adjusted Operating Profit (US$ MM)+13.4%

+690
+3.0

-5.0%

-258

3,257

2015
reported

-598

3,095

3,693

VolumePrice/Mix

Other

2016 atconstant
currency

FX

2016
reported

Note: The selection of Top40 markets is basedon profit contribution.

Japan Tobacco Inc. Annual Report 2016023

Review of Operations continued

International Tobacco Business
FY2016: Results for the fiscal year ended December 31, 2016

Pricing was also the key driver of our
13.4% increase in adjusted operating
profit at constant currency. South &West Europe, CIS+ and Rest-of-theWorld all delivered double-digit
adjusted operating profit growthat constant currency. In North &Central Europe, adjusted operating
profit only grew low single-digit
at constant currency as we
increased investments to support
the integration of Natural American
Spirit and to strengthen our position
ahead of new regulations in the UK.
2016 Key highlights
Broadening the base for futuresustainable growth
In 2016, we continued to invest inseeding markets. We define theseas markets where JTI has a limited
presence and where we have identified
growth opportunities through sustained
and focused investments.
Initiatives focused on strengthening
our brand portfolio and equity, as
well as expanding our distribution
network and trade partnerships.
These investments generated
solid results, with our total volume
growing 29% versus 2015. This was
driven by Global Flagship Brands,
which increased their volume bymore than 30%, led by Winston,Camel and Mevius.
This volume momentum delivered
significant year-on-year core revenue
growth at constant currency.
These seeding initiatives areimportant as they will enable JTI
to benefit from a more balanced
geographic footprint. As a result,they support our sustainable earnings
growth over the mid to long term.
People, cornerstone of our growth
A major enabler of our strategy are
the approx. 27,000 employees of JTI
worldwide. To ensure sustainable future
growth, we continuously invest in ourpeople by setting high standards andfostering a diverse work environment
where our employees excel. This allows
JTI to recruit the best candidates anddevelop their skills and competencies
across the organization.

024

These efforts were rewarded by the
Top Employer Global certificationin 2015, 2016 and 2017, recognizing
33 countries for their exceptional
employee environment. In 2017, JTI
is ranked number one by the Top
Employers in Europe, Middle East
and Asia Pacific regions.
Expanding the business footprint
To complement our robust growth,
we conducted a number of footprint
expansion during the course of 2016.
In July 2016, the JT Group won abid to acquire a 40% equity stake in
National Tobacco Enterprise Ethiopia
S.C., the Ethiopian state tobaccocompany. This great opportunity
will further expand our presencein Eastern Africa following ouracquisition in Sudan in 2011.
To address the different growth
opportunities in the Americas, inFebruary 2016 we completed thepurchase of a 50% stake in La
Tabacalera in the Dominican Republic.
La Tabacalera has more than 100
years of experience in the cigaretteand cigar business and was the firstcompany in the Dominican Republic
to be certified under the International
Standard ISO 9001:2000 at the end of
2003. Operated as a joint venture with
the Government of the Dominican
Republic, this provides JTI with astrategic asset in the Caribbean.
Lastly, we also strengthened ourbusiness footprint in Bolivia with theacquisition of BIS Overseas Bolivia
S.R.L., the second largest tobaccospecific distributor in the market.
This new addition will accelerate
JTI’s expansion in Bolivia andenhance our presence acrossLatin America.

Japan Tobacco Inc. Annual Report 20162017 Outlook
We entered 2017 with confidence inour business fundamentals, positive
GFB momentum and the continuationof our strategic investments.
However, we expect the operating
environment will be challenging,primarily due to tightening
regulations and price competition.
This will overshadow the continued
volume and share growth of our Global
Flagship Brands and the increasing
top-line contribution from seeding
markets and emerging products.
Despite the anticipated operating
challenges, we are confident inachieving 9% adjusted operating
profit growth at constant currency,
driven by the significant efficiencies
generated by the planned andalready implemented manufacturing
optimization programs.
We will continue our investment
strategy toward brand equity
building, seeding markets andemerging products to ensure
long term sustainable growth andstrengthen our role as the profit
growth engine of the JT Group.
On March 31, 2017, Thomas A. McCoy
will be retiring and stepping downfrom JTI as President and Chief
Executive Officer. He will be
succeeded by Eddy Pirard, JTI’s
Executive Vice President Business
Development, Corporate Affairs andCorporate Communications. This
management change will not affect
JTI’s strategy as confirmed by Eddy
Pirard during the company’s full year
results investor meeting in Tokyo:“As of April 1, my Excom colleagues
and I will lead JTI in achieving its
objectives and financial targets forthe current year, while working hardand developing new plans to further
enhance our business fundamentals
and competitiveness, to ensure
continued and sustained growthin the long term.”

Operations & Analysis

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

Global Flagship Brands (GFB) Portfolio
Our GFBs form the core of our brand portfolio.
We have nine GFBs providing a well-balanced
portfolio to address consumer needs globally.

Winston is the leading brand of the JTI portfolio. Launched in
1954, Winston became the world’s second biggest cigarettebrand as of 2007. Winston is now sold in more than 120 markets
following the 2016 launches in Nepal, Laos, Ivory Coast andDominican Republic.
In 2016, Winston volume grew 5.5% to 139.3 billion cigarette
equivalent units. Winston’s continued performance is driven
by a comprehensive portfolio architecture comprised of two
sub-families – Core and XS.

GLOBAL SALES

139.3BnU

Winston Core family, of which the lead styles are Winston Blueand Red, is Winston’s global bestseller. In 2016, Winston Core
grew volume by 2%, primarily driven by business expansion in the
Rest-of-the-World. The XS family, which grew double-digit in 2016,is a more progressive range with a refined taste signature andfeatures such as the LSS technology (Less Smoke Smell) and the
new water-activated filter recently launched in Russia as Winston
XS Plus AQUA.
Winston recorded double-digit volume growth in 34 markets
and record market share in 20 markets, including Russia, France,
Iran, Italy, the Philippines and Taiwan. As a result, Winston
strengthened its global market share by 0.3 percentage points
to 9.1% in JTI’s Top40 markets.

Camel is the world’s most inspiring tobacco brand since1913, a global icon of creativity with over 100 years of tobacco
experience. With its distinctive taste signature, Camel is soldin almost 100 markets with 4 new market launches in 2016:
Iran, Myanmar, Namibia and Thailand.
2016 set a new record year for Camel driven by volume andshare growth for the third consecutive year. The brand reached52.2 billion cigarette equivalent units, an increase of 2.5%
versus 2015. Camel’s market share reached 3.3% in JTI’s
Top40 markets, gaining 0.1 percentage point versus prior year.
This positive performance was driven by strong growth
momentum in Camel’s European strongholds such as Belgium,
Czech Republic, Germany, Italy, the Netherlands, Portugal,
Spain, and also in emerging markets like the Philippines andSouth Africa, the latter entering Camel’s cluster of markets
exceeding 1 billion cigarette equivalent units.
GLOBAL SALES

52.2BnU

Camel continues to build relevance amongst adult smokers
driven by its iconic and international brand equity together
with product quality enhancement and innovation. Capsuleand modern line products continued to be the key growth
driver in 2016 with line extensions now representing
one-third of Camel’s total volume.

Japan Tobacco Inc. Annual Report 2016025

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

Global Flagship Brands (GFB) Portfolio continued
LD is one of the top bestselling tobacco brands in the world
and a key value proposition globally. Constantly increasing
its footprint, LD is now present in 50 countries and became
the first Global Flagship Brand to launch in the US market.
Relevant portfolio expansions combined with a focus onmodern formats (versus 2015, compact format grew 53%
and capsules increased 31%) and successful migrations
continued to build the brand as a stronghold in the JTI portfolio.
In a highly competitive value segment, LD delivered 47.6 billion
cigarette equivalent units in 2016. Industry size contractions
and competitive price pressures in CIS+ resulted in a volume
decrease of 3.9% versus prior year.

GLOBAL SALES

47.6BnU

Outside CIS+, LD volume continued to grow, notably at
double-digit rates versus prior year in the Rest-of-the-World
cluster. The brand achieved its highest ever market sharein Canada, Latvia, Montenegro, Singapore and Taiwan. In
Kazakhstan, LD became the leading brand with a historicalhigh share of market of 21.3% in December 2016. Overall,
LD reached a 3.4% market share in JTI’s Top40 markets.

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 Asianmarkets, and is expanding geographically to new markets.
For the full year of 2016, Mevius’ international volume recorded
an inspiring growth of 4.7%, to close at 17.9 billion cigarette
equivalent units, driven by significant growth in South East Asia
and World Wide Duty Free, while maintaining a steady growth
momentum in stronghold markets.
Mevius continued to grow its share of the premium segment in
its top Asian markets. In Taiwan, Mevius remained the number
one brand with a share of market of over 20%, enhancing its
leadership in premium by exceeding a 60% share of segment.
In JTI’s Top40 markets, Mevius’ market share reached 0.7%.

GLOBAL SALES

17.9BnU026

Japan Tobacco Inc. Annual Report 2016

Operations & Analysis

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

Global Flagship Brands (GFB) Portfolio continued

GLOBAL SALES

13.4BnU

GLOBAL SALES

2.0BnU

Originally established in 1873, Benson &Hedges has a proud British heritage. In
2016, B&H volume increased 10.7% to 13.4
billion cigarette equivalent units driven by
the success of B&H Blue in the UK. B&H
increased its market share 0.1 percentage
point to 0.8% in JTI’s Top40 markets.

Natural American Spirit joined the JTI
portfolio in January 2016. This brandoffers a unique positioning as the only
global exclusively “additive-free”
premium cigarette. Present in readymade cigarettes and fine cut, Natural
American Spirit is available in 16
countries, following the launches in
Greece and Ireland. Volume grew 6.7%
to 2.0 billion cigarette equivalent units.

GLOBAL SALES

5.9BnUGLOBAL SALES

2.9BnUGLOBAL SALES

2.5BnU

Glamour is JTI’s leading super slims brandintroduced in 2005. In 2016, mainly due
to the industry size contraction in Russia,
its volume declined 8.0% to 5.9 billion
cigarette equivalent units.

Audacity, uncompromised excellence
and noble characters define Sobranie,
one of the oldest luxury cigarettesince 1879. In 2016, Sobranie grew
volume by 7.0% to 2.9 billion cigarette
equivalent units.

Launched in 1964, Silk Cut established
its premium credentials as one of the first
low tar brands in the 1970s. In 2016, Silk
Cut volume declined 7.4% to 2.5 billion
cigarette equivalent units due to industry
volume contraction in Ireland andthe UK.

Other Tobacco Products Portfolio
Fine CutIn this category which encompasses roll-your-own andmake-your-own products, JTI’s fine cut volume and sharecontinued to grow.
With an 8.1% increase, our fine cut volume growth has continued
in 2016, driven by the strong performance of our GFB fine cut
volume (+17.7%) and the acquisition of Natural American Spirit.
JTI’s fine cut market share was up in 11 of our 15 key markets
for this category, essentially located in Europe.
We will continue to enrich our fine cut product pipeline with
innovative product features to keep delivering solid resultsin this category.

ShishaJTI entered the shisha tobacco business in 2013, and since thenwe have continuously improved the quality of the products, inaddition to rationalizing the portfolio, rejuvenating the offeringand expanding our presence.

E-Vapor

We continued to enhance our efforts to further develop JTI’s
presence and portfolio in E-Vapor. The acquisition of Logic
provided JTI with the opportunity to become a leading E-Vapor
player in the world’s three largest markets in value, namely
the USA, the UK and France.
Our E-Vapor portfolio encompasses all possible variants suchas e-pens, closed tanks and open tanks with our own e-liquids.
While the category is evolving rapidly from a product andregulatory standpoint, JTI holds a 12.4% share of value in the
USA and 12.3% in the UK market where we hold the number
three position. JTI holds the number one E-Vapor company
position in Ireland and is the number one closed tank propositionin France with Logic Pro.
We expanded further our presence in 2016, entering Austria,
Germany, Italy and Korea. We will continue investing in thisgrowing category to strengthen our portfolio and pursue
more geographical expansion.

In 2016, we returned to volume growth reaching 19,000 tons(+3.8%), despite the continued geopolitical tensions in the
Middle East, a key geography for shisha tobacco.

Japan Tobacco Inc. Annual Report 2016027

Review of Operations continued

Japanese Domestic Tobacco Business
FY2016: Results for the fiscal year ended December 31, 2016

Chito Sasaki
President, Japanese Tobacco Business

Our operating environment continues
to be challenging, mainly due to theongoing industry contraction and an
intensifying competition in TobaccoVapor (T-Vapor) category.
However, we are committed to taking
various measures to secure ourleadership position and to achieve
quality top-line growth. In January
2016, we acquired Natural American
Spirit (NAS) business outside the U.S.
and have been pursuing the top-line
synergy. In April, we also took a priceincrease of Mevius without tax hike.
Driven by these initiatives, we havestrived for strengthening our brandportfolio as well as growing revenue.
Regarding Ploom TECH, through thetest marketing in Fukuoka city and ouronline store, we have become more
confident in the superior featuresof the product, such as no smell of
tobacco smoke and good usability.

Profit grew by quality top-line as wellas cost optimization initiatives despite
severe conditions.

Looking forward, we will maintain ourrole as a highly competitive platform of
profitability for the Group by means ofquality top-line growth, the optimizationof investments in cigarette as wellas the increased emphasis on
T-Vapor category.
Performance Review(volume/financial)• Revenue and profit grew mainly
through Mevius price increase
and the acquisition of NAS.
–– JT sales volume decreased
2.8% to 106.2 BnU mainly
due to the decline of cigarette
industry volume, partly offset
by the addition of NAS.
–– Core revenue increased 1.2%
to ¥649.7 billion, mainly becauseof the Mevius price increase.
–– Adjusted operating profit grew
2.4% to ¥260.2 billion driven by
the pricing, the benefits frominitiatives to strengthen ourcompetitiveness and effective
cost management.

Sales Volume

106.2
(BnU)

-

2.8%

Year-On-Year ChangeCore Revenue

649.7(JPY BN)

1.2%+

Year-On-Year Change

Adjusted Operating Profit

260.2(JPY BN)

2.4%+

Year-On-Year Change

Sales Volume (BnU)

Core Revenue (JPY BN)

-2.8%

028

Adjusted Operating Profit (JPY BN)

+1.2%

+2.4%

109.2

106.2

642.2

649.7

254.1

260.2

FY2015FY2016FY2015FY2016FY2015FY2016

Japan Tobacco Inc. Annual Report 2016

Operations & Analysis

Performance Review(Market share)• Our total and Mevius cigarettemarket shares were resilient in
the context of severe competition.
–– In FY2016, JT market share
increased 1.2 percentage
points to 61.1%.

Share evolution of JT and MEVIUS (%)

60.1

62.4

59.8

60.7

61.4

32.0

33.2

29.8

31.1

31.5

Oct-Dec
2015

Jan-Mar2016

Apr-Jun
2016

Jul-Sep
2016

Oct-Dec
2016

JT

Going forward, we will keep
investing in our core brands tofurther reinforce our brand equity.
As a result of these investment
initiatives, our market shareincluding Mevius remained solid.
Our strategies
We respond to changes in theoperating environment with an aim
to generate stable profit. Meanwhile,
we continue to invest in order toachieve sustainable profit growth.
In terms of cigarette, we are striving
for maximizing our top-line throughmarket share gains with a particularfocus on our core brands. At thesame time, we will optimize ourinvestment in cigarette. With these
efforts, we will secure and improve
profitability in this category.

Outlook
We continue to pursue themaximization of our top-line as wellas the optimization of investment
in cigarette. However, revenue andprofit are forecast to decrease in2017, mainly due to cigarette industry
volume contraction impacted by the
expansion of T-Vapor category.
Despite this challenging
environment, the Japanese domestic
tobacco business is committed
to fulfilling our role as a highly
competitive platform of profitability
in the mid- to long-term. Towards
this goal, we will make necessary
investment in T-Vapor and core
brands to further build our businessfoundation which will underpin oursustainable profit growth from 2018
and beyond.

MEVIUS

Amid the intensifying competition,
we continued to invest in sales
promotion and brand equity
enhancement with a focus on
Mevius. Furthermore, with theaddition of NAS, we can offer acompelling brand portfolio toconsumers in each price segment.

Regarding Ploom TECH, ourpriority is to complete the planned
production capacity enhancement,
which will lead to the expansion ofits sales area. Also we will effectively
communicate with consumers to
improve awareness of this productand promote better understandingof its feature.

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
to encourage smoking by consumers.

Japan Tobacco Inc. Annual Report 2016029

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

Our core brands

PRESTIGE

NaturalAmerican Spirit

SHARE OFSEGMENT*

52.5%• The Natural American Spirit brand was born in the U.S. in 1982, and introduced to Japan in 1996.
• JT Group has completed the acquisition of the Natural American Spirit business outside theUnited States in January 2016 and been expanding its markets such as Japan, Germany,
Switzerland, Italy, Spain and the UK.
• The Natural American Spirit brand vision is unchanged even after its phenomenal growth
globally with the idea to provide the most premium, additive-free, all natural tobacco product.
• The Natural American Spirit family comprises a line-up of 8 cigarette products as well as
3 Roll-your-own products.
PREMIUM
SHARE OFSEGMENT*

Seven Stars

44.3%• Launched in 1969, Seven Stars featured Japan’s first domestically produced charcoal filter
in pursuit of better taste.
• Since its launch, Seven Stars has consistently offered unique value in terms of taste, aroma,and product design.
• Seven Stars Original soft package with 14mg tar had been the most sold product in theJapanese domestic market for 9 years until 2016.
• The Seven Stars family comprises a line-up of 19 products.
SUB-PREMIUM+
SHARE OFSEGMENT*MEVIUS

99.6%• Evolved in 2013 from Mild Seven, MEVIUS has commanded the No.1 share in the Japanese
domestic market for more than 30 years.
• Its regular products offer smooth taste as well as menthol products allow consumers
to enjoy premium and high quality products with only 100% natural menthol.
• The MEVIUS family comprises a line-up of 38 cigarette products as well as 3 capsuleproducts for Ploom TECH, JT’s tobacco vapor product.
SUB-PREMIUMSHARE OFSEGMENT*

Winston32.5%• First introduced in 1954 in the United States, and today Winston is the second largest
cigarette brand in the world.
• In 2015, CABIN and CASTER were migrated into Winston in Japan. Winston has three
types of taste, “Bitter”, “Straight” and “Sweet”, in both Regular and Menthol segment.
• The Winston family comprises a line-up of 29 products.

* JT total. 2016 results.

030

As of December 31, 2016

Japan Tobacco Inc. Annual Report 2016

Operations & Analysis

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 toencourage smoking by consumers.

Ploom-TECH
Tobacco-vapor witha newly developed concept
Ploom TECH offers clearer tobacco
taste without ash or smell of
tobacco smoke provided by unique
technology with no combustionand no direct heating of tobacco. It
makes a new way to enjoy tobaccothat helps to avoid annoying thosenearby. In addition, Ploom TECH is
activated merely by inhaling, making
it possible to enjoy the experience
immediately and at any time, alsoeasy to hold and carry.

Japan Tobacco Inc. Annual Report 2016031

Review of Operations continued

Pharmaceutical Business
FY2016: Results for the fiscal year ended December 31, 2016

We aim to build a unique, world-classpharmaceutical business driven by R&D
and to increase our market presence
through original and innovative drugs.

Muneaki Fujimoto
President, Pharmaceutical Division

We strive to strengthen the profit
base through R&D promotionof “first-in-class” compounds
and value maximization ofeach product.
Strategy• Promote R&D of “first-in-class”
compounds and seek optimum
timing to out-license them
• Maximize the value of each product
Performance Overview[Development in Japan]• “Genvoya Combination Tablets”:
a novel anti-HIV drug, Launchedby Torii Pharmaceutical (July 2016)• “Descovy Combination Tablets
LT/HT“: novel anti-HIV drugs,
Launched by Torii Pharmaceutical(January 2017)

Revenue (JPY BN)[Licensed compounds]• Elvitegravir (Anti-HIV)–– E/C/F/TAF (single-tablet regimen“Genvoya”): Launched by Gilead
Sciences, Inc. in the U.S. and EU• Trametinib (Melanoma)–– For use in combination withdabrafenib: Approved in Japanand EU

Revenue

Business results(financial overview):• Revenue grew ¥11.6 billion driven
by an increased royalty from ourlicense partners, mainly Genvoya.
Milestone revenue associated withthe progress in drug development
also supported the strong result.
• Adjusted operating profit
improved by ¥12.0 billion
achieving a record high profit
due to revenue increase.

Adjusted Operating Profit

87.2(JPY BN)

11.6+

Year-On-Year Change (JPY BN)

9.7(JPY BN)

12.0+

Year-On-Year Change (JPY BN)

Adjusted Operating Profit (JPY BN)

+11.6

+12.0

9.7
75.6

87.2

-2.3
FY2015032

FY2016FY2015

Japan Tobacco Inc. Annual Report 2016

FY2016

Operations & Analysis

Value chain

R&D

Continue to strengthen R&D capability, acornerstone of our pharmaceutical business
By focusing our resources on specifictherapeutics areas, we continue tostrengthen our R&D capability whichenables us to create innovative drugs.
• Focus mainly on the fields of metabolic
diseases; viral infection; andautoimmune/inflammatory diseases
to best leverage our expertise.
• Allocate adequate resources in R&D
in light of time-consuming and costly
development process.

Manufacturing

Ensure a reliable supply of quality products
We are proud of ourselves with asustainable supply chain that delivers highquality products to our patients. We also
pursue efficiency in our manufacturing
arrangements; products marketed inJapan are mainly produced by Torii
Pharmaceutical to maximize intra-groupsynergies, while outsourcing to contract
manufacturers where appropriate.

Sales & Promotion

Build marketing competence on our MRs
In the pharmaceutical industry, medical
representatives (MRs) play a crucialrole in successful sales and promotion
by providing medical and scientificknowledge with clients. At the same time,they collect valuable information from the
medical front which could be reflectedin the ongoing or future R&D activities.

• Aiming at discovery of “first-in-class”
compounds, enhance pre-clinical researchcapability and build development strategies
tailored to accomplish the objective.
• Translate innovation into medicines that areboth approvable and commercially viable.

• Remain focused on quality
assurance and safely control.
• Maintain optimal
manufacturing arrangements.
• Continuously strive to reduce
environmental impacts, asevidenced by operation andmaintenance of the ISO 14001
certificate by our Sakura plant.

Torii Pharmaceutical is marketing our
products in Japan through approximately
500 highly-trained MRs. Outside Japan,
instead of directly marketing our products,
we receive royalties based on sales
performance from our license partners forthe compounds for which we out-license
the right to develop and market.
• Provide extensive training programs
to MRs and expand their knowledge
to earn trust from our clients.

• Strengthen our marketing capabilities
by leveraging the marketing support
system, which integrates various
clients’ information.
• Build a sales and marketing strategy
to meet the existing and future
market needs in the changing
business environment.

Japan Tobacco Inc. Annual Report 2016033

Review of Operations continued

Pharmaceutical BusinessJapan Tobacco Inc. Clinical Development (as of February 6, 2017)
In-house development
Code(Generic name)Potential Indication/
Dosage form

Mechanism

Description

JTZ-951

Anemia associated withchronic kidney disease/Oral

HIF-PHD inhibitor

Increases red blood cells by stimulating production of erythropoietin,
an erythropoiesis-stimulating hormone, via inhibition of HIF-PHD.

JTE-052

Autoimmune/allergic
diseases /Oral, Topical

JAK inhibitor

Suppresses overactive immune response via inhibition of Janus kinase(JAK) related to immune signal.

JTE-051

Autoimmune/allergic
diseases/Oral

Interleukin-2 inducible
T cell kinase inhibitor

Suppresses overactive immune response via inhibition of the signal
to activate T cells related to immune response.

JTT-251

Type 2 diabetes
mellitus/Oral

PDHK inhibitor

Decreases blood glucose by activation of pyruvate dehydrogenase(PDH) related to carbohydrate metabolism.

JTK-351

HIV infection/Oral

HIV integrase inhibitor

Suppresses blood HIV levels by inhibiting the activity of integrase,an enzyme involved in the replication of HIV.

JTE-451

Autoimmune/allergic
diseases/Oral

ROR antagonist

Suppresses overactive immune response via inhibition of ROR
related to Th 17 activation.

JTT-751(ferric citrate)

Iron-deficiency
anemia/Oral

Oral iron replacement

Corrects iron-deficiency anemia by using absorbed Iron forsynthesis of hemoglobin.

Clinical trial phase presented above is based on the first dose.

Licensed compounds
Compound(JT’s code)

Licensee

Mechanism

trametinib

Novartis

MEK inhibitor

Inhibits cellular growth by specifically inhibiting
the activity of MAPK/ERK Kinase (MEK1/2).

Anti-ICOS
monoclonal
antibody
JTE-052

MedImmune

ICOS antagonist

LEO Pharma

JAK inhibitor

JTZ-951

JW
Pharmaceutical

HIF-PHD inhibitor

Suppresses overactive immune response via
inhibition of ICOS which regulates activationof T cells.
Suppresses overactive immune response
via inhibition of Janus kinase (JAK) related
to immune signal.
Increases red blood cells by stimulatingproduction of erythropoietin, an erythropoiesisstimulating hormone, via inhibition of HIF-PHD.

034

Note

Japan Tobacco Inc. Annual Report 2016

NSCLC, trametinib+dabrafenib
U.S., EU, Japan marketing
approvals submitted

Operations & Analysis

Location

Phase 1

Phase 2Phase 3

Preparing to file

Filed

OriginJapan
In-house
OverseasJapan

In-house; Co-development with Torii

Overseas

In-house

Overseas

In-houseJapan

In-house

Overseas

In-houseJapan

In-license (Keryx Biopharmaceuticals);Co-development with Torii*
additional indication

Japan Tobacco Inc. Annual Report 2016035

Review of Operations continued

Processed Food Business
FY2016: Results for the fiscal year ended December 31, 2016

If we are going to prepare food for those
who matter to us most, we wish to do so
cordially and with care. This is our desire
when running our business at TableMark.

Atsuhiro Kawamata
President and CEO, TableMark

TableMark began its operation
as a food manufacturer withfrozen and ambient processed
food, bakery items and seasoning
as our business pillars. In particular,
we strive to provide high valueadded products by focusing
on staple food such as frozen
noodles, frozen rice, packed
cooked rice and frozen
baked bread.
Strategy• Increase the attractivenessof our offerings with a particularemphasis on staple foodproducts* by meeting consumer
needs with our own expertise.
• Minimize negative impact ofrising raw material costs andweak yen.

Performance Overview
The processed food businessis primarily engaged in businessconcerning frozen and ambient
processed food, mainly staple foodproducts such as frozen noodles,frozen rice and packed cooked rice,seasonings including yeast extracts
and oyster sauce, and bakery chain
outlets in the Tokyo metropolitan area.
Business results(financial performance):• Revenue decreased despite
favorable sales of staple products,
offset by the decline of sales ofother products.
• Adjusted operating profit increasedby 2.3 billion yen year-on-year as
better product mix, cost reduction
efforts and the strong yen enhanced
the profit margin.

Revenue

164.1(JPY BN)

1.8-

Year-On-Year Change (JPY BN)

Adjusted Operating Profit

5.0(JPY BN)

2.3+

Year-On-Year Change (JPY BN)*	Staple food products: frozen noodles, frozen rice,
packed cooked rice and frozen baked bread.

Revenue (JPY BN)

Adjusted Operating Profit (JPY BN)

+2.3

-1.8

165.8

164.1

5.0
2.7

FY2015036

FY2016FY2015

Japan Tobacco Inc. Annual Report 2016

FY2016

Operations & Analysis

Value chain

R&D

Procurement

Marketing

Production

Strive to develop innovative products to meet
consumers’ needs• Leveraging our own know-how, we aim todevelop value-added products to meet diversified
consumers’ needs.
• Frozen baked bread products have beendeveloped which allow consumers to enjoy thetaste of freshly baked bread at home. TableMark’s
original techniques for fermentation, baking andfreezing recreate and preserve the taste andtexture of fresh bread.
• New process for making frozen udon noodles,
called “Tamnenjikomi Aya Jyukusei-ho” wasdeveloped. This process enables us to offer
higher quality and value-added udon products.

Strive for effective marketing
to improve product awareness• We analyze the market fromconsumers’ point of view and, by
combining the technology owned
by TableMark, we strive to provide
products with new values to increase
our presence in the market. We strive
for effective marketing in order toimprove consumer awareness of
our products.

Sales & Distribution

Increase penetration to retail outlets• Strive to enhance profitability throughour initiatives to increase our presencein supermarkets and convenience stores,
by offering a wider range of products
while also seeking better shelf space.
• TableMark products are also sold torestaurants and other public facilities.

Ensure procurement of safe and quality raw materials• Review of quality assurance certificatessubmitted by our suppliers.
• Inspections and monitoring of agrochemical
residues and regular inspection at processing
plants, in compliance with JT Group’s internal
standards, the Food Sanitation Act and otherrelevant laws.
• Examination of safety of production sites for
raw materials sourced abroad.
• As for agricultural farms, inspections are
made not only for soil and water but also interms of how products are cultivated and how
agrochemicals are handled. Breeding farms
are also inspected.

Prioritize safety and follow establishedquality control procedures• JT Group is pursuing the adoption of the
HACCP system, ISO22000 and FSSC22000 in
our and business partners‘ factories. Under the
ISO22000 and 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 have achieved the ISO22000 or
FSSC22000 certification.

Food Safety Control

Ensure safety control at all levels of the value chain• Independent food safety management division is
responsible for overall safety control, ensuring that
consumers can continue to enjoy our products safely.
• External food safety experts provide assessment andadvice regarding our initiatives – their knowledge andviewpoints are actively incorporated into our business.

Japan Tobacco Inc. Annual Report 2016037

Risk Factors

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

Considering such circumstances, wehave put in place a risk management
framework. Under the framework,
relevant divisions are assigned tocarefully monitor the developmentof events that may adversely impact
the JT Group and prevent theirmaterialization where possible.
When risks materialize, we promptly
respond in order to minimize theirunfavourable impacts. In reviewing
risks, the magnitude of potential
impact and likelihood of occurrence
are most prudently assessed among
other factors. Material risks, which
could have a significant impact on oursustainable profit growth and business
continuity, are reported to the
CEO together with the request
for approval to implement
countermeasures against them.
The following section describes certain
risks which potentially have a material
impact on our business operations andfinancial results, but is not intended
to be an exhaustive list of the risks weface. In addition, it is possible that risks
that are currently considered immaterial
or even unknown could turn out to bematerial in the future, as the businessenvironment changes.
This section should be read
together with the forward looking
and cautionary statements
contained in this annual report.

038

1

Disruptive
tax increases

2

Pressure from
illicit trade

Tobacco products are subject to excise
or similar taxes in addition to valueadded tax. Excise taxes are increasing
in most markets where we operate
as governments seek to secure theirrevenue or promote public health.
In general, value-added tax is also
increasing. As a general principle,
we fully pass on any tax increase
to consumers by adjusting our sales
prices. In addition, to the extent
possible, we increase our prices morethan the tax increase, considering
the financial impact of an expectedvolume decline. A tax increase withina reasonable range is manageable
through such a price increase as wellas our efforts to support top-line andpursue efficiency. Most governments
are aware that a substantial tax
increase or repeated tax increases
can reduce their revenue and theytake a rational approach. However,in the past we have experienced tax
increases in some markets that havedisrupted our business.

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 fuelsorganized crime, and may increase healthconcerns due to poor manufacturing
standards and improper product handling.
The tobacco industry has been fighting
against illicit trade, which takes theforms of contraband, counterfeit
and illicit whites.

Risk description and potential impact
A disruptive tax increase on tobacco
products could result in 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 andprofit could decrease due to thesenegative reactions by consumers.

Risk description and potential impact
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 cost to combat illicit trade, resulting
in pressure on its earnings. Furthermore,
it is possible that low quality counterfeits
and improperly handled smuggled
products damage the credibility ofgenuine brands, as well as the reputationof their owners.

Measures to address the risk
• Promote the understandingof relevant authorities that a
disruptive tax increase does notnecessarily serve their purpose.
• Optimize our product offerings
to capture the potential changes
in consumer preference.
• Enhance our geographical portfolio
to limit the negative impact of
a disruptive tax increase in a
specific market.
• Further improve efficiency toprotect revenue and earnings.
• If a disruptive tax increase takes
place, find an optimal price foreach product which minimizes
the unfavorable influence inthe market.

Japan Tobacco Inc. Annual Report 2016

Illegally traded products in a market
tend to increase after a steep tax
increase. Regulatory actions seeking
to commoditize packages and products
could also trigger the acceleration of illicit
trade because such commoditization
could make counterfeit manufacturing
easier and detection of illicit products
more difficult. We take a zero tolerance
approach towards all these criminal
activities with an emphasis on
eliminating contraband products.

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.

Operations & Analysis

3
Working together with authorities:
In 2007, JT International Holding
B.V. and JT International S.A.,
JT Group subsidiaries, entereda cooperation agreement with
the European Commission, theexecutive branch of the European
Union (EU), and 26 EU Member
States as part of efforts to combat
illicit trade. In 2009, the United
Kingdom joined the agreement.
Under the terms of the agreement,
the JT Group contributed US$50
million annually in the first five
years from its execution andcontributes US$15 million annuallyin the subsequent ten years. Thisfinancial contribution is to be used
to support anti-smuggling andanti-counterfeiting initiatives led
by the EU or EU Member States.
In 2010, JTI-Macdonald Corp., a JT
Group Canadian subsidiary, also
signed a similar agreement with
the Government and Provincesof Canada.

Tightening tobacco
regulations

The tobacco industry is highly regulated
in various aspects, and regulations could
influence our business performance andfinancial results. Among the regulations
on products, for example, we may incur
additional costs in order to comply withingredients and packaging requirements.
Furthermore, the regulatory attempt tocommoditize tobacco products could leadto an increase in illicit trade and 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, theJT Group abides by applicable laws
and regulations wherever we operate.
That said, we believe that laws andregulations should differ country bycountry, reflecting legal, social andcultural background. We endeavor
to hold constructive dialogues withgovernments and regulators for areasonable and balanced approach
towards tobacco regulation.

4

Countryrisks

Our tobacco business has consistently
expanded our earnings base to securelong-term growth by making acquisitions,entering new markets and increasing
share in markets where we had limited
presence. Geographical expansion may
increase our exposure to country risks.
In any market where we operate, we
may face economic, political or social
turmoil which may negatively affectour operations and financial results.
Risk description and potential impact
Political instability, economic downturn,social unrest or other unfavorable
developments in a certain market could
disrupt our business, leading to lower
volume, revenue and profit in the market.
Measures to address the risk
• Avoid overdependence on a small
number of markets as sourcesof profits by expanding the poolof highly profitable markets.

Risk description and potential impact
Further tightening of tobacco regulations
on marketing activities could undermine
our strategy for top-line growth as welose opportunities to enhance brandequity. Moreover, certain regulations
may impose on us additional compliancecosts. These may negatively influence
our volume, revenue and profit.
Measures to address the risk
• Identify ongoing regulatory initiatives
as early as possible by promptly
collecting accurate information.
• Endeavor to hold constructive
dialogues with governments andregulators for reasonable andbalanced regulations that meettheir objectives.
For further details, please refer to‘Regulation and Other Relevant Laws’
contained in this annual report.

Japan Tobacco Inc. Annual Report 2016039

Risk Factors continued

5

Instability in the
procurement of
key materials

Across its businesses, the JT Groupprocures raw and processed materials
for product manufacturing.
In particular, we strive to procure key
materials in the required quantity andat reasonable costs. Our key materials
include agricultural products: mostnotably, tobacco leaf for the tobacco
business, and grains for the processedfood 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
increase, due to the high demand inenergy resources, global population
increases, and economic growth inemerging countries.
Risk description and potential impact
Insufficient supply of key materials
could lead to inability to manufacture
our products, subsequently resulting
in the loss of revenue and profit.
Furthermore, the increase inprocurement costs driven by higher
production costs for agricultural
products would directly pressure
our earnings.
Measures to address the risk
• Reinforce ability to procure key
materials by building a strong
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.

040

6

Unfavorable
developments
in litigation

JT and some of its subsidiaries are
defendants in lawsuits filed by plaintiffs
seeking damages for harm allegedly causedby smoking. As of December 31, 2016,20 smoking and health-related cases werepending in which 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
for JT’s acquisition of RJR Nabisco Inc.’soverseas (non-U.S.) tobacco operations.
JT and its subsidiaries, who are defendants
in such lawsuits, believe that we havevalid grounds to defend the claims in suchlawsuits; however, we cannot predict theoutcome of any pending or future litigation.
Risk description and potential impact
A decision unfavorable to us
could materially affect our financial
performance due to the payment ofmonetary compensation. Critical media
coverage of such lawsuits may reducesocial tolerance of and strengthen
regulations on smoking. Such media
coverage may also prompt the filingof a number of similar lawsuits against
JT or its subsidiaries, resulting inincreased litigation costs.
Measures to address the risk
• Continue to build well-organizedteams coordinating with external
legal counsel to defend ourselves
against these lawsuits.
• Continue legitimate and appropriate
business operations. For further
details, see section regarding‘Litigation’.

Japan Tobacco Inc. Annual Report 20167

Naturaldisasters

Our operations may be disturbed by natural
disasters such as earthquakes, typhoons,floods, volcano eruptions and others.
Japan is one of the most important markets
for the JT Group’s businesses and subject
in particular to various natural disasters.
The Great East Japan Earthquake wasdevastating. The impacts on the JT Group
included casualties among our employees,
physical damage to our factories, andsupply shortages of certain tobacco
product materials. Our tobacco business
was forced to temporarily suspend productshipment and limit shipment volume foran extended period.
We have developed a Business Continuity
Plan to minimize the impact of suchdisasters, with a particular emphasis on
the optimization of the global supply chain.
Risk description and potential impact
Natural disasters could cause damage
to the JT Group as well as our suppliers,
trade partners and consumers, leading to
disruption of our business and negatively
impacting financial results.
Measures to address the risk
• Continuously review the BusinessContinuity Plan and revise it
as necessary.
• Carry out emergency drills toincrease employees’ preparedness
against disasters.
• Insure key assets such as buildings,
machinery, equipment and inventory
to recover financial losses asappropriate.

Operations & Analysis

89Currency
fluctuations

As the JT Group operates globally,
we are exposed to the risks associatedwith currency fluctuations. The reporting
currency of the JT Group consolidated
financial statements is Japanese Yen,
while the financial statements of ourinternational subsidiaries are reported inother currencies such as Russian ruble,
Euro, British pound, Taiwanese dollar,
U.S. dollar, and Swiss franc.
Therefore, exchange rate fluctuations ofthese currencies against Japanese Yen
influence the Group’s 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
U.S. dollars. We often communicate thefinancial performance of our international
tobacco business in U.S. dollars, whichis affected by exchange rate fluctuations
against the U.S. dollar. In principle, we
do not hedge these risks which arise fromthe translation of financial statements.
However, we hedge against risks whicharise when equity denominated in eachfunctional currency of the JT Groupis translated into Japanese yen to beconsolidated by using foreign currencydenominated interest-bearing debts
and part of these are designated as
net investment hedges. In addition,
many companies make transactions
in currencies other than their reporting
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 tocompletely eliminate them.

Furthermore, if we liquidate or sell agroup subsidiary which we acquired
in a currency other than Japanese yenor impair a substantial value of sucha subsidiary, the gain or loss from thetransaction includes the currency
fluctuation impact. Specifically, theimpact comes from the differencein the exchange rates of the relevant
currency against Japanese yen at thetime of the acquisition and at the timeof such transaction.
Risk description and potential impact
Fluctuations of exchange rates against
Japanese yen affect the JT Group’s reported
financial results. Reported financial resultsof our international tobacco business in
U.S. dollars are similarly influenced by thefluctuations of exchange rates against the
U.S. dollar. In addition, we are exposed tothe exchange rate fluctuation risks whena group company makes a transaction ina currency other than its reporting currency.
Measures to address the risk
• Mitigate the risk through hedging
activities such as derivative contracts,
possession of interest bearing debts
in a foreign currency etc.

Competition

The JT Group competes fiercely inboth domestic and international tobacco
business with our competitors.
In the Japanese domestic tobacco
market, import of tobacco products
was deregulated in 1985, followed by theprovisional suspension of custom duties
on imported tobacco in 1987. Since then,competition has intensified each year,
as smokers’ preferences diversify andas our competitors pursue aggressive
promotional activities.
In the overseas tobacco markets, the JT
Group expanded its business organicallyas well as through M&A, by acquiring thenon-U.S. 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 businessor with local competitors with strength inspecific markets.
Market share can fluctuate due to a numberof factors, including increasing regulations,increases in health awareness, changes
in smokers’ preferences or changes toeconomic conditions of each market. It
can also fluctuate from competitors’ 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 the accompanying
promotional activities.
Risk description and potential impact
Fluctuation of our market share may
affect the JT Group business performance.
In addition, price competition (pricereductions or brand repositioning, among
others) aimed at increasing market share,
may negatively affect our profit margins.
Measures to address the risk
• Optimize our product portfolio by:-- developing and providing productsthat can capture changing
consumer preferences and needs-- placing brands with strong brandequity in each price category• Provide product support by enhancing
trade marketing capability andeffective promotional initiatives.
• Further improve efficiency to protect
revenue and earnings.
• Avoid overdependence on a small
number of markets as sources of
profits by expanding the pool ofhighly profitable markets.

Japan Tobacco Inc. Annual Report 2016041

JT Group and Sustainability

Our approach to sustainability is underpinned by our management principles known as 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 model enhances corporate value and helps us to meet and exceed stakeholders’interest in the most balanced way possible.

Contents

Our strategic approach

Our way of doing business

Our people

Summarized below are material issues for the JT Group. If you wish to learn
more about our approach and commitment to sustainability or specificprograms, ‘JT Group Sustainability Report FY2015’ is currently available
on JT Group website. The FY2016 report will be available on our website
in June 2017. This report will be compiled in accordance with the Global
Reporting Initiative (GRI) G4 Sustainability Reporting Guidelines ‘Core’ level.
JT Group Materiality Assessment
We carried out our first materiality assessment covering the entire JT Group,
which allowed us to arrive at a final list of 22 material issues ranked by levelof importance to the JT Group and our external stakeholders in 2015 – seematrix below. In 2016, we carried out various initiatives in our business andsupply chain, taking each materiality into consideration.

Our planet

Our contributions to society

JT Group materiality matrix

Our processed food businessIn focus:-- Respecting human rights-- Illegal tradeHigh
MediumOur pharmaceutical business

Importance to external stakeholders

Our tobacco business

Product safety
and productresponsibility

Supply chain
management

Product innovationand intellectual
property

Respecting
human rights

Information
security

Responsible
marketing

Litigation

Anticompetitive
behaviour

Being aresponsible
employer

Anti-bribery
and corruption

Illegal trade

Workplacehealth andsafetyCollaborations
andpartnerships

Employeedevelopment andtalent management

Equality anddiversity inthe workplace

Environment

Contributions
to society

Political andregulatory
decision-making
processes

MediumHigh

Importance to the JT Group
Value chain boundaries
Supply chain042

Laws andregulations

Environmental
impacts ofproducts

Tax practices

JT Group Sustainability
Report and GRI G4 index:
www.jt.com/csr/report/
index.html

Corporate
governance andtransparency

Our Company

Japan Tobacco Inc. Annual Report 2016

Our customers and consumers

Operations & Analysis

Respecting human rights
In 2016 we launched the JT Group Human Rights
Policy that aligns with the UN Guiding Principles on
Business and Human Rights. The Policy was developedin consultation with stakeholders, and it formalizes anddetails our commitment to respect human rights within
our operations and in our value chain. From 2017 onward,
we will carry out research on potential human rights risks
related to our stakeholders. The results of this work will
guide the development of our human rights due diligenceprocess, which includes the identification, management,
monitoring, and reporting of key issues.
Child labor prevention
Our ARISE program launched in 2012 aims to addressroots causes of child labor in tobacco growing. The
program, which covers Brazil, Malawi, Zambia andTanzania, tackles social and economic factors that
tempt farmers to employ children.
This program aims to ensure that children are not partof the workforce by providing education and engaging
with tobacco farming communities in various ways.
This ranges from providing educational materials,
after-school tutoring, and mentoring, to vocational
training for older children in farming schools.

Through ARISE, we work with communities to improvetheir understanding of the long-term value of education,and the future prospects that it can bring. ARISE also
works to replace lost income through Family Support
Scholarships, which can enable parents or guardians
to send their children to school.
Supply chain management
In 2016 our international tobacco business madesignificant progress on developing an IT-based
supplier life cycle management system that will enableassessment of Tier 1 suppliers against our standards,
including on key compliance, environmental and social
risks. The system will be implemented in 2017 alongside
our Agricultural Labor Practices program for directly
contracted tobacco farmers and merchants.
Agricultural Labor Practices (ALP)
Our ALP defines minimum requirements for farmers
we source tobacco on preventing and eliminating childlabor, respecting workers’ rights, and applying healthand safety measures at the workplace. From 2016 westarted to extend the scope of ALP to cover third party
tobacco leaf suppliers, and our objective is to implement
ALP throughout our supply chain by 2019.

Japan Tobacco Inc. Annual Report 2016043

From tobacco leaves to consumers

The supply chain of our international tobacco business,
JTI, ensures that the necessary quality products areproduced and delivered to all markets at the righttime and at the optimal cost. This is a large and diverse
process flowing from farmer to consumer, and including
a wide range of procurement, manufacturing anddistribution activities.
When it comes to procuring quality tobacco leaf as well as
non-tobacco materials and services, we continue to put
sustainability first. Working with more than 38,000 tobacco

growers and countless supply partners around theworld, we have been adapting our procurement models
and supplier life cycle management system over the
past few years to ensure a most responsible andsustainable approach.
This is particularly the case for tobacco leaf procurement.
While we are committed to securing the long-term
supply of quality leaf at the best cost, we strongly believein creating shared value – for both the JT Group and thetobacco farming communities in which we operate.

PROCURENON TOBACCO
MATERIALS
FROM

380+
DIRECT SUPPLIERSINPUT FROM

120+
MARKETPLANS

PROCURETOBACCO LEAF
FROM

38,000VERTICALLY INTEGRATEDFARMERS &35

INDEPENDENT MERCHANTS

044

Japan Tobacco Inc. Annual Report 2016

Special Feature

To JTI, this means much more than securing fair returns
to growers. It means taking effective action on issues
including child labor, deforestation, or the reduction ofenvironmental impacts of tobacco farming across theentire leaf supply chain. In order to be successful in theseareas, we seek to build stable, long-term and mutually
beneficial relationships with our leaf merchants, growers
as well as their communities.

In the area of processing and manufacturing, ourinternational tobacco business continues to optimize
its global footprint and focus on delivering continuous
improvement and excellence in execution throughout
all manufacturing activities. With a current portfolio of
5 leaf processing facilities and 25 finished goods factories,
we are well placed to overcome the increasing regulatory
challenges and remain a most competitive industry player.

MAKE & PACKFINISHED GOODS
IN

25
FACTORIESDISTRIBUTION& SALE IN

120+
COUNTRIESTHRESH &PROCESS LEAFPROCESSNON FINISHEDTOBACCO

IN

5*

IN

2

THRESHING
FACTORIESFACTORIES* Two of these threshing facilities are integrated in our finished goods factories.
Japan Tobacco Inc. Annual Report 2016045

Corporate
Information
046

Japan Tobacco Inc. Annual Report 2016

Corporate Information

Environmental, Socialand Governance Initiatives

Environmental, Social and Governance Initiatives047
Corporate Governance
048
History of the JT Group
060
Regulation and Other Relevant Laws
064
Litigation067
Members of the Board, Audit & Supervisory 068
Board Members and Executive Officers
Members of the JTI Executive Committee
069
Corporate Data
069

The JT Group actively works for sustainable business through environmental, social and governance (ESG) initiatives.
At present, we have started programs in each area as recognized below.
ESG

Important Initiatives

Environment

Protecting the environment is a crucial part of our responsibility to society
and key to the sustainability of our business. Climate change is one of thebiggest environmental challenges the world faces today. From a businessperspective, it poses a threat to the supply of key raw materials, given thepotential negative impacts on tobacco crops, as well as on the productionof many of the non-tobacco materials used across our supply chain.
We have established Group-wide Green House Gas (GHG) emission reduction
targets up to 2020 and are on track to achieve these. We will develop further
longer-term environmental targets, prioritizing issues that could impact
society and our supply chain. Figures relating to 2016 environmental
performance are undergoing external verification and will be publishedin the JT Group Sustainability Report FY2016.
We plan to deliver on the 2020 targets through the further expansion ofenergy efficiency programs, by increasing the proportion of electricity fromrenewable energy sources, and by continuing the roll-out of site-level
reduction targets and action plans.
The JT Group has been reporting its Group-wide GHG emissions and climatechange information to CDP since 2012. In 2016, we have been identified asa global leader for its actions and strategies in response to climate change
and have been awarded a position on the Climate A List by CDP.

SocialEquality and Diversity
We are proud of our diverse workforce and the way that it contributes to andshapes the culture of the JT Group. Employing a diverse workforce is a strong
source of competitiveness within an international marketplace and supports
our goal of sustainable growth. We employ more than 110 nationalities acrossour global workforce. Beyond national diversity, we value diversity of opinion,
allow people to express their own personalities, and believe in creating awork environment that fosters creativity and innovation.
In 2016, we have been selected for Diversity Management Selection 100,
Nadeshiko Brand, and the “gold” of PRIDE INDEX.

GovernanceFor the information regarding our corporate governance, please refer to the next section.

Our Recognition in
Socially Responsible
Investment Indexes

We have been selected as a member of the Dow Jones Sustainability Asia/
Pacific Index (www.sustainability-indices.com) for three consecutive years
since 2014.
And we are also a member of the Morningstar Socially Responsible
Investment Index (MS-SRI) (www.morningstar.co.jp/sri, in Japanese).

Japan Tobacco Inc. Annual Report 2016047

Corporate GovernanceDecision-Making, Business Execution, SupervisionCorporate Governance at JT
We have enhanced our corporate governance, based on
our belief that it is the means for conducting transparent,
fair, timely and decisive decision-making for pursuingJT’s management principle, the “4S model”. Specificallythe 4S model aims ‘’to fulfill our responsibilities to ourvalued consumers, shareholders, employees and thewider society, carefully considering the respective
interests of these four key stakeholder groups, andexceeding their expectations wherever we can.’’

We have set out the “JT Corporate Governance Policies”
and continuously strive to make enhancements basedon our belief that it will enable us to achieve mid- to longterm sustainable profit growth and increase corporate
value, which will contribute to the development of ourGroup’s stakeholders and eventually the economic
society as a whole.
The “JT Corporate Governance Policies’’ is available at:https://www.jt.com/investors/at_a_glance/governance01/
index.html

Initiatives to enhance corporate governance
Rigorous supervisory and advisory function

Quality and prompt decision-making

Efficient business execution

Set up the Compliance Committee FY2000
Set up the Advisory Committee* FY2001

Reduced number of directors FY2000
Introduced executive officer system FY2001
Promote the delegation of business execution to the executive officers FY2000, FY2008
and FY2011
Set up the Compensation Advisory Panel FY2006 Invited outside directors FY2012
Abolition of the Advisory Committee on June 30, 2014.

*

Our corporate governance system
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 mattersseven members(including two
outside directors)

ReportIndependent
Auditors

Selection or dismissal of members

Review of
the policy
and the rule
relating tocompensationfor Board
members
and executive
officers

Supervisionof theperformance

Operational Review
and Business
Assurance Division

Report/ProposalPresident andChief Executive
Officer

Compensation
Advisory Panel

JT Group
Compliance
Committee

Audit & Supervisory
Boardfour members(including two outside
Audit & Supervisory
Board members)1

five members(including threeoutside members)

Compliance Office

Auditor’s Office

five members(including two outside
directors and two outside
Audit & Supervisory
Board members)
Internal
audit

Executive Officers
Accounting audit/Operating audit
Departments

Group
audit

Subsidiaries

	In preparation against a situation where the number of outside Audit & Supervisory Board Members falls below the required number, one substitute Audit & Supervisory Board
Member is elected.

1

048

Japan Tobacco Inc. Annual Report 2016

Corporate Information

General Meeting of Shareholders
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 be resolved at a shareholder meeting including, mostnotably, the appointment and dismissal of the directors,
audit & supervisory board members and external
accounting auditors, dividend amount, and loss
compensation, as well as change in the Articles ofIncorporation. Our Articles of Incorporation do not
stipulate any additional matter to be resolved at ourshareholders’ meeting other than matters legallyrequired. 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.
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 bya majority of the voting rights present or represented
at the meeting. A resolution for the appointment of theCompany’s director and audit & supervisory board
members additionally require a quorum, which is onethird of the total number of 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 the quorum of one-thirdof the total number of voting rights and the approvalof at least two-thirds of the voting rights present or
represented at the meeting. Certain matters resolved
at our shareholders’ meetings need further approvalby the Minister of Finance in Japan.

The Japan Tobacco Inc. Act
JT was established pursuant to the Japan Tobacco,Inc. Act (“the JT Act”) for the purpose of managing
businesses related to the manufacturing, sale andimports 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 classshares, which have no voting right against all mattersthat can be resolved at our shareholders’ meeting. The JT
Act also states that the issuance of new shares and stockacquisition rights requires the approval of the Ministerof Finance. In the case of a share-for-share exchange,
the same approval is required for issuance of newshares (excluding own shares), stock acquisition rights(excluding subscription rights to treasury shares), andbonds with stock acquisition rights (excluding bonds
with subscription rights to treasury shares). Under the JT
Act, subject to the approval by the Minister of Finance,
JT is allowed to engage in businesses other thanmanufacturing, sales and imports of tobacco products or
tobacco-related business, provided that our engagementin such businesses serves the purpose of the Company.
JT is also required to obtain approval from the Ministerof 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 astatement of financial position, a statement of income,and a business report to the Minister of Finance.
The supplementary provisions of the Reconstruction
Financing Act*, which came into effect on December 2,
2011 states that the Government shall study by the 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.
* Act on Special Measures for Securing Financial Resources Necessary for
Reconstruction from the Great East Japan Earthquake.

Japan Tobacco Inc. Annual Report 2016049

Corporate Governance continued

Decision-Making, Business Execution, Supervision continued

The Board of Directors
The Board of Directors assumes
responsibility in making decisions forimportant issues including the Groupstrategy as well as supervising all theactivities of the Group. In view ofthe point that the Board of Directors
determines Company-wide
management strategy and importantmatters and effectively assumesroles and responsibilities as the
body exercising supervision overall business activities, the concept
concerning the composition of theBoard of Directors shall be set forth
as follows:

Yasutake Tango
Chairman of the Board
Date of birth: March 21, 1951
Term of office: 2 years since March 2016
Number of shares held: 2,800

Mitsuomi Koizumi*
President, Chief Executive Officer
and Representative Director
Date of birth: April 15, 1957
Term of office: 2 years since March 2016
Number of shares held: 29,500• The number of Members of theBoard in the Board of Directors
shall be fifteen (15) or less, withinnecessary and appropriate scope,composed of diverse people witha high-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 willcontribute to its sustainable profit
growth and increase of corporate
value in the mid- to long-term fromthe viewpoint of strengthening
supervisory functions andtransparency of business.

Yasushi Shingai*
Executive Vice President
and Representative Director
Date of birth: January 11, 1956
Term of office: 2 years since March 2016
Number of shares held: 26,700

A Board meeting, in principle, is held
every month and a special Board
meeting may be called, as necessary.
The Board of Directors decides thosematters required to be resolved by
the Board of Directors under theCompanies Act, such as importantbusiness plans, disposal or acquisitionof important assets, significant
amount of borrowings, conclusionof important agreements. For the
purpose of supervising the Company’s
activities, the Board of Directors
requires directors to deliver a reporton the progress of operations at least
on a quarterly basis. In year ended
December 2016, we had 16 Board
meetings to discuss important issues
including the management plan.

Mutsuo Iwai*
Executive Vice President
and Representative Director
Date of birth: October 29, 1960
Term of office: 2 years since March 2016
Number of shares held: 21,000

Hideki Miyazaki*
Executive Vice President,
Member of the Board
Date of birth: January 22, 1958
Term of office: 2 years since March 2016
Number of shares held: 16,600.

Members
7 (including two independent
outside directors)
The directors marked with * are also the executive officers.

050

Japan Tobacco Inc. Annual Report 2016

Corporate Information

April 1974
Entered Ministry of FinanceJuly 2010Retired from the office of Administrative Vice Minister

October 2006
Director-General of the Financial Bureau

December 2010
Corporate Auditor, The Yomiuri Shimbun Holdings

July 2007
Deputy Vice Minister

December 2012
Special Advisor to the Cabinet

July 2008
Director-General of the Budget Bureau

April 2014
Retired from Special Advisor to the Cabinet

July 2009
Administrative Vice Minister

June 2014
Chairman of the Board (Current Position)

April 1981
Joined the Company (Japan Tobacco and Salt
Public Corporation)

June 2006
Executive Vice President, and Vice President ofTobacco Business Planning Division, Tobacco
Business Headquarters

June 2001
Vice President of Corporate Planning Division
June 2003
Senior Vice President, and Head of Human
Resources and Labor Relations Group
June 2004
Senior Vice President, and Vice President ofTobacco Business Planning Division, Tobacco
Business Headquarters

June 2007
Member of the Board, Executive Vice President,
and Head of Marketing & Sales General Division,
Tobacco Business Headquarters

June 2005
Member of the Board, Senior Vice President,
and Chief Financial Officer

July 2001
Vice President of Financial Planning Division

June 2006
Member of the Board, Executive Vice President,
JT International S.A.

July 2004
Senior Vice President, Chief Financial Officer

June 2009
Representative Director and Executive
Deputy President
June 2012
President, Chief Executive Officer andRepresentative Director (Current Position)

July 2007
Member of the Board, Executive Vice President,
and Chief Marketing & Sales Officer, Tobacco
Business Headquarters

April 1980
Joined the Company (Japan Tobacco and Salt
Public Corporation)

June 2004
Senior Vice President, Head of Finance Group

Significant Concurrent Positions outside
the Company
Outside Director, The Ogaki Kyoritsu Bank, Ltd.

Significant Concurrent Positions outside
the Company
Outside Director, Recruit Holdings Co., Ltd.

June 2011
Executive Vice President and Representative
Director (Current Position)

April 1983
Joined the Company (Japan Tobaccoand Salt Public Corporation)

June 2008
Executive Vice President, and Chief Strategy
OfficerJanuary 2016
Senior Executive Vice President and President,
Tobacco Business Headquarters

June 2003
Vice President of Corporate Planning Division

June 2010
Member of the Board, Senior Vice President,
and Chief Strategy Officer and Assistant to CEO
in Food Business

March 2016
Executive Vice President, Representative Director
and President, Tobacco Business Headquarters(Current Position)

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

Significant Concurrent Positions outside
the Company
Chairman, JT International Group Holding B.V.

July 2004
Vice President of Corporate Strategy Division
June 2005
Senior Vice President, and Vice Presidentof Food Business Division, Food Business
June 2006
Member of the Board, Executive Vice President,
and President, Food Business

April 1980
Joined Nomura Securities Co., Ltd.
July 2005
Senior Manager of Accounting Divisionof the Company
January 2006
Deputy Chief Financial Officer

June 2013
Senior Executive Vice President,
and Chief Strategy Officer

June 2010
Executive Vice President and Chief Financial
OfficerJune 2012
Executive Vice President, Member of the Board(Current Position)

June 2008
Senior Vice President, and Chief Financial Officer

Japan Tobacco Inc. Annual Report 2016051

Corporate Governance continued

Decision-Making, Business Execution, Supervision continued

Motoyuki Oka
Member of the Board (Outside director)
Date of birth: September 15, 1943
Term of office: 2 years since March 2016
Number of shares held: 0

Main Kohda
Member of the Board (Outside director)
Date of birth: April 25, 1951
Term of office: 2 years since March 2016
Number of shares held: 0

The Audit & Supervisory Board
Entrusted by shareholders andensured of its autonomy, the Audit& Supervisory Board conducts
accounting audits as well as
operating audits. Currently, we
have four audit & supervisory board
members including two independent
outside audit & supervisory board
members. Collectively, they haveexperience in management, legal,finance and accounting among otherareas. Audit & supervisory board
members have various statutory
rights in order to accomplish theirroles and responsibilities, including
making requests to deliver reports tothe directors, executive officers andemployees, issuing an injunction toprevent illegal activities by directors,
and representing the Company
in case of litigation between any
director and the Company. In
addition, the Audit & Supervisory
Board has a right to dismiss theauditing firm which conducts
accounting audit. The Audit &supervisory board members’ reportcontaining the results of both theaccounting and operating audits
is submitted to the annual general
meeting of shareholders.

052

Futoshi Nakamura
Standing Audit &Supervisory Board Member
Date of birth: November 23, 1957
Term of office: 4 years since March 2015
Number of shares held: 4,800

Tomotaka Kojima
Standing Audit &Supervisory Board Member
Date of birth: December 19, 1953
Term of office: 4 years since March 2015
Number of shares held: 0Japan Tobacco Inc. Annual Report 2016

Corporate Information

April 1966
Joined Sumitomo Corporation

June 2001
President and CEO, Sumitomo Corporation

June 1994
Director, Sumitomo Corporation

June 2007
Chairman of the Board of Directors, Sumitomo
Corporation

April 1998
Managing Director, Sumitomo Corporation
April 2001
Senior Managing Director, Sumitomo Corporation

September 1995
Started independently as Novelist (Current
Position)January 2003
Member of Fiscal System Council, Ministryof Finance Japan
April 2004
Visiting professor, Faculty of Economics,
Shiga University

April 1981
Joined the Company (Japan Tobacco and Salt
Public Corporation)
July 2004
Head of Procurement Planning Division

Significant Concurrent Positions outside
the Company
Outside Director, NEC Corporation

June 2012
Advisor, Sumitomo Corporation (Current Position)
Outside Director of the Company (Current Position)

March 2005
Member of the Council for Transport Policy,
Ministry of Land, Infrastructure, Transport
and Tourism
November 2006
Member of the Tax Commission, Cabinet Office,
Government of Japan
June 2010
Member of the Board of Governors, Japan
Broadcasting Corporation

June 2012
Outside Director of the Company (Current
Position)
Significant Concurrent Positions outside
the Company
Novelist
Outside Director, LIXIL Group Corporation
Outside Director, Japan Exchange Group

July 2009
Senior Manager of Accounting Division
July 2010
Head of Operational Review and Business
Assurance Division

September 2005
Senior Manager of Operational Review andBusiness Assurance Division
JT International Holding B.V. Vice President

June 2012
Standing Audit & Supervisory Board Member,the Company (Current Position)

April 1976
Entered Ministry of Finance

April 2007
Deputy Director-General of General Secretariat,
National Personnel Authority

November 2010
Executive Secretary, Japan Associationof Corporate Directors

January 2008
Director General of Equity and Investigation
Bureau, General Secretariat of National
Personnel Authority

June 2013
Standing Audit & Supervisory Board Member,the Company (Current Position)

July 2000
Director-General of the Fukuoka Local FinanceBranch Bureau
July 2002
Deputy Head of Finance Group of the Company
July 2004
Deputy Director-General of Employee
Welfare Bureau, General Secretariat,
National Personnel Authority

August 2009
Commissioner, National Hospital Organization

Japan Tobacco Inc. Annual Report 2016053

Corporate Governance continued

Decision-Making, Business Execution, Supervision continued

If directors and executive officers findany issue that may cause a substantial
damage to the Company, they are
obliged to report it to the Audit &Supervisory Board, along with otherrelevant matters that could affect theCompany. Audit & supervisory board
members are authorized to attend themeetings of the Board of Directors
and other important meetings.
Our directors and executive officers
respond in a prompt and appropriatemanner, when requested by audit &supervisory board members to deliver
documents for their inspection, toarrange field audits and to submit
reports. The Operational Review andBusiness Assurance Division, which
conducts internal audits, as well as
the Compliance Office, exchanges
necessary information and works
together with audit & supervisoryboard members.

Yoshinori Imai
Audit & Supervisory Board Member(Outside Audit & Supervisory Board
Member)Date of birth: December 3, 1944
Term of office: 4 years since March 2015
Number of shares held: 700

Hiroshi Obayashi
Audit & Supervisory Board Member(Outside Audit & Supervisory Board
Member)Date of birth: June 17, 1947
Term of office: 4 years since March 2015
Number of shares held: 0

Members
4 (including two independent outside
audit & supervisory board members)
Independence of Outside Directors
and Outside Audit & Supervisory Board Members
JT reports to the securities exchanges on which it is listed thatthe two outside directors and two outside audit & supervisoryboard members are designated as independent executives. We
have a criteria list to assess the independence of an executive.
Based on the criteria, the independence of the four executives
has been confirmed. Motoyuki Oka, Main Kohda, Yoshinori
Imai and Hiroshi Obayashi, who are outside directors andoutside audit & supervisory board members, serve as
members of the Compensation Advisory Panel.
Criteria list for independence of an executive
A person who fits any of the following descriptions
is not designated as an independent executive:
1. A person who belongs or belonged to JT or an
associate 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 oforganization which is a major shareholder of JT
4. A person who is a major supplier or customer of JT(if the supplier or customer is a company or any otherform of organization, a person who belongs thereto)
5. A major creditor of JT including a major loan lender(if the creditor is a company or any other formof organization, a person who belongs thereto)054

6. A certified public accountant who serves as anaccounting auditor or an audit advisor of JT, or aperson who belongs to an auditing firm which serves
as an accounting 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 forlegal, financial and tax affairs or business consulting
services (if the recipient of such fee is a company
or any other form of organization, a person who
belongs thereto)
8. A person who receives a large amount of donationfrom 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 thefollowing 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 associate or sister company of JT(c) A person who has fit the descriptions in (a)or (b) in the recent past

Japan Tobacco Inc. Annual Report 2016

Corporate Information

April 1968
Joined Japan Broadcasting Corporation
June 1995
Bureau Chief of General Bureau for Europe,
Japan Broadcasting Corporation
May 2000
Director General, Planning & Broadcasting
Department, Japan Broadcasting Corporation
June 2003
Executive Editor and Programme Host,Japan Broadcasting Corporation

January 2008
Executive Vice President, Japan Broadcasting
Corporation
January 2011Retired from Executive Vice President,
Japan Broadcasting Corporation
April 2011
Visiting Professor, Ritsumeikan University(Current Position)
June 2011
Audit & Supervisory Board Member,the Company (Current Position)

April 1970
Judicial Apprentice

June 2006
Vice-Minister of Justice, Ministry of Justice

March 2011
Registered as Attorney at Law

April 1972
Appointed as Public Prosecutor

July 2007
Superintending Prosecutor, Sapporo High Public
Prosecutors’ Office

March 2015
Audit & Supervisory Board Members,
the Company (Current Position)

July 2008
Superintending Prosecutor, Tokyo High Public
Prosecutors’ OfficeSignificant Concurrent Positions outside
the Company
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 METALCORPORATION

May 2001
Director-General of the Rehabilitation Bureau,
Ministry of Justice
January 2002
Deputy Vice-Minister of Justice, Ministry ofJustice
June 2004
Director-General of the Criminal Affairs Bureau,
Ministry of Justice

June 2010
Prosecutor-General
December 2010Retired from the office of Prosecutor-General

Support for Outside Directors andOutside Audit & Supervisory Board Members
We provide support to outside directors and outside audit& supervisory board members. The Corporate Strategy
Division or Secretary Office explains the agendas for board
meetings in advance, submits requested documents anddelivers necessary information to outside directors
for them to contribute to the quality of board discussion.
As an independent body entrusted by shareholders, theAudit & Supervisory Board is expected to monitor the
performance of the Directors and executive officers, withan aim to underpin the Company’s healthy and sustainablegrowth as well as increase its credibility. For outside audit& supervisory board members to perform their expectedroles, we support them by making necessary information
available and allocating adequate human resources to
the Auditor Office which assists audit & supervisoryboard members.

Executive Officer System
JT employs the Executive Officer System to ensure
effective and efficient management by promptly
responding to the changing environment, and thus
aims to increase its company value. Executive officers
are appointed by the Board of Directors. At the sametime, the Board assigns certain responsibilities anddelegates relevant authorities to the executive officers
in accordance with the Rules Defining the Extent of
Responsibility and Authority. In addition, we have thestructure for quick decision-making and high-quality
implementation of business about plan and strategy
relevant to all business execution except the matterswhich are submitted 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.
Please refer to page 68 for the list of Executive Officers.

Japan Tobacco Inc. Annual Report 2016055

Corporate Governance continued

Internal Control System & Risk Management System

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 arereported regularly to the Board of Directors. In addition, we have the Audit & Supervisory Board Member’s Office,a department dedicated to support the Audit & 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), reliable financial reporting, internal audit and risk management.
Internal control framework
The Board of Directors
Reporting

Crisis management/
Disaster response

Financial risks/Credit exposure

External Auditors
Monitoring

Compliance Policy andthe Compliance
Implementation Plan

Internal audit plan/Internal audit report

Internal control
reportInternal control
audit

Compliance
A Code of Conduct has been created based on ourinternal guidelines approved by the Board of Directors.
Under the Code of Conduct, all directors and employees
are expected to fully comply with applicable laws, ourArticles of Incorporation, social norms and othercompliance standards. In addition, the Board of
Directors has established a fair and effective
compliance framework as described below.

The JT Group has both internal and external hotlines
through which employees may consult or report any
violations or possible violations of the JT Group Codeof Conduct. The Compliance Office is responsiblefor 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 a Board Member responsible for compliance• 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

The JT Group Compliance Committee is headed by
the Chairman of the Board, with the majority of themembers consisting of external members. The JT Group
Compliance Committee met three times in the year
ended December 31, 2016, and discussed initiatives
to promote compliance throughout the Group among
other matters.

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

056Japan Tobacco Inc. Annual Report 2016

Corporate Information

Reliable financial reporting
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 theexternal accounting auditor who makes an assessmentof our internal control system based on the Internal
Control Report prepared by us.
Risk management
Financial risk management
JT has put in place the internal guidelines for financial
risk management. The executive officer in charge
updates the status of financial risks together with thecountermeasures against these risks. Meanwhile, theserisks and the countermeasures against them are reported
to CEO and the Board of Directors on a quarterly basis.

Internal audit system
JT has an Operational Review and Business Assurance
Division, which is thoroughly independent of other
JT Group divisions and organizations engaging inoperations. Under such a capacity, it conducts internal
audits and directly reports to the President. 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 to report to the
President the results of internal audits along with theiranalysis and assessment, and also reports to the Boardof Directors. The head of the division has the right tocontact the management of JT and the Group companies
regularly and as frequently as needed.

Crisis management and disaster response
In order to deal with possible crises or disasters, JT has
produced a manual for crisis management and disaster
response so that we can make a proper initial response.
In the event of a crisis or a disaster, a project team ledby the President is immediately assembled. In the projectteam, the Corporate Strategy Division assumes the keyrole to support the President. Under the leadership of the
President, we respond promptly and properly, ensuringclose cooperation across the organization. Crisis or disaster
incidents shall be reported to the Board of Directors.
Management of other risks
In accordance with the Rules Defining the Extent of
Responsibility and Authority, management of otherrisks is delegated to relevant divisions, which identify
and monitor the risks in their areas of responsibility.
Significant risks are reported to CEO, together with therequest for approval to implement countermeasuresagainst them, where necessary.
Please refer to page 38 for our risk factors.

Japan Tobacco Inc. Annual Report 2016057

Corporate Governance continued

Executive Remuneration

Overview
Remuneration for our directors is determined by resolution
at the Board of Directors, taking into account discussion
at the Compensation Advisory Panel. Remuneration for
our audit & supervisory board members is determinedthrough the deliberations of the Audit & Supervisory
Board. The aggregate remuneration of directors andaudit & supervisory board members cannot exceed
the respective ceilings approved at a general meetingof shareholders. In determining remuneration, we referto research management remuneration conducted bya third party, and benchmark Japanese manufacturing
companies operating globally with a scale or profit
comparable with ours.
The Compensation Advisory Panel
The Compensation Advisory Panel has been established
as an advisory body to the Board of Directors with an
aim to increase the objectiveness and transparency of
our executive remuneration. The Compensation Advisory
Panel comprises the Chairman, two outside directors
and two outside audit & supervisory board members.
Upon request, the Panel reviews and provides advice
on the policy, framework and calculation method for
remuneration of our directors and executive officers.
It also monitors whether our executive remunerationlevel is reasonable. During the past fiscal year, theCompensation Advisory Panel met four times to discuss
the level of remuneration among other matters.
Based on the recommendation by the Compensation
Advisory Panel, the key policy for our executive
remuneration is as follows:• Set the remuneration at an adequate level to retain
personnel with superior capabilities• Link the remuneration to company performanceso as to motivate executives to achieve theirperformance targets• Link the remuneration to company value in themid- to long-term• Ensure transparency by implementing an objective
and quantitative framework.

Remuneration for the directors and audit & supervisoryboard members is structured as follows:
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 achievementof assigned annual targets through their day-to-day
management.
The combined amount of “executive bonus” at a 100%
grant basis 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 Group strategies in addition
to supervision of business and corporate activities.
Remuneration for outside directors consists solely of“base salary” and does not include performance linked
compensation from the perspective of 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 wasapproved at our 22nd Annual General Shareholders’Meeting in June 2007. The maximum remuneration for all
the directors combined is ¥870 million, and ¥190 million
for all the audit & supervisory board members combined.
In addition, the ceiling for annual “stock option grants”
for the directors was approved at the same shareholders’meeting. The ceiling is 800 options in number and ¥200
million in value. The number of the stock options granted
to the directors and the executive officers who are notdirectors is decided each year by the Board of Directors.

Structure of executive remuneration
In accordance with the above policy, remuneration forour executive comprises (1) “base remuneration” paid
monthly, (2) “director’s bonus” linked to our businessperformance in the relevant year, and (3) “stock option
grants”, the value of which is linked to our mid- tolong-term company value. In 2007, JT introduced a stock
option program as an incentive linked to the mid- tolong-term company value. The Companies Act requires
a special resolution at a shareholders’ meeting if stock
options are granted under particularly advantageous
terms or at particularly advantageous prices. This is not
the case with our stock option program, as our stock
options are compensation for the executives who
perform their duties, and the options are granted
in exchange for certain considerations.

058

Japan Tobacco Inc. Annual Report 2016

Corporate Information

The remuneration payments to the directors and audit & supervisory board members for the year ended
December 2016 are as follows.
Total remunerationand other payments(million yen)

Category

Directors (excluding Outside Directors)
Audit & Supervisory Board member (excluding
Outside Audit & Supervisory Board members)
Outside Directors and Outside Audit &Supervisory Board members
Total

Total amount of remuneration and other payments
by type (million yen)Basicremuneration

Director’sbonus1

Stock option
grants2

Number to be paid
(people)

603
77

316
77

170
–

117
–

7
2

56

56

–

–

4

736

449

170

117

13

1. Amounts to be paid.
2. Total amounts granted for the year ended December 2016.

The remuneration payments to the directors and the audit & supervisory board members whose total remuneration
exceeds ¥100 million for the year ended December 2016 are as follows.
Amount of consolidated remuneration and other payments
by type (million yen)
Name

Category

CompanyBasicremuneration

Director’s
bonus

Stock option
grantsTotal(million yen)

Mitsuomi Koizumi
Yasushi Shingai

Representative Director
Representative Director

JT
JT

85
52

69
41

31
19

185
112

The stock options granted for the year ended December 2016 are as follows:
Resolution dateJune 17, 2016

Positions and number of people grants

Directors (excluding outside Directors): 5 persons
Executive officers (excluding persons serving as Directors): 18 persons
34,200 shares to Directors (excluding outside Directors)
51,800 shares to Executive officers (excluding persons serving as Directors)
Total 86,000 shares (200 shares per stock acquisition right)

Number of shares

Japan Tobacco Inc. Annual Report 2016059

History of the JT Group
Before 1985

JT’s history in Japan dates back to 1898, when the
Government formed a monopoly bureau to operate
the exclusive sale of domestic tobacco leaf.

The JT Group’s overseas history began with the foundingof Austria Tabak in 1784. Roughly 70 years later, Tom
Gallaher started out in business in Northern Ireland, laying
the foundations for the Gallaher Group. Meanwhile, R.J.
Reynolds Tobacco Co. (RJR), which would subsequently
create the Camel and Winston brands, was established in
1874 in the U.S. In this manner, the current JT Group cantrace its origins to many different countries and regions
such as Austria, Northern Ireland, the U.S. and Japan.
The JT Group has a long history and extensive experiencein the tobacco business.
History in Japan from the early 20th century to 1984,
when the Japan Tobacco Inc. Act was enacted.
Our history in Japan dates back to 1898, when the
Government formed a monopoly bureau to undertake theexclusive sale of domestic leaf tobacco. In the early 1900s,
the Japanese government extended this monopoly to all
tobacco products in Japan and to the domestic salt
business. On June 1, 1949, the bureau was establishedand duly named the Japan Tobacco and Salt Public
Corporation, or JTS. This corporation helped to ensure
the stable supply of tobacco and secure fiscal revenues
for the Government.
The growth in demand for cigarettes in Japan began toslow in the mid-1970s as a result of demographic trends
and growing concern about health risks associated withsmoking. This trend continued, such that growth inindustry sales essentially stopped. In addition to thestructural change, the domestic tobacco market opened
up substantially to foreign suppliers, triggering competition
between domestic and foreign tobacco products in Japan.

060

Foreign countries stepped up pressure on Japan to takefurther measures to open the market that were difficult
to implement within the framework of the monopoly
tobacco sales system. Amid such pressure as well as
moves toward the reform of Government-run public
corporations, a Government panel was establishedin March 1981 to conduct research into the public
corporation system. In its third report (July 30, 1982),
the panel proposed drastic reform of the monopoly
and public corporation systems. In response to this
proposal, the Government conducted a comprehensive
review of these systems and drafted bills to:• Abolish the tobacco monopoly law to liberalize
tobacco imports and establish a tobacco businesslaw to make necessary adjustments related tothe tobacco business.
• Abolish the JTS law, reorganize JTS as a joint stock
corporation so as to enable it to pursue rational
corporate management as much as possible andestablish the Japan Tobacco Inc. Act, which provides
for a necessary minimum level of regulation in lightof the corporation’s need to compete with foreign
tobacco companies on an equal footing in thedomestic market following the liberalization of
tobacco imports.
These bills were enacted on August 3, 1984 in the 101st
session of the Diet and promulgated on August 10 of thesame year. In April 1985, JT was founded as an entitythat took over the whole of the business operations
and assets of JTS.

Japan Tobacco Inc. Annual Report 2016

Corporate Information

JT’s history in Japan dates back to 1898, when the
Government formed a monopoly bureau to operate
the exclusive sale of domestic tobacco leaf.

1784

1857

1913
1931

Tom Gallaher sets up his businessin Londonderry, Northern Ireland.

Cellophane is introduced by RJR
in order to preserve the freshnessof tobacco.

1964
1968

1874

1949

1969

1879

1954
1955

1977
1981

1956
1957

1984

Austria Tabak is foundedby Emperor Joseph II.

RJR is founded by Richard Joshua
Reynolds in Winston, North
Carolina.

Sobranie is registered in London,
to become one of the oldest
cigarette brands in the world.

1891

The Moscow-based Ducat factoryis founded.

1898

The Japanese Monopoly Bureau isestablished for the sale of domestic
leaf tobacco.

Camel is launched.

The Monopoly Bureau becomes
the Japan Tobacco and Salt Public
Corporation.

Winston is launched.

Benson & Hedges is acquired
by Gallaher.

Salem is launched.

Silk Cut is launched.

Gallaher is acquired by theAmerican Tobacco Company.

Seven Stars is launched, featuring
Japan’s first domestically produced
charcoal filter.

Mild Seven is launched (Japan).

Mild Seven is launchedinternationally.

Japan Tobacco Inc. Act is enacted.

HOPE (10) is launched as Japan’s
first domestically produced filter
cigarettes.

Japan Tobacco Inc. Annual Report 2016

061

History of the JT Group continued

In and after 1985

The corporate history of JT is summarized in the table
to the right. For the international tobacco business,the history before JT’s acquisitions of RJR Nabisco’s
non-US tobacco operations and Gallaher is included.
The operating environment for JT changed drastically injust two years after the foundation of the Company, withthe yen’s strong appreciation following the Plaza Accord
in 1985, a tobacco tax hike in 1986 and the abolition oftariffs on imported cigarettes in 1987. Amid the yen’s
upsurge, a price increase for JT products due to thetobacco tax hike, coupled with price cuts for imported
cigarettes attributable to the tariff abolition, eliminatedthe price advantage of JT products over imported
products, which had stood at around ¥60 to ¥80
when JT was founded in 1985. As a result, competition
between JT and foreign tobacco makers intensified in
the Japanese market, leading to a decline in JT’s market
share from 97.6% in fiscal 1985 to 90.2% in fiscal 1987.
To cope with the rapid deterioration of the operating
environment, JT implemented rationalization measures
to enhance its cost-competitiveness and pursued
diversification while taking measures to strengthen
its marketing capability. In the 1990s, JT’s competition
with foreign rivals in the Japanese market intensified
further. Furthermore, overall cigarette demand inJapan peaked in the latter half of the 1990s due
to a contraction of the adult population and growing
concerns with health problems associated with smoking.
Amid the increasingly difficult operating environment
for the Japanese domestic tobacco business, JT took
additional rationalization steps, pursued consolidationof operations in its areas of business diversification andexpanded the international tobacco business, thereby
strengthening its business foundation.
JT significantly strengthened the international tobacco
business by acquiring RJR Nabisco’s non-U.S. tobacco
operations in 1999 and Gallaher in 2007. With its
international sales volume exceeding its domestic sales
volume, the JT Group continues to grow as a global
tobacco company. The international tobacco businessis the engine of the JT Group’s profit growth throughits comprehensive brand portfolio which includes
Winston, Camel, Mild Seven – MEVIUS and LD
as well as Benson & Hedges, Silk Cut, Sobranie,
Glamour and Natural American Spirit.

1985

April
Japan Tobacco Inc. is established.
(Japanese tobacco market opened
to Foreign tobacco manufacturers).
The Business Development Division
is established to promote new
businesses.
The Business Development Division
is later reorganized into operational
divisions engaged in the food andpharmaceutical businesses,
finishing in July 1990.

1987

April
Import tariffs on imported
cigarettes are abolished.

1988

October
JT communication nameis introduced.

1992

Acquisition of Manchester
Tobacco Company Ltd.
Acquisition of AS-Petro (Russia).*

1993

September
The Central Pharmaceutical
Research Institute is establishedto enhance in-house researchcapabilities.

1994

October
Government releases first trancheof outstanding JT shares for initialpublic offering (394,276 shares
offered at ¥1,438,000 apiece).
JT stock is listed on the firstsections of stock exchanges
in Tokyo, Osaka and Nagoya.
November
JT stock is listed on the stock
exchanges in Kyoto, Hiroshima,
Fukuoka, Niigata and Sapporo.
Acquisition of Yelets (Russia).*

1995

May
Head office is moved back to
Minato-ku from Shinagawa-ku.
Peter I is launched (Russia).*

1996

June
Government releases second trancheof outstanding JT shares (272,390
shares offered at ¥815,000 apiece).
Acquisition of Tanzanian tobacco
production facility.*

1997

April
JT ends its salt monopoly businessin line with abolition of the saltmonopoly system.
The Tobacco Mutual Aid Pension
scheme is integrated into the
Employees’ Pension scheme.
American Brands spins off Gallaher
which becomes Gallaher Group Plc
and is listed on the London and
New York stock exchanges.**

1998

April
JT signs an agreement with Unimat
Corporation (currently, Japan
Beverage Holdings Inc.) on a tie-up
regarding beverage business. JT later
acquires a majority stake in Unimat.
December
JT acquires a majority stake in Torii
Pharmaceutical Co., Ltd. througha tender offer.

1999

May
JT acquires the non-U.S. tobacco
business of RJR Nabisco Inc.
July
JT acquires the food business of Asahi
Kasei Corporation, including Asahi
Foods and seven other subsidiaries.
October
Under a business tie-up between JT
and Torii Pharmaceutical Co., Ltd.,the two companies’ R&D operations
related to medical pharmaceuticals
are concentrated at JT, while theirpromotion operations are combinedat Torii Pharmaceutical.
LD launched (Russia).***	Topics of RJR Nabisco’s non-US operations before participating in the JT Group.
** Topics of Gallaher before participating in the JT Group.

062

Japan Tobacco Inc. Annual Report 2016

Corporate Information

2000

2007

2001
2003

2008

Acquisition of Liggett-Ducat(Russia).**Acquisition of Austria Tabak.**

October
JT repurchases 45,800 of its
own shares to increase its
management options.

2004

April
JT acquires all outstanding sharesof Gallaher Group Plc.

January
JT acquires a majority stake in
Katokichi Co., Ltd. through atender offer.
April
JT acquires a majority stake in Fuji
Foods Corporation.
July
JT concentrates its processed foodoperations, including frozen foodand seasonings operations, at the
Katokichi Group.

June
Government releases third trancheof outstanding JT shares (289,334
shares offered at ¥843,000 apiece),
reducing its stake in JT to theminimum level allowed under law.

2009

November-March 2005
JT repurchases 38,184 of its own
shares to increase its management
options.

June
JTI Leaf Services (U.S.) LLC
is established.

2005

April
JT terminates a licensing contract
under which it had exclusive rights
to produce and sell Marlboro brandproducts in Japan and use the
Marlboro trademark in the country.
June
Acquisition of CRES Neva Ltd.
(Russia).
Glamour is launched(Russia, Ukraine, Kazakhstan).**

2006

April
JT implements a 5 for 1 stock split
in order to expand the investor
base, effective April 1, 2006.
May
Acquisition of AD Duvanska
Industrija Senta in Serbia.

May
JTI celebrates its 10th anniversary.

October
Acquisition of leaf suppliers
Kannenberg & Cia. Ltda. (Brazil) and
Kannenberg, Barker, Hail & Cotton
Tabacos Ltda. (Brazil).
NovemberAcquisition of leaf suppliers Tribac
Leaf Limited (UK).

2010

January
Katokichi Co., Ltd. is renamed
TableMark Co., Ltd.
May
Smokeless tobacco product
Zerostyle Mint is launched.

2011

March
JT repurchases 58,630 of its own
shares, as part of its shareholder
return measures.
NovemberAcquisition of Haggar Cigarette &Tobacco Factory Ltd. (North Sudan)and Haggar Cigarette & Tobacco
Factory Ltd. (South Sudan).

2012

July
For the purpose of enlarging
Company’s investor base, a 200
for 1 stock split is conducted. At thesame time, JT adopts the share unit
system, setting a share trading unit
at 100 shares.
AugustAcquisition of Gryson NV, a
Belgium Fine Cut maker.

2015

February–March
JT repurchases 26,896,200 sharesas part of its shareholder returnmeasures.
July
Acquisition of leading US
e-cigarette company Logic.

2013

February
The name change of Mild Seven
to MEVIUS in Japan.

Transfer shares of JT’s subsidiaries
conducting vending machine
operation business and JT beverage
brands “Roots” and “Momono
Tennensui”. Afterwards, JT
withdrew from the manufacture andsale of JT beverage products in
September and JT’s beveragebusiness division was abolished in
December 2015.

Government releases fourth trancheof outstanding JT shares(333,333,200 shares offered).

AugustIntegration of ‘’Cabin’’ and ‘’Caster’’with ‘’Winston’’.

On February 27, JT repurchases
86,805,500 shares through
ToSTNeT-3, including 80,071,400
shares from the Government.

2016

Excluding the share repurchased by
JT, 253,261,800 shares are offeredby the Government in March.
March
Acquisition of Al Nakhla Tobacco
Company S.A.E. and Al Nakhla
Tobacco Company – Free Zone
S.A.E., a leading Egyptian waterpipe company.
May
Launch of a novel anti-HIV drug
“Stribild Combination Tablets”
in Japan, containing our originalcompound (elvitegravir).
December
JT acquires a minority interest in
Megapolis, the leading Russian
distribution company.

January
Acquisition of Natural American
Spirit Business outside the UnitedStates.
July
Launch of a novel anti-HIV drug
“Genvoya® Combination Tablets”
in JapanAcquisition of 40% shares of
National Tobacco Enterprise
Ethiopia S.C
DecemberApproval of selling novel anti-HIV
drugs, “Descovy® Combination
Tablets LT and HT” in Japan

2014

April
TableMark establishes a holding
company.
October
Launch of “Cedatoren sublingual
drop Japanese Ceder Pollen,” asublingual Immunotherapy Drugfor Japanese Ceder Pollinosis.
NovemberAcquisition of e-cigarettes company
Zandera Ltd. (UK).

Japan Tobacco Inc. Annual Report 2016

063

Regulation and Other Relevant Laws

Tobacco business
Regulation in the international markets
In international markets where JT Group’s tobacco
products are sold, World Health Organization (WHO)adopted the Framework Convention on Tobacco Control(“FCTC”) at its 56th World Health Assembly held in May
2003. It came into force in February 2005 (Governmentof Japan accepted it in June 2004). Since then, there
has been a rising trend in regulations regarding sales
promotions, packages and outer wrappers, marketingof tobacco products and smoking.
The purpose of the FCTC is to continuously andsubstantively control the proliferation of smoking. Itsprovisions include, among others, price and tax measures
to reduce tobacco demand, non-price measures toreduce the demand for tobacco (such as protection fromexposure to tobacco smoke, regulation of contents andemissions of tobacco products, regulation of disclosureof tobacco products, regulations on packaging andlabelling 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, prohibitionof sale of tobacco products to minors, among others).
Moreover, in November 2012, the protocol to eliminate
illicit trade in tobacco products was adopted at the fifthsession of the Conference of the Parties. As generalobligation, signatories to the protocol are to formulate,adopt, periodically update and review strategies, plansand programs for tobacco regulation. However, thecontent, scope and method of specific controls
undertaken in these nations are ultimately legislated
by each respective nation.
Regulation by country or region
In May 2014, the ‘EU Tobacco Product Directive (EUTPD)’ revised from the earlier Directive promulgatedin July 2001, entered into force. This revised Directive
includes, among others, strengthening of packaging
and labeling regulations, restrictions on the use ofadditives including menthol for cigarettes and fine cut,and regulations related to electronic cigarettes. All EU
member states are required to establish their domestic
laws, regulations and ordinances to conform the revised
directive. This revised directive has been legislated
or implemented by each EU member.

064

One of the most notable regulations adopted recently is
the plain packaging legislation. In Australia, the very firstplain packaging legislation was approved in 2011 andadopted in December 2012. Since then, plain packaging
legislation has been passed in the UK, one of our key
markets, and sale of non-compliant products will be
prohibited from May 2017. Furthermore, plain packaging
legislation was approved in France in January 2016 andhas been implemented since January 2017. In addition,
several other countries are considering similar legislation.
In Russia, another of our key markets, legislation was
passed in February 2013, which includes protection
from exposure to tobacco smoke and other mattersrelated to tobacco consumption. The legislation
came into effect, starting from June 2013 and is being
implemented in steps through up to 2017. It contains a
number of provisions including display ban, restrictions
on sales of tobacco products in certain retail stores, banon advertising, sponsorship and promotions, introductionof minimal pricing and ban on smoking in public places.
Although it is impossible to predict the content of futurelaws, regulations and industry guidelines relating to sales
activities, marketing and smoking, the JT Group expects
regulations like the above and new regulations (including
those of local governments) to spread across Japan andother countries where the group sells its products.
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 Japanthat include the indication of warning labels on tobacco
product advertisements and packages that urge caution
over the relationship between the consumption of
tobacco products and health.
In November 2003, the Ordinance for Enforcementof the Tobacco Business Act was revised including thewording of the cautions over the relationship between
the consumption of tobacco products and healthindicated on tobacco product packages and, starting
July 2005, all tobacco products sold in Japan have beenin conformity to the revised regulations. In addition, theJapanese Minister of Finance has indicated a “Guideline
for Advertising of Tobacco Products” based on theJapan Tobacco Inc. Annual Report 2016

Corporate Information

Tobacco Business Act which, in March 2004, wasrevised with tougher language. The Tobacco Instituteof Japan has established voluntary standards regarding
the advertising and sales promotion activities for tobacco
products. All member companies, including JT, comply
with these standards. In addition, the ministry of financehas started to discuss for revising the wording of cautions
and advertising regulation. We expect these regulations
will be materialized followed by the future discussion.
Recently in Japan from the perspective of passive
smoking prevention, cases where smoking in publicareas including restaurants and office buildings has
been restricted by laws. Moreover, the discussion
regarding the strengthening measures against
the prevention of secondhand smoke was started
by the Japanese Government in January 2016.
Tobacco Business Act
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 tobacco products manufactured by JT and imported
tobacco products at the fixed retail price which is approvedby 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 andthe prices for leaf tobacco by variety and grade. JT must
purchase all leaf tobacco produced pursuant to suchcontracts, except for any not suited for the manufactureof tobacco products. When JT decides the aggregate
cultivation area and the prices of leaf tobacco for its
contracts with tobacco growers, it is required to respect theopinion of the Leaf Tobacco Deliberative Council (hatabako
shingi kai), which consists of members appointed by JT

with the approval of the Minister of Finance from among
the representatives of domestic leaf tobacco growers andacademic appointees. Much like many other agricultural
products in Japan, production costs for domestically-grownleaf tobacco is higher than those of foreign-grown leaf
tobacco to the extent that the purchasing price for theformer (before re-drying) is approximately three times
that of the latter (after re-drying).
In November 2003, the Ordinance for Enforcement of
the Tobacco Business Act was revised and the wordingof warnings concerning tobacco consumption and healthindicated on the tobacco product package was changed.
In addition, the Ordinance stipulated that when wording
like “mild” and “light” is used on the package, they mustbe accompanied by a warning that clarifies that suchwords do not mean that the risk to their health is lower
than other tobacco products so as to prevent consumers
from misunderstanding the relationship between the
consumption of tobacco products and health. JT has
been adhering to this rule since July 1, 2005.
Self-regulation on marketing
JT Global Marketing Principles
The JT Group complies with all regulation of 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 importanceon responsible marketing of tobacco products and outline
our thoughts on advertising and promotions or healthwarnings, among others. Moreover, we recognize thatyouth smoking prevention is an issue which must be
addressed by society as a whole. Based on the Principle,
we govern our business and marketing activities, whileworking with government and other relevant organizations
to take steps towards preventing youth smoking.
For further details, please refer to the JT Group websites.

Japan Tobacco Inc. Annual Report 2016065

Regulation and Other Relevant Laws continued

Pharmaceutical Business
The pharmaceutical industry operates in a highly regulated
environment. In many countries, R&D, manufacturing
and sales activities are strictly regulated. Moreover, in
recent years, the approval process for new drugs has
been tightening due to the increased requirements topromote public health and safety. Today, comparedto the past, pharmaceutical companies are required
to spend more time to examine pharmaceutical safetyissues and conduct a greater number of clinical trials
on subjects to collect more data on the efficacy of
new pharmaceuticals. Consequently, clinical trials
are growing in scale, cost and time. Meanwhile, thestandards of reliability and amount of research data
have been internationally harmonized. Therefore, more
efficient and reasonable development process withinternationally utilized data has been carried out.
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 andCellular Therapy Products, Gene Therapy Products,
and Cosmetics, while part of its supervisory authority
is undertaken by the relevant prefectural governor.
Under the Act, in order to conduct the marketingbusiness of pharmaceuticals, the manufacturer isrequired to obtain from the relevant prefectural governor
a renewable, generally five-year marketing businesslicense. In addition, under the act, in order to market
pharmaceuticals, it is necessary to obtain marketing
approval from the MHLW for each kind of product.

Processed Food BusinessAs 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-relatedcompanies to take necessary measures to ensure foodsafety in each process of the supply chain, as well as tomake efforts to provide accurate information about foods
and food-related goods in an appropriate manner.
The Food Sanitation Act concentrates on preventionof sanitary problems arising from consumption of foods
and beverages. This Act requires food companies totake necessary measures under their own responsibility
to ensure the safety of foods, additives, appliances andpackages. The measures discussed in the Act include
the acquisition of knowledge and skills, assurance ofthe safety of raw materials and voluntary inspection.
The Food Labeling Act sets the standards for labelingof food that is intended for sales which define thelabeling requirements such as allergen and expiration
date, materials, or origin. Persons Engaged in Foodrelated Business and others must comply with thestandards in preparing their product labels.
The JT Group is striving to establish a high levelof food safety control from the above-mentioned four
perspectives – “food safety”, “food defense”, “foodquality” and “food communication” – in addition
to complying with these laws and regulations andensuring thorough awareness of them.

The national health insurance system covers virtually
the entire Japanese population. To sell a pharmaceuticalproduct in Japan, the manufacturer must have a newpharmaceutical product listed on the National Health
Insurance Pharmaceutical Price List for coverage under
the national health insurance system. Generally, prices
on the price list are subject to revision once every two
years as part of the Government’s policy to control
healthcare spending.

066

Japan Tobacco Inc. Annual Report 2016

Corporate Information

Litigation

Some of our subsidiaries are defendants in lawsuits filedby plaintiffs seeking damages for harm allegedly causedby smoking, the marketing of tobacco products, or
exposure to tobacco smoke. As of the fiscal year-end
date, there were a total of 20 smoking and health-relatedcases pending in which one or more members of the
JT Group were named as a defendant or for which JT
may have certain indemnity obligations pursuant to theagreement for JT’s acquisition of RJR Nabisco Inc.’soverseas (non-U.S.) 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 andhealth-related cases. Please refer to “Note 39” tothe consolidated financial statements (ContingenciesContingent Liabilities) for major lawsuits to which JT
and some of its subsidiaries are named as defendants.
Similar lawsuits involving us may be filed and contested
in courts in the future.
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 of the fiscal year-end date, there are 10 ongoinghealthcare cost recovery cases in Canada pending
against JTI-Macdonald Corp. and JT’s indemnities(RJR Nabisco Inc.’s affiliates), brought by Canadianprovinces. In addition, there are 8 pending class actions
in Canada, of which 6 are currently dormant, whereplaintiffs are seeking damages for harm allegedly
caused by smoking of cigarettes. Damages claimed
in some of these cases reach sums in the multi-billion
dollar range. We will continue to take all appropriate
actions to defend such claims vigorously, and believe
there are a number of valid defenses.

In recent decades, numerous, large-scale, smoking andhealth-related cases have been brought against tobacco
product manufacturers in the US, 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
with respect 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 not include brands in the US, and even now,
our historic and current tobacco business scale in the
US remains small. Accordingly, we consider potential
exposure to smoking and health-related litigation in
the US to be low, and we thus believe that litigationin the US will not materially affect our businesses in
the near future.
Following the 2015 acquisition of Logic Technology
Development LLC, JT Group operates an e-cigarettebusiness in the US. We are not aware of any related
ongoing litigation alleging chronic effects on healthassociated with e-cigarette use. However, cases
were filed against e-cigarette manufacturers in the
US alleging harm caused to consumers by misleading
representations and advertising for which plaintiffs areseeking damages and/or demanding health warnings.
As of 31st December 2016, neither JT nor any of its
subsidiaries are a party to these cases.
As a tobacco product manufacturer, we continue
to monitor closely the developments and trendsof litigation involving tobacco companies in the
US, Canada, and elsewhere, with particularinterest and attention.

Japan Tobacco Inc. Annual Report 2016067

Members of the Board, Audit and Supervisory
Board Members, and Executive Officers(As of March 24, 2017)

Members of the Board

Executive Officers

Chairman of the Board
Yasutake Tango

President
Mitsuomi Koizumi
Chief Executive Officer

Representative Directors
Mitsuomi Koizumi
Yasushi Shingai
Mutsuo Iwai
Members of the Board
Hideki Miyazaki
Motoyuki Oka*
Main Kohda**Outside Directors under theCompanies Act of Japan.

Executive Vice Presidents
Yasushi Shingai
Deputy Chief Executive Officer
Compliance, General Affairs, Legal,
HR, Corporate Strategy, IT, Business
Development and Operation Review& Business Assurance
Mutsuo Iwai
President
Tobacco Business

Senior Vice Presidents
Junichi Fukuchi
Corporate, Scientific & Regulatory
Affairs Division
Tobacco BusinessKoji Shimayoshi
Head of Tobacco Business
Planning Division
Tobacco Business
Takehisa Shibayama
Chief R&D Officer
Tobacco Business

Hideki Miyazaki
Finance, CSR and Communications

Hirakazu Otomo
Manufacturing Group
Tobacco Business

Audit and Supervisory
Board Members

Senior Vice Presidents
Ryoji Chijiiwa
Compliance and General Affairs

Kenji Ogura
Head of Leaf Procurement Group
Tobacco BusinessStanding Audit andSupervisory Board Members
Futoshi Nakamura
Tomotaka Kojima

Chito Sasaki
President
Japanese Tobacco BusinessTobacco Business

Muneaki Fujimoto
President
Pharmaceutical Business

Audit and Supervisory
Board Members
Yoshinori Imai*
Hiroshi Obayashi*

Kazuhito Yamashita
Head of China Division
Tobacco Business*Outside Audit and Supervisory Board Members
under the Companies Act of Japan.

Shiroji Maeda
Chief Marketing & Sales Officer
Tobacco Business

Shigenori Ohkawa
Head of Central Pharmaceutical
Research Institute
Pharmaceutical Business
Naohiro Minami
Chief Financial Officer
Ryoko Nagata
CSR
Haruhiko Yamada
Legal
Kiyohide Hirowatari
Human Resources
Yuki Maeda
Corporate Strategy and IT
Takehiko Tsutsui
Business Development
Kei Nakano
Communications
Takanori Kikuchi
General Affairs

068

Japan Tobacco Inc. Annual Report 2016

Corporate Information

Members of the
JTI Executive Committee

Corporate Data

(As of April 1, 2017)

Eddy Pirard
President and Chief Executive Officer
Masamichi Terabatake
Deputy CEO, Executive Vice President
Emerging Products & Corporate Strategy
Roland Kostantos
Chief Operating and Financial Officer

Wade WrightSenior Vice President
Legal & Scientific Regulatory Affairs
Howard Parks
Senior Vice President
Human Resources
Bilgehan Anlas
Senior Vice President
Global Supply Chain & Global Leaf
Antoine Ernst
Senior Vice President
Marketing and Sales
Stefan Fitz
Regional President
Asia Pacific
Marchant Kuys
Regional President
Americas

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/
Date of Establishment
April 1, 1985
Paid-in Capital¥100 billion

JT International S.A.
8, rue Kazem Radjavi
1202 Geneva
Switzerland
Tel: +41 (0)22-703-0777
Fax: +41 (0)22-703-0789
URL: http://www.jti.com/

Hiroyuki Miki
Senior Vice President
Research & Development
Jorge da Motta
Regional President
Middle East, Near East, Africa,
Turkey and World Wide Duty Free
Kevin Tomlinson
Regional President
CIS+
Daniel Torras
Regional President
Central Europe
Vassilis Vovos
Regional President
Western Europe

Japan Tobacco Inc. Annual Report 2016

069

Shareholder
Information
070

Japan Tobacco Inc. Annual Report 2016

Shareholder Information

As of December 31, 2016

Composition of shareholders (%)

Common Stock
Note: A 200 for 1 stock split was completed on July 1, 2012.
Authorized:
Issued:Number of shareholders:

8,000,000,000
2,000,000,000
154,377

1.1
1.2

0.9
1.4

1.3
2.3

0.6
2.8

0.8
2.8

15.9

13.4

13.7

14.0

14.8

33.5

35.1

33.6

32.1

30.9

15.0

15.9

15.9

17.1

17.3

33.3

33.3

33.3

33.3

33.3

2013
March 312014
March 312014
Dec 312015
Dec 31

2016
Dec 31

0.5
1.1
7.5
27.4

13.5

Administration of the Registry of Shareholders
The Mitsubishi UFJ Trust and Banking Corporation
4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo.

50.0

Stock Exchange Listings
First Sections of Tokyo Stock Exchange.
2012
March 31

Government of Japan

Other institutions

Financial institutions

Foreign institutions and others

Securities companies

Individuals and others

As of December 31, 2016
Principal Shareholders
Name

Shares held

The Minister of FinanceJapan Trustee Services Bank, Ltd. (Trust Account)
The Master Trust Bank of Japan, Ltd. (Trust Account)
State Street Bank and Trust Company(Standing proxy: The Hongkong and Shanghai Banking Corporation Limited, Tokyo Branch)
Trust & Custody Services Bank, Ltd. as trustee for Mizuho Bank, Ltd.
Retirement Benefit Trust Account re-entrusted by Mizuho Trust and Banking Co., Ltd.
GIC Private Limited(Standing proxy: The Bank of Tokyo-Mitsubishi UFJ, Ltd.)State Street Bank and Trust Company 505223(Standing proxy: Mizuho Bank, Ltd., Settlement Sales Department)
State Street Bank and Trust Company 505001(Standing proxy: Mizuho Bank, Ltd., Settlement Sales Department)
JPMorgan Chase Bank 380055(Standing proxy: Mizuho Bank, Ltd., Settlement Sales Department)
The Bank of New York 133522(Standing proxy: Mizuho Bank, Ltd., Settlement Sales Department)

666,927,200
57,243,800
56,742,000
35,920,351
33,800,000
31,123,800
29,825,673
25,502,286
22,489,094
20,434,226

Japan Tobacco Inc. Annual Report 2016071

Shareholder Information continued

Offering JT Shares by Government
1st Offering
MethodOffer Price(Pricing Date)

Offering by Bids
Offering by non-Bids
Bid Price: From ¥1,362,000 to ¥2,110,000 ¥1,438,000
Weighted Average Price: ¥1,438,000(August 31, 1994)(August 29, 1994)
229,920 shares
164,356 shares

Number ofOffering shares
Offering Term

From August 15 to 18, 1994

From September 2 to 8, 1994

Note:
The Listing date
October 27, 1994: First Sections of Tokyo Stock Exchange.

2nd and 3rd, 4th Offering

MethodOffer Price(Pricing Date)
Number ofOffering shares
Offering Term

2nd Offering

3rd Offering

4th Offering

Offering by Book-Building formula
Bid Price: ¥815,000(June 17, 1996)
Japan: 237,390 shares,
International: 35,000 shares(Total: 272,390 shares)
From June 18 to 19, 1996

Offering by Book-Building formula¥843,000(June 7, 2004)
Japan: 198,334 shares,
International: 91,000 shares(Total: 289,334 shares)
From June 8 to 10, 2004

Offering by Book-Building formula¥2,949(March 11, 2013)
Japan: 145,625,500 shares,
International: 107,636,300 shares(Total: 253,261,800 shares)
From March 12 to 13, 2013

Stock Price Chart(Yen)(Points)
All Time High
February 1, 2016: ¥4,850

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

All Time Low
April 7, 2003: ¥644
(Pre-split: ¥128,800)

500

94.10 95.3

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

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.

072

Japan Tobacco Inc. Annual Report 2016

11.3

12.3

13.3

14.3 14.12

15.12

16.12

Financial Information

Financial
Information
Japan Tobacco Inc. Annual Report 2016073

Financial Review
Analysis of the Results
FY2016: Results for the fiscal year ended December 31, 2016

Continuing Operations
Actual Results

Decrease

Increase (Decrease in case of expense)

Revenue1(billions of yen)

FY20152,252.9

International tobacco-118.0Japanese domestic tobacco+6.9

Pharmaceutical+11.6

Processed food

-1.8

Others-8.4

FY2016

2,143.3

Revenue decreased ¥109.6 billion or -4.9% year-on-year to ¥2,143.3 billion.
• This was mainly due to the significant negative impact of foreign currency movements despite the robust
pricing and mix effect in international tobacco business.
• The revenue of pharmaceutical business increased mainly driven by the increase of royalty revenue fromout-licensed compounds.

Adjusted Operating Profit2/Operating Profit(billions of yen)

FY2015 Adjusted Operating Profit
International tobacco
Business momentum (at constant FX)
International tobacco
Local currency vs. US$ FX effectInternational tobacco
US$ vs. Yen FX effectJapanese domestic tobacco

626.7
+52.5
-72.3
-38.4
+6.2

Pharmaceutical+12.0

Processed food

+2.3

Others
FY2016 Adjusted Operating Profit

-2.2
586.8

Adjustment total+6.6

FY2016 Operating Profit

593.3

Adjusted operating profit decreased ¥39.9 billion or -6.4% year-on-year to ¥586.8 billion.
• While international tobacco business achieved strong growth at constant FX mainly driven by robust pricing,
adjusted operating profit still decreased due to the significant negative impact of foreign currency movements.
• In Japanese domestic tobacco business, although the sales volume declined, adjusted operating profit grew, mainly
due to the MEVIUS price increase, the additional of Natural American Spirit and the effect of competitivenessenhancing measures.
• In pharmaceutical business, adjusted operating profit improved significantly. This was mainly driven by theincreased royalty revenue from out-licensed compounds.
Adjusted operating profit at constant foreign currency increased +11.3% year-on-year.
Operating profit increased 5.0% year-on-year to ¥593.3 billion.
• Mainly because of other income of proceeds from the sales of real estates assets.

074

Japan Tobacco Inc. Annual Report 2016

Financial Information

Continuing Operations
Profit3(billions of yen)

FY2015398.5

Operating profit+28.1

Financial income/financial cost

-15.0

Income tax
Profit attributable to non-controllinginterests (continuing operations)
FY2016

+9.9
+0.2
421.7

Profit from continuing operations increased ¥23.2 billion or +5.8% year-on-year to ¥421.7 billion.
• Financial costs increased (shown as a decrease in the graph above) mainly due to the increase in bonds andshort-term borrowings.
• Despite the increase in profit before income tax, income tax expenses decreased (shown as an increase in thegraph above) as a result of the decrease in effective tax rate in both Japan and international tobacco businesses.

Revenue by business segment

Adjusted Operating Profit and Operating
profit by business segment
Billions of yen

Revenue (continuing operations)International tobacco
Core revenue 4Japanese domestic tobacco
Core revenue5
Pharmaceutical
Processed Food
Others

FY2015FY20162,252.9
1,317.2
1,252.5
677.3
642.2
75.6
165.8
17.0

2,143.3
1,199.2
1,138.8
684.2
649.7
87.2
164.1
8.6

Billions of yen
FY2015FY2016

565.2
61.4
626.7
346.9
47.5

593.3
(6.6)
586.8
301.8
34.4

394.4
249.2
4.8

336.2
244.1
16.1

Adjustment total6

254.1
(2.3)
–
(2.3)
3.2
(0.5)
2.7
(31.8)
9.6

260.2
9.7
–
9.7
5.0
0.0
5.0
32.7
(57.1)

Others/Elimination:
Adjusted operating profit(22.2)(24.4)

Continuing Operations: Operating profit
Adjustment total6
Continuing Operations: Adjusted operating profit

International tobacco: Operating profit
Adjustment total6
International tobacco:
Adjusted operating profit

Japanese domestic tobacco: Operating profit
Adjustment total6
Japanese domestic tobacco:
Adjusted operating profit

Pharmaceutical: Operating profit

Average Exchange Rate

Adjustment total6
Pharmaceutical: Adjusted operating profit

Processed Food: Operating profit

YEN/US$
RUB/US$
GBP/US$EUR/US$

FY2015FY2016121.10
60.98
0.65
0.90

108.78
67.07
0.74
0.90

1.	E xcludes tobacco excise taxes and agency transactions.
2.	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 ± restructuringincome and costs ± others
3.	Profit attributable to owners of the parent company.
4.	Includes revenue from waterpipe tobacco and emerging products, but excludes
revenues from distribution, contract manufacturing and other peripheral businesses.
5.	E xcludes revenue from distribution of imported tobacco in the Japanese domestic
tobacco business, among others, includes revenue from domestic duty free, the China
business and emerging products such as Ploom TECH device and capsules.
6.	Depreciation and amortization ± adjustment items(income and costs)****Adjustment items (income and costs) = impairment losses on goodwill ±restructuring income and costs ± others.

Adjustment total6
Processed food: Adjusted operating profit

Others/Elimination: Operating profit• For analysis of revenue, core revenue and adjusted
operating profit of each business segment, pleaserefer to section Review of Operation.

Japan Tobacco Inc. Annual Report 2016075

Financial Review continued

Analysis of the Results continued
FY2016: Results for the fiscal year ended December 31, 2016

Consolidated
Actual Results

Decrease

Increase (Decrease in case of expense)

Consolidated Statements of Financial Position (Assets)(billions of yen)

December 31, 2015

4,558.2

Cash and cash equivalents-232.6

Trade and other receivables-9.5

Inventory-5.0

Property, plant and equipment-1.0+172.7

Goodwill+96.1

Trademark
Other assets+165.4

December 31, 2016

4,744.4• Total assets increased ¥186.1 billion to ¥4,744.4 billion, mainly due to the increase in goodwill, trademark andother assets, which is related to the acquisition of Natural American Spirit business outside the United States.

Consolidated Statement of Financial Position (Debt and Equity)(billions of yen)

5 December 31, 2015

4,558.2

Trade and other payables

+4.9

Bonds

+143.1

Borrowing+157.6

Corporate tax payables-51.5

Other liabilities-74.4

Retained earnings
Exchange differences on translationof foreign operations
Treasury shares+170.4-163.2Other equity total-0.7

December 31, 2016

4,744.4• Total liabilities increased ¥179.6 billion to ¥2,216.3 billion mainly due to the increase in bonds and borrowings
but partially offset by the decrease in corporate tax payables and other liabilities.
• Despite the increase in retained earnings, total equity increased only 6.5 billion to ¥2,528.0 billion mainly
because of the significant negative impact of exchange differences on translation of foreign operations.

076Japan Tobacco Inc. Annual Report 2016

Financial Information

1. Significant Accounting Policies
Having acquired RJR Nabisco’s non-U.S. tobacco
operation in 1999 and Gallaher Group Plc. in the UK in
2007, the JT Group has been growing steadily as a global
company with operations in over 70 countries and with
our products sold in more than 120 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 in capital markets and to diversify thegroup’s sources of financing through international
capital markets.
In addition, from the third quarter of FY2015,
beverage business has been classified as discontinued
operations due to the withdrawal from beverage businessin 2015. Consequently, profit (loss) and some items fromcontinuing operations and discontinued operations arepresented separately for the financial results of FY2015.
For further details of significant accounting policies,
please refer to Note 3 to the consolidated financial
statements.

2. Non-GAAP financial measures
The JT Group discloses certain additional financial
measures that are not required or defined under IFRS.
These measures help grasp underlying performanceof each business and are used for internal performance
management. We believe that they are useful information
for users of our financial statements to assess theGroup’s performance.
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 treatedas supplementary information, rather than alternative
measures to corresponding financial numbers preparedin accordance with IFRS.
Core Revenue
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 accounted for distribution ofimported tobacco products, among others, and includes
revenue from domestic duty free, the China businessand emerging products such as Ploom TECH device
and capsules. Core revenue for the international tobacco
business is presented after deducting the revenue
accounted for the distribution business and contract
manufacturing, among other areas, from revenue,
and including revenue from waterpipe tobaccoand emerging products.
Adjusted Operating Profit
In order to provide useful comparative information on
our business performance, adjusted operating profit
is presented as operating profit plus amortization 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 alsopresented 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 the prior year.

Japan Tobacco Inc. Annual Report 2016077

Financial Review continued

Analysis of the Results continued
FY2016: Results for the fiscal year ended December 31, 2016

3. Analysis of consolidated financial results for FY2016
Consolidated financial results
For analysis of ‘Revenue’, ‘Adjusted operating profit’,‘Operating profit’ and ‘Profit attributable to owners of theparent company’, please refer to page 74 and 75. For analysisof ‘Assets’, ‘Debt’ and ‘Equity’, please refer to page 76. For
analysis of financial results by business segment, pleaserefer to ‘Review of Operations’.
(2) Results and plans of capital expenditures
Excluding the assets acquired through businesscombination, capital expenditures include outlays on
property, plants and equipment such as land, buildings,
and structures; machinery; vehicles and others; andintangible assets such as goodwill, trademark, software,and others that are necessary for enhancing the
productivity of our factories and other facilities;
strengthening our competitiveness, and operatingin various business fields.
Total amount of capital expenditures amounted to ¥113.0
billion in FY2016.
(Billions of yen)
Capital expenditure

FY2015FY2016

129.8
77.2
37.4
6.2
5.7
3.3

113.0
70.6
29.8
3.8
5.7
3.1

Continuing operations
International tobacco
Japanese domestic tobacco
Pharmaceutical
Processed Food
Other/Elimination and corporate

In international tobacco business, capital expenditures
amounted to ¥70.6 billion which was mainly spenton the optimization of manufacturing bases and for
improvement of product specifications. In Japanese
domestic tobacco business, capital expenditures
amounted to ¥29.8 billion which was mainly spent on
the maintenance and upgrading of manufacturing bases,
the enhancement of production, the improvementof product specifications in response to the new
products. In pharmaceutical business, capital

expenditures amounted to ¥3.8 billion which was
mainly spent on the development and reinforcementof R&D capabilities. In processed food business, capital
expenditures amounted to ¥5.7 billion, which was mainly
spent on enhancing and maintaining the production
capacity. These capital expenditures were internally
funded through cash generated by operations.
Plans for new installations and disposal of facilities
Regarding the mid- to long-term resource allocationof the JT Group, we will place top priority on business
investments that will lead to sustainable profit growthin the mid- to long-term based on our management
principles. We position the international and Japanese
domestic tobacco business as the core business andprofit growth engine and place top priority on business
investments that will lead to their sustainable profit
growth. Meanwhile, regarding the pharmaceuticalbusiness and processed food business, we will strive
to strengthen 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 ¥136.0 billion for FY2017.
As JT and JT Group companies have wide-ranging plansfor capital expenditure, figures are disclosed by segment.
Our actual capital expenditures may differ significantly
from the planned figures mentioned above as a resultof a number of factors, including those discussed in‘Risk Factors’.
4. Dividends
The year-end dividends for FY2016 were ¥66 per share.
The total annual dividends per share, including the interim
dividends per share of ¥64, were ¥130 per share, witha ¥12 increase of dividend per share year-on-year.
The year-end dividends related to the current year are
recognized in the following year for accounting purposes.
The year-end dividend related to FY2015 (record date ofDecember 31, 2015) and the interim dividends for FY2016(record date of June 30, 2016) are recorded in the financial
statements for FY2016. For more details, please refer to Note
24 to the consolidated financial statements “Dividends”.

Capital Expenditure Plan

FY2017(Billions of yen)

Main purpose of investment

Funding

International tobacco

64.0

Investment for the improvement of product specification and the
optimization of manufacturing bases

Internally fundedJapanese domestic
tobacco42.0

Investment for the maintenance and upgrading of manufacturing
Same as above
bases, the enhancement of production, the improvement of productspecifications in response to the new products

Pharmaceutical

9.0

Investment for the maintaining and reinforcing of R&D

Same as above

Processed food

15.5

Investment for enhancing and maintaining production capacity

Same as above

078

Japan Tobacco Inc. Annual Report 2016

Financial Information

5. Capital management
The JT Group’s management principle is pursuit of the“4S” model: we strive to fulfill our responsibilities toour valued consumers, shareholders, employees andthe wider society, carefully considering the respective
interests of these four key stakeholder groups, andexceeding their expectations wherever we can. The
JT Group believes that sustainable profit growth in themid- to long-term based on this principle will increase
the JT Group’s value in the mid- to long-term, and isconsequently in the best interest of all stakeholders,
including our shareholders.
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 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 solid balance sheet for future investment.
We monitor credit ratings for a solid balance sheet, andROE (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 interestbearing debt, and capital (the part attributable to ownersof the parent company). The amounts as of each yearend are as follows:(Billions of yen)
As of Dec 31, As of Dec 31,
2015
2016
Interest-bearing debt
Cash and cash equivalents
Net interest-bearing debt (Note)
Capital (equity attributable to ownersof the parent company)

255.3(526.8)(271.5)555.3(294.2)261.1

2,451.6

2,456.1

Note: The figure in parentheses () represents the net amount of cash and cash
equivalents after deducting interest-bearing debt.

6. Financial activities
Our Group Treasury Division provides Group-wide
support to enable secure and efficient financing activities.
JT Group is exposed to financial risks (credit risk, liquidity
risk, foreign exchange risk, interest rate risk, and market
price fluctuation risk). Treasury operations are conductedpursuant to a set of Group-wide financial risk
management policies and results are reported to the CEO
and the Board of Directors of JT on a regular basis. For
more details on financial risk management, please referto “(2) Financial Risk Management” to “(8) Market Price
Fluctuation Risk” of Note 33 to the consolidated financial
statements “Financial Instruments”.
(1) Cash Management Systems
To maximize the total group cash efficiency, we give firstpriority to utilizing internal financing mainly by the CashManagement Systems (CMS) within our Group, wherelegally permissible and economically viable.
(2) External financing
Short-term working capital needs are basically financed
through short-term borrowings from financial institutionsor through commercial paper, or a combination of both.
Mid- to long-term capital needs are financed throughlong-term borrowings from financial institutions, bondor equity, or a combination of those previously stated.
We continue to diversify our financing method andcorrespondent financial institutions to secure stable andefficient funding sources through activities such as theestablishment of committed facilities. The condition of
the Group’s wide external debt is reported to the CEO
and the Board of Directors of JT on a regular basis.
(3) External investments
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 of the financial investment are reported to the
CEO and the Board of Directors of JT on a regular basis.

Share buy-back:As of December 31, 2016 we held 209,044,267 shares ofcommon stock as treasury stock, amounting to 10.45%
of total number of shares issued.
A repurchase of our shares requires cash outlays. In
order to repurchase our shares in a flexible manner, weamended the Articles of Incorporation at the general
meeting of shareholders held on June 24, 2004 so that
we could make repurchase based on a resolution madeby the Board of Directors. We may continue to holdthe repurchased shares as treasury stock or use themfor other purposes. Stock repurchase provides ourmanagement with an additional option for increasing
flexibility and speed in capital management in orderto adapt to a rapidly changing business environment.

Japan Tobacco Inc. Annual Report 2016079

Financial Review continued

Analysis of the Results continued
FY2016: Results for the fiscal year ended December 31, 2016

7. Results of Cash flows of FY2016 and FY2015
Cash and cash equivalents at the end of FY2016
decreased by ¥232.6 billion from the end of FY2015
to ¥294.2 billion. Cash and cash equivalents at theend of FY2015 were ¥526.8 billion.
Cash flows from (used in) operating activities
Net cash flows from operating activities during FY2016
were ¥376.5 billion. The main factors were the generationof a stable cash inflow from the tobacco business. Net
cash flows from operating activities were ¥468.4 billion
for FY2015.
Cash flows from (used in) investing activities
Net cash flows used in investing activities during
FY2016 were ¥687.5 billion. This was mainly due to theacquisition of Natural American Spirit business outside
the U.S. and the payment for the purchase of property,
plant and equipment and the investment in subsidiaries.
Net cash flows used in investing activities were ¥63.3
billion for FY2015.
Cash flows from (used in) financing activities
Net cash flows from financing activities during FY2016
were ¥91.3 billion. This was mainly because short-termborrowings increased and bonds were issued in FY2016,
partially offset by the increase of dividends per share. Net
cash flows used in financing activities were ¥254.9 billion
for FY2015.

8. Liquidity
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
to be stable and cover funds needed for ordinary businessactivities. On December 31, 2016, we had approximately¥574.4 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 shelfregistration and EMTN program.
(1) Long-term debt
Bonds issued (including the current portion) as ofDecember 31, 2015 and December 31, 2016 accountedfor ¥215.1 billion and ¥358.2 billion respectively andlong-term borrowings as loans from financial institutions(including the current portion) accounted for ¥1.0 billionand ¥1.4 billion respectively. Annual interest rates
applicable to long-term borrowings outstanding asof December 31, 2015 and December 31, 2016 ranged
from 2.32% to 4.64% and 1.05% to 4.41%, respectively.
Long-term lease obligations accounted for ¥7.8 billion asof December 31, 2015 and ¥7.3 billion as of December 31,
2016. Maturities of interest-bearing debts are shown in
the table on the next page.
As of December 31, 2016, our long-term debt was rated
Aa3 by Moody’s Japan K.K. (Moody’s), AA- by Standard& Poor’s Ratings Japan K.K. (S&P), and AA by Rating
and Investment Information Inc. (R&I), with a “stable”
outlook from Moody’s, a “stable” outlook from S&P
and a “stable” outlook from R&I. These ratings are among
the highest ratings for international tobacco companies.
These ratings are affected by a number of factors suchas developments in our major markets, our businessstrategies and general economic trends that are beyond
our control. The ratings may be withdrawn or revisedat any time. Each rating should be evaluated separatelyfrom other ratings. Under the Japan Tobacco Inc. Act, thebondholders of JT can enjoy statutory preferential rights
over unsecured creditors in seeking repayment, withthe exception of national and local taxes and otherstatutory obligations.
(2) Short-term debt
Short-term borrowings totaled ¥30.8 billion as ofDecember 31, 2015 and ¥187.9 billion as of December 31,
2016. There was no commercial paper outstanding asof December 31, 2015 and December 31, 2016.
Annual interest rates applicable to short-term borrowings
ranged from 0.43% to 11.30% as of December 31,
2015 and from 0.33% to 15.00% as of December 31,
2016. Short-term lease obligations totaled ¥0.6 billion
as of December 31, 2015 and ¥0.4 billion as ofDecember 31, 2016.

080

Japan Tobacco Inc. Annual Report 2016

Financial Information(Billions of yen)

Year ended December 31, 2016

Short-term borrowings as loans
Short-term lease obligations
Long-term borrowings as loans (current portion)
Bonds (current portion)
Long-term borrowings as loans
Bonds
Long-term lease obligations
Total

Book Value

Due within
1 yearDue after
1 yearthrough 2years

Due after
2 years
through 3years

Due after
3 years
through 4
years

Due after
4 years
through 5
years

Due
after
5 years

187.9
0.4
0.6
20.0
0.9
338.2
7.3
555.3

187.9
0.4
0.6
20.0
–
–
–
208.9

–
–
–
–
0.4
58.2
0.2
58.8

–
–
–
–
0.1
–
0.2
0.3

–
–
–
–
0.0
80.0
0.2
80.2

–
–
–
–
0.0
87.4
0.1
87.5

–
–
–
–
0.3
113.2
6.7
120.2

Japan Tobacco Inc. Annual Report 2016081

Consolidated Financial Statements
Consolidated Statement of Financial Position
Japan Tobacco Inc. and Consolidated Subsidiaries
FY2016: Year ended December 31, 2016

Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)

Cash and cash equivalents (Note 7)¥  526,765¥  294,157

Trade and other receivables (Note 8)

406,387

396,934

Inventories (Note 9)563,820558,846

Other financial assets (Note 10)

17,84914,921Other current assets (Note 11)

280,493

340,312

1,795,313

1,605,169

AssetsCurrent assets

Subtotal
Non-current assets held-for-sale (Note 12)
Total current assets

2,904

821

1,798,217

1,605,990

Non-current assets
681,865

680,835

1,429,287

1,601,987

Intangible assets (Note 14)332,478

423,970

Investment property (Note 16)

23,61418,184Retirement benefit assets (Note 22)38,954

23,680Investments accounted for using the equity method

59,523

123,753

Other financial assets (Note 10)

101,727

99,358Deferred tax assets (Note 17)

92,570166,6172,760,017

3,138,384¥4,558,235¥4,744,374

Property, plant and equipment (Note 13)
Goodwill (Notes 14, 37)

Total non-current assets
Total assets

082Japan Tobacco Inc. Annual Report 2016

Financial Information

Millions of yen

Liabilities and equity

FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)

Liabilities
Current liabilities¥  373,032¥  377,933

Bonds and borrowings (Note 19)30,980208,521

Income tax payables

106,391

54,940

Other financial liabilities (Note 19)

6,459

13,023

Provisions (Note 20)

19,297

12,529Other current liabilities (Note 21)729,761

689,629

1,265,920

1,356,574

Bonds and borrowings (Note 19)

215,938

339,036

Other financial liabilities (Note 19)

10,143

9,009

Retirement benefit liabilities (Note 22)

333,562

333,410

Trade and other payables (Note 18)

Total current liabilities
Non-current liabilities

Provisions (Note 20)
Other non-current liabilities (Note 21)

9,210

4,423

113,958

102,221

Deferred tax liabilities (Note 17)

87,97971,660Total non-current liabilities

770,790859,759

2,036,710

2,216,333

Share capital (Note 23)

100,000

100,000

Capital surplus (Note 23)736,400

736,400

Treasury shares (Note 23)(444,333)(443,822)

Total liabilities
EquityOther components of equity (Note 23)(137,122)(303,554)

Retained earnings

2,196,651

2,367,067

Equity attributable to owners of the parent company

2,451,596

2,456,091

Non-controlling interests
Total equity
Total liabilities and equity

69,92971,9502,521,524

2,528,041¥4,558,235¥4,744,374

Japan Tobacco Inc. Annual Report 2016083

Consolidated Statement of Income
Japan Tobacco Inc. and Consolidated Subsidiaries
FY2016: Year ended December 31, 2016

Millions of yen
FY2015FY2016(Year ended
December 31, 2015)(Year ended
December 31, 2016)¥2,252,884¥2,143,287

Continuing operations
Revenue (Notes 6, 25)
Cost of sales (Notes 14, 22)(920,056)(872,433)

Gross profit

1,332,828

1,270,854

Other operating income (Note 26)

15,367

70,101

Share of profit in investments accounted for using the equity method

6,381

6,489

Selling, general and administrative expenses (Notes 12, 13, 14, 16, 22, 27, 32, 37)(789,346)(754,115)

Operating profit (Note 6)565,229593,329

Financial income (Notes 28, 33)

15,016

6,618

Financial costs (Notes 22, 28, 33)(15,132)(21,710)

Profit before income taxes

565,113578,237

Income taxes (Note 17)(162,386)(152,464)

Profit for the period from continuing operations

402,727

425,773

87,515—¥  490,242¥  425,773¥  485,691¥  421,695

Discontinued operations
Profit for the period from discontinued operations (Note 38)
Profit for the period
Attributable to:
Owners of the parent company
Non-controlling interests
Profit for the period

4,551

4,078

¥  490,242¥  425,773¥   221.95¥   235.47

Earnings per share
Basic (Yen)Continuing operations (Note 30)
Discontinued operations (Note 30)
Total basic earnings per share for the period (Note 30)

48.59

—

¥   270.54¥   235.47¥   221.81¥   235.33

Diluted (Yen)Continuing operations (Note 30)
Discontinued operations (Note 30)
Total diluted earnings per share for the period (Note 30)

48.56

—

¥   270.37¥   235.33

Reconciliation from “Operating profit” to “Adjusted operating profit”
Millions of yen
FY2015FY2016(Year ended
December 31, 2015)(Year ended
December 31, 2016)¥565,229¥593,329

Continuing operations
Operating profit
Amortization cost of acquired intangibles arising from business acquisitions

31,87546,767

Adjustment items (income)(10,346)(65,212)Adjustment items (costs)
Adjusted operating profit (Note 6)084Japan Tobacco Inc. Annual Report 2016

39,90011,894¥626,657¥586,777

Financial Information

Consolidated Statement of Comprehensive Income
Japan Tobacco Inc. and Consolidated Subsidiaries
FY2016: Year ended December 31, 2016

Millions of yen

Profit for the period

FY2015FY2016(Year ended
December 31, 2015)(Year ended
December 31, 2016)¥ 490,242¥ 425,773

Other comprehensive income
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 (Notes 29, 33)

10,735(3,159)Remeasurements of defined benefit plans (Notes 22, 29)(4,102)(22,202)

Total of items that will not be reclassified to profit or loss

6,633

(25,361)(289,400)(163,683)

Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations (Notes 29, 33)
Net gain (loss) on derivatives designated as cash flow hedges (Notes 29, 33)
Total of items that may be reclassified subsequently to profit or loss

233

(1,479)(289,167)(165,162)

Other comprehensive income (loss), net of taxes(282,534)(190,523)

Comprehensive income (loss) for the period¥ 207,708¥ 235,250¥ 203,257¥ 231,590

Attributable to:
Owners of the parent company
Non-controlling interests
Comprehensive income (loss) for the period

4,450

3,660

¥ 207,708¥ 235,250

Japan Tobacco Inc. Annual Report 2016085

Consolidated Statement of Changes in Equity
Japan Tobacco Inc. and Consolidated Subsidiaries
FY2016: Year ended December 31, 2016

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

As of January 1, 2015
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 32)
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, 2015
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 32)
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, 2016

Exchangedifferences ontranslation offoreign
operations

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¥100,000
—
—
—
—
—
—
—
—

¥736,400
—
—
—
—
—
—
—
—

¥(344,447)———(100,000)
114
—
—
—

¥1,631
—
—
—
—
(85)
395
—
—

¥ 116,421—(288,894)(288,894)
—
—
—
—
—

¥ 1,215
—
233
233
—
—
—
—
—

¥23,156—
10,50010,500
—
—
—
—
(140)

—
—
—
—
100,000
—
—
—
—
—
—
—
—

—
—
—
—
736,400
—
—
—
—
—
—
—
—

—
—
—
(99,886)(444,333)
—
—
—
(0)
512
—
—
—

—
—
—
310
1,941
—
—
—
—
(413)
265
—
—

—
—
—
—
(172,473)—(163,169)(163,169)
—
—
—
—
—

—
—
(1,324)(1,324)125—(1,479)(1,479)
—
—
—
—
—

—
(232)
—
(372)
33,284—(3,069)(3,069)
—
—
—
—
—

—
—
—
—
¥100,000————¥736,400———
512¥(443,822)

—
—
—
(147)
¥1,794————¥(335,642)

—
—
1,794
1,794
¥   440

—
(360)
—
(360)
¥29,854
Millions of yen

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

As of January 1, 2015
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 32)
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, 2015
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 32)
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, 2016086

Remeasurementsof defined
benefit plans

Total

Retainedearnings

Total

Non-controllinginterests

Total equity¥     ——
(4,272)(4,272)—————¥ 142,425—(282,433)(282,433)
—
(85)
395
—
(140)

¥1,902,460
485,691—
485,691—(29)—(187,574)
140¥2,536,838
485,691(282,433)
203,257(100,000)
0395(187,574)—¥ 85,665
4,551
(101)
4,450
—
—
—
(13,809)(6,044)¥2,622,503
490,242(282,534)
207,708(100,000)
0395(201,383)(6,044)

—
4,272
—
4,272
—
—
(22,387)(22,387)
—
—
—
—
—

—
4,040
(1,324)2,886(137,122)—(190,105)(190,105)
—
(413)
265
—
—

4
(4,040)—(191,500)
2,196,651
421,695—
421,695—(99)—(229,223)—

4—(1,324)(288,500)
2,451,596
421,695(190,105)
231,590(0)0265(229,223)
—

(321)
—
(13)
(20,187)
69,929
4,078
(419)
3,660
—
—
4
(2,038)
1,069

(318)
—
(1,337)(308,686)
2,521,524
425,773(190,523)
235,250(0)0270(231,261)
1,069—
22,387—22,387¥     ——
22,027
1,794
23,674¥(303,554)

69(22,027)—(251,280)¥2,367,067

69
—
1,794
(227,094)¥2,456,091

(675)
—
—
(1,639)¥ 71,950

(606)
—
1,794
(228,733)¥2,528,041

Japan Tobacco Inc. Annual Report 2016

Financial Information

Consolidated Statement of Cash Flows
Japan Tobacco Inc. and Consolidated Subsidiaries
FY2016: Year ended December 31, 2016

Millions of yen

Cash flows from operating activities
Profit before income taxes
Profit before income taxes from discontinued operations
Depreciation and amortization
Impairment losses
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(Gains) losses on sale of investments in subsidiaries(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 (Note 38)
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 37)
Proceeds from sale of investments in subsidiaries
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
Proceeds from long-term borrowings
Repayments of long-term borrowings
Proceeds from issuance of bonds
Redemption of bonds
Repayments of finance lease obligations
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)

FY2015FY2016(Year ended
December 31, 2015)(Year ended
December 31, 2016)¥ 565,113
119,009
139,057
12,654(14,818)
4,030(6,381)¥ 578,237—
140,794
1,239(6,372)
8,680(6,489)6,697(134,287)
3,866(5,272)(6,697)(5,162)(59,789)
31,714(34,585)(33,839)
581,310
22,687(3,538)(132,027)
468,432(33,473)(26,106)(20,128)(686)
16,157(4,724)(48,228)(14,192)
2,787(31,938)
555,557
13,064(6,788)(185,285)
376,549(1,320)3,687(116,976)(2,303)
5,340(101,072)

8,372(12,123)(1,002)
977(70,110)
126,774—(1,550)(63,271)

42,046(9,929)(346)
298(589,737)
26,979(52,291)(6,493)(687,509)(187,646)(13,734)—
5,255—(30,147)
114,724(40,000)(2,986)(100,000)(318)
0(254,852)
150,309385,820(9,365)¥ 526,765(229,261)(2,011)
129
186,570856(578)
136,181
—
(569)
(0)
—
0
91,318(219,643)
526,765(12,965)¥ 294,157

Japan Tobacco Inc. Annual Report 2016087

Notes to Consolidated Financial Statements
Japan Tobacco Inc. and Consolidated Subsidiaries
FY2016: Year ended December 31, 2016 / FY2015: Year ended December 31, 2015

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.jti.co.jp/).

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, 2016, were approved on March 24, 2017by Mitsuomi Koizumi, President and Chief Executive Officer.

2. Basis of Preparation(1)

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

(2)

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)

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.

(4)

Early Adoption of New Accounting Standards

The Group has early adopted IFRS 9 “Financial Instruments”(amended in November 2013) (hereinafter referred to as “IFRS 9”)from January 1, 2015.

IFRS 9 replaces IAS 39 “Financial Instruments: Recognition andMeasurement” (hereinafter referred to as “IAS 39”) and provides
two measurement categories for financial instruments: amortizedcost and fair value. Changes in fair value of financial assets measured at fair value are recognized in profit or loss. However,changes in fair value of investments in equity instruments, except
for equity instruments held for trading purposes, are allowed to berecognized in other comprehensive income.
For hedge accounting, the hedging relationships that meet thequalifying criteria are reviewed to appropriately reflect an entity’srisk management activities in the consolidated financial statements.

(5)

Changes in Method of Presentation“Purchase of investments in subsidiaries,” which was presented
in cash flows from investing activities for the prior year, has beenpresented as “Payments for business combinations” to appropriately reflect the substance of the transaction for the year ended
December 31, 2016.

3. Significant Accounting Policies(1)

Basis of Consolidation

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.

088

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.
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. Annual Report 2016

Financial Information

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.

comprehensive income, and cash flow hedges are recognized asother comprehensive income.
The assets and liabilities of foreign operations are translated into
Japanese yen at the rates of exchange prevailing at the fiscal year
end date, while income and expenses of foreign operations aretranslated into Japanese yen at the rates of exchange prevailing at
the dates of transactions or an approximation of the rate. The resulting translation differences are recognized as other comprehensive
income. In cases where foreign operations are disposed of, thecumulative amount of translation differences related to the foreign
operations is recognized as profit or loss in the period of disposition.

(2)

(4)

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 acapital 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)

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 the fiscal year end
date. Differences arising from the translation and settlement arerecognized as profit or loss. However, exchange differences arisingfrom the translation of financial instruments designated as hedging
instruments for net investment in foreign operations (foreign subsidiaries), financial assets measured at fair value through other

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.
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 theclassification as follows:(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 instruments­designated as measured at fair value through other comprehensive
income are recognized as other comprehensive income and theJapan Tobacco Inc. Annual Report 2016089

amount 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
In accordance with IAS 39, the Group assesses at the end ofeach reporting period whether there is any objective evidence
that financial assets measured at amortized cost are impaired.
Evidence of impairment includes significant financial difficulty ofthe borrower or a group of borrowers, a default or delinquency
in interest or principal payments, and bankruptcy of the borrower.
The Group assesses whether objective evidence of impairment
exists individually for financial assets that are individually significant
and collectively for financial assets that are not individuallysignificant.
If there is objective evidence that impairment losses on financial
assets measured at amortized cost have been incurred, the amountof the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows.
When impairment is recognized, the carrying amount of thefinancial asset is reduced by an allowance for doubtful accounts
and impairment losses are recognized in profit or loss. The carrying
amount of financial assets measured at amortized cost is directlyreduced for the impairment when they are expected to become
uncollectible in the future and all collateral is implemented or transferred to the Group. If, in a subsequent period, the amount of theimpairment loss provided changes due to an event occurring after
the impairment was recognized, the previously recognized impairment losses are adjusted through the allowance for doubtful
accounts.
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 classification as follows:(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 liabilities090

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 are­measured at the higher of:• The best estimate of expenditure required to settle the obligation
as of the end of the fiscal year, and• The amount initially recognized less cumulative amortization.
(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 initially­measured at fair value when the contract is entered into, and aresubsequently 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
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.

Japan Tobacco Inc. Annual Report 2016

Financial Information

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.
(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 consolidated­statement 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
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.
F. Fair Value of Financial Instruments
Fair value of financial instruments that are traded in active financial
markets at the fiscal 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)

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)

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.
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 fiscal year end and if there are any changes made to theestimated useful lives and depreciation method, such changes areapplied prospectively as changes in estimate.

Japan Tobacco Inc. Annual Report 2016091

(8)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.
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 fiscal year
end, and the effect of any changes in estimate would be accounted
for on a prospective basis.
The estimated useful lives of major intangible assets with finite
useful lives are as follows:• Trademarks: 10 to 20 years• 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.

(9)

LeasesLeases 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 of 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.

092

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.

(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 fiscal year whether there is any indication that an asset may be impaired. If any such indication exists,
or in cases where the impairment test is required to be performed
each year, the recoverable amount of the asset is estimated. In
cases that the recoverable amount cannot be estimated for each
asset, it is estimated by the cash-generating unit to which the asset
belongs. The recoverable amount of an asset or a cash-generating
unit is determined at the higher of its fair value less costs of disposal or its value in use. If the carrying amount of the asset or cashgenerating 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 thelower 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.

Japan Tobacco Inc. Annual Report 2016

Financial Information(12) Non-current Assets Held-for-Saleand Discontinued Operations(14) Share-based Payments

A. 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.
B. Discontinued Operations
The Group has classified a business segment that has been­disposed of, or is classified as held-for-sale, into discontinued
operations.

(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 fiscal year, and the­discount rate is determined by reference to market yields for theperiod corresponding to the discount period at the end of the fiscal
year on high quality corporate bonds or government bonds.
Liabilities or assets for defined benefit plans are calculated by thepresent value of the defined benefit obligation, deducting the fairvalue of any plan assets (including adjustments for the asset ceilingfor 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.

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.

(15) Provisions
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.

(16) Revenue
A. Sale of Goods
The Group mainly engages in the sale of tobacco products, prescription drugs and processed foods. Revenue from the sale ofthese goods is recognized when the significant risks and rewardsof ownership of the goods transfer to the buyers, the Group retains
neither continuing managerial involvement nor effective control overthe goods sold, it is probable that the future economic benefits willflow to the Group, and the amount of revenue and the corresponding costs can be measured reliably. Therefore, revenue is usually
recognized at the time of delivery of goods to customers. In addition, revenue is recognized at fair value of the consideration
received or receivable less discounts, rebates and taxes, including
consumption taxes.
Since the amount of turnover where the Group is involved as anagency, including tobacco excise taxes, is deducted from revenue,
the Group recognizes only the economic benefit inflow, excluding
such amount as revenue in the consolidated statement of income.

Japan Tobacco Inc. Annual Report 2016093

B. Interest Income
Interest income is recognized using the effective interest rate
method.
C. Dividend Income
Dividend income is recognized when the shareholder’s right toreceive payment is established.
D. Royalties
Royalties are recognized on an accrual basis in accordance withthe substance of the relevant agreement.

(17) Government Grants
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.

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• 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 fiscal year when the asset is realized or the liability is settled, based on tax rates that have beenenacted or substantively enacted by the fiscal year end.

(20) Treasury Shares(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 fiscal year. The current income taxes are recognizedin profit or loss, except for taxes arising from items that are recognized in 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 the fiscal year end. Deferred tax assets arerecognized for deductible temporary differences, carryforward ofunused tax credits and unused tax losses to the extent that it isprobable that future taxable profit will be available against which
they can be utilized. Deferred tax liabilities are recognized for­taxable temporary differences.

094

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.

(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.

(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.

Japan Tobacco Inc. Annual Report 2016

Financial Information(23) Contingencies
A. Contingent Liabilities
The Group discloses contingent liabilities in the notes to consolidated financial statements if it has possible obligations at the fiscal
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 the fiscal year end.

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 fiscal year
ended December 31, 2016.
IFRS

IAS 19(24) Adjusted Financial Measures
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

Description of new standards and amendments

Employee
Benefits

Clarifying the method of determining
the discount rate for post-employment
benefit obligations

The effect of adopting the above standards and interpretations
on the consolidated financial statements is immaterial.

4. Significant Accounting Estimates and Judgments
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 fiscal year end date. These estimates andassumptions are based on the best judgment of management inlight of historical experience and various factors deemed to bereasonable as of the fiscal year end date. Given their nature, actual
results may differ from those estimates 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. Annual Report 2016095

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.”
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 fiscal
year end date.
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.”096

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.
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 theavailable evidence as of the fiscal year end date and by taking into
account the probability of these contingencies and their impact onfinancial reporting.
The content of contingencies is described in “39. Contingencies.”

Japan Tobacco Inc. Annual Report 2016

Financial Information

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.
IFRS

Mandatory adoption(From the year beginning)

To be adopted
by the GroupThe 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.
Description of new standards and amendments

IFRS 1First-time Adoption ofInternational Financial
Reporting Standards

January 1, 2018

Fiscal year ending
December 2018

Deleting short-term exemptions for first-time adopters

IFRS 2

Share-based Payment

January 1, 2018

Fiscal year ending
December 2018

Clarifying accounting treatment for the effects of vesting conditions
on cash‑settled share‑based payment transactions

IFRS 4

Insurance Contracts

January 1, 2018

Fiscal year ending
December 2018

Adding the option to defer the adoption of IFRS 9 for entities engaging
mainly in insurance business

IFRS 9Financial Instruments

January 1, 2018

Fiscal year ending
December 2018

Limited changes to classification and measurement of financial assets,
and introduction of an expected credit loss impairment model

IFRS 12Disclosure of Interests
in Other Entities

January 1, 2017

Fiscal year ending
December 2017

Clarifying the scope for adoption of the Standard

IFRS 15

Revenue from Contracts
with Customers

January 1, 2018

Fiscal year ending
December 2018

Amendments to accounting treatment for recognizing revenue

IFRS 16

LeasesJanuary 1, 2019

Fiscal year ending
December 2019

Amendments to accounting treatment for lease arrangements

IAS 7

Statement of Cash Flows

January 1, 2017

Fiscal year ending
December 2017

Requiring disclosure of changes in liabilities arising from financing
activities

IAS 12

Income Taxes

January 1, 2017

Fiscal year ending
December 2017

Clarifying the requirements for the recognition of deferred tax assets
for unrealized losses

IAS 28Investments in
Associates and Joint
Ventures

January 1, 2018

Fiscal year ending
December 2018

Clarifying accounting treatment for investments in associates andjoint ventures

IAS 40Investment Property

January 1, 2018

Fiscal year ending
December 2018

Clarifying the rules for transfers of property to or from investment
property

IFRIC 22

Foreign Currency
Transactions andAdvance Consideration

January 1, 2018

Fiscal year ending
December 2018

Clarifying accounting treatment for the transactions that include­payment/receipt of advance consideration in a foreign currency

IFRS 10

Sale or Contribution of
Not yet determined
Assets between an
Investor and its Associateor Joint Venture

IAS 28

Not yet determined Amendments to accounting treatment for sale or contribution of assets
between an investor and its associate or joint venture

Japan Tobacco Inc. Annual Report 2016097

6. Operating Segments(1)

Outline of Reportable Segments

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

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.

(2)

Revenues and Performances ofReportable Segments

Revenues and performances of reportable segments from continuing operations are as follows. The Board of Directors assesses thesegment performance and determines resource allocation after
reviewing revenues and adjusted operating profit. Since financial
income, financial costs and income taxes are managed by theGroup head office, these income and expenses are excluded fromsegment performance. Transactions within the segments are based
mainly on prevailing market prices.

FY2015: Year ended December 31, 2015
Millions of yen
FY2015
Reportable Segments
Domestic
TobaccoInternational
TobaccoPharmaceuticals¥677,331 ¥1,317,178¥ 75,564

Processed
Food

Total

Other (Note 2)

Elimination

Consolidated

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

20,342¥165,843 ¥2,235,916 ¥ 16,968 ¥     — ¥2,252,884

46,738—¥697,672 ¥1,363,917¥ 75,564

37

67,117

9,858(76,976)—¥254,053 ¥  394,395¥   (2,315) ¥  2,728 ¥  648,860 ¥(21,802) ¥     (402) ¥  626,657¥ 43,668 ¥   76,007¥  4,603¥165,880 ¥2,303,034 ¥ 26,826 ¥(76,976) ¥2,252,884

Other items
Depreciation and amortization¥  6,476 ¥  130,754 ¥   2,673 ¥     (303) ¥  133,123

Impairment losses on other thanfinancial assets

1,168

4,393

187

56

5,805

3,757

(47)

9,516

Reversal of impairment losses
on other than financial assets

—

276

—

—

276

—

—

276

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

098

61

6,252

—

37

6,351

30

—

6,381

37,416

77,217

6,200

5,651

126,484

3,970

(703)

129,751

Japan Tobacco Inc. Annual Report 2016

Financial Information

FY2016: Year ended December 31, 2016
Millions of yen
FY2016
Reportable Segments
Domestic
TobaccoInternational
TobaccoPharmaceuticals

Processed
Food

Total

Other (Note 2)

Elimination

Consolidated

Revenue¥684,233 ¥1,199,190

External revenue (Note 3)

18,245Intersegment revenue
Total revenue
Segment profit (loss)Adjusted operating profit (Note 1)

30,280¥87,183 ¥164,078 ¥2,134,683 ¥   8,604 ¥     — ¥2,143,287—

30

48,554

9,653(58,207)—¥702,478 ¥1,229,470¥87,183 ¥164,108 ¥2,183,237 ¥ 18,257 ¥(58,207) ¥2,143,287¥260,205 ¥  336,227¥ 9,717 ¥  4,998 ¥  611,146 ¥(24,725) ¥    356 ¥  586,777¥ 57,994 ¥   69,129¥ 4,908 ¥  6,423 ¥  138,453 ¥   2,675 ¥   (335) ¥  140,794

Other items
Depreciation and amortization
Impairment losses on other thanfinancial assets

54

615

—

16

685

554

—

1,239

Reversal of impairment losses
on other than financial assets

—

27

—

—

27

—

—

27

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

33

6,327

—

(4)

6,355

134

—

6,489

29,82070,592

3,823

5,707

109,942

3,902

(847)

112,998

Reconciliation from “Adjusted operating profit” to “Profit before income taxes”
FY2015: Year ended December 31, 2015
Millions of yen
FY2015
Reportable Segments
Domestic
TobaccoInternational
TobaccoPharmaceuticals

Processed
Food¥254,053¥394,395¥(2,315)¥2,728

Amortization cost of acquired­intangibles arising frombusiness acquisitions—(31,875)——(31,875)

Adjustment items (income) (Note 4)

97

3,548

—

464

4,108

(4,946)(19,148)—(9)(24,103)¥249,204¥346,921¥(2,315)¥3,182Adjusted operating profit(Note 1)

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

Total

Other (Note 2)

Elimination

Consolidated¥648,860 ¥(21,802)¥(402)¥626,657——(31,875)

6,238—

10,346(15,798)—(39,900)¥596,992 ¥(31,361)¥(402)¥565,229

Financial income

15,016

Financial costs(15,132)

Profit before income taxes¥565,113

Japan Tobacco Inc. Annual Report 2016099

FY2016: Year ended December 31, 2016
Millions of yen
FY2016
Reportable Segments

Adjusted operating profit(Note 1)

Amortization cost of acquired­intangibles arising frombusiness acquisitions

Domestic
TobaccoInternational
TobaccoPharmaceuticals

Processed
Food¥260,205¥336,227¥9,717¥4,998

Total

Other (Note 2)

Elimination

Consolidated¥611,146 ¥(24,725)¥356¥586,777(46,767)(16,245)(30,522)——(46,767)——

Adjustment items (income) (Note 4)

282

34

—

2

318

64,894—65,212Adjustment items (costs) (Note 4)(137)(3,960)—(8)(4,105)(7,789)—(11,894)¥244,106¥301,779¥9,717¥4,991¥560,592 ¥ 32,380¥356¥593,329

Operating profit (loss)
Financial income

6,618

Financial costs(21,710)¥578,237

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) are excluded 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 the head office.
(Note 3)	Core revenue as part of the “Domestic Tobacco Business” and the “International Tobacco Business” is as follows:

Millions of yen
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)

Domestic Tobacco¥  642,240¥  649,744

International Tobacco

1,252,496

1,138,805(Note 4) “Adjustment items (income)” include restructuring income of gains on sale of real estate.
	“Adjustment items (costs)” include restructuring costs of the closing down of a factory.
The breakdown of restructuring income is described in “26. Other Operating Income.” Restructuring costs included in “Cost of sales” were ¥57 million for the year ended
December 31, 2015. Restructuring costs included in “Selling, general and administrative expenses” were ¥39,843 million and ¥11,894 million for the years ended December 31,
2015 and 2016, respectively. The breakdown of restructuring costs in “Selling, general and administrative expenses” is described in “27. Selling, General and Administrative
Expenses.”
The breakdown of “Adjustment items (costs)” is as follows:

Millions of yen
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)

Restructuring costs¥39,900¥11,894

Adjustment items (costs)¥39,900¥11,894

Restructuring costs for the year ended December 31, 2015 mainly relate to rationalization of distribution system and factory platform in some markets in the “International
Tobacco Business” and disposal of real estate. Restructuring costs for the year ended December 31, 2016 mainly relate to disposal of real estate.

(3)

Geographic Information

The regional breakdown of non-current assets and external revenue from continuing operations as of each fiscal year end is as follows:
Non-current Assets
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)Japan¥  461,265¥  833,543

Overseas2,005,979

1,891,433

Consolidated¥2,467,244¥2,724,975(Note) Non-current assets, exclusive of financial instruments, deferred tax assets and retirement benefits assets, are segmented by the location of the assets.

100

Japan Tobacco Inc. Annual Report 2016

Financial Information

External Revenue from Continuing Operations
Millions of yen
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)Japan¥  894,710¥  889,742

Overseas

1,358,174

1,253,545

Consolidated¥2,252,884¥2,143,287(Note) Revenue is segmented by the sales destination.

(4)

Major Customers Information

The “International Tobacco Business” of the Group sells products to the Megapolis Group that engages in distribution and wholesale­business in Russia and other countries. The external revenues from the Megapolis Group were ¥293,541 million (13.0% of consolidated
revenue) for the year ended December 31, 2015 and ¥235,932 million (11.0% of consolidated revenue) for the year ended December 31,
2016.

7. Cash and Cash Equivalents
The breakdown of “Cash and cash equivalents” as of each fiscal year end is as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)

Cash and deposits¥399,265¥234,957

Short-term investments

127,499

59,200¥526,765¥294,157

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

8. Trade and Other Receivables
The breakdown of “Trade and other receivables” as of each fiscal year end is as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥392,882¥386,708

Other

15,316

11,742

Allowance for doubtful accounts(1,812)(1,515)¥406,387¥396,934

Note and account receivables

Total

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. Annual Report 2016101

9. Inventories
The breakdown of “Inventories” as of each fiscal year end is as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)

Merchandise and finished goods (Note 1)¥162,208¥176,702

Leaf tobacco (Note 2)

344,623

324,802

Other

56,98957,343

Total¥563,820¥558,846(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 at the end of each fiscal year is included in inventories and presented as “Merchandise andfinished goods.”(Note 2) Leaf tobacco includes those products that will be used after 12 months from the end of each fiscal year, but they are included in inventories since they are held within the normal
operating cycle.

10. Other Financial Assets(1) The breakdown of “Other financial assets” as of each fiscal year end is as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)

Derivative assets¥  7,106¥ 11,769

Equity securities

72,79565,548Debt securities

6,600

4,572

Time deposits

994

965

39,61438,345

Other
Allowance for doubtful accounts
Total
Current assets
Non-current assets
Total(7,533)(6,920)¥119,576¥114,279¥ 17,849¥ 14,921

101,727

99,358¥119,576¥114,279

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 ofeach fiscal year end are as follows:
Millions of yen
Company name

FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥30,926¥28,010Seven & i Holdings Co., Ltd.

4,747

3,808

DOUTOR•NICHIRES Holdings Co., Ltd.

2,496

2,872

Mizuho Financial Group, Inc.

3,114

2,683

Mitsubishi UFJ Financial Group, Inc.

2,668

2,165

Mitsubishi Shokuhin Co., Ltd.

1,794

2,089

KT&G Corporation

102

Japan Tobacco Inc. Annual Report 2016

Financial Information

Equity securities are held mainly for strengthening relationships with investees. Therefore, they are designated as financial assets­measured at fair value through other comprehensive income.
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 eachfiscal year is as follows:
Millions of yen
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)

Fair Value¥ 800¥1,532

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

(232)

(360)

(Note) T he 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.

11. Other Current Assets
The breakdown of “Other current assets” as of each fiscal year end is as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥219,942¥274,157

Prepaid expenses

14,144

15,743

Consumption tax receivables

17,125

18,575Other

29,282

31,836

Total¥280,493¥340,312

Prepaid tobacco excise taxes

12. Non-current Assets Held-for-Sale
The breakdown of “Non-current assets held-for-sale” as of each fiscal year end is as follows:
Breakdown of Major Assets
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)

Property, plant and equipment¥  105¥309

Investment property

2,799

512

¥2,904¥821

Non-current assets held-for-sale

Total“Non-current assets held-for-sale” are mainly rental properties
and idle properties which are currently actively marketed for sale.
With regard to such assets and assets sold, impairment losses
from continuing operations of ¥47 million are ­recognized in“Selling, general and administrative expenses” in the consolidated
statement of income for the year ended December 31, 2015.

Japan Tobacco Inc. Annual Report 2016103

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
Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total

As of January 1, 2015

¥325,895¥292,404¥ 66,622¥ 71,206¥756,127

Individual acquisition

27,48329,903

20,60142,433

120,420

560

3,538

69

1

4,168

(19,439)

(90)

(192)

—

(19,721)

Carrying Amount

Acquisition through business combinations
Transfer to investment property
Transfer to non-current assets held-for-sale

(193)

(415)

(0)

—

(608)

Depreciation(16,380)(54,478)(19,237)—(90,094)

Impairment losses(1,988)(2,826)(3,133)(56)(8,003)

—

229

1

46

276

(2,025)(4,103)(3,836)(189)(10,154)

Reversal of impairment losses
Sale or disposal
Decrease resulting from transfer of subsidiaries(5,617)(4,732)(14,059)—(24,407)

Exchange differences on translation of foreign operations(14,886)(23,311)(2,475)(3,964)(44,635)

Other

46,13013,041

1,994(62,667)(1,503)As of December 31, 2015

339,542

249,160

46,35546,808681,865

Individual acquisition

13,05330,787

12,39043,75899,989Acquisition through business combinations

1,066

451

241

3

1,762

Transfer to investment property(5,702)

(9)

(16)

—

(5,726)

(180)

—

(0)

—

(180)

(15,709)(47,121)(14,670)—(77,500)

Impairment losses

(24)

(537)

(3)

(10)

(575)

Reversal of impairment losses

—

8

19

—

27

(507)

(3,646)

(736)

(162)

(5,050)(18,604)

Transfer to non-current assets held-for-sale
Depreciation

Sale or disposal
Exchange differences on translation of foreign operations(4,722)(8,864)(766)(4,252)

Other

17,42025,963

1,377(39,932)

4,827¥344,237¥246,192¥ 44,193¥ 46,213¥680,835

Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total

As of January 1, 2015

¥661,172¥804,276¥188,732¥71,206¥1,725,386

As of December 31, 2015

633,789

706,561

144,618

46,808

1,531,776

As of December 31, 2016

643,073

693,378

147,223

46,213

1,529,888

Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total¥335,277¥511,872¥122,110¥     —¥ 969,259

As of December 31, 2016

Millions of yen
Acquisition Cost

Millions of yen
Accumulated Depreciation and Accumulated Impairment Losses

As of January 1, 2015
As of December 31, 2015

294,247

457,401

98,263—849,910

As of December 31, 2016

298,836

447,187

103,030—

849,053

104

Japan Tobacco Inc. Annual Report 2016

Financial Information

The carrying amount of property, plant and equipment as of each fiscal year end includes the carrying amount of the following leased assets:
Millions of yen
Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Total¥6,910¥5,250¥6,766¥18,926

As of January 1, 2015
As of December 31, 2015

6,801

1,853

9

8,662

As of December 31, 2016

6,538

1,201

7

7,746

(2)

Impairment Losses

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 from continuing operations of ¥5,185 million for the year ended December 31, 2015, and¥575 million for the year ended December 31, 2016 in “Selling,
general and administrative expenses” in the consolidated statementof income.
Impairment losses recognized in the year ended December 31,
2015 represent the losses incurred to reduce the carrying amounts

to the recoverable amounts of the buildings, structures, machineryand vehicles due to decision of closing down of a factory.
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,
2016 represent the losses incurred to reduce the carrying amounts
to the recoverable amounts of the buildings, structures, machineryand vehicles due to decision of individual selection for demolition.
The recoverable amounts of these assets are calculated mainlyby their values in use, which are set at “zero.”

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, 2015
Individual acquisition

Goodwill

Trademarks

Software

Other

Total

¥1,539,376¥301,960¥ 35,856¥27,096¥1,904,288
15,051

—

794

7,232

7,024

65,252

14,9678

8,740

88,967

Amortization (Note)—(30,216)(12,852)(5,040)(48,107)

Impairment losses

—

—

(268)

(362)

(631)

Sale or disposal

—

(0)

(316)

(140)

(456)

(882)

(0)

(193)

(3,022)(4,097)(174,516)(20,182)

(172)

(206)

(195,076)

57

1,505

4,124

(3,858)

1,827

1,429,287

268,828

33,41830,232

1,761,765

Acquisition through business combinations

Decrease resulting from transfer of subsidiaries
Exchange differences on translation of foreign operations
Other
As of December 31, 2015

—

222

5,597

6,852

12,670289,720

180,29782,243

472,268

Amortization (Note)—(44,154)(12,795)(5,696)(62,645)

Impairment losses

—

—

(102)

—

(102)

Sale or disposal

—

—

(90)

(40)

(130)

(114,709)(40,315)

(406)

(280)

(155,710)

Individual acquisition
Acquisition through business combinations

Exchange differences on translation of foreign operations
Other
As of December 31, 2016

(2,312)17

1,448(1,314)(2,161)¥1,601,987¥364,896¥ 27,078¥31,996¥2,025,957(Note) The amortization of intangible assets is included in “Cost of sales” and “Selling, general and administrative expenses” in the consolidated statement of income. The amortization of
intangible assets from discontinued operations for the year ended December 31, 2015 is included in “Profit for the period from discontinued operations.”

Japan Tobacco Inc. Annual Report 2016105

Millions of yen
Acquisition Cost

As of January 1, 2015

Goodwill

Trademarks

Software

Other

Total

¥1,539,376¥845,499¥132,309¥92,280¥2,609,465

As of December 31, 2015

1,429,287

818,982

135,951

92,0622,476,282

As of December 31, 2016

1,601,987

928,876

137,761

96,994

2,765,618

Goodwill

Trademarks

Software

Other

Total

¥        —¥543,539¥ 96,453¥65,184¥705,177

Millions of yen
Accumulated Amortization and Accumulated Impairment Losses

As of January 1, 2015
As of December 31, 2015—

550,154

102,533

61,830714,517

As of December 31, 2016—

563,981

110,683

64,997

739,661(2)

Material Goodwill and Intangible Assets

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
as of December 31, 2015 and 2016 were ¥1,387,593 million and¥1,310,727 million, respectively. The carrying amounts of trademarks as of December 31, 2015 and 2016 were ¥266,521 millionand ¥216,617 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 acquisitionof Natural American Spirit’s non-U.S. tobacco operations in 2016
and the carrying amounts are ¥265,891 million for goodwill and¥148,260 million for trademark as of December 31, 2016.
The trademarks are amortized using the straight-line method
and the remaining amortization period is mainly from 9 to 10 years.

(3)

Impairment Test for Goodwill

For the year ended December 31, 2016, the carrying amount of
the majority of goodwill is allocated to the domestic tobacco cashgenerating unit of ¥265,891 million, the international tobacco cashgenerating unit of ¥1,310,727 million (¥1,387,593 million for theyear ended December 31, 2015) and the processed food cashgenerating unit of ¥25,368 million (¥25,368 million for the year
ended December 31, 2015). Details of the result of impairment
tests are as follows:
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, the Group conservatively decreases a growth rate from 2.9% in the fourth year to 0%
in the ninth year gradually, and calculates the value in use from thetenth year by using the same cash flows as the ninth year.
The discount rate before taxes is 4.6%. The value in use sufficiently exceeds the carrying amount of the cash-generating unit.
Therefore, even in cases where the discount rate and growth rateused 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.

106

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 2.8% in the fourth year (FY2015: 3.2%) to 1.4%
in the ninth year (FY2015: 3.8%), 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 9.7% (FY2015: 11.7%). The
value in use sufficiently exceeds the carrying amount of the cashgenerating unit. Therefore, even in cases where the discount rate
and growth rate used in calculating the value in use fluctuate withinreasonable ranges, the Group assumes that the value in use will
not become less than the carrying amount.
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 1.6% in the fourth year (FY2015: 2.8%) to 1.0%
in the ninth year (FY2015: 1.1%), and the same growth rate as theninth year issued from the tenth year as a continued growth rate
for inflation.
The discount rate before taxes is 3.9% (FY2015: 4.1%). The
value in use sufficiently exceeds the carrying amount of the cashgenerating unit. Therefore, even in cases where the discount rate
and growth rate used in calculating the value in use fluctuate withinreasonable ranges, the Group assumes that the value in use will
not become less than the carrying amount.

(4)

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 from continuing operations of ¥311 million for the year ended December 31, 2015, and¥102 million for the year ended December 31, 2016 in “Selling,
general and administrative expenses” in the consolidated statementof income.

Japan Tobacco Inc. Annual Report 2016

Financial Information

15. Lease Transactions
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)

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 each fiscal year end are as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)

Not later than 1 year¥   702¥   589

Future financial costs

149

218

Present value

553

372

Total of future minimum lease payments

2,201

1,696

Future financial costs

1,062

1,018

Present value

1,140

678

Total of future minimum lease payments

10,066

9,489

Future financial costs

3,385

2,838

Present value

6,680

6,652

Total of future minimum lease payments

12,969

11,775

Future financial costs

4,596

4,074

Present value

8,373

7,701

Total of future minimum lease payments

Later than 1 year and not later than five years

Later than 5 years

Total

(2)

Future Minimum Lease Payments under Non-cancellable Operating Leases

The total of future minimum lease payments under non-cancellable operating leases as of each fiscal year end is as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥ 6,446¥ 7,287

Later than 1 year and not later than 5 years

8,968

8,382

Later than 5 years

7,419

7,871

¥22,833¥23,539

Not later than 1 year

Total

(3)

Total of Minimum Lease Payments and Contingent Rents

The total of minimum lease payments and contingent rents of operating lease contracts recognized as an expense from continuing­operations for each fiscal year is as follows:
Millions of yen

Total of minimum lease payments
Contingent rents

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥11,621¥8,099

1,057

1,147

Japan Tobacco Inc. Annual Report 2016107

16. Investment Property(1)

Schedule of Investment Property

The schedule of the carrying amount of “Investment property” for each fiscal year is as follows:
Millions of yen
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥17,870¥23,614

Balance at the beginning of the period

556

338

Transfer from property, plant and equipment

19,721

5,726

Transfer to non-current assets held-for-sale(3,560)(3,130)Transfer to property, plant and equipment(731)(1,799)Depreciation

(856)

(649)

Expenditure after acquisition

Impairment losses(3,973)(562)

Sale or disposal(5,399)(1,904)

Exchange differences on translation of foreign operations

(8)

(5)

Other

(6)

(3,446)

Balance at the end of the period¥23,614¥18,184

Acquisition cost at the beginning of the period¥46,084¥69,106

Accumulated depreciation and accumulated impairment losses
at the beginning of the period

28,21445,493Acquisition cost at the end of the period

69,106

51,245

Accumulated depreciation and accumulated impairment losses
at the end of the period

45,49333,061

The investment properties as of December 31, 2016 are mainly idle properties.

(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 each fiscal year end is as follows:
Millions of yen
FY2015 (As of December 31, 2015)

Investment property

Level 1

Level 2

Level 3Total¥     —

¥64,829¥3,526¥68,355

Millions of yen
FY2016 (As of December 31, 2016)

Investment property

Level 1

Level 2

Level 3Total¥     —

¥45,763¥1,570¥47,334

The carrying amount of investment property as of each fiscal year end is as follows:
Millions of yen

Investment property

108

Japan Tobacco Inc. Annual Report 2016

FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥23,614¥18,184

Financial Information(3)

Impairment Losses

the carrying amount of land and buildings as idle properties wereindividually selected for demolition. The recoverable amount iscalculated based on value in use basis, which is zero for buildings
due to the decision of demolition, and the recoverable amount ofother properties is calculated by the fair value less costs of disposal.
Impairment losses recognized for the year ended December 31,
2016 represent the difference between the recoverable amount andthe carrying amount of land and buildings as idle properties wereindividually selected for demolition. The recoverable amount iscalculated based on value in use basis, which is zero for buildings
due to the decision of demolition, and the recoverable amount ofother 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 from continuing operations of ¥3,973 million for the year ended December 31, 2015, and¥562 million for the year ended December 31, 2016 in “Selling,
general and administrative expenses” in the consolidated statementof income.
Impairment losses recognized for the year ended December 31,
2015 represent the difference between the recoverable amount and17. Income Taxes(1)

Deferred Tax Assets and Deferred Tax Liabilities

The breakdown and schedule of “Deferred tax assets” and “Deferred tax liabilities” by major causes of their occurrence for each fiscal year
are as follows:
FY2015: Year ended December 31, 2015
Millions of yen

Deferred Tax Assets

Fixed assets

As ofJanuary 1, 2015

Recognized in
profit or loss

Recognized inother comprehensive income

Other (Note 1)

As ofDecember 31,
2015¥ 40,392¥ 45,228¥ (4,868)¥    —¥     32

Retirement benefits

124,330(25,886)(3,495)(3,080)91,870Carryforward of unused tax losses

63,0501,479—(6,946)

57,582

85,684(1,513)(4,860)(2,472)

76,839318,292(30,788)(8,355)(12,466)

266,683(Note 2)

Other
Subtotal
Valuation allowance(66,478)(4,403)

(611)

5,704

(65,788)¥251,814¥(35,191)¥(8,966)¥ (6,762)¥200,895

Deferred Tax Liabilities

As ofJanuary 1, 2015

Recognized in
profit or loss

Recognized inother comprehensive income

Other (Note 1)

As ofDecember 31,
2015

Fixed assets (Note 2)¥(115,753)¥24,602¥     —

¥3,236¥ (87,915)(7,334)

(476)

(502)

615

(7,696)

Other(106,722)

(913)

2,147

4,794

(100,693)

Total¥(229,809)¥23,214¥1,646¥8,645¥(196,305)

Total

Millions of yen

Retirement benefits

Japan Tobacco Inc. Annual Report 2016109

FY2016: Year ended December 31, 2016
Millions of yen
As ofDecember 31,
2016

As of
January 1, 2016

Recognized in
profit or loss

Recognized inother comprehensive income

Fixed assets (Note 2)¥ 40,392¥(12,218)¥    —¥108,540

Retirement benefits

91,870(11,902)

1,441(1,468)79,940Carryforward of unused tax losses

57,582(2,029)—(2,419)53,13576,839(1,372)

4,192(3,688)75,971

266,683(27,522)

5,633

100,966

345,760

Deferred Tax Assets

Other
Subtotal

Other(Note 1)

¥136,713(65,788)

322

1,914

2,320

(61,231)¥200,895¥(27,200)¥7,547¥103,285¥284,528

Deferred Tax Liabilities

As ofJanuary 1, 2016

Recognized in
profit or loss

Recognized inother comprehensive income

Other (Note 1)

As ofDecember 31,
2016

Fixed assets (Note 2)¥ (87,915)¥11,097¥      —

¥ 3,013¥ (73,805)(7,696)

234

1,824

1,132

(4,506)

Other(100,693)(7,467)(9,030)5,931(111,260)

Total¥(196,305)¥ 3,864¥(7,206)¥10,075¥(189,572)

Valuation allowance
Total

Millions of yen

Retirement benefits(Note 1) “Other” includes exchange differences on translation of foreign operations and acquisition through business combinations. The outline of the major business combination and thedeferred tax assets recognized in the year ended December 31, 2016 are described in “37. 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 ¥47,738 million (including ¥14,609
million, for which the carryforward expires after five years) as of(2)

December 31, 2015, and ¥44,484 million (including ¥12,644 million,
for which the carryforward expires after five years) as of December
31, 2016. Tax credits, for which the deferred tax assets are notrecognized, were ¥3,953 million (including ¥3,669 million, for which
the carryforward expires after five years) as of December 31, 2015,and ¥4,951 million (including ¥4,541 million, for which the carryforward expires after five years) as of December 31, 2016.

Income Taxes

The breakdown of “Income taxes” from continuing operations for each fiscal year is as follows:
Millions of yen
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)

Current income taxes¥150,774¥129,128

Deferred income taxes

11,612

23,336

Total income taxes¥162,386¥152,464

Deferred income taxes decreased by ¥1,358 million and increased by ¥167 million for the years ended December 31, 2015 and 2016,
respectively, due to the effect of changes in tax rates in Japan and other countries.

110Japan Tobacco Inc. Annual Report 2016

Financial Information(3)

Reconciliation of the Effective Tax Rate

The breakdown of major items that caused differences between the effective statutory tax rate and the average actual tax rate in continuing
operations for each fiscal year is as follows:
The Company is subject mainly to corporate tax, inhabitant tax and enterprise tax, and the effective statutory tax rate is calculated basedon these taxes. The corporate tax rate and other tax rates were changed for the year ended December 31, 2016 and the effective statutory
tax rates were 35.41% and 32.78% for the years ended December 31, 2015 and 2016, respectively. Foreign subsidiaries are subject toincome taxes at their locations.
%
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)

35.41

32.78

(10.20)(7.62)

Effective statutory tax rate
Different tax rates applied to foreign subsidiaries
Non-deductible expenses

0.53

1.31

Valuation allowance

1.74(0.03)

1.26(0.08)

28.74

26.37

Other
Average actual tax rate

18. Trade and Other Payables
The breakdown of “Trade and other payables” as of each fiscal year end is as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)

Accounts payable¥178,709¥188,285

Other payables

104,193

85,646

Other

90,130104,002

Total¥373,032¥377,933

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

The breakdown of “Bonds and borrowings” and “Other financial liabilities” as of each fiscal year end is as follows:
Millions of yen%

FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)

Average interest
rate (Note 1)Due¥  5,595¥ 12,516——

30,832

187,949

1.99—

Current portion of long-term borrowings

148

572

1.63

—

Current portion of bonds (Note 2)—

20,000——Long-term borrowings

866

877

3.34

Bonds (Note 2)

215,072

338,158

—

—

Other

11,007

9,516

—

—

Total

¥263,520¥569,589

Current liabilities¥ 37,439¥221,544

Non-current liabilities

226,080

348,045¥263,520¥569,589

Derivative liabilities
Short-term borrowings

Total

2018–2028(Note 1) The average interest rate is calculated using the interest rate and outstanding balance as of December 31, 2016.

Japan Tobacco Inc. Annual Report 2016111

(Note 2) The summary of the issuing conditions of the bonds is as follows:

Company

Name of bondDate of issuance

Millions of yen%

FY2015FY2016

Interest
rate(As of December 31, 2015)(As of December 31, 2016)

Collateral

Date of maturity

Japan Tobacco Inc. 7th domestic
straight bondDecember 9, 2010

¥ 20,000¥ 20,000(20,000)

0.84

Yes

December 8, 2017

Japan Tobacco Inc. 8th domestic
straight bondDecember 9, 2010

20,00020,0001.30

Yes

December 9, 2020

Japan Tobacco Inc. 9th domestic
straight bondJuly 15, 2015

60,00060,0000.22

Yes

July 15, 2020

Japan Tobacco Inc. 10th domestic
straight bondJuly 15, 2015

30,00030,0000.36

Yes

July 15, 2022

Japan Tobacco Inc. 11th domestic
straight bondJuly 15, 2015

25,00025,0000.60

Yes

July 15, 2025

Japan Tobacco Inc. Straight bondin USD

July 23, 2013

60,072[USD 500 mil.]

58,106[USD 500 mil.]

2.10

Yes

July 23, 2018

Japan Tobacco Inc. Straight bondin USD

April 13, 2016—87,109[USD 750 mil.]

2.00

Yes

April 13, 2021

Japan Tobacco Inc. Straight bondin USD

April 13, 2016—

57,943[USD 500 mil.]

2.80

Yes

April 13, 2026

¥215,072(—)¥358,158(20,000)

Total(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 Group on the bonds and borrowings.

(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 ¥70 million and ¥66 million as of December 31, 2015 and 2016, respectively. Theircorresponding debts are ¥82 million and ¥53 million as of December 31, 2015 and 2016, respectively.

112

Japan Tobacco Inc. Annual Report 2016

Financial Information

20. Provisions
The breakdown and schedule of “Provisions” for each fiscal year are as follows:
FY2015: Year ended December 31, 2015
Millions of yen
Asset retirement
provisions

Restructuringprovisions

Provisions forsales rebates

Other
provisions

Total¥2,742¥ 22,954¥ 3,994¥ 4,935¥ 34,624

Provisions

498

15,0393,323

742

19,603

Interest cost associated with passage of time

36

—

—

—

36

Provisions used(100)

(13,416)(3,941)(1,149)(18,606)

Provisions reversed(447)(1,161)(53)(3,299)(4,960)—(2,150)—(40)(2,190)

As of December 31, 2015

¥2,728¥ 21,267¥ 3,323¥ 1,189¥ 28,507

Current liabilities¥      —

¥ 15,058¥ 3,323¥   915¥ 19,297

Non-current liabilities

2,728

6,209

—

273

9,210

¥2,728¥ 21,267¥ 3,323¥ 1,189¥ 28,507

Asset retirement
provisions

Restructuringprovisions

Provisions forsales rebates

Other
provisions

Total¥2,728¥ 21,267¥ 3,323¥1,189¥ 28,507

Provisions

685

4,774

3,459

450

9,368

Interest cost associated with passage of time

31

—

—

—

31

Provisions used

(85)

(13,414)(3,323)(430)(17,253)

Provisions reversed

(10)

(748)

—

(153)

(911)

Exchange differences on translation of foreign operations—(2,755)—(35)(2,790)

As of December 31, 2016

¥3,348¥   9,124¥ 3,459¥1,021¥ 16,952

Current liabilities¥   26¥   8,287¥ 3,459¥  757¥ 12,529

Non-current liabilities

3,322

837

—

264

4,423

¥3,348¥   9,124¥ 3,459¥1,021¥ 16,952

As of January 1, 2015

Exchange differences on translation of foreign operations

Total
FY2016: Year ended December 31, 2016

Millions of yen

As of January 1, 2016

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. 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. Annual Report 2016113

21. Other Liabilities
The breakdown of “Other current liabilities” and “Other non-current liabilities” as of each fiscal year end is as follows:
Millions of yen

Tobacco excise tax payables

FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥334,557¥306,816

Tobacco special excise tax payables

14,54813,882

Tobacco local excise tax payables

183,492

180,799

Consumption tax payables

103,933

105,497

Bonus to employees

34,01433,828

Employees’ unused paid vacations liabilities

18,827

18,832

Other

154,348

132,195

Total¥843,719¥791,850

Current liabilities¥729,761¥689,629

Non-current liabilities

113,958

102,221¥843,719¥791,850

Total

22. Employee Benefits(1)

Post-employment Benefits

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 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.

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.
(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.

114

Japan Tobacco Inc. Annual Report 2016

Financial Information

A. Schedule of Defined Benefit Obligations
The schedule of the defined benefit obligations is as follows:
Millions of yen

As of January 1, 2015 (Notes 1, 2)
Current service cost
Past service cost and gains and losses on settlement
Interest expense
Contributions by plan participants

Japan (Note 3)

Overseas

Total¥292,138¥552,006¥844,144

11,802

11,21623,018

310

389

699

1,923

15,337

17,261

—

1,697

1,697

Remeasurement gains and losses:
Actuarial gains and losses arising from changes in demographic assumptions

(634)

(327)

(961)

Actuarial gains and losses arising from changes in financial assumptions(105)(2,266)(2,371)

(47)

346

299

Benefits paid

Actuarial gains and losses arising from experience adjustments(25,941)(20,823)(46,764)

Decrease resulting from transfer of subsidiaries(13,277)—(13,277)—(38,030)(38,030)42
266,213(466)
519,079(423)
785,292

11,324

8,777

20,100—(5,362)(5,362)

1,790

12,644

14,434

—

1,300

1,300

Exchange differences on translation of foreign operations
Other
As of December 31, 2015 (Notes 1, 2)
Current service cost
Past service cost and gains and losses on settlement
Interest expense
Contributions by plan participantsRemeasurement gains and losses:
Actuarial gains and losses arising from changes in demographic assumptions(1,158)

7,703

6,545

Actuarial gains and losses arising from changes in financial assumptions

4,222

59,52963,751(1,264)(527)(1,791)(20,953)(23,963)(44,916)

Exchange differences on translation of foreign operations—(62,630)(62,630)

Other

(51)

324

273

¥260,122¥516,875¥776,997

Actuarial gains and losses arising from experience adjustments
Benefits paid

As of December 31, 2016 (Notes 1, 2)(Note 1) The Group’s weighted-average duration of the defined benefit obligations is 7.7 years for Japan and 16.2 years for overseas (FY2015: 7.7 years for Japan and 15.3 years foroverseas).
(Note 2) The Group’s breakdown of the defined benefit obligation by plan participant is as follows:

Millions of yen
FY2016 (As of December 31, 2016)

FY2015 (As of December 31, 2015)
Japan

Overseas

Total

Japan

Overseas

Total

Active members¥165,996¥208,743¥374,739¥165,390¥191,202¥356,592

Deferred members

16,23551,014

67,24915,00670,98085,986

Pensioners

83,982

259,322

343,304

79,726

254,693

334,418

Total¥266,213¥519,079¥785,292¥260,122¥516,875¥776,997(Note 3) The schedule of mutual pension benefits obligations included in the category of Japan is as follows:

Millions of yen

Balance at the beginning of the period

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥59,191¥52,710

Interest expense

296

264

Remeasurement gains and losses

276

1,600

Benefits paid
Balance at the end of the period(7,052)(5,967)¥52,710¥48,607

Japan Tobacco Inc. Annual Report 2016115

B. Schedule of Plan Assets
The schedule of the plan assets is as follows:
Millions of yen

As of January 1, 2015
Interest income

Japan

Overseas

Total¥111,515¥416,117¥527,631

765

12,517

13,282Remeasurement gains and losses:
Return on plan assets (excluding amounts included in interest income)Contributions by the employer (Notes 1, 2)
Contributions by plan participants

1,605(4,724)(3,119)3,754

10,536

14,290

—

1,697

1,697

Benefits paid

(9,162)(17,091)(26,253)

Decrease resulting from transfer of subsidiaries(11,670)—(11,670)

Exchange differences on translation of foreign operations—(24,708)(24,708)

Other

—

(466)

(466)

96,806

393,878490,684

679

10,263

10,942As of December 31, 2015
Interest income
Remeasurement gains and losses:

906

42,132

43,037

2,099

7,015

9,113

—

1,300

1,300

(6,918)(20,311)(27,229)

Exchange differences on translation of foreign operations—(58,376)(58,376)

Other—(2,206)(2,206)¥ 93,571¥373,696¥467,267

Return on plan assets (excluding amounts included in interest income)Contributions by the employer (Notes 1, 2)
Contributions by plan participants
Benefits paid

As of December 31, 2016

(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 ¥6,941 million in the year ending December 31, 2017.

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 each fiscal year end is as follows:
FY2015: As of December 31, 2015
Millions of yen
FY2015Japan

Overseas

Total¥ 96,583¥ 387,804¥ 484,387(96,806)(393,878)(490,684)(223)(6,074)(6,297)

Present value of the unfunded defined benefit obligations

169,629

131,275

300,905

Net defined benefit liabilities (assets) recognized in the consolidated statement offinancial position¥169,406¥ 125,201¥ 294,608

Retirement benefit liabilities¥172,385¥ 161,176¥ 333,562(2,979)(35,975)(38,954)¥169,406¥ 125,201¥ 294,608

Present value of the funded defined benefit obligations
Fair value of the plan assets
Subtotal

Retirement benefit assets
Net defined benefit liabilities (assets) recognized in the consolidated statement offinancial position

116

Japan Tobacco Inc. Annual Report 2016

Financial Information

FY2016: As of December 31, 2016
Millions of yen
FY2016
Japan

Overseas

Total¥ 92,436¥ 383,213¥ 475,648(93,571)(373,696)(467,267)(1,136)

9,517

8,381

Present value of the unfunded defined benefit obligations

167,686

133,662

301,348

Net defined benefit liabilities (assets) recognized in the consolidated statement offinancial position¥166,550¥ 143,179¥ 309,729

Retirement benefit liabilities¥170,804¥ 162,606¥ 333,410(4,254)(19,426)(23,680)¥166,550¥ 143,179¥ 309,729

Present value of the funded defined benefit obligations
Fair value of the plan assets
Subtotal

Retirement benefit assets
Net defined benefit liabilities (assets) recognized in the consolidated statement offinancial position
D. Major Breakdown of Plan Assets
The breakdown of plan assets by major category as of each fiscal year end is as follows:Japan

Millions of yen
FY2016 (As of December 31, 2016)

FY2015 (As of December 31, 2015)
Market price inan active market

Cash and cash equivalents

Market price inan active market

QuotedUnquoted

Total

QuotedUnquoted

Total¥23,002¥     —

¥23,002¥18,233¥     —

¥18,233

3,383

—

3,383

3,579

—

3,579

Japan

2,251

—

2,251

2,381

—

2,381

Overseas

1,132

—

1,132

1,198

—

1,198

10,395—

10,395

11,000—11,000

Japan

9,142

—

9,142

9,758

—

9,758

Overseas

1,252

—

1,252

1,242

—

1,242

—

59,45459,454—60,15560,155Equity instruments

Debt instruments

General account of life insurance companies (Note)
Other

—

572

572

—

603

603

Total

¥36,779¥60,027¥96,806¥32,813¥60,759¥93,571

Overseas
Millions of yen
FY2016 (As of December 31, 2016)

FY2015 (As of December 31, 2015)
Market price inan active market

Market price inan active market

QuotedUnquoted

Total

QuotedUnquoted

Total

Cash and cash equivalents¥ 12,084¥      —

¥ 12,084¥  5,397¥      —¥  5,397

Equity instruments

122,613—

122,613

123,669—

123,669

United Kingdom

29,719—29,71930,212—30,212

North America

35,974—35,97438,532—

38,532

Other

56,920—56,92054,925—54,925

Debt instruments

220,473

4,968

225,441

207,393

5,035

212,427

United Kingdom

143,809—

143,809

137,158—

137,158

North America

48,969—48,96947,524—47,524

Other

27,695

4,968

32,66322,711

5,035

27,746

Real estate

9,266

464

9,731

9,026

441

9,468

Other

18,105

5,905

24,00915,8086,927

22,735

Total¥382,541¥11,337¥393,878¥361,293¥12,403¥373,696

Japan Tobacco Inc. Annual Report 2016117

TotalMillions of yen
FY2016 (As of December 31, 2016)

FY2015 (As of December 31, 2015)
Market price inan active market

Market price inan active market

QuotedUnquoted

Total

QuotedUnquoted

Total

Cash and cash equivalents¥ 35,086¥      —

¥ 35,086¥ 23,630¥      —

¥ 23,630

Equity instruments

125,996—

125,996

127,248—

127,248

Debt instruments

230,868

4,968

235,836

218,393

5,035

223,428

9,266

464

9,731

9,026

441

9,468

—

59,45459,454—60,15560,155

Real estate
General account of life insurance companies (Note)
Other

18,105

6,477

24,58215,8087,530

23,338

Total¥419,320¥71,364¥490,684¥394,106¥73,161¥467,267(Note) A certain interest rate and principal for the general account of life insurance are guaranteed by life insurance companies.

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.

(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.

E. Matters Related to Actuarial Assumptions
The major items of actuarial assumptions as of each fiscal year end are as follows:%
FY2015 (As of December 31, 2015)

FY2016 (As of December 31, 2016)

Japan

Overseas

Japan

Discount rate

0.7

2.9

0.5

Overseas

2.2

Inflation rate

—

2.4

—

2.6

FY2015: As of December 31, 2015
Years
FY2015Japan
Males

Females23.6 (Note 2)

29.3 (Note 2)

Overseas
Males

Females21.7 (Note 3)

24.2 (Note 3)

23.1

25.7 (Note 4)

Average life expectancy at retirement (Note 1)
Current pensioners
Future pensioners

118Japan Tobacco Inc. Annual Report 2016

(Note 4)

Financial Information

FY2016: As of December 31, 2016
Years
FY2016
Japan
Males

Females23.6 (Note 2)

29.3 (Note 2)

Overseas
Males

Females

21.9 (Note 3)

24.3 (Note 3)

23.3

25.8 (Note 4)

Average life expectancy at retirement (Note 1)
Current pensioners
Future pensioners(Note 4)(Note 1) The average life expectancies underlie the values of the defined benefit obligations on major plans. Assumptions regarding future mortality rate are based 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 to changes in major assumptions asof each fiscal year end are as follows. Each of these sensitivities assumes that other variables remain fixed; however, in fact, they do not always change independently. Negative
figures show a decrease in pension plan obligations, while positive figures show an increase.

Millions of yen
FY2016 (As of December 31, 2016)

FY2015 (As of December 31, 2015)

Discount rate
Inflation rate
Mortality rate

Change in assumptions

Japan

Overseas

Japan

Overseas

Increase by 0.5%

¥ (9,672)¥(37,287)¥ (9,636)¥(39,870)

Decrease by 0.5%

10,36842,05810,36343,735

Increase by 0.5%—

27,545—29,449Decrease by 0.5%—

(25,543)—(25,654)

Extended 1 year

5,809

16,8595,540

19,321

Shortened 1 year

(5,649)(16,964)(5,370)(17,860)

F. Breakdown of Defined Benefit Cost
The breakdown of defined benefit cost for each fiscal year is as follows:
FY2015: Year ended December 31, 2015
Millions of yen
FY2015Current service cost
Past service cost and gains and losses on settlement

Japan

Overseas

Total¥11,802¥11,216¥23,018

310

389

699

Interest expense (income)

1,159

2,820

3,979

Defined benefit cost through profit or loss

27,696

13,27014,426

Actuarial gains and losses arising from changes in demographic assumptions

(634)

(327)

(961)

Actuarial gains and losses arising from changes in financial assumptions(105)(2,266)(2,371)

Actuarial gains and losses arising from experience adjustments

(47)

346

299

(1,605)

4,724

3,119

Defined benefit cost through other comprehensive income¥ (2,390)¥ 2,476¥    86

Total of defined benefit cost

¥10,880¥16,902¥27,782Return on plan assets (excluding amounts included in interest income)Japan Tobacco Inc. Annual Report 2016119

FY2016: Year ended December 31, 2016
Millions of yen
FY2016

Current service costJapan

Overseas

Total¥11,324¥   8,777¥ 20,100(2,956)—(2,956)

Interest expense (income)

1,111

2,381

3,492

Defined benefit cost through profit or loss

12,4358,201

20,636

Actuarial gains and losses arising from changes in demographic assumptions(1,158)

7,703

6,545

Actuarial gains and losses arising from changes in financial assumptions

4,222

59,52963,751

Actuarial gains and losses arising from experience adjustments(1,264)(527)(1,791)(906)(42,132)(43,037)

Defined benefit cost through other comprehensive income¥   894¥ 24,573¥ 25,467

Total of defined benefit cost

¥13,328¥ 32,775¥ 46,103

Past service cost and gains and losses on settlement

Return on plan assets (excluding amounts included in interest income)(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 and administrative
expenses.” The defined benefit cost through profit or loss from discontinued operations for the year ended December 31, 2015 is included in “Profit for the period from discontinued operations.”(Note 2) Contributions to the defined contribution plans were ¥7,649 million for the year ended December 31, 2015 and ¥6,917 million for the year ended December 31, 2016 and were
not included in the table above.

(2)

Other Employee Benefit Expenses

The employee benefit expenses other than post-employment benefits from continuing operations that are included in the consolidated statement of income for each fiscal year are as follows:
Millions of yen
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥233,512¥211,838

Bonus to employees

62,13459,474

Legal welfare expenses

43,86139,803Welfare expenses

36,18334,581

Termination benefits

4,392

1,479

Remuneration and salary

23. Equity and Other Equity Items(1)

Share Capital and Capital Surplus

A. Authorized Shares
The number of authorized shares as of December 31, 2015 and as of December 31, 2016 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 of shares

Millions of yen

Number of ordinary
issued shares

Share capital

Capital surplus

As of January 1, 2015

2,000,000¥100,000¥736,400

Increase (decrease)

—

—

—

2,000,000

100,000

736,400

As of December 31, 2015

—

—

—

2,000,000¥100,000¥736,400

Increase (decrease)
As of December 31, 2016

(Note) The shares issued by the Company are non-par value ordinary shares that have no restriction on any content of rights.

120

Japan Tobacco Inc. Annual Report 2016

Financial Information(2)

Treasury Shares

The schedule of the number of treasury shares and its amount as of each fiscal year end is as follows:
Thousands of shares

Millions of yen

Number of shares

Amount182,443¥344,447

As of January 1, 2015
Increase (decrease) (Note 2)

26,842

99,886

As of December 31, 2015

209,285

444,333

Increase (decrease) (Note 2)

(241)

(512)

As of December 31, 2016

209,044¥443,822(Note 1) The Company adopts share option plans and utilizes treasury shares for delivery of shares due to its exercise. Contract conditions and amount are described in“32. Share-based Payments.”(Note 2) The number of treasury shares purchased based on the resolution made by the Board of Directors was 26,896 thousand shares and the total purchase cost was ¥100,000 million
for the year ended December 31, 2015. Purchases of shares less than one unit are 0 thousand shares for the year ended December 31, 2015 and 0 thousand shares for the year
ended December 31, 2016. The number of shares delivered upon exercise of share options is 54 thousand shares for the year ended December 31, 2015 and 241 thousand sharesfor the year ended December 31, 2016. Sales of shares less than one unit are 0 thousand shares for the year ended December 31, 2016.

(3)

Other Components of Equity

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 “32. Share-based Payments.”
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. N
 et Gain (Loss) on Derivatives Designated as Cash Flow
HedgesThe Company 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.

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.
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.

24. Dividends
Dividends paid for each fiscal year are as follows:
FY2015: Year ended December 31, 2015
FY2015Class of shares

Millions of yen

Yen

Total dividends

Dividends per share

Basis date

Effective date

(Resolution)
Annual Shareholders’ Meeting(March 20, 2015)

Ordinary shares¥90,878¥50

December 31, 2014

March 23, 2015

Board of Directors(August 3, 2015)

Ordinary shares

96,69654

June 30, 2015

September 1, 2015

Japan Tobacco Inc. Annual Report 2016121

FY2016: Year ended December 31, 2016
FY2016Class of shares

Millions of yen

Yen

Total dividends

Dividends per share

Basis date

Effective date

(Resolution)
Annual Shareholders’ Meeting(March 23, 2016)

Ordinary shares¥114,606¥64

December 31, 2015

March 24, 2016

Board of Directors(August 1, 2016)

Ordinary shares

114,61764

June 30, 2016

September 1, 2016

Dividends, for which the effective date falls in the following fiscal year, are as follows:
FY2015: Year ended December 31, 2015
FY2015Class of shares

Millions of yen

Yen

Total dividends

Dividends per share¥114,606¥64

Millions of yen

Yen

Total dividends

Dividends per share¥118,203¥66

Basis date

Effective date

December 31, 2015

March 24, 2016

(Resolution)
Annual Shareholders’ Meeting(March 23, 2016)

Ordinary shares

FY2016: Year ended December 31, 2016
FY2016Class of shares

Basis date

Effective date

December 31, 2016

March 27, 2017

(Resolution)
Annual Shareholders’ Meeting(March 24, 2017)

Ordinary shares

25. Revenue
The reconciliation from “Gross turnover” to “Revenue” from continuing operations for each fiscal year is as follows:
Millions of yen
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)

Gross turnover¥ 7,436,141¥ 7,062,848

Tobacco excise taxes and agency transaction amount(5,183,257)(4,919,561)

Revenue¥ 2,252,884¥ 2,143,287

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 the­consolidated statement of income.

122

Gross turnover is an item that the Group discloses voluntarily
and is not “Revenue” as defined by IFRS.

Japan Tobacco Inc. Annual Report 2016

Financial Information

26. Other Operating Income
The breakdown of “Other operating income” from continuing operations for each fiscal year is as follows:
Millions of yen

Gain on sale of property, plant and equipment, intangible assets
and investment properties (Note)
Gain on sale of investments in subsidiaries (Note)

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥ 7,277¥41,161—

26,106

Other (Note)

8,089

2,835

Total

¥15,367¥70,101(Note) The amount of restructuring income included in each account for each fiscal year is as follows:

Millions of yen

Gain on sale of property, plant and equipment, intangible assets
and investment properties

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥6,193¥38,973

Gain on sale of investments in subsidiaries—

26,106

Other

606

100

Total

¥6,799¥65,178

27. Selling, General and Administrative Expenses
The breakdown of “Selling, general and administrative expenses” from continuing operations for each fiscal year is as follows:
Millions of yen

Advertising expenses
Promotion expenses
Shipping, warehousing 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

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥ 25,644
120,270
26,85951,330264,725
57,79665,9999,516¥ 26,108
124,766
26,79350,860241,752
58,19379,088
1,239

19,156
148,052¥789,346

11,256
134,060¥754,115(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

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥ 4,720
7,643¥ 1,243743

12,523
14,957¥39,843

5,676
4,231
¥11,894

Japan Tobacco Inc. Annual Report 2016123

28. Financial Income and Financial Costs
The breakdown of “Financial income” and “Financial costs” from continuing operations for each fiscal year is as follows:
Millions of yen
Financial Income

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥ 1,771¥ 1,707

13,010235¥15,016

4,664
247¥6,618Dividend income
Financial assets measured at fair value through other comprehensive income
Interest income
Financial assets measured at amortized cost
Deposits and bonds
Other
Total

Millions of yen
Financial Costs

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥ 3,745
153
6,010
3,971
1,253
¥15,132¥ 8,592
87
9,183
3,492
355
¥21,710

Interest expenses
Financial liabilities measured at amortized cost
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.

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 fiscal year are as follows:
FY2015: Year ended December 31, 2015
Millions of yen
FY2015
Amount arising

Reclassification
adjustments

Before tax
effects

Tax effects

Net oftax effects¥   14,220¥    —¥   14,220¥(3,485)¥   10,735

(86)

—

(86)

(4,016)(4,102)¥   14,134¥    —¥   14,134¥(7,501)¥   6,633

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
Total of items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss¥(289,270)¥   (223)¥(289,493)¥     93¥(289,400)

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

Exchange differences on translation of foreign operations

1,084

(812)

271

(38)

233

Total of items that may be reclassified subsequently to profit
or loss¥(288,186)¥(1,036)¥(289,222)¥     55¥(289,167)¥(274,052)¥(1,036)¥(275,088)¥(7,446)¥(282,534)

Total

124

Japan Tobacco Inc. Annual Report 2016

Financial Information

FY2016: Year ended December 31, 2016
Millions of yen
FY2016
Amount arising

Reclassification
adjustments

Before tax
effects

Tax effects

Net oftax effects¥  (5,574)¥  —¥  (5,574)¥ 2,416¥  (3,159)(25,467)—(25,467)

3,265(22,202)¥ (31,042)¥  —¥ (31,042)¥ 5,681¥ (25,361)

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
Total of items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss¥(157,539)¥ 19¥(157,520)¥(6,163)¥(163,683)

Net gain (loss) on derivatives designated as cash flow hedges(2,986)849(2,136)658(1,479)Total of items that may be reclassified subsequently to profit
or loss¥(160,525)¥868¥(159,657)¥(5,506)¥(165,162)¥(191,567)¥868¥(190,699)¥   175¥(190,523)

Exchange differences on translation of foreign operations

Total

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

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥485,691¥421,695——

Profit for the period used for calculation of basic earnings per share¥485,691¥421,695

Profit for the period from discontinued operations attributable
to ordinary shareholders of the parent company¥ 87,237¥      —

Profit for the period from continuing operations used for calculationof basic earnings per share¥398,454¥421,695

Profit not attributable to ordinary shareholders of the parent company

B. Weighted-average Number of Ordinary Shares Outstanding During the Period
Thousands of shares

Weighted-average number of shares during the period(2)

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)

1,795,254

1,790,878

Basis of Calculating Diluted Earnings per Share

A. Profit Attributable to Diluted Ordinary Shareholders
Millions of yen

Profit for the period used for calculation of basic earnings per share

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥485,691¥421,695——

Profit for the period used for calculation of diluted earnings per share¥485,691¥421,695

Profit for the period from discontinued operations attributable
to ordinary shareholders of the parent company¥ 87,237¥      —

Profit for the period from continuing operations used for calculationof diluted earnings per share¥398,454¥421,695

Adjustment

Japan Tobacco Inc. Annual Report 2016125

B. Weighted-average Number of Diluted Ordinary Shares Outstanding During the Period
Thousands of shares
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)

1,795,254

1,790,878

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

1,128

1,030

1,796,382

1,791,908

31. Non-cash Transactions
Significant Non-cash Transactions
The amount of assets acquired under finance leases was ¥3,507 million for the year ended December 31, 2015 and ¥202 million for the year
ended December 31, 2016.

32. Share-based Payments
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:(1)

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: None(2)

Conditions related to the exercise of share options are as
follows:(a) T he 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 therights become exercisable from the date following the date on
which they no longer hold their positions.
(b) In the case where any holders of subscription rights to shares
waive such rights, they cannot exercise them.

Changes in the Number of Share Options of the Company
Shares
FY2016 (Year ended December 31, 2016)

FY2015 (Year ended December 31, 2015)
Directors

Executive
Officers

Total

Directors

Executive
Officers

Total

Balance at the beginning of the period

275,800

795,200

1,071,000

324,800

807,200

1,132,000

Granted49,00066,200115,200

34,20051,80086,000—(54,200)(54,200)—(241,200)(241,200)

ExercisedTransferred
Balance at the end of the period
Exercisable balance at the end of the period

—

—

—

(83,200)

83,200—324,800

807,200

1,132,000

275,800

701,000

976,800—

424,400

424,400—

442,200

442,200(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 6 directors and 18 executive officers for the year ended December 31, 2015, and 5 directors and 18 executive officers for the year ended December
31, 2016.
		“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 ¥3,556 and ¥2,863 for the years ended December 31, 2015 and 2016, respectively.
(Note 5) The weighted-average share prices of share options at the time of exercise during the period were ¥4,497 and ¥4,258 for the years ended December 31, 2015 and 2016,
respectively.
(Note 6) The weighted-average remaining contract years of unexercised share options at the end of each period were 25.7 years and 25.2 years for the years ended December 31, 2015
and 2016, respectively.

126

Japan Tobacco Inc. Annual Report 2016

Financial Information(3)

Method of Measuring Fair Value of Share Options Granted During the Period of the Company

A. Valuation Model
Black-Scholes Model
B. Main Assumptions and Estimation
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)

Share price¥4,847¥4,315Volatility of share price (Note 1)

32.7%

32.9%

15 years

15 years

Estimated dividends (Note 3)¥100/share¥118/share

Risk free interest rate (Note 4)

0.78%(0.12)%

Estimated remaining period (Note 2)(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 share option rights would be­exercised 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)

Share-based Payment Expenses

The costs for share options from continuing operations included in “Selling, general and administrative expenses” in the consolidated statement of income were ¥383 million and ¥270 million for the years ended December 31, 2015 and 2016.

33. Financial Instruments(1)

Capital Management

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 inthe 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 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 each fiscal year end are as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥  255,291¥  555,257

Cash and cash equivalents(526,765)(294,157)

Net interest-bearing debt (Note)(271,474)

261,101

Capital (equity attributable to owners of the parent company)

2,451,596

2,456,091

Interest-bearing debt

(Note) The figure in parentheses ( ) represents the net amount of cash and cash equivalents after deducting interest-bearing debt.

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 return

Japan Tobacco Inc. Annual Report 2016127

on 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)

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.

(3)

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.

The analysis of the aging of financial assets that are past due but not impaired as of each fiscal year end date is as follows:
The financial assets include amounts considered recoverable by credit insurance and collateral.
FY2015: As of December 31, 2015
Millions of yen
FY2015
Amount past due

Trade and other receivables

Total

Within 30 days

Over 30 days,
within 60 days

Over 60 days,
within 90 days

Over 90 days

¥3,238¥2,260

¥349

¥38

¥591

FY2016: As of December 31, 2016
Millions of yen
FY2016
Amount past due

Trade and other receivables

128

Total

Within 30 days

Over 30 days,
within 60 days

Over 60 days,
within 90 days

Over 90 days

¥6,916¥2,612¥1,004¥8¥3,292

Japan Tobacco Inc. Annual Report 2016

Financial Information

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:
Millions of yen
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥10,595¥9,345

Balance at the beginning of the period
Addition

346

335

Decrease (intended use)

(357)

(515)

Decrease (reversal)

(986)

(336)

Other

(253)

(394)

¥ 9,345¥8,436

Balance at the end of the period(4)Liquidity Risk

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 businessplan 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 financial liability balance (including derivative financial instruments) by maturity as of each fiscal year end is as follows:
FY2015: As of December 31, 2015
Millions of yen
FY2015Due after
two years
throughthree years

Due after
three years
throughfour years

Due after
four years
throughfive years

Due after
five years¥     —

Carrying
amountContractual
cash flow

Due within
one year

Due after
one yearthrough
two years

Trade and other payables¥373,032¥373,032¥373,032¥      —

¥      —¥—

¥     —

Short-term borrowings

30,83230,83230,832

—

—

—

—

—

148

148

148

—

—

—

—

—

Non-derivative financial liabilities

Current portion of long-term borrowings
Long-term borrowings
Bonds
Subtotal

866

866

—

150

152

97

45

422

215,072

215,305—

20,00060,305—80,00055,000619,949

620,183

404,012

20,15060,45797

80,04555,422

5,594

5,594

5,594

—

—

—

—

—

1

1

1

—

—

—

—

—

5,595

5,595

5,595

—

—

—

—

—

¥625,544¥625,778¥409,607¥20,150¥60,457¥97¥80,045¥55,422

Derivative financial liabilities
Foreign exchange forward contract
Interest rate swap
Subtotal
Total

Japan Tobacco Inc. Annual Report 2016129

FY2016: As of December 31, 2016
Millions of yen
FY2016

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

Trade and other payables¥377,933 ¥377,933 ¥377,933¥      —¥—

¥     —

¥     —

¥      —

Short-term borrowings

187,949

187,949

187,949

—

—

—

—

—

Current portion of long-term borrowings

572

572

572

—

—

—

—

—

Long-term borrowings

877

877

—

360

92

41

43

341

Carrying
amountContractual
cash flow

Non-derivative financial liabilities

Current portion of bonds

20,00020,00020,000

—

—

—

—

—

Bonds

338,158

338,858—

58,245—80,00087,368113,245925,489

926,188586,453

58,60592

80,041

87,411

113,586

12,516

12,516

12,516

—

—

—

—

—

12,516

12,516

12,516

—

—

—

—

—

¥938,005 ¥938,704 ¥598,970¥58,605¥92¥80,041

Subtotal
Derivative financial liabilities
Foreign exchange forward contract
Subtotal
Total¥87,411 ¥113,586

The total of commitment lines and withdrawal as of each fiscal year end are as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥682,286¥574,432

Total committed line of credit
Withdrawing
Unused balance(5)

Foreign Exchange Risk

The Group operates businesses globally and, therefore, is exposedto the following risks due to foreign exchange fluctuation:(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 transactions, 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.

130

—

—

¥682,286¥574,432

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.
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 fiscal 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:
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

Japan Tobacco Inc. Annual Report 2016

FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥(866)¥(1,502)

Financial Information(6)

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 the­current condition of the interest rates in a comprehensive manner.
The Treasury Division of the Company reports the performances
to the president and the Board of Directors of the Company.

(7)

Interest Rate Sensitivity Analysis
In cases where the interest rate of financial instruments held by theGroup as of each fiscal year end increases by 100bp, the impact on
profit before income taxes in the consolidated statement of income
is as follows:
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.
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥2,058¥(559)

Profit before income taxes

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:
FY2015: As of December 31, 2015
FY2015Carrying amount (Note)(Millions of yen)Contract amountOver one year

AssetsLiabilities

Average rates(yen, %)USD 129 mil.

USD        —

¥   70¥   75¥119.95

USD 175 mil.

USD 175 mil.

3,870

—

0.24%

Foreign exchange risk
Foreign exchange forward contract
JPY/USD
Interest rate risk
Cross currency swap
Fixed rate receipt and fixed rate payment
FY2016: As of December 31, 2016
FY2016
Carrying amount (Note)(Millions of yen)Contract amountOver one year

AssetsLiabilities

Average rates(yen, %)USD 259 mil.

USD        —¥1,077¥  478¥109.84

USD 175 mil.

USD 175 mil.

3,052

—

0.24%

Foreign exchange risk
Foreign exchange forward contract
JPY/USD
Interest rate risk
Cross currency swap
Fixed rate receipt and fixed rate payment(Note) C arrying 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. Annual Report 2016131

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, 2015

Foreignexchange risk

Interest
rate risk

Total¥ 1,077¥ 139¥ 1,215

Other comprehensive income
Amount arising (Note 1)

284

800

1,084

Reclassification adjustments (Note 2)

—

(812)

(812)

Tax effects

(49)

11

(38)

Others(1,324)—(1,324)As of December 31, 2015

    
(12)

137

   125(2,168)(818)(2,986)

128

721

849

Other comprehensive income
Amount arising (Note 1)
Reclassification adjustments (Note 2)
Tax effects
Others
As of December 31, 2016

625

33

658

1,794

—

1,794

¥   367¥   73¥   440(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 ofincome. The amount of hedge ineffectiveness is immaterial.

B. Hedge of Net Investment in Foreign Operations
The details of hedging instruments designated as hedge of net investment are as follows:
FY2015: As of December 31, 2015
FY2015Carrying amount (Note)(Millions of yen)

Bonds in USD

Contract amountOver one year

AssetsLiabilities

Average rates(yen)

USD 325 mil.

USD 325 mil.

¥   —¥38,965¥99.45FY2016: As of December 31, 2016
FY2016
Carrying amount (Note)(Millions of yen)Over one year

AssetsLiabilities

Average rates(yen)

USD 500 mil. USD         —¥   —¥ 58,245¥117.91

USD 1,575 mil. USD 1,575 mil.

—

182,773

107.36

Contract amount

Short-term borrowings
Bonds in USD(Note) C arrying amounts of bonds and short-term borrowings 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.”

The schedule of net gains (losses) on hedging instrument designated as hedge of net investment in foreign operations is as follows:
Millions of yen

Balance at the beginning of the period
Other comprehensive income
Amount arising (Note 1)
Tax effects
Balance at the end of the period (Note 2)

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥(3,100)¥ (4,497)(1,490)93¥(4,497)

19,444(6,163)¥ 8,784(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) Net gain arising from the hedging instruments for which hedge accounting is discontinued were ¥136 million and ¥18,241 million as of December 31, 2015 and 2016 respectively
those which are included in the exchange differences on translation of foreign operations.

132

Japan Tobacco Inc. Annual Report 2016

Financial Information(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(i) Financial instruments measured at amortized cost
The carrying amount and fair value hierarchy of financial instruments measured at amortized cost as of each fiscal year end are as follows:
FY2015: As of December 31, 2015
Millions of yen
FY2015
Fair value
Carrying amount

Level 1

Level 2

Level 3Total

Long-term borrowings (Note)¥  1,014¥      —

¥      —

¥1,014¥  1,014

Bonds

215,072

217,215——217,215

FY2016: As of December 31, 2016
Millions of yen
FY2016
Fair value
Carrying amount

Level 1

Level 2

Level 3Total

Long-term borrowings (Note)¥  1,449¥      —

¥      —

¥1,449¥  1,449

Bonds (Note)

358,158

357,126——

357,126(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.
(ii) Financial instruments measured at fair value
The fair value hierarchy of financial instruments measured at fair value is as follows:
FY2015: As of December 31, 2015
Millions of yen
FY2015
Level 1

Level 2

Level 3 (Note)

Total

Derivative assets¥     —

¥7,106¥    —¥ 7,106

Equity securities

72,79567,557

—

5,239

Other

319

—

1,727

2,046

Total

¥67,876¥7,106¥6,966¥81,948¥     —

¥5,595¥    —¥ 5,595¥     —

¥5,595¥    —¥ 5,595

Derivative liabilities
Total

Japan Tobacco Inc. Annual Report 2016133

FY2016: As of December 31, 2016
Millions of yen
FY2016
Level 1

Level 2

Level 3 (Note)

Total

Derivative assets¥     —

¥11,769¥    —¥11,769

Equity securities

65,54860,662

—

4,886

Other

368

—

2,316

2,683

Total

¥61,030¥11,769¥7,202¥80,001¥     —

¥12,516¥    —¥12,516¥     —

¥12,516¥    —¥12,516

Derivative liabilities
Total(Note) The schedule of financial instruments that are classified in Level 3 is as follows:
Millions of yen
FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)¥5,411¥6,966

172
1,154
478
(250)
—
¥6,966

(16)
80
448
(76)
(200)
¥7,202

Balance at the beginning of the period
Total gain (loss)
Profit or loss (Note 1)
Other comprehensive income (Note 2)
Purchases
Sales
Other
Balance at the end of the period(Note 1) Gains and losses included in profit or loss for the year ended December 31, 2015 and 2016 are related to financial assets measured at fair value through profit or loss as of the
fiscal year end date. These gains and losses are included in “Financial income” and “Financial costs.”(Note 2) Gains and losses included in other comprehensive income for the year ended December 31, 2015 and 2016 are related to financial assets measured at fair value through othercomprehensive income as of the fiscal year end date. These gains and losses are included in “Net gain (loss) on revaluation of f­inancial assets measured at fair value throughother comprehensive income.”

34. Related Parties
Based on the Japan Tobacco Inc. Act, the Japanese government shall hold more than one-third of all of the shares issued by the Company(excluding the type of shares, for which it is stipulated that voting rights may not be exercised on any matters that can be resolved by Annual
Shareholders’ Meeting). As of December 31, 2016, the Japanese government held 33.35% of all outstanding shares of the Company.

(1)

Related-party Transactions

Related-party transactions are conducted under the same conditions as regular business transactions.
The Company’s revenue from CJSC TK Megapolis, the local Russian distribution affiliate, was ¥240,837 million and ¥207,768 million forthe years ended December 31, 2015 and 2016, respectively. The Company held trade receivables of ¥27,396 million and ¥38,373 million
from CJSC TK Megapolis as of December 31, 2015 and 2016, respectively.

(2)

Remuneration for Directors and Audit and Supervisory Board Members

Remuneration for directors and audit and supervisory board members for each fiscal year is as follows:
Millions of yen

Remuneration and bonuses
Share-based payments
Total

134

Japan Tobacco Inc. Annual Report 2016

FY2015FY2016(Year ended December 31, 2015)(Year ended December 31, 2016)

¥650
159
¥809

¥620
117
¥737

Financial Information

35. Subsidiaries, Associates and Others(The composition of the Group)
The composition of the Group by reportable segment as of each fiscal year end is as follows:
FY2016 (As of December 31, 2016)

FY2015 (As of December 31, 2015)

Reportable Segments

Number ofsubsidiaries

Number of entities
accounted for using
the equity method (Note)

Number ofsubsidiaries

Number of entities
accounted for using
the equity method (Note)

11
144
3
28
8
194

2
5
—
3
2
12

12
150
2
28
10
202

2
5
—
3
2
12

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, 2016.

36. Commitments(1)

Commitments for the Acquisition of Assets

Commitments for the acquisition of assets after each fiscal year end date are as follows:
Millions of yen
FY2015FY2016(As of December 31, 2015)(As of December 31, 2016)¥41,879¥41,889

Acquisition of property, plant and equipment
Acquisition of intangible assets
Total

(2)

Procurement of Domestic Leaf Tobacco

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

1,402

3,374

¥43,281¥45,264

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.

37. Business Combinations
Acquisition of the Natural American Spirit Business outside the United States(1)

Summary of Business Combinations

On January 13, 2016, the Group acquired from the Reynolds
American Inc. group (“RAI”) the Natural American Spirit businessoutside the United States which included the non-U.S. trademarks
and all outstanding shares of RAI’s subsidiaries outside the U.S.
which sold the brand, Santa Fe Natural Tobacco Company Japan
K.K.(Note) and eight other subsidiaries.
Natural American Spirit, the tobacco brand that Santa Fe Natural
Tobacco Company, Inc. launched in the U.S. in 1982, has established a unique brand positioning due to its additive-free tobacco
products that abundantly use high quality leaf tobacco. The brandhas steadily increased the sales volume in the U.S., Japan,
Germany, Switzerland, Italy, Spain, the U.K. and others.

The purpose of this acquisition is that Natural American Spirit,
which has a strong presence in a premium priced category, allows
the Group to further extend its brand portfolio and strengthen thebusiness foundation.
Notably in Japan, which accounts for the majority of the sales
volume worldwide excluding the U.S., the brand has enjoyed broad
support of consumers and experienced significant growth in sales
volume. This acquisition is positioned as part of business investments to underpin the Group’s sustainable long-term profit growth
in Japan, which is one of the Group’s most significant markets.
(Note) Santa Fe Natural Tobacco Company Japan K.K. changed its name to K.K. TRUESPIRIT TOBACCO COMPANY on May 1, 2016.

Japan Tobacco Inc. Annual Report 2016135

(2)Financial Impact on the Group

Since the acquisition date, the acquired business has contributed to total revenue and operating loss of ¥28,291 million and ¥13,946 million,
respectively.
The amortization of trademarks acquired from the business combinations included in the above operating loss is ¥17,928 million.

(3)

Consideration and Details (Total of the Acquisition)

The consideration is ¥591,420 million and all is paid in cash.

(4)

Cash Out for the Business Combinations (Total of the Acquisition)
Millions of yen
Net cash outflow forthe business combinations¥591,420(4,335)¥587,085

Cash consideration
Cash and cash equivalents in subsidiaries acquired
Net cash outflow for the business combinations(5)

Fair Values of the Assets Acquired and Liabilities Assumed
Millions of yen
Fair value

Current assets
Trademarks
Deferred tax assets
Other non-current assets
Total assets¥ 21,369
180,471
113,185
9,207¥324,232

Current liabilities
Non-current liabilities
Total liabilities
Goodwill¥ 11,376
8,415¥ 19,791¥286,979

Goodwill represents future economic benefits for integration synergies including enhanced business scale in each market, and it isexpected that most of the trademarks and goodwill are deductible
for tax purposes.
Fair values 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 ¥293 million are expensed as incurred andrecognized in “Selling, general and administrative expense.”136

Other Acquisitions
In addition to the above, the Group acquired other entities throughbusiness combinations for the year ended December 31, 2016,
which are omitted as they are immaterial both individually andin aggregate.

Japan Tobacco Inc. Annual Report 2016

Financial Information

38. Discontinued Operations
The Group classifies continuing operations and discontinued operations based on operating segments. As a result, for a business not
managed as an independent operating segment, it will not be classified as discontinued operations when sold or discontinued and its
operating income (loss) and cash flows will be included in the operating income (loss) and cash flows of continuing operations.
Shares of Japan Beverage Holdings Inc., JT A-star Co., Ltd. andother subsidiaries conducting vending machine operation businesswere transferred to Suntory Beverage & Food Limited on July 31,2015 and the manufacture and sale of JT beverage products werediscontinued at the end of September, 2015. Accordingly, in theprior year, “Beverage Business” was classified as discontinued
operations and presented separately from continuing operations.
¥134,287 million of gain on sale of investments in subsidiaries and¥36,494 million of income taxes related to the transfer of subsidiaries are included in “Profit for the period from discontinued operations” in the consolidated statement of income for the year ended
December 31, 2015. ¥36,494 million of income taxes paid related
to the transfer of subsidiaries for the prior year are included in the
consolidated statement of cash flows for the year ended December
31, 2016.

39. Contingencies
Contingent Liabilities
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, 2016, there were a total of
20 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 for the Company’s acquisition of RJR Nabisco Inc.’soverseas (non-U.S.) tobacco operations.
The major ongoing smoking and health related cases are
as follows: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, andone individual case brought against the Company’s subsidiaries in
Russia on February 20, 2017.
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-Macdonald Corp.
(hereinafter referred to as “JTI-Mac”), the Company’s Canadiansubsidiary. Plaintiffs are seeking a total of approximately ¥396.9
billion (approximately CAD 4.6 billion) in compensatory damages,
an amount for which all the defendants are jointly and severally
liable. Plaintiffs are seeking an additional amount of approximately¥396.9 billion (approximately CAD 4.6 billion) in punitive damages,
to be divided among all the defendants based on their respective
market shares. The class was certified by the court in February 2005,
and the trial was conducted from March 2012 through December
2014.
The Quebec Superior Court rendered the first instance judgment
in May 2015, ordering a punitive damage award against the defendants of approximately ¥11.3 billion (CAD 131 million), in which theshare of the total damage award against JTI-Mac is approximately¥1.1 billion (approximately CAD 13 million). Although the Court
found that the defendants had all committed some faults, it refused
to award moral damages because the evidence did not establish thetotal amount of the claims of class members. In June 2015, JTI-Mac
appealed the judgment to the Quebec Court of Appeal, and theappeal on the merits was heard in November 2016. The timing of
the decision is at the Court’s discretion.
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 areseeking a total of approximately ¥1,075.4 billion (approximately CAD
12.4 billion) in compensatory damages, an amount for which all thedefendants are jointly and severally liable. Plaintiffs are seeking an

Japan Tobacco Inc. Annual Report 2016137

additional amount of approximately ¥70.1 billion (approximately
CAD 0.8 billion) in punitive damages, to be divided among all thedefendants based on their respective market shares. The class wascertified by the court in February 2005, and the trial was conductedfrom March 2012 through December 2014.
The Quebec Superior Court rendered the first instance judgment
in May 2015, ordering a compensatory damage award jointly andseverally against the defendants of approximately ¥1,340.1 billion(CAD 15.5 billion), in which the share of the total damage award
against JTI-Mac is approximately ¥174.2 billion (CAD 2.015 billion).
Given the enormity of the damage award, the Court granted a symbolic amount of punitive damages of approximately ¥3 million (CAD
30,000) per defendant. In June 2015, JTI-Mac appealed the judgment to the Quebec Court of Appeal, and the appeal on the merits
was heard in November 2016. The timing of the decision is at the
Court’s discretion.

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.
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.

138

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.
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.
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 pre-trial process is ongoing.
A trial date is not yet scheduled.
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¥4,323 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.

Japan Tobacco Inc. Annual Report 2016

Financial Information

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¥5,244.4 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 ¥864.6 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
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,
which may include proceedings that are conducted pursuant toapplicable confidentiality obligations. Details of such proceedings
and their outcomes are disclosed by the Company only where­permitted by such confidentiality obligations.
One major commercial litigation case is pending.
Japan Compensatory Damages Claim:
In February 2010, a former President & CEO of Katokichi Co., Ltd.
filed a claim against TableMark Holdings Co., Ltd. (renamed after
acquisition of Katokichi Co., Ltd. by the Company) and its subsidiaryseeking damages allegedly incurred by the plaintiff from an asset
purchase agreement between the plaintiff and Katokichi Co., Ltd.
and a joint and several guarantee provided by the plaintiff. The
plaintiff argues the invalidity of the asset purchase agreement.
(Note) The amount of damages sought denominated in foreign currencies is translated into
Japanese yen at the rates as of December 31, 2016.

Japan Tobacco Inc. Annual Report 2016139

40. Subsequent Events
No items to report

Consolidated Supplementary Information
A. Quarterly Information for the Year ended December 31, 2016
Millions of yen
Q1
From January 1, 2016
to March 31, 2016

Q2
From January 1, 2016
to June 30, 2016

Q3
From January 1, 2016
to September 30, 2016

FY2016
From January 1, 2016
to December 31, 2016

Revenue¥534,088¥1,076,879¥1,618,537¥2,143,287

Profit before income taxes for the period (year)

200,339

339,364484,275

578,237

Profit attributable to owners of the parent
company for the period (year)

145,445

247,094

350,008

421,695

81.22

137.98195.44235.47

Q1
From January 1, 2016
to March 31, 2016

Q2
From April 1, 2016
to June 30, 2016

Q3
From July 1, 2016
to September 30, 2016

Q4
From October 1, 2016
to December 31, 2016¥81.22¥56.76¥57.47¥40.03

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.

140

Japan Tobacco Inc. Annual Report 2016

Financial Information

Japan Tobacco Inc. Annual Report 2016141

Glossary 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 arisingfrom business acquisitions + Adjusted items (income
and costs)*.
*	Adjusted items (income and costs) = impairment losses on goodwill ± restructuringincome and costs ± others

Adjusted Profit: Profit for the year (profit attributable toowners of the parent company) ± adjustment items (income
and costs)* ± (tax and minority interests adjustments)*	Adjustment items (income and costs): impairment losses on goodwill ± restructuringincome and costs ± others

BnU: Billion Units.
Contraband: Genuine products smuggled from abroad.
Genuine products diverted from the legitimate supply
chain and sold in a country different from the intended
market of retail sale and without domestic duty paidin that country.
Constant Exchange Rates: Constant exchange rates
measures are computed by restating current year results at
the previous year’s foreign currency exchange rate. Results
at constant rates of exchange should be considered inaddition to, not as a substitute for, results reported inaccordance with IFRS.
Core Revenue (International Tobacco Business):
Includes revenues from waterpipe tobacco and emerging
products, but excludes revenues from distribution,
contract manufacturing and other peripheral businesses.
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 emerging products such as Ploom TECH
device and capsules.

Counterfeit: Fake products appearing to be a genuine
brand. Products protected by intellectual property rights
which are manufactured without authorization from therights’ owners and with the intent to copy the genuine
brand to deceive the consumer, also sold without duties
being paid.
FCF (Free Cash Flow): The sum of cash flows fromoperating activities and investing activities but excluding
the following items:• 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 (for both short-term and longterm), payments into time deposits, proceeds fromsale or redemption of investment securities (for both
short-term and long-term), proceeds from withdrawalof time deposits and other investing activities not forbusiness operation purposes.
GFB: Global Flagship Brands (Winston, Camel, MEVIUS,
LD, Benson & Hedges, Glamour, Silk Cut, Sobranie andNatural American Spirit)
FY2014: Results for the fiscal year ended December 31, 2014.
In FY2014, the Company and its subsidiaries with fiscal
year ends other than December 31 have changed theirfiscal year ends to December 31.
The fiscal year end for international business continues tobe December 31 as before, hence the Group consolidates
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).
For the purpose of fair comparison of businessperformance, we are providing figures for the twelvemonth period from January 1, 2014 to December 31, 2014
(Like-for-Like basis) with regard to all business segments
in continuing operations.

142

Japan Tobacco Inc. Annual Report 2016

Results for Nine months ended December 31, 2014
(Reported basis): For domestic businesses: consolidated
nine-month results from April 1 to December 31, 2014.

Jan
Mar

Jul
Sep

Oct
Dec

Jan
Mar

Apr
Jun

Jul
Sep

Oct
Dec

Jul
Sep

Oct
Dec

Domestic
International
FY2014For international business: consolidated twelve-monthresults from January 1 to December 31, 2014.
Results of Jan-Dec 2014 (Like-for-Like basis): For the
purpose of fair comparison of business performance, weare providing figures with regard to all business segments
in continuing operations for January to December, 2014.
• Revenue, operating profit, adjusted operating profit
from continuing operations and profit attributed toowners of the parent company from continuing anddiscontinued operations combined for January to
December, 2014 were disclosed in the FY2015 Annual
Securities Report, which was audited.

Apr
Jun

Jan
Mar

Apr
Jun

FY2015

Jul
Sep

Oct
Dec

Jan
Mar

Apr
Jun

Domestic
International
2014 Jan – Dec

FY2015

Illicit Whites: Legitimately manufactured brands
intentionally sold on the illicit market. Brands
manufactured legitimately in one country but smuggled
into another country to provide consumers with cheap
brands, also without duties being paid.
IFRS: International Financial Reporting Standards.
JPY BN: Billion Japanese Yen.
Restated: See ‘Constant Exchange Rates’.
Revenue: Excluding tobacco excise taxes and revenue
from agent transactions.
Profit: Profit attributable to owners of the Parent.
TableMark: References to “TableMark” are to TableMark
Holdings Co. Ltd., TableMark Co. Ltd.
Total Shipment Volume (International Tobacco
Business): Includes fine cut, cigars, pipe tobacco andsnus but excludes contract manufactured products,
waterpipe tobacco and emerging products.
Total Sales Volume (Japanese Domestic Tobacco
Business): Excludes sales volume of domestic duty
free, the Chinese business and emerging products.
US$ MM: Million US dollars.

Japan Tobacco Inc. Annual Report 2016143

Japan Tobacco Inc.
2-1, Toranomon 2-chome,
Minato-ku, Tokyo 105-8422, Japan
Tel: (81) 3-3582-3111
Fax: (81) 3-5572-1441
URL: http://www.jt.com/

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