CORPORATEPROFILEJapan Tobacco Inc.

Integrated Report
2020

VALUE
CREATION

Year ended December 31, 2020

BUSINESS
Forward-looking statements
This report contains forward-looking statements. These statements appear in a number of places in this report andinclude statements regarding the intent, belief, or current and future expectations of our management with respect
to our business, financial condition and results 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.
These statements are not guarantees of future performance and are subject to various risks and uncertainties.
Actual results, performance or achievements, or those of the industries in which we operate, may differ materiallyfrom any future results, performance or achievements expressed or implied by these forward-looking statements.
In addition, these forward-looking statements are necessarily dependent upon assumptions, estimates and datathat may be incorrect or imprecise and involve known and unknown risks and uncertainties. Forward-looking
statements regarding operating results are particularly subject to a variety of assumptions, some or all of which
may not be realized.
Risks, uncertainties or other factors that could cause actual results to differ materially from those expressed in any
forward-looking statement include, without limitation:
1. ‌increase in awareness of health concerns related to smoking;
2. ‌regulatory developments; including, without limitation, tax increases and restrictions on sales,
marketing, packaging, labeling and use of tobacco products, privately imposed restrictions andgovernmental investigations;3. ‌litigation around the world alleging adverse health and financial effects resulting from, or relating to,tobacco products;
4. ‌our ability to further diversify our business beyond the traditional tobacco industry;
5. ‌our ability to successfully expand internationally and make investments outside Japan;
6. ‌competition, changing consumer preferences and behavior;
7. ‌our ability to manage impacts derived from business diversification or business expansion;
8. ‌economic, regulatory and political changes, such as nationalization, terrorism, wars and civil unrest, in countries
in which we operate;
9. ‌fluctuations in foreign exchange rates and the costs of raw materials; and10. ‌catastrophes, including natural disasters.

SUSTAINABILITY

GOVERNANCE

Editorial policy
Period covered
In principle, this report covers the period fromJanuary 1, 2020 to December 31, 2020, but also
includes some information related to activities before
and after this period.
Scope of reportJapan Tobacco Inc. and consolidated subsidiaries
Published
March 2021

Referenced guidelines
The International Integrated Reporting Council’s“International Integrated Reporting Framework” wasreferred to in the writing of this report. In addition, the
GRI Standards of the Global Reporting Initiative werereferred to with regard to ESG information.

FINANCIALINFORMATION/
OTHERS002 Our management principle
004 At a glance

006 Key performance indicators• Financial performance review• Non-financial performance review
010 Our response to COVID-19

014 Message from the CEO
018 Our history
020 Our value creation process

022 Our value chains
024 Superior brand equity

028 Business Plan 2021
050 Risk factors
030 Message from the CFO
054 R
 egulation and key laws
034 Business strategy/Business review
057 Litigation• Tobacco Business– International Tobacco Business– Japanese-Domestic Tobacco Business• Pharmaceutical Business• Processed Food Business

060 Our material issues
062 Sustainability strategy
064 Three absolute requirements for sustainability• Respect for human rights• Improving our social and environmental impact• Good governance and business standards

068 Investing in people/Health and safety
072 Focus areas by business segment• Tobacco Business• Pharmaceutical Business• Processed Food Business
082 Interview with the CSO

086 Interview with the Outside Director
090 Corporate governance096 Management structure
100 Internal control system &risk management system

106 Financial review
114 Consolidated financial statements
180 Glossary of terms
182 Awards and recognitions

184 Shareholder information
185 List of key disclosures
185 Contact information

CORPORATE PROFILE
The JT Group is a leading global tobacco company operating inover 70 countries/regions and our products are sold in over 130
countries/regions.
To illustrate the overview of the Group, this chapter explains theGroup's management principle and vision, which are thefoundation of its value creation, outlines its businesses, andpresents key financial and non-financial performance indicators.

002 Our management principle
004 At a glance
006 Key performance indicators• Financial performance review• Non-financial performance review
010 Our response to COVID-19

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

001

Japan Tobacco Inc. Integrated Report 2020

Our management principle
Management principle
To pursue the 4S model
Under the 4S model, we strive to fulfill our responsibilities to our valued consumers, shareholders, employees and the wider
society, carefully considering the respective interests of these four key stakeholder groups and exceeding their expectations
wherever we can.

Shareholders

Consumers

Employees

Society

By pursuing the 4S model, we aim to achieve sustainable profit growth over the mid to long term. We firmly believe that pursuingthe 4S model is the best approach to continuously grow our corporate value and serve our four stakeholder constituencies’common interests.

Consumers

Shareholders

We provide exceptional products and services that deliver

We aim to enhance shareholder returns by realizing the mid-value beyond fulfillment of diverse needs and preferences.

to long-term profit growth, placing priority on striking a

To keep doing so, we will upgrade our innovation capabilities

balance between profit growth through business investments

by leveraging our Group’s diversity.

and shareholder returns.

Employees

Society

We aim to be an appealing, highly esteemed company for

In order to fulfill our responsibility as a member of society

which our employees are proud to work. While evaluating

and contribute to society's sustainable development throughemployees fairly and transparently and supporting their

our business, we will work with a wide range of stakeholders

personal growth, we aim to foster a corporate culture thatand strive to resolve various issues together.

respects and embraces diverse values.

002

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILEVISION
To continue to be a growing global company thatprovides diverse value, unique to the JT Group.
Based on our 4S model, our vision is to continue to be a
growing global company that provides diverse value, unique to

VALUE CREATION

the JT Group.
Our long, rich history has endowed us with three key
strengths: a solid financial base, superior brand equity and adiverse workforce. To realize our vision, we plan to leveragethese strengths as sources of competitiveness in ourbusiness activities. We will create a variety of products andservices that meet the needs of our consumers and society,enhance the corporate value of the JT Group, and createsocial value that contributes to the development of a sustainable society.

BUSINESSThe JT Group WAY

To create, develop and nurture our unique brands
to win consumer trust, while understanding andrespecting the environment, and the diversity ofsocieties and individuals.

• Act with integrity, always putting theconsumer first.
• Continue to evolve while remaining committed
to quality in all its aspects.
• Harness the power of diversity across the
JT Group.

SUSTAINABILITY

The JT Group MISSION

Our mission is to create, develop and nurture our unique brands to win consumer trust, while understanding and respecting theenvironment, and the diversity of societies and individuals through the 4S model. Our Code of Conduct and values guide the way inwhich every employee should act on a daily basis. We have codified them into three statements we call the JT Group WAY.
GOVERNANCE

The world in which we live encompasses diverse natural environments, societies and peoples. By embracing such diversity, we
believe we can create brands that offer value to our consumers.
We define a brand as all products, services and actions trusted by consumers and believe it is the key to forming deep bonds oftrust between us and consumers. Setting our brands as our most valuable management resource, we will continue to create,develop, and refine distinctive brands that win consumers’ trust.

FINANCIAL INFORMATION/OTHERS

In order to achieve our mission, each and every one of us at the JT Group practices the JT Group WAY as a personal guide.

Japan Tobacco Inc. Integrated Report 2020003

At a glance
The JT Group is a leading global tobacco company operating in over 70 countries/regions and our
products are sold in over 130 countries/regions. In addition to the tobacco business, we aredeveloping pharmaceutical and processed food businesses.

International Tobacco BusinessJapanese-Domestic Tobacco Business

The international tobacco business, headquartered in Geneva,

The Japanese-domestic tobacco business, headquartered

manufactures and offers tobacco products all over the worldin Tokyo, manufactures and offers tobacco products mainly

except Japan and a few Asian countries/regions.

for Japan.

Its key markets include France, Italy, Russia, Spain, Taiwan,

Its brand portfolio includes Ploom in the RRP category andTurkey and the U.K. Its international brand portfolio includes

the key brands such as MEVIUS, Seven Stars, Natural Ameri-leading brands in cigarettes and FCT (fine cut tobacco), such

can Spirit, Winston and Camel in the cigarette category.

as Winston, Camel, MEVIUS and LD, as well as in RRP(Reduced-Risk Products),* such as Logic and Ploom.

Combustibles market share in the tobacco business
The presence of JT Group in our key markets (2020)

ITALY

25.6%
RUSSIA

38.4%
U.K.
FRANCE

45.0%

JAPAN

TURKEYTAIWAN

27.1%
SPAIN

26.6%
47.7%

26.7%

Source: JT estimate, IRI, Nielsen and Logista* RRP (Reduced-Risk Products): Products with the potential to reduce the risks associated with smoking.

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Japan Tobacco Inc. Integrated Report 2020

59.8%

CORPORATE PROFILE

Pharmaceutical Business

Processed Food Businessturing and sale of prescription drugs, concentrating on three
specific therapeutic areas: metabolic diseases, autoimmune/
inflammatory diseases, and viral infection.

Pharmaceuticalrice, and frozen okonomiyaki (Japanese savory pancakes); thebusinessseasonings business, focusing on seasonings including yeast

3.8%
extracts; and the bakery business through bakery chain

CORECTIM Ointment, Riona Tablets and REMITCH
®

0.1%
7.1%
food business, mainly for frozen noodles, packaged cooked

VALUE CREATION

The pharmaceutical business focuses on the R&D, manufac-

Processed foodOtherbusiness
The processed food business handles the frozen and ambient®

®

2,092.6

outlets, mainly in the Tokyo metropolitan area.

CAPSULES/OD Tablets are the main products, among others.

(JPY BN)

Major products include “Reito-Sanuki-Udon” (frozen noodles),“Takitate-Gohan” (packaged cooked rice), and the “Vertex”

Japanese-domestic

Total revenue

Number of
employees
tobaccobusiness(2020)(As of December 31, 2020)

26.5%

Processed foodbusiness

Other

Pharmaceuticalbusiness

3.8%

International
tobacco business

62.4%

Processed foodbusiness

Other

1.7%

8.6%

SUSTAINABILITY

0.1%

7.1%

BUSINESS(yeast extract seasonings) in particular.

Pharmaceuticalbusiness

2.4%

2,092.6

26.5%

International
tobacco business

62.4%

Processed foodbusiness

Japanese-domestic
tobacco business

17.8%

GOVERNANCE

Japanese-domestic
tobacco business

58,300employees(JPY BN)International
tobacco business

69.6%

Other

FINANCIAL INFORMATION/OTHERS

1.7%

8.6%

Pharmaceuticalbusiness

2.4%

58,300employees

Japan Tobacco Inc. Integrated Report 2020005

Key performance indicators
Financial performance review
Revenue(JPY BN)2,143.3

2,139.7

2,216.0

2,175.6

JPY

2,092.6

2,092.6 BN

3.8%decrease year on year

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

2016

2017

2018

2019

2020

Adjusted operating profit(JPY BN)

586.8

585.3

595.5
515.9

+28.6

544.5

5.5% increase year

-57.6
487.0

on year at constant FX

5.6%
487.0

decrease to

JPY

BN (reported basis)

Consolidated adjusted operating profit (AOP) atconstant FX, JT Group’s performance indicator,
grew 5.5%. On a reported basis, AOP was down
2016

2017

2018

2019

Business 2020 at
momentum constant FX

FX

2020

5.6% due to unfavorable foreign currency impacts.
Adjusted operating profit is calculated asfollows: Adjusted operating profit=Operating
profit+amortization cost of acquired intangibles
arising from business acquisitions+ adjusted
items (income and costs).** Adjusted items (income and costs) are impairment losses
on goodwill, restructuring income and costs and others.

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Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Profit(JPY BN)

421.7

392.4

JPY

385.7

310.3 BN

310.3

VALUE CREATION

10.9%

348.2

decrease year on year

Profit attributable to owners of the parent
company.

2017

2018

2019

BUSINESS

2016

2020

Free cash flow

Dividend per share

503.9
404.2

72.6

(JPY)

130

140

150

154

154

2018

2019

2020

SUSTAINABILITY(JPY BN)

105.6
2016

2017

-316.2

JPY
JPY

2017

2018

2019

2020

503.9 BN99.7 BN increase year on year

Free cash flow is the sum of cash flows from operating activities

GOVERNANCE

2016

154 yenThe sum of interim and year-end dividends per share, therecord dates of which fall in the relevant fiscal year.

and investing activities, but excludes the following items:
FINANCIAL INFORMATION/OTHERS• From operating cash flow: depreciation from lease transactions, interest
received, dividends received, interest paid and income taxes related tothese items excluding lease transactions, and other items• From investing cash flow: purchase of investment securities (bothshort-term and long-term), payments into time deposits, proceeds fromsale or redemption of investment securities (both short-term andlong-term), proceeds from withdrawal of time deposits and otherinvesting activities not for business operation purposes

Japan Tobacco Inc. Integrated Report 2020

007

Non-financial performance review
Dow Jones Sustainability Indices (DJSI)
We are proud to be included in the DJSI Asia Pacific Index for the seventh consecutive
year, retaining second place in the tobacco industry.
Highlights include:• Improved scores across all economic, environmental and social dimensions• Continued to be the industry leader in the social dimension, with a full score in Social Reporting and Corporate
Citizenship and Philanthropy• In the environmental dimension, earned perfect scores in Environmental Reporting and Climate Strategy• Also earned a perfect score in Materiality in the social dimension• Awarded the SAM Bronze Class and Industry Mover distinction in the Sustainability Yearbook 2021 for the second
consecutive year
RRP (Reduced-Risk Products)
At the end of 2020, our RRP portfolio was present

in 27 countries, with a choice of 6 tobacco vapor
offerings (T-Vapor) and/or 5 types of e-cigarettes(E-Vapor).

Tackling illegal trade
As part of our constructive partnership with law
enforcement agencies around the world, we
provided them with information to effectively tackle
illegal trade in tobacco products, leading to:• More than 60 counterfeit tobacco factories andwarehouses raided• 3.22 billion illegal cigarettes seized
Respect for human rights
In 2020, with our ability to conduct in-person

Contributing to our communities
US$ 49.5 MM: Total value of community investment

Human Rights Impact Assessments disrupted by

7,888: The number of employees who volunteered

the pandemic, we expanded the human rights

on company time (Total of 19,199 hours volunteered)self-assessment questionnaire tool. This tool was
launched in a further 10 countries in 2020.
Agricultural Labor Practices (ALP)
Of all the entities that provided us with tobacco leaf,
either directly or through leaf merchants, 87%
reported against ALP.

3,589: The number of employees who volunteeredon their own time (Total of 4,889 hours volunteered)ComplianceMore than 99% of our employees in our Japanese
operations completed online training on the Codeof Conduct.

Almost 2/3 of employees of our international
tobacco business took advanced information
security training voluntarily.

Investing in people
Our international tobacco business was certified ascompany and achieved Gold status in the Pride Index Reporta Global Top Employer for the seventh consecutiveof Japanese employers for the fifth consecutive year.

year. We were certified as a Top Employer by the

Top Employers Institute in 64 countries around theworld. In Japan, JT was selected as a “White 500”

008

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Environment
We strive to further reduce environmental impacts, focusing on the most significant environmental risks and opportunities for our business and stakeholders. For further information on our environmental data, please visit JT.com.

VALUE CREATION

GHG emissions in our value chain in 2020
(CO2e thousand tons)

Combined Scope 1 and 2 GHG emissions

5%

8%

9%

(CO2e thousand tons)

4%

1,000

7,656
494

434

500

396

401

383

BUSINESS

335

74%
Combined Scope 1 and 2 GHG emissions

397

405

390

378

373

344

2015

2016

2017

2018

2019

2020

Scope 3Purchased goods and services
Capital goods
Transportation and distribution
OthersScope 1

その他

8.3%

1.5%

Water withdrawal (Thousand m )
3

医薬

2.4%

9,000
国内たばこ

61,975人

17.0%
6,000

10,523

10,712

10,432

10,302
海外たばこ

2016

2017

2018

2019

2020

70.8%

140

135

133

134

133

2015

2016

2017

2018

2019

50

126

GOVERNANCE

10,802

100

3,000

2015

Waste generated (Thousand tons)
150

12,00010,864SUSTAINABILITY

加工食品

Scope 22020

Note: Read more about our calculation methodology at JT.com.

FINANCIAL INFORMATION/OTHERS

For the second year running, we achieved a place on CDP's prestigious "A List" for tacklingclimate change and acting to protect water security. We are also recognized as a global
leader for engaging our supply chain on climate change. This marks our second recognition for CDP Supplier Engagement Leader following 2019.
Read more on JT.com.
Learn more about our non-financial data scope annotations at JT.com.
Any data without annotated scope in this report covers the entire JT Group including subsidiaries.
Japan Tobacco Inc. Integrated Report 2020009

Our response to COVID-19
The COVID-19 pandemic has drastically changed our daily lives, including our day-to-day
environments and jobs. How much longer the upheaval will persist is hard to predict. During the
pandemic, the JT Group has taken various steps to act responsibly based on pandemic-response
policies and business continuity plans.

COVID-19 impact on our top line
We estimate the pandemic has reduced our consolidated revenue by about 3% for 2020. The headwind on the tobacco business
was concentrated in its Duty-Free operations, due to international travel restrictions. The processed food business has seen afalloff in food-service products within its frozen and ambient food as well as the seasonings business, in addition to the decline indemand in its bakery business.

Safety of our employees and support for our business partners
Under the COVID-19 pandemic, we have placed top priority on ensuring the safety of stakeholders involved in our operations.
For employees, across the entire JT Group, we promptly encouraged working from home (WFH) to all the positions that did not
require immediate presence of our employees within the premises, whether in offices, factories or sales teams. As an example,
in Japan, more than 80% of our employees with office positions that can be done at home were doing so as of January 2021.
To enable such widespread WFH, we rapidly upgraded our IT infrastructure.
For all employees with jobs not conducive to WFH, including those working in sales roles, stores, factories, warehouses and research facilities, we have sufficiently provided
personal protective equipment (PPE) such as masks andenforced strict requirements with respect to hand-washing/sanitizing, mask-wearing, and checking body temperature.
We continue to operate with maximal safeguards against
infection in place.
Keeping supply chains functioning even amid the pandemic
is crucial to delivering products to consumers. We havebeen maintaining close communication with a host of
suppliers to prevent disruptions in product supplies. By
virtue of such efforts, we have so far averted major productsupply disruptions.

Improving our social impact
We strive to improve our social impact by helping to make communities more inclusive and resilient. In the countries and regions
where we operate, the JT Group provides emergency support such as essential supplies and financial aid in response to requests
from local communities. We are also providing our support to solve issues caused by the prolonged effect of the pandemic for abetter recovery. Visit our website* to find out more about our initiatives and programs to support those in need in Japan.
* Available only in Japanese010

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Digital transformation (DX)We expect DX to play a key role in strengthening our competitiveness. Since 2019, we have been carrying out various digital
initiatives under the leadership of an executive officer. We have been working on a modernization of our technology platform in
our markets, factories and logistics, expanding into artificial intelligence, IoT and robotic process automation (RPA). We havealso taken initiatives to enhance consumer convenience on our digital platforms across our businesses. A great example ofthese initiatives is CLUB JT in Japan (see details below). Given the dramatic increase in opportunities for our employees tocommunicate online with each other and consumers since the pandemic, we expect online communication to continue to play

VALUE CREATION

an increasingly important role.
CLUB JT is a digital marketing platform launched in March
2020 by the Japanese-domestic tobacco business in pursuitof better two-way communication with consumers. Itfeatures not only an online shop to meet diverse consumer
needs but also useful content like a map showing nearby
locations where smoking is permitted. We are endeavoring
to increase points of contact with consumers even as the
pandemic has reduced opportunities for face-to-face

BUSINESS

communication.

Tackling illegal trade
Tobacco is the JT Group's core business and tackling theillegal trade of tobacco products is one of our top priorities.
The outbreak of COVID-19 has caused serious damage to

Anti Illicit Trade Organisation 2020: The Gathering Storm

economies around the world. With dwindling consumer
exploit the decline in affordability. To assess the negative
impact of pandemics on illegal trade, we carried out ananalysis and shared our findings with law enforcement
agencies. We also published the report on our website.
Throughout the COVID-19 pandemic and beyond, we will

The
Gathering
Storm

SUSTAINABILITY

confidence and buying power, criminal groups are seeking tocontinue to combat illegal trade by working and engaging withthe relevant authorities.
Please see Regulatory environment and illegal trade (P. 77) for more details.

How illegal tobacco plans to rideout the Covid-19 pandemic

GOVERNANCE

Criminality is preparing to reap rewards in theeconomic aftermath that will follow Covid-19

1

With the pandemic showing no sign of abating, we must not view its impact as something temporary, but instead be prepared
FINANCIAL INFORMATION/OTHERS

for the continuous societal transformation it causes. Capitalizing on our strengths as a global player, we will continue to act incooperation with our stakeholders.

Japan Tobacco Inc. Integrated Report 2020

011

VALUE CREATIONThe JT Group enhances corporate value by providing a wide
range of products and services that satisfy the needs ofconsumers and society. At the same time, the Group createssocial value that contributes to the sustainable developmentof society.
This chapter shows the JT Group’s value creation road map
through the message from the CEO and illustration of the value
creation process. Other contents include the Group's value
chain and its unique strengths as the source of its
competitiveness, and also initiatives to enhance them.

014 Message from the CEO
018 Our history
020 Our value creation process
022 Our value chains
024 Superior brand equity

012

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

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Japan Tobacco Inc. Integrated Report 2020

Message from the CEO
The COVID-19 pandemic has brought an unprecedented upheaval around the world. I extend myheartfelt sympathies to everyone suffering in any way from this pandemic. Amid these challenging
times, I want to also thank the essential workers who keep society functioning worldwide, oursupply-chain partners and our employees dedicating themselves to keeping our businesses running.
The JT Group has placed utmost priority on the safety of all stakeholders, even during this crisis,
especially our employees and their families, while doing everything possible to minimize
inconvenience to consumers and business associates. Faced with such a worldwide crisis,collective wisdom is critical to prevent spreading the COVID-19 infection. We at the JT Group, as agood corporate citizen, have been continuously seeking solutions to societal challenges, helping tobring about increasingly inclusive and sustainable solutions to local communities. We will continue
to fulfill our role as a responsible member of the local communities in which we operate.
Please see page 10 for more on the JT Group’s response to COVID-19.

Masamichi Terabatake
Representative Director and President,
Chief Executive Officer

014

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

JT Group value creation
Our operating environment has regularly been impacted by uncertainties stemming from multiple factors, including changing
international political conditions and exchange rate fluctuations. These uncertainties are now compounded by a risk of pandemic-induced global economic volatility and the impact of lockdowns and travel restrictions. We expect the impact of COVID-19 on
consumer behavior to persist to some extent even after COVID-19 abates or completely ends.

VALUE CREATIONIn the midst of an operating environment that has been undergoing drastic changes historically, we have continued to grow byproactively transforming and preemptively addressing challenges with our sights set firmly on the future. For example, we havemade major acquisitions, including RJR Nabisco Inc.’s non-U.S. tobacco business and Gallaher Group Plc; geographically expanded into emerging markets; and strengthened our brand equity, particularly in our GFB (Global Flagship Brands). Today we continue
to invest in RRP (Reduced-Risk products) sales expansion.
My confidence is rooted in our unwavering management principle encapsulated in our pursuit of the 4S model and in the corestrengths we have cultivated over the course of our evolution to date, namely a solid financial base, superior brand equity and adiverse workforce. Capitalizing on these strengths as asource of competitiveness, we will continue to grow

BUSINESS

our corporate value by creating a wide range of
products and services that meet the needs of consumers and society. At the same time, we will continue tocreate social value through sustainability initiatives that
help to usher in a more sustainable society.
With the capabilities we have built through our actions todate, I am confident we can realize our mid- to long-term
vision of continuing to achieve global growth by providing

SUSTAINABILITY

diverse value unique to JT, even in times of tumultuouschange like today’s unprecedented circumstances.
Please see page 20 for more on the JT Group’s value creation.

In pursuit of sustainable profit growth: Business Plan 2021
To achieve our vision, we have set a Group profit target and our shareholder return policy from a mid- to long-term perspective in
our latest three-year (2021-23) business plan, Business Plan 2021, based on the 4S model and the resource allocation policy.

GOVERNANCE

Under our Business Plan 2021, our three-year business plan, we will remain committed to pursuing sustainable profit growth overthe mid to long term. Specifically, we will continue aiming to achieve mid to high single digit annual average growth of consolidated adjusted operating profit at constant FX, a measure of operating performance that excludes exchange rate movements andspecial factors, over the mid to long term. The key to achieving this target is to continue growing our tobacco business, which wehave designated as our core and driver of the JT Group’s profit growth.
The tobacco business’s operating environment currently continues to experience major changes, including changing perception of

FINANCIAL INFORMATION/OTHERS

smoking and health, heightened tobacco regulations and tax reforms in various countries, increasingly diverse consumer preferences as well as expansion and intense competition in product development in the RRP category. For the JT Group to achievesustainable growth amid such an environment, it is necessary to strengthen our competitiveness and profitability. Since I assumed
office as the CEO of the Group in 2018, we have made progress in several areas, starting with transforming the operating and organizational structures in the international tobacco business to strengthen the business foundation. To especially strengthen the
RRP business, we have formed global R&D and global RRP functions by integrating their respective domestic and international
teams. Furthermore, as the head of the tobacco business, I have been leading the development of next generation devices for HTS(heated tobacco sticks), which will be launched in Japan early in the second half of this year.

Japan Tobacco Inc. Integrated Report 2020

015

The RRP category, especially HTS, which has been mainly growing in Japan in recent years, is an entirely new business in comparison to the combustibles business for us. The combustibles business model is well established and it has been possible for theinternational tobacco business and the Japanese-domestic tobacco business to grow their respective contribution. However, ourcompetitors are concentrating their global resources in this new business. In order to strengthen our position in the RRP category,
it is essential to continue deploying a consistent strategy to offer products and services that meet consumers’ needs with agility
and in a short turnaround.
Recognizing these challenges, effective January 2022 we decided to transcend the boundaries of the international tobacco
business and the Japanese-domestic tobacco business to operate as a single tobacco business in order to further enhance thespeed of business operations and break through the current uncertainties. Combining the existing tobacco businesses is an
important step toward nurturing the RRP category into our long-term growth driver. This combination will help us to focus ourresources on HTS and maintain a competitive organizational structure as our competitors.
In the Business Plan 2021, we have redefined the investment priorities in the tobacco business toward more focus on HTS andcombustibles, particularly on HTS, taking into account the further expansion of RRP category.
Regarding business investments, over the past three years we focused on manufacturing capabilities. Going forward we havedecided to strengthen investments in areas closer to our consumers, such as R&D, marketing, and digital capabilities. We plan
to increase total investment in RRP compared to the past three years. In addition, with regard to improving profitability tosupport increased investment in RRP, we expect to realize cost savings of approximately 40 billion yen, compared to 2019, forthe entire tobacco business in 2023 when JTI's transformation and review of the business operation model in the Japanesemarket will be completed.
The integration plan for the unification of the tobacco businesses and setting up the specific goals and strategies for the global
tobacco business are expected to be prepared by the middle of this year, under my leadership as a project owner. Through thisintegration, we intend to enhance our competitiveness and deliver results through our collective efforts by enhancing the speed ofdecision-making and a more effective and efficient business management system based on a simplified organizational structure,
as well as by sharing the knowledge possessed by each market globally.
The pharmaceutical and processed food businesses both face adverse operating environments in our view. Nonetheless, their role assecondary profit growth drivers remains unchanged. The pharmaceutical business is committed to developing globally marketable,
innovative drugs and making them available to patients as early as possible; the processed food business will focus on producing
products that consumers and their loved ones can enjoy safely.
Next, I would like to discuss changes to our shareholder return policy.
We have revised our shareholder return policy, effective from 2021. We did so partly from the standpoint of business continuity
across the entirety of our supply chain. With our revised shareholder return policy, we can better maintain a financial foundation able
to withstand major changes in our operating environment, like those caused by Lehman shock or the more recent COVID-19 pandemic. A second motivation was to better align our shareholder return policy with our resource allocation policy, under which we prioritize
business investments that will lead to sustained profit growth over the mid to long term and seek to strike a balance between
investment-driven profit growth and shareholder returns. Under our previous shareholder return policy, we aimed to steadily increase
dividend per share (DPS) every year. Going forward, will be targeting a dividend payout ratio of 75%.* For 2021, we are forecasting
DPS of 130 yen. Even under our revised policy, our long-standing aim of increasing shareholder returns by achieving mid- to long-term
profit growth through business investment remains unchanged.
* To be in the range of approximately ±5%
Please see page 28 for more on Business Plan 2021 and Message from the CFO on page 30 for more on shareholder returns.

016

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Sustainability initiatives for long-term business growth
Sustainability initiatives are essential for attaining mid- to long-term profit growth of our business. These initiatives will in turnsustain growth in shareholder returns, as set out in Business Plan 2021. We have consistently placed importance on creating
corporate values that will contribute to sustainable development of our society. The 4S model, our management principle, is about
our commitment to our valued consumers, shareholders, employees and the wider society. We believe the model has a closeaffinity to sustainability.

VALUE CREATION

Sustainability has always been at the core of our management initiatives. For example, as the JT Corporate Governance Policy sets
out that the Board of Directors shall proactively address sustainability issues, we have appointed a chief sustainability officer who is aboard member. Our Group Sustainability Strategy has been formulated based on material issues defined through materiality assessment. Specifically, we have set out three absolute requirements for sustainability which apply across the Group, while each businesshas set out its own focus areas with plans and targets. As the Group CEO, I am committed to achieving the sustainability targets. Our
Board of Directors is too. In order to better realize our plans and targets, we are directly involved in the Plan-Do-Check-Action cycle ofsetting, monitoring and discussing the progress of our sustainability plans and targets on a regular basis.
The JT Group’s efforts in sustainability have been highly evaluated by external parties, and we have been selected as a memberof the Dow Jones Sustainability Asia Pacific Index, which is one of the international indicators for evaluating corporate sustain-

BUSINESS

ability from three perspectives: economic, environmental, and social. In addition, we feel honored that CDP, the global environmental non-profit-organization, has named JT to its “Climate A List” as well as “Water A List” for the second consecutive year. In
2019 we formulated the JT Group Environment Plan 2030, in which we set targets, concrete initiatives, and milestones. We also
endorsed the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in December 2020. The JT
Group has been conducting multiple scenario analyses on climate change, and in accordance with these recommendations, wewill further identify and disclose the risks and opportunities that climate change may have on the Group's business activities in
the future. We believe sustainability initiatives are essential to support sustainable growth and development of society as wellas the Group's long-term growth in business. We will further promote such initiatives and contribute to the Sustainable Devel-

SUSTAINABILITY

opment Goals (SDGs).
Please see page 58 for more on sustainability and page 84 for corporate governance.

We believe the JT Group is now at its most important inflection point since its founding. One of my key roles as Group CEO is
to lay the groundwork for the future JT Group’s growth by anticipating changes in our operating environment and, to theextent feasible, taking decisive preemptive actions instead of waiting. As I mentioned, we have been steadily reconfiguring the
tobacco business’s operating model over the past three years to optimize Group-wide resource allocation. One outcome ofthis process was our decision to consolidate the international and Japanese-domestic tobacco businesses into a single unit.
Seizing upon such self-catalyzed change as an opportunity for further growth, we will embark on a new chapter as a truly
global company from 2022.

GOVERNANCE

We are confident we can maximize stakeholder value through sustained profit growth
driven by business investment based on the
management principle encapsulated in our
pursuit of the 4S model. The key to doing so
is to earnestly engage with consumers, thestakeholder constituency at the heart of the

FINANCIAL INFORMATION/OTHERS

4S model. The JT Group will increasingly add
value to keep rolling out new products andservices that exceed consumers’ expectations and to remain an essential company inthe eyes of consumers, shareholders,
employees and society.

Japan Tobacco Inc. Integrated Report 2020

017

Our history

The JT Group has achieved sustainable growth by globalizing and diversifying its businesses through both organi

1970s and earlier

1980s

Origins of the modern
Japanese tobacco industry

Privatizing and creating
the base of the current
business portfolio

Growing to become the third largest gl
tobacco company in volume by acquir
the world’s leading brands through M

Japan Tobacco and Salt Public
Corporation, under the authority of the
Ministry of Finance, lays the foundationof the Japanese tobacco industry.

The public corporation privatizes
under the name Japan Tobacco Inc.,
founding the tobacco,
pharmaceutical and processed foodbusinesses, which persist to this day.

By acquiring RJR Nabisco Inc.’s non-U.S. tobac
business, JT obtains competitive brands ana global business foundation.

1949 J apan Tobacco and Salt Public

1985 J apan Tobacco Inc. is

1992 J
 T acquires Manchester Tobacco

Corporation is founded.

established.

 OPE (10) is launched as1957 H

Division is established topromote new businesses.

produced filter cigarette.

The division is later reorga-

1969 S even Stars is launched as

nized into the food andJapan’s first domestically
produced charcoal filter
cigarette.
1977 M
 ILD SEVEN is launched.

Company Ltd. (U.K.).

1985 T he Business Development

Japan's first domestically

1990s

1993 T he Central Pharmaceutical ResearchInstitute is established.
1998 J
 T acquires a majority stake in Torii
Pharmaceutical Co., Ltd.

pharmaceutical businesses.
1988 J
 T is introduced as theCompany’s public communication name.

 T acquires RJR Nabisco Inc.’s non-U.S.
1999 J

tobacco business, taking over the globa
brands of Winston and Camel.

• This realizes an exponential growth ininternational tobacco business with sa

volume expanding by over ninefold gre
than the previous year.

1999 J
 T acquires Asahi Kasei Corporation’s fobusiness, including Asahi Foods and sev
other subsidiaries.

Solid financial base

The three strengths underpinned byour history and accomplishments• Sustainable profit growth backed by a combination of organic
growth and M&A• Ability to generate stable cash flows underpinned byprofit growth018

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

ic growth and M&A.

2010s

lobal
ring
M&A

Strengthening our position as a global
tobacco company by accelerating ourglobal expansion

Providing new value by addressing increasingly
diverse consumer needs and preferences

ccond

By acquiring Gallaher Group Plc, JT further
expands the international tobacco businessand obtains a diverse workforce while
fostering its financial base.

JT strengthens the international tobacco businessthrough both geographical expansion driven by M&A
and organic growth in the existing markets, andprovides a wide range of product choices, including
RRP (Reduced-Risk Products).

BUSINESS

2007 J
 T acquires Gallaher Group Plc (U.K.), taking

VALUE CREATION

2000s

2013 M
 ILD SEVEN is renamed MEVIUS.

over the global brands of LD, Benson &Hedges and more.

 T acquires E-Vapor company, Logic (U.S.).
2015 J

tobacco business increases by more than

2016 J
 T acquires Natural American Spirit’s non-U.S. tobacco• The sales volume of the international
50% compared to the previous year,
making the international tobacco business2008 J
 T acquires a majority stake in Katokichi.

Co., Ltd. (currently TableMark Co., Ltd.) andal

Fuji Foods Corporation.
the

ales

2016 P loom TECH is launched in Japan.

SUSTAINABILITY

the main profit driver of the JT Group.

business from Reynolds American Inc. (U.S.).

2016 J
 T conducts tobacco business acquisitions, notably in the2018 Philippines, Indonesia, Russia and Bangladesh.
2019 P loom TECH+ and Ploom S are launched in Japan.
2020 P loom S is launched in Russia, Italy and the U.K.

eater

GOVERNANCE

ood

ven

• High brand equity through continuous investment in MEVIUS,
our leading brand in Japan, as well as in Winston, Camel, LD
and other global brands acquired through M&A

FINANCIAL INFORMATION/OTHERS

Superior brand equity

A diverse workforce• A corporate culture that respects diversity and leverages it
into the value creation process• A Group that maximizes the synergies generated from diversity• Strong R&D and innovative product development capabilities

Japan Tobacco Inc. Integrated Report 2020019

Our value creation process

Our management principle pursues the 4S model. This principle guides our efforts to achieve our vision by enhancing cowide range of products and services through business activities leveraging our three strengths: a solid financial base, s

Our core capital

Our business activities and growth strategies

Financial capitalBusiness strategy

Sustainable profit growth and stable cash flows arebacked by a combination of organic growth and M&A.

Achieve quality top-line growth•A djusted operating profit at constant FX	���� ¥544.5 billion

Strengthen cost competitiveness(+5.5% year on year change)• Total equity................................................... ¥2,599.5 billion• FCF................................................................... ¥503.9 billion

Enhance business foundation

Intellectual capital

Strategies by segment

Strong R&D Capabilities
We possess a diverse portfolio of competitive brands
and robust brand equity rooted in our ability to deliver
high-quality, innovative products.

Tobacco

P. 34
P. 46
P. 48

Pharmaceuticals
Processed Food

• R&D expenditures............................................. ¥60.8 billion(Tobacco Science Research Center,
Central Pharmaceutical Research Institute, etc.)•W e own three of the top 10 highest-selling cigarettebrands in the world.

We have global business operations and a wide
collaborative network spanning the value chain.

Solidfinancial base

Superior
brand equity

A diverse
workforce

ale
s

•C
 ountries/regions where our products are sold	�����Over 130•C ountries where we operate.................................... Over 70•D irectly contracted tobacco leaf growers andtobacco leaf merchants....................................Over 76,000

Three strengths driving
our global growth

acturin g

Social and relationship capital

Pro
cu
re
m

nuf

• Number of employees................................................58,300• Employee nationalities...........................................Over 100• Certified as a Top Employer in........................64 countries/S

Shareholders

Our corporate culture respects diverse values andgenerates synergy from a diverse workforce.

D is t ri b u ti o n

We strive to fulfill our
responsibilities to our valued
consumers, shareholders,
employees and the wider society,carefully considering therespective interests of these four
key stakeholder groups,
continuously working to exceed
their expectations.

D
R&

Ma

The 4S model

Human capitalten

Our management
principle

M ark etin g

Manufacturing capital
Consumers

Employees

Society

Our optimal manufacturing system and active capital
investment ensure superior quality and productivity.
Our system provides markets with products in an
efficient and timely manner.
•C apital expenditures....................................... ¥112.9 billion• Tobacco manufacturing bases........................41 factories(29 countries)•P rocessed food manufacturing bases	����������32 factories(all factories have achieved FSSC 22000
certification except one that began operation in 2020)

The JT Group’s three absolute requirements
Respect for human rights
Improving our social and environmental impact
Good governance and business standards

Natural capital
The natural environment is vital to our sustainable growth.
• Water resources	����������������������� 10,302 thousand m3 ofwater withdrawal (2020)• Forest......................................... Planted 6 million trees
Our measures to improve our environmental impact

Our sustainability strategy

Strategic focus areas for sustainability
TobaccoPharmaceuticals
Processed Food

P.72
P. 80
P. 81

P. 66

Corporate governance and compliance supp

The external environment surroun
020

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

orporate value and creating social value. We provide asuperior brand equity and a diverse workforce.

s

The value we create

Tobacco BusinessCorporate value

Expanding our product portfolio
to satisfy increasingly diverse
consumer needs and preferences

VALUE CREATION

Our products and services

Achieving consolidated
profit targets
Mid to high single digit annual
average growth of adjusted
operating profit at constant FX
over the mid to long term

Improving shareholder returns

BUSINESS• Cigarettes/FCT (fine cut tobacco)• RRP (Reduced-Risk Products)– T-Vapor– E-Vapor, etc.

By realizing sustainable profit
growth over the mid to long term

Pharmaceutical Business
Developing new, original drugs
to save people around the worldfrom disease

Realizing the future of dining
in Japan through businesses that
support our dietSocial value
Contributing to thesustainable development ofsociety through ourbusiness activities

To continue to be a
growing global
company that provides
diverse value, uniqueto the JT Group.

We contribute most significantly tothe following nine SDGs by achieving
specific targets in each business’s
focus areas, such as providing
products and services that exceed
consumer expectations, investing in
our people and building a sustainablesupply chain.

GOVERNANCE

Processed Food Business

VISIONSUSTAINABILITY• Three key therapeutic areas– Metabolic diseases– Autoimmune/
inflammatory diseases– Viral infection

through business investments

FINANCIAL INFORMATION/OTHERS• Frozen and ambient foods• Seasonings• Bakery products

porting all of these processesnding the JT Group

P. 84

P. 50
Japan Tobacco Inc. Integrated Report 2020021

Our value chains

We are strengthening all of our value chains from R&D through sales in pursuit of the 4S model that encapsulates
our core strengths – a solid financial base, superior brand equity and a diverse workforce – we are endeavoring todistinctive products and services.

R&D• Innovate by strengthening R&D

Tobacco BusinessPriorities

Main
initiativesles

M a r k e ti n g

Pharmaceutical Businesst u ri n g

ufac
an

/Sa

M

D i s t r i b u ti o n

Solidfinancial
base
Superior
A diverse
brand equity workforce

needs and product regulations
that form the basis of R&D• Product innovation including
tobacco leaf, blends, filters,
packaging, etc.
• Speedy development ofcompetitive RRP (Reduced-Risk
Products) through JT-JTI
collaboration• Promotion of research on
scientific evaluation of RRP andproactive disclosure ofaccumulated scientific evidencetenThree strengths driving
our global growth

Processed Food Business
022

Japan Tobacco Inc. Integrated Report 2020

tobacco leaves• Maintain competitive pricecosts more effectively

contracted tobacco leaf growintegrated bases (in Africa, B• Enhance the sustainability ofby helping tobacco leaf growproductivity as well as taking
support their communities• Strengthening of relationshipgrowers and leaf merchantsbased resolution of issues arLabor Practices• Pursuit of improved efficienc
better lot-size management
non-tobacco materials• Improvement in responsivenmarket prices and supply-de
through, e.g., purchasing mautilizes supply market intellig

R&D
Priorities• Develop innovative drugs• Improvement in R&D efficiency through concentration of resources
disease domains

Main
initiatives• Promotion of efficient and expeditious clinical development throughamong domestic and foreign R&D sites• Proactive pursuit of opportunities to out- and in-license compounds

R&D* For information on sustainability initiatives in the
tobacco, pharmaceutical and processed foodbusinesses’ value chains, please refer to pages
72, 80 and 81, respectively.

• Sustainable supply of hig• Increase the proportion of le• Analysis of trends in market

Pro
cu
re
m

D
R&

capabilities and continuously
improve quality

Procurement

Priorities• Develop high-value-added
products that meet consumer
needs and preferences• Development of new products

Maininitiatives

tailored to consumer needs
based on market/competition
research and analysis• Upgrading of products andaddition of value throughutilization of proprietary yeast
and freezing technologies as well
as development of new
manufacturing processes

Procurement• Strengthen supply chain toof safe, high-quality ingred• Verification of ingredientsquality specification certifi
submitted by suppliers• Monitoring of main ingred
residue content and period
ingredient production plan
applicable laws/regulation
standards• Inspection of source farmquality, verification of crop
pesticide management chinspections of livestock an

CORPORATE PROFILEs our management principle. Capitalizing ono continuously create value by developing

es and control

eaves procured fromwers on our vertical
Brazil, etc.)
f tobacco farming
wers to improveg initiatives tocy through, e.g.,
in sourcing ofness to changes inemand fluctuations
anagement thatgence

• Optimize production operations for• Enhance equity of brands throughstable manufacturing/supply ofhigh-quality products

effective communication with
consumers• Formulation of flexible production• Appropriate allocation of resources inplans adaptable to manufacturing
complexities due to increase in
number of products• Thorough quality inspections
based on advanced quality
management systems• Business continuity preparedness
against emergencies• Optimization of plant locations toenable product supply to eachcountry in an efficient manner

pursuit of brand equity growth, mainly
among GFB (Global Flagship Brands)• Marketing activities that are tailored toindividual markets and comply withlocal laws/regulations as well as
self-regulatory principles• Promotion of two-way communication
with consumers through use ofdigital platforms, including loyalty
point programs and e-commerce forJapan market

Manufacturing

Distribution/Saless’ safety based on
ficationsms’ soil and waterp conditions,
hecks andnd fish farms• Conduct detailing activities responsibly• Formulation of guidelines to verify
conformity between drugs’ approved
specifications and actual
manufacturing processes• Continuation of annual inspections ofcontract manufacturing plants basedon the guidelines

Manufacturing• Manufacture safe, high-quality
food products• Formulation of internal standards based on the guidelines on ethical drug detailing
activities, issued by the Ministry of Health, Labour and Welfare• Thorough compliance with said standards through training of Torii Pharmaceutical’s
medical sales repsMarketingDistribution/Sales• Propose products and promote sales• Strengthen sales capabilities andstrategies in response to increasingly
diverse consumer needs and trends

disclose information conducive toconsumer reassurance• Certification of compliance with ISO• Aggressive sales approach targeted at

22000 or FSSC 22000 international foodsafety standard across all JT-affiliatedplants and contract manufacturing
plants globally (One of our factories,
which started its operations in 2020 isscheduled to be certified in 2021)• Verification of end products’
compliance with pesticide content andother safety standards throughmonitoring inspections• Reduction of contamination risk throughestablishment of and compliance withfood defense guidelines

supermarkets, convenience stores and otherfood retailers to assure a variety in products andpreferential display locations• Strengthening of communication with
consumers through online disclosure of productinformation and labeling of products with theirproduction location, main ingredients’ place oforigin and contact information for consumer
inquiries/feedback• Improvement in safety visibility through traceabilityof inspection/audit results across the entire value
chain from raw material sourcing throughproduction, processing, distribution and sales• Consumer-centric market analysis todevelop product proposals that add
new value• Effective sales promotion to boost
product recognition among consumers• Enhancement of marketing/sales
activities that prioritize profitableproducts

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

dients’ pesticide
dic inspections of
nts in accord withns and our own

initiatives suited for each market,
taking market context into accountsuch as channel development,
consumers and competitors• In Japan:— Improvement in consumer
convenience through developing
purchase areas in collaboration withmajor retailers— Improvement in consumer-experiencevalue by appealing product benefits— Providing opportunities for
consumers to enjoy tobacco throughinitiatives such as accommodatingthem with smoking environments

GOVERNANCE

o enable sourcing
dientsshare through sales initiatives tailored toindividual situation• Promote a broad range of localized,
consumer-centric activities

SUSTAINABILITY

pharmaceuticals stably

coordination• Expand sales networks and market• Apply most effective marketing• Manufacture high-quality

s in targetedDistribution/Sales

BUSINESS

ps with tobacco leafs through dialogueround AgriculturalMarketing

VALUE CREATION

gh-quality

Manufacturing023

Superior brand equity
We largely attribute our long history of success to three strengths: a solid financial base, superior
brand equity and a diverse workforce. In conducting business activities, we leverage these threestrengths as sources of competitiveness.
This feature highlights our superior brand equity, one of our three core strengths.

TobaccoWe have a broad portfolio of brands that meet diverse consumer needs globally. The nucleus of our brand portfolio is our GFB(Global Flagship Brands)–Winston, Camel, MEVIUS and LD–all of which are globally recognized for their superior quality. To
gain mass consumer loyalty, we believe we must keep building more brand equity. We have been doing so worldwide throughvarious approaches, most notably including our rebranding of MILD SEVEN as MEVIUS. In the RRP (Reduced-Risk Products)
category, with devices under the Ploom brand, we offer HTS (heated tobacco sticks) in Russia, Italy and the U.K. while offeringboth HTS and Infused (infused tobacco capsules)
in Japan’s large RRP market. We also have E-Vaporand oral such as Logic and Nordic Spirit.

KV 横矩形（H515×W725）1/2

なにと

する？
NEW

プルーム・テック・プラス
ウィズ

メビウス・プレミアムゴールド・レギュラー・プルーム・テック・プラス専用 たばこカプセル5本 カートリッジ1本入 ※画像はイメージです。

本 デバイスには、
プルーム・テック・プラス専用たばこカプセルが必 要です。

20歳未満の者の喫煙は、法律で禁じられています。
加熱式たばこの煙（蒸気）は、子供の健康への悪影響が否定できません。たばこの誤飲を防ぐため、乳幼児の手が届かない所に保管・廃棄を。
加熱式たばこの煙（蒸気）は、発がん性物質や、依存性のあるニコチンが含まれるなど、あなたの健康への悪影響が否定できません。

「low」の表現は、健康への悪影響が他製品より小さいことを意味するものではありません。

Since its launch in 1977, MEVIUS has been a popular cigarette brand for over 40
years. Even my father was a MEVIUS smoker back when MEVIUS was still MILDSEVEN and it is also my beloved brand. We will continue to evolve the MEVIUS brand,
keeping it in sync with diversifying needs and tastes to perpetuate its status as thepreferred choice of smokers across multiple generations, so that it is the brand thatalways brings comfort to our consumers in moments of sorrow and in joy.

Reiji Yokoyama
Product & Brand Division,
Marketing Group, Tobacco Business Headquarters, JT
This section is intended only to explain the business operations of the JT Group, not to promote sales of tobacco or vaping products or encourage smoking or vaping among consumers.

024

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Processed Food
The processed food business concentrates on the frozen and ambient food, seasonings and bakery businesses, and we seek
to provide consumers with safe, secure and delicious food, in the hope that they will choose our products for their loved ones.
TableMark, one of the main frozen and ambient food business’s companies, has a long history of innovation focused on
consumer needs. It has been rolling out delicious new foods in rapid succession by revolutionizing production methods refined
through constant technological innovation.

VALUE CREATION

Frozen foods offer time-saving convenience,
the need for which is growing in tandem withthe working-single and DEWK (dually employed with kids) populations. In 2020, we
focused on developing time-saving products.
I get a lot of fulfillment from creating productsthat free up time for consumers.

BUSINESS

Tomoko Uozumi
Product Development Department,
TableMark Co., Ltd.

TableMark is fastidious about flavor also. To obtain the flavors it seeks, it has developed original production processes andinstalled a variety of specialty equipment. Its production process for frozen udon noodles, for instance, exactingly replicates anartisanal noodle-making method that yields firmly textured, eminently slurpable noodles that go down smoothly.
SUSTAINABILITY

TableMark’s core products include packaged cooked rice and frozen
okonomiyaki in addition to frozen udon. In Japan, all three are ranked
at the top of their respective segments by market share. Capitalizing on its proprietary production technologies and product development prowess, TableMark aims to keep incessantly developing new
products that can be consumed safely.

GOVERNANCE

TableMark’s Frozen Sanuki Udon
TableMark had long sought to capture the delectability of authentic sanuki
udon in a frozen food format. It succeeded with its frozen sanuki udon,
which features robustly textured, translucent white noodles with a wheaty
flavor/fragrance and silky smooth mouthfeel. TableMark developed the

FINANCIAL INFORMATION/OTHERS

product with meticulous attention to detail across every single step fromselecting ingredients to designing the production process, all so families
throughout Japan could enjoy authentically delicious sanuki udon.

Japan Tobacco Inc. Integrated Report 2020025

BUSINESSThe JT Group will pursue sustainable profit growth over the mid
to long term, providing a wide range of products and services ineach business.
This chapter explains the Group’s growth strategy andoperations driving the Group’s value creation. It also includes
the Group’s financial policy, explained by the CFO, as well as thesurrounding external environment and risk factors which
influence its businesses.

028 Business Plan 2021
030 Message from the CFO
034 Business strategy/Business review• Tobacco Business– International Tobacco Business– Japanese-Domestic Tobacco Business• Pharmaceutical Business• Processed Food Business
050 Risk factors
054 Regulation and key laws
057 Litigation

026

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

027

Japan Tobacco Inc. Integrated Report 2020

Business Plan 2021
Every year the JT Group publishes a three-year rolling business plan, reflecting the changing
operating environment, including economic trends, geopolitical risks and the competitive landscape.
We will achieve sustainable profit growth by investing in our businesses, maximally leveraging ourresources on a Group-wide scale and transforming ourselves even in a drastically changing
operating environment.

Group profit target
Consolidated adjusted operating profit (AOP) at constant FX growth rate: mid to high single digit CAGR

Roles and targets of each businessTobacco Business
The tobacco business, the core and driver of the JT Group’s profit growth, aims to grow at a mid to high single digit CAGR over the
mid to long term of AOP at constant FX.

Pharmaceutical Business/Processed Food Business
The pharmaceutical and processed food businesses aim to complement the JT Group’s profit growth.
• Pharmaceutical business: Focus on R&D investments toward next-generation strategic products and maximize the value ofeach product• Processed food business: Ensure sustainable profit increase through top-line growth

Operating environment outlook 2021-2023
Uncertainties are expected to increase due to COVID-19, in addition to changes in international political conditions, exchange rate
fluctuations, and other factors.
• COVID-19 continues to affect the global economy, while economic recovery in all countries is forecast to be moderate• Close monitoring of further changes in operating environment is essential despite limited direct impact expected from COVID-19
on the tobacco business in the mid term. Additionally, we assume regulatory tightening and periodic tax increases will continue

Combustibles: cash-generation source– Industry volume to continue to decline and downtrading to accelerate, notably in mature markets– Opportunities of profit pool increase through pricing

RRP (Reduced-Risk Products): pillar of future business growth– Market size to continue to expand and competition to intensify

028

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Tobacco Business: Redefine investment prioritization categories andstrengthen the operating model• With an eye on the long-term operating environment, we have redefined the investment prioritization categories to reinforce ourcompetitiveness and profitability to achieve sustainable growth– We will prioritize management resources toward HTS (heated tobacco sticks) and combustibles– We will position E-Vapor, Infused (infused tobacco capsules) and oral tobacco (snus, nicotine pouches) as exploratory

VALUE CREATION

categories and adopt a more selective investment posture• In order to undertake the aforementioned investments, we will strengthen the tobacco business’s operating model. We willconsolidate the existing international and Japanese-domestic tobacco businesses into one tobacco business (from January 2022)• At the same time, we will strengthen our competitiveness in the Japanese market, the JT Group’s most important market(transition to a new organization in April 2022)– Establish an organization structure to enhance consumer satisfaction– Ensure competitiveness and adjust the operating model in line with Japan sales volumes
Please refer to Business strategy/Business review (P. 34) for more details.

Resource allocation policy
BUSINESS

Resource allocation policy based on the 4S model• Prioritize business investments*¹ for sustainable profit growth in the mid to long term
• Strike a balance between profit growth through business investments and shareholder returns

Shareholder return policy– Aim to enhance shareholder returns by realizing the Group’s mid- to long-term profit growth, while maintaining a strong financial base*2– Target a dividend payout ratio of about 75%,*³ a competitive level*4 in the capital markets
SUSTAINABILITY– Consider implementing a share buy-back program, mainly taking into account the Group’s financial outlook of the respective year
and mid-term capital needs*1 Investment towards the growth of the tobacco business is our highest priority. Pursue growth of AOP at constant FX through quality top-line growth*2 The Group will maintain a strong financial base that secures stability in case of changes in business environment such as economic crises and flexibility enabling
expeditious responses to business investment opportunities*3 To be in the range of approximately ±5%*4 We monitor the shareholder return trends of Fast-Moving Consumer Goods companies which have a stakeholder model similar to our 4S model and have realized
strong business growth

We have revised our shareholder return policy for 2021 in accordance with our resource allocation policy, which remains unchanged.
For more details, please refer to Message from the CFO (P. 30).

The 4S model

Materiality

GOVERNANCE

JT Group's approach to sustainability

Sustainability strategy

SDGs
FINANCIAL INFORMATION/OTHERS• In order for the Group to achieve sustainable growth, it is essential for our business to contribute to the sustainable developmentof our society through our business activities• Sustainability is at the heart of managing our business. Our sustainability strategy is formulated based on the 4S model, ourmanagement principle, and encompasses our materiality analysis• To proactively address ESG (Environment, Social and Governance) issues, we have set out three absolute requirements forsustainability which apply across the Group, while each business has set out its own focus areas
For more details, please refer to Sustainability strategy (P. 62).

Japan Tobacco Inc. Integrated Report 2020029

Message from the CFO
We aim to enhance shareholder returns by realizing
sustainable investment-driven profit growth over the
mid to long term while maintaining a financial
foundation able to withstand major changes in theoperating environment under the 4S model-guided
resource allocation policy.

2020 Financial results
Consolidated adjusted operating profit (AOP) at constant FX,
our preferred metric for assessing operating performance,
grew 5.5%, driven by the international tobacco business’s
growth. This achievement is in line with our aspired target of
mid to high single digit CAGR over the mid to long term in our
Business Plan.

Naohiro Minami

Revenue was down 3.8% year on year to 2,092.6 billion yen.

Representative Director andExecutive Vice President,
Chief Financial Officer

Factors behind its decline include decreases in the Japanese-domestic tobacco business’s cigarettes sales volume
and RRP (Reduced-Risk Products)-related revenue; sales
reductions in domestic Duty-Free and China businesses dueto the impact of COVID-19; sales decreases in the processedfood business’s food-service products in the frozen and ambient food business, seasonings business as well as lower sales of the
bakery business in the wake of a major COVID-19-induced demand contraction; and a reduction in the pharmaceutical business’s
overseas royalty income. We analyze the negative impact of COVID-19 on the top line as around 61 billion yen.
AOP was down 5.6% to 487.0 billion yen. The decrease was mainly attributable to the Japanese-domestic tobacco and processed foodbusinesses in addition to adverse exchange rate movements in the international tobacco business.
Operating profit decreased 6.6% to 469.1 billion yen despite an increase in the sales of real estate mainly due to the former JT head
office building’s sale and the non-recurrence of year-earlier restructuring cost in the international tobacco business. These two incremental profit factors were outweighed by the non-recurrence of one-time revenue booked in 2019 by the pharmaceutical business on thetermination of a domestic licensing agreement for six anti-HIV drugs.
Profit attributable to owners of the parent company was down 10.9% at 310.3 billion yen, largely as a result of the decrease in operating
profit and higher financing costs.
Free cash flow (FCF) was 503.9 billion yen as a result of stable operating cash flow, even amid the COVID-19 pandemic, and a one-time
cash inflow from the former JT head office building’s sale.

Our response to COVID-19
In the first quarter of 2020, we augmented our liquidity, largely through commercial paper issuance, as a buffer against unforeseen
circumstances arising from COVID-19. We issued the commercial paper while leaving a committed line of credit substantially undrawn.
As it is unpredictable to forecast the future with the ongoing COVID-19 pandemic, we decided it would be prudent to maintain the
undrawn credit-line capacity while sourcing capital by other means.

030

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

In sum, we are making decisions on how to manage our finances–either normally or more conservatively–based on prevailing andprospective conditions, including the existence of any structural changes afoot in the external environment with respect to capitalraising. Additionally, our treasury division has made arrangements to expedite implementation following decision-making.
We have also provided financial support to key supply-chain partners during COVID-19, including increases in customers’ credit
limits and extension of payment deadlines.
Such measures resulted in a transient increase in credit risk exposure, but we have not incurred any material credit losses.

VALUE CREATION

Financial policy: stability and flexibility
I will now explain our financial policy.
We believe financial stability and flexibility are equally important. We define the former as the ability to stay in business even whenmajor risk events like economic crises occur; the latter as the ability to nimbly take advantage of attractive investment opportunities. We have adopted a financial policy that ensures our financial foundation is both stable and flexible enough to realize sustainable profit growth through business investment.
This policy is shaped by how we think about capital structure and raising capital, as explained below.
JT was established under the Japan Tobacco Inc. Act (hereinafter JT Act), not the generic Companies Act. The JT Act requires the

BUSINESSJapanese government to always own at least a one-third equity interest in JT. If JT were to raise equity capital, one-third of the
new shares must be issued to the government under the JT Act. JT consequently relies predominantly on debt financing from afinancial-agility standpoint. While we have the option of improving our financial stability by refinancing through sale of treasury
shares, we believe such an offering would be appropriate only if we are confident we can grow the JT Group’s value enough tomore than offset the resultant dilution.
Given the JT Act’s constraints on the equity component of our capital structure, we ascribe critical importance to maintaining amanageable balance between assets and liabilities. We believe the key to doing so is to grow our assets while keeping liabilities at

SUSTAINABILITY

an appropriate level. The main lever by which we regulate the balance between assets and liabilities is cash flow. By boosting our
cash-flow generation capacity, we aim to maintain or increase our debt capacity and use it to fund investments as efficiently as
possible. We raise debt capital either from subordinated loans or through subordinated bond issuance by subsidiaries, dependingon the capital market environment, to improve both our financial soundness and capital efficiency.
We ended 2020 with a debt/equity ratio of 0.38x and credit ratings of AA– (S&P), A1 (Moody’s) and AA (R&I), all of which we
consider appropriate. We periodically perform credit-rating simulations internally. Such simulations involve estimating future
operating cash requirements, modeling cash inflows from additional debt and acquirable assets and reviewing our shareholder
return policy and investment opportunities from a financial standpoint while also taking into account credit-rating impacts.

GOVERNANCE

Resource allocation policy
Under this policy, in terms of allocating management resources, our policy is to place top priority on business investments that willlead to sustainable profit growth over the mid to long term and focus on striking a balance between shareholder returns andinvestment-driven profit growth.
As outlined in the JT Group history on page 18, we have made various business investments over the years, including M&A. In

FINANCIAL INFORMATION/OTHERS

recent years, we have made a number of acquisitions to expand our brand and product portfolios and to enlarge our previously
small footprint in Asia and Africa. We have been branching into emerging markets in the aim of growing along with their economic
growth. Our pursuit of long-term growth through geographic expansion is sometimes faced with unforeseen circumstances like
COVID-19. With the pandemic exacerbating volatility in emerging markets in particular, we believe we need to be more cognizant
of various factors than in the past when expanding into emerging markets, including through M&A, over the next several years.
While appropriately assessing such factors, we will seek investment opportunities conducive to the JT Group’s growth. Additionally, the fledgling RRP category has grown substantially over the past few years, particularly in Japan. We are currently stepping up
investment to lay the groundwork to grow our RRP sales. We intend to achieve sustainable growth by using cash generated by

Japan Tobacco Inc. Integrated Report 2020031

combustibles to prioritize investments in the RRP category, especially HTS (heated tobacco sticks). While combustibles are ourcurrent source of earnings, we are counting on RRP as the pillar of our future business growth.

Shareholder return policy
Effective from 2021, we have revised our shareholder return policy in accord with our resource allocation policy of placing
utmost priority on business investments and striking a balance between profit growth and shareholder returns.
From a business continuity perspective, maintaining a strong financial base is, more than ever before, a priority to withstandany major disruptions to the operating environment, such as those caused by Lehman shock or the more recent COVID-19
pandemic. Considering this, we revised our shareholder return policy, which, up until now, prioritized stable and sustainabledividend per share growth. From this year, the revised policy targets a dividend payout ratio of about 75% and aims to enhanceshareholder returns by realizing mid- to long-term profit growth while targeting this dividend payout ratio. To do so, we willcontinue to pursue growth in adjusted operating profit at constant FX, which will contribute to the necessary growth in net
income in the mid to long term, and ultimately enhance shareholder returns.

Resource allocation policy based on the 4S model• Prioritize business investments*¹ for sustainable profit growth in the mid to long term
• Strike a balance between profit growth through business investments and shareholder returns

Shareholder return policy– Aim to enhance shareholder returns by realizing the Group’s mid- to long-term profit growth, while maintaining a strong
financial base*²– Target a dividend payout ratio of about 75%,*³ a competitive level*4 in capital markets– Consider implementing a share buy-back program, mainly taking into account the Group’s financial outlook of therespective year and mid-term capital needs*1 Investment towards the growth of the tobacco business is our highest priority. Pursue growth of AOP at constant FX through quality top-line growth*2 The Group will maintain a strong financial base that secures stability in case of changes in business environment such as economic crises and flexibility enabling
expeditious responses to business investment opportunities*3 To be in the range of approximately ±5%*4 We monitor the shareholder return trends of Fast-Moving Consumer Goods companies which have a stakeholder model similar to our 4S model and haverealized strong business growth2021 earnings forecast
Next, I will explain our forecast’s underlying assumptions about the impact of COVID-19.
The impact continues to heavily affect the global economy and our social lives. We currently do not have much clarity on when
it will end. We assume national economies will gradually recover in 2021. In the tobacco and processed food businesses, we
assume the impact of COVID-19 on demand will persist to some extent in 2021 but attenuate relative to 2020.
On a constant-FX basis, we are projecting 5.1% AOP growth driven partly by the Japanese-domestic tobacco business on top ofcontinued strong growth momentum in the international tobacco business. We expect to grow in accordance to our Business
Plan 2021 which continues to be — as articulated in our Business Plan in the previous year — to target mid to high single digit
CAGR growth over the mid to long term.
Revenue is expected to be flat year on year, with revenue growth in the Japanese-domestic tobacco and processed foodbusinesses offsetting a revenue decline in the pharmaceutical business and the impact of projected adverse exchange rate
movements in the international tobacco business.
We are forecasting AOP at 475 billion yen, a 2.5% decrease year on year. We expect the pharmaceutical business’s AOP to
decline and the international tobacco business’s to be reduced by adverse exchange rate movements.

032

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

We are forecasting operating profit at 363 billion yen, a 22.6% decrease year on year. The main factors behind the projected
decrease, in addition to the forecasted decrease in AOP, are a reduction in proceeds from the sales of real estate and anticipatedcosts associated with the initiatives to strengthen competitiveness in the Japanese-domestic tobacco business.
We are forecasting profit attributable to owners of the parent company at 240 billion yen, a 22.6% decrease year on year despite aprojected reduction in financial costs net of financial income.
We are forecasting a free cash flow of 315 billion yen. Although we expect operating activities to generate stable cash flow again
in 2021, we expect our FCF to shrink year on year as a result of increased investment due to revision of our investment plan in

VALUE CREATION

response to COVID-19 in addition to the non-recurrence of the 2020 cash inflow from the former JT head office building’s sale.

2021 shareholder returns
As you may note in “Message from the CEO,” we have redefined our investment priorities to better achieve sustainable profit
growth. While pursuing steady growth in profits from combustibles, our current source of earnings, we will invest more intensively
in the pillar of our future business growth, RRP, particularly HTS. Even after COVID-19, we expect the highly uncertain businessenvironment to continue to impact earnings. However, we will continue to aim for growth in adjusted operating profit at constant
FX through business investment. This growth in adjusted operating profit at constant FX, in turn, will contribute to mid- to longterm growth in net income.

BUSINESSOn the other hand, there is a certain time lag before investments contribute to profit growth. Therefore, we believe that it isnecessary to secure room for investment during this period as well. In light of these circumstances, we have revised our annual
dividend forecast for 2021 to 130 yen per share, which exceeds the target dividend payout ratio of 75% as explained in theshareholder return policy. In order to avoid a substantial decline in dividends per share, we have set it at a level at which thedividend payout ratio will not exceed 100% and the dividend can be returned to our shareholders to the maximum extent possible,
based on our resource allocation policy.

SUSTAINABILITY

Going forward, by realizing profit growth through business investments, we will strive to strike a balance between profit and shareholder returns under the 4S model-guided resource allocation policy.

JT Group IR activities
Lastly, I will explain JT Group IR activities.
We disclose non-financial information, including management strategies, ESG information and updates on individual businesses,
in addition to financial information like quarterly earnings reports in an appropriate and timely manner. We also proactively engage
with shareholders and institutional investors.

GOVERNANCE

Our IR team in Tokyo, where the JT Group head office is located, and the IR team in Geneva, where the JTI head office is located,meet individually with securities analysts and institutional investors to discuss the content of our earnings releases and otherdisclosures as well as ESG matters. In 2020, we held approximately 380 meetings. Together with our IR team, our Group CEO and I
also take part in meetings with domestic and overseas institutional investors, including conferences sponsored by investment banks.
Although we have switched from in-person meetings to conference calls and online conferencing, we still meet individually with
European, North American, Japanese and other Asian institutional investors, just like we did before COVID-19. Moreover, we

FINANCIAL INFORMATION/OTHERS

participate in conferences held by brokers, both in Japan and overseas, to meet with institutional investors. Starting in 2019, we
have been holding ESG specific meetings and in 2020, we broadly expanded our ESG meetings overseas also, enabling us toengage with more investors. Lastly, we held our first individual investor-exclusive online briefing in 2020. There were approximately
1,800 investors participating in the program.
Feedback and opinions gathered from investors through IR activities are reported to all executive officers as well as relevant
departments, in addition to the periodic reports to the Board of Directors. We endeavor to further improve our decision-making andoversight functions in response to feedback from capital markets.

Japan Tobacco Inc. Integrated Report 2020033

Business strategy/Business review
Tobacco Business
Top market players ranked by combustibles* market share

Top 10 countries by combustibles volume*

Share of market (%)
2015

2016

2017

2018

2019

25.6

25.0

24.3

24.3

23.9

(BnU)
2015

2016

2017

2018

2019

2,490

2,351

2,344

2,369

2,346

Indonesia

321

316

308

307

307

U.S.

273

266

255

243

228

Russia

293

279

259

235

219

Japan

182

174

152

134

125

Turkey

103

106

107

119

121

Germany

117

114

112

110

109

Egypt

86

90

93

96

99

India

88

85

81

83

87

Bangladesh

83

84

84

81

81

China

Philip MorrisInternational Inc.

British American
Tobacco Plc.

23.0

Japan Tobacco Inc.

16.0

Imperial Brands Plc.

23.3

16.3

7.7

7.5

23.6

16.1

7.6

23.3

22.7

15.7

16.2

7.4

7.4

Source: JT (2019 data)* Including FCT (fine cut tobacco) in addition to cigarettes where available.
The ranking excludes China National Tobacco Corp.

Source: JT (2019 data)* Including FCT in addition to cigarettes where available.

JT Group’s top-selling cigarette brands

RRP category value (USD BN)(BnU)Winston*

2015

2016

2017

2018

2019

132

139

144

150

155

Camel*

51

52

53

54

57

LD

50

48

46

47

49

MEVIUS

17

18

18

16

16

Source: JT (2019 data)* Excluding U.S. where Imperial Brands Plc. and British American Tobacco Plc.
own Winston and Camel respectively.

034

Japan Tobacco Inc. Integrated Report 2020

13.7
11.8
8.2
5.6

2016
Source: JT (2019 data)

2017

2018

2019

CORPORATE PROFILE

Tobacco industry
The RRP market, though smaller than the combustibleof products. The best-known category is cigarettes. Other

market, has been growing year after year and we expect the

tobacco products include FCT (fine cut tobacco), cigars, pipe

growth to continue. The largest RRP markets include the U.S.,

tobacco, oral tobacco, waterpipe tobacco and kretek ciga-

Japan, Italy, South Korea, the U.K., Germany and Russia.

rettes. In addition to these categories long familiar to consum-

Please be aware that the most successful RRP subcategory

ers, RRP (Reduced-Risk Products) are a newer category thatcan be different from one market to another, depending on

has been gaining popularity in recent years.

consumer preferences. The growth in HTS category is

VALUE CREATION

Today’s tobacco product market encompasses a diverse array

expected to continue to drive growth in RRP sales.
One of the RRP subcategories is E-Vapor. Consumers use
the product by heating its nicotine-based liquid without using

Excluding China National Tobacco Corp. (CNTC), a state-

tobacco leaf. E-Vapor products have triggered a certain level

owned monopoly, the major global players in the tobacco

of market presence notably in western countries. At its

industry are Philip Morris International, British American

beginning, since it does not use leaf tobacco, E-Vapor was

Tobacco, the JT Group and Imperial Brands. In addition to

not regulated or taxed as tobacco products. However,these four global majors, other key players in the RRP

countries have started to make regulatory/tax changes tocategory include JuuL Labs, a U.S. company that sells

account for this relatively new subcategory.

E-Vapor products, and Swedish Match, a Swedish company
BUSINESS

which is focused primarily on oral products.
Another RRP subcategory is T-Vapor, which is gaining market
presence mainly in the Japanese market. T-Vapor products

The JT Group’s tobacco business is ranked third in the worldcontain tobacco leaf and creates a tobacco-enriched vapor by(excluding CNTC) by shipment volume. The Group is

heating the tobacco without any combustion. In general,

operating in over 70 countries/regions while its products are

T-Vapor is regulated and taxed as other tobacco products.

sold in over 130 countries/regions. It owns strong brands,

Among T-Vapor products, tobacco companies are focusing

notably GFB (Global Flagship Brands), that meet diverse

primarily on developing HTS (heated tobacco sticks). We

worldwide consumer demands.
SUSTAINABILITY

expect HTS to further grow through innovation.
Following the global pandemic in 2020, the outlook for the
A third RRP subcategory is made of oral products, which

tobacco industry as a whole has become increasingly

enables consumers to enjoy the different flavors by placing a

uncertain. While the impact on consumer behavior will

small pouch directly in their nose and mouth between their lip

continue to persist to some extent, we expect COVID-19 will

and gum. It has been growing in popularity mainly in the

not have any material impact in the mid to long term. We will

matured oral tobacco markets such as Europe and the U.S.

continue monitoring the changes in business environment
as each country or region’s condition differs and governments may raise taxes to fund fiscal spending in response tosome 5.4 trillion units annually, representing a value of roughly

the impacts of COVID-19 on their economy.

GOVERNANCE

Global combustibles industry volume totals the equivalent of
US$700 billion.* The world’s biggest cigarette market is
China, which accounts for over 40% of global consumption,* Based on 2019 data.

followed by Indonesia, the U.S., Russia and Japan.* In China,
however, a Chinese state-owned enterprise has a near-monopoly over product manufacturing, distribution and sales.

FINANCIAL INFORMATION/OTHERS

Global combustibles industry volume* is declining. Nonetheless, the tobacco industry’s profit-generating capacity
structure remains robust. Even amid the current challenging
environment, we expect the overall sales volume to continue
growing during Business Plan 2021’s term as well, mainly
driven by a positive cigarette price/mix variance. This
divergence between sales growth and shrinkage in the industry volume is expected to continue.

Japan Tobacco Inc. Integrated Report 2020

035

Fundamental strategy
We will operate our tobacco business, the JT Group’s core andprofit growth driver, to achieve mid to high single digit
sustainable profit growth over the mid to long term of
adjusted operating profit at constant FX.

Quality top-line growth
Strengthening RRP initiatives
The JT Group believes that RRP are beneficial to the consumer, to society, and to the Group’s business. We have positioned
RRP as the pillar of sustainable growth for the tobacco
business, with resources to this area being given priority
allocation going forward. We will focus on developing RRP
that will be chosen by more consumers, and leverageinnovation to broaden its portfolio of high-quality products,
thus satisfying the changing needs of consumers. With regard
to existing tobacco products, there has been no change totheir importance as the foundation of our profits, and we willcontinue to make business investments with the aim ofachieving sustainable growth.

Maintaining and increasing shares in the key markets
through superior brand equity
Over the past years, the JT Group’s tobacco business hasgrown its share in most of the key markets through superior
brand equity; this performance is mainly the result of ouroutstanding brand portfolio.
In order to further grow market share, we will continue
strengthening our brands, especially through consistentinvestments towards GFBs. Other local brands will receive
selective investments to enable the JT Group to meet theunique preferences of the consumers in the diverse markets
and regions where we are active.

Geographic expansion
Over the years, the Group has increased its presence as aleading global tobacco manufacturer through large-scaleacquisitions, most notably RJR Nabisco Inc.’s non-U.S.
tobacco business in 1999 and Gallaher Group Plc in 2007.
The geographical expansion achieved with these two transactions has been the main driver of the growth for over a
decade. The success of these acquisitions, owing in part tothe prompt post-merger integration within the Group’sbusiness, has reinforced our global business foundation.
With the aim of both entering new markets and expanding ourpresence in existing markets, we have continued to build ageographically balanced portfolio between high margin
markets primarily existing in developed countries and rapidly
growing markets primarily in emerging countries, through036

Japan Tobacco Inc. Integrated Report 2020

such measures as strengthening investment in existing
businesses and acquiring external resources through acquisition or by taking equity stakes. Moving forward, the JT Groupwill continue to seek organic growth and further strengthen
and expand its global business foundation. We will makebalanced investments in our established markets and highpotential markets. In addition, we also consider seeking andimplementing growth opportunity through acquiring external
resources as another important strategic option.

Strengthening cost competitiveness
The tobacco business will persistently pursue continuous cost
efficiency improvement of its operations, in particular withrespect to the global supply chain, with an emphasis on agility
and efficiency without compromising quality. We will enhance
our cost competitiveness by optimizing the global supply chain
through various initiatives, including: vertical integration in
global leaf procurement; unification of non-tobacco material
standards; ensuring compatibility among suppliers; flexible
procurement scheme and optimized material inventory
management to pursue competitiveness in raw material costs.
Furthermore, we will also continue to reduce processing costs
through a review of our manufacturing system and optimization of capital investment with the aim of improving productivity. At the same time, in order to improve our business
continuity capability, we aim to establish a multi-sourcing
system, optimize the distribution of manufacturing capacity
through mutual utilization of our global manufacturing bases,
and distribute manufacturing capacity in areas related topriority issues from the perspective of ensuring substitutability and decentralization of key functions.
Through the above measures, we aim to achieve cost
efficiency without compromising on quality, further improvemargins, and strengthen our ability to generate cash flow by
optimizing working capital and investments.

Strengthening the business foundation
The JT Group believes that human resource development is the
key driver of sustainable profit growth in the tobacco business.
We are operating in over 70 countries/regions, with employees from more than 100 different nationalities working aroundthe world, regardless of nationality, gender, or age. We takeadvantage of this diversity to maximize synergies while
promoting collaboration. Based on the strong recognition that
all corporate activities and results are generated by humanresources, we intend to further advance the acquisition anddevelopment of global human resources.

CORPORATE PROFILE

The tobacco business management policy
Our tobacco business is the core driver of the JT Group’s

The importance of combustibles remains unchanged and we

profit growth and aims to achieve sustainable profit growth

believe it will continue to be a driver of profit growth in theover the mid to long term. It plays a key role in achieving ourtobacco business. We will also work to increase profitability

target of Business Plan 2021; mid to high single digit annualand grow our market share through effective investment inaverage growth of consolidated adjusted operating profit at

combustibles, which is a source of profit generation.

constant FX over the mid to long term. To pursue this target,
In order to achieve these goals, effective January 2022 we

We will accelerate our efforts in both combustibles and RRP

have decided to consolidate the existing the international

by reviewing and evolving our past ideas and initiatives fromtobacco business and the Japanese-domestic tobacco

the aforementioned perspective.

business into one tobacco business. In the past, we have

VALUE CREATION

we will remain committed to a consumer-centric approach.

reinforced the business foundation to build stronger competiintegration of Japanese and international R&D functions anda pillar of future business growth, but we have redefined our

RRP organizations, as well as the transformation initiative ininvestment prioritization among categories to strengthen our

the international tobacco business, which have brought uscompetitiveness and profitability. We will prioritize manage-

clear improvements. This consolidation will enable us to makement resource toward HTS and combustibles by mobilizing

the most of our global resources in terms of businessresources within the JT Group to provide products and services

operating model. This also boosts our competitivenessthat exceed the needs and expectations of our consumers.

among the other industry players.

The highest priority for resource allocation is HTS, where

This will also establish an organization structure that enables

intense competition is expected to continue. JT and JTI have

us to provide products and services that exceed the needs andbeen working together on the development of next-generation

expectations of our consumers. We will challenge the competi-

products in this category and will work together to launch andtion as a single united organization. Meanwhile, in Japan, we

expand these on a global scale. Regarding business invest-

will also be revising our organizational structure in response toments, over the past three years we focused on manufacturing

the decrease in sales volume resulting from the decline in thecapabilities. Going forward we have decided to strengthenindustry volume, while ensuring that we remain competitive.

SUSTAINABILITY

tiveness on a global basis through the initiatives such as the

combustibles as a profit-generation source and RRP overall as

BUSINESS

In order to achieve our target, we will continue to position

investments in areas closer to our consumers, such as R&D,
marketing, and digital capabilities. We plan to increase total

In addition, we expect to realize cost savings of approximately

investment in RRP compared to the past three years.

40 billion yen, compared to 2019, for the entire tobacco
business in 2023 when JTI's transformation and review ofthe business operation model in the Japanese market will
be completed.
GOVERNANCE

We aim to achieve our target, mid to high single digit annual
average growth of consolidated adjusted operating profit atconstant FX over the mid to long term, by providing products
and services that exceed the needs and expectations of ourconsumers, through prioritizing management resource toward
HTS and combustibles as well as strengthening our tobacco

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

business management structure.

037

Business review

International Tobacco Business
I am very confident that JTI will continue to deliver sustainableprofit growth, investing behind both combustibles and HTS.
This confidence is reinforced by the future opportunities
arising from the consolidation with the Japanese-domestic
tobacco business.

Eddy Pirard

The consolidation of the tobacco businesses is scheduled for January 2022.
HTS (heated tobacco sticks)

Chief Executive Officer,
JT International S.A.

2016-2020 performance
Total shipment volume - BnU

GFB shipment volume - BnU+2% CAGR

399

399

2016

2017

+2% CAGR

428

446

436

257

260

266

277

282

2018

2019

2020

2016

2017

2018

2019

2020

Core revenue – YoY variance at constant FX, %Adjusted operating profit – YoY variance at constant FX, %*
+17%
+14%

+13%

+12%
+9%

+11%

+10%

+9%
+7%

-0%
2016

2017

2018

2019

2016

2020

2017

2018

2019

2020

USD MM

2016

2017

2018

2019

2020

USD MM

2016

2017

2018

2019

2020

Reported

10,49010,498

11,33011,496

11,724

Reported

3,095

3,138

3,493

3,126

3,181

+2%

+0%

+8%

+2%

+2%

-5%

+1%

+11%

-11%

+2%

YoY varianceYoY variance

JTI outperformed industry volume over the last five years through continued market share gains driven by GFB (Global Flagship
Brands) and acquisitions in markets that matter. This, together with solid pricing and cost discipline, enabled JTI to consistently
grow currency neutral adjusted operating profit at a double digit rate.

* Adjusted operating profit at constant FX: Excluding 2017 one-time loss in adjusted operating profit at constant FX, %. The main indicator of our business performanceis adjusted operating profit at constant FX. We use previous year's FX rates to evaluate our business performance excluding the forex impact.

038

Japan Tobacco Inc. Integrated Report 2020

This section is intended only to explain the business operations of the JT Group, not to promote sales of tobacco or vaping products or encourage smoking or vaping among consumers.

CORPORATE PROFILE

Results for the year ended December 31, 2020

2020 performance
Overview

Price/mix

2020 was JTI’s tenth consecutive year of double-digit

In 2020, JTI recorded another year of positive price/mix withadjusted operating profit growth at constant FX, driven bycontributions from all clusters.

solid share and pricing gains across its well-balanced
geographic footprint. We estimate the negative impact ofPricing gains were generated across our footprint, with the key

COVID-19 on the top line to be about 20 billion yen.

markets of France, Russia, Taiwan and the U.K. significantly
VALUE CREATION

complemented by the contribution from other markets.
2020 performance*¹

As a result, 2020 price/mix benefit was above JTI’s five-year
JTI SoM*²
JTI volume
GFB volume

average, demonstrating the continued resilience of the+1.4ppt

tobacco pricing model.

-2.3%

JTI price/mix variance (USD MM)

+1.8%

+772

+729
Core revenue+7.0%+16.8%

BUSINESSAOPThe Group's 4S model and the commitment and dedication of

2015-2019average

employees, who have been the cornerstone of JTI’s growth2020

since 1999, were key enablers in ensuring continued
strengthening of business fundamentals during the pandemic.
*³

Share of market
Through continued market share gains in 2020, JTI once
SUSTAINABILITY

again outperformed the industry volume decline, which wasbroadly in line with historical trend.
Notably, JTI increased both its share of market (SoM) and

The sustained strategic investment behind the equity of GFBs,

share of value (SoV) in 27 of its top-30 markets.

in both cigarettes and FCT (fine cut tobacco), was beneficial incapturing the redistributed industry volume across JTI’s

The continued share growth was primarily driven by JTI’s

markets due to travel restrictions. 2020 was the sixth

consumer-centric approach, strategically positioning ourconsecutive year of GFB volume growth, with shipment of 5

brands across key product categories and price segments.

billion additional units compared to 2019.
GOVERNANCE

JTI share in top-30 markets
SoM+1.4ppt

28.4%

SoV+1.7ppt

29.8%
27.4%
25.7%

2020

2019

FINANCIAL INFORMATION/OTHERS

2019

2020

*1 2020 variance vs. prior year. Core revenue and adjusted operating profit (AOP) at constant FX*2 Based on JTI’s top-30 markets (Cigarettes + FCT)
*3 Global Top Employer: The international tobacco business has been certified as a Global Top Employer by the Top Employers Institute for the seventh consecutive year.
Japan Tobacco Inc. Integrated Report 2020039

Performance by cluster

RRP (Reduced-Risk Products)

In South & West Europe, total shipment volume increased by
2.2%, driven by strong market share gains in markets such as

HTSFrance, Italy, Spain and Switzerland and more resilient

2020 marked the long-awaited international rollout of our HTS

industry volume in several markets.

offer, combined with our Ploom S device, in Russia, Italy andthe U.K.

In North & Central Europe, total shipment volume increased by
13.5% driven by Austria, Germany, Ireland and the U.K. which

This is in line with the group strategy to prioritize HTS, backed

benefited from market share gains and higher industry volume

up by positive category development and higher grossdue to higher domestic purchases from travel restrictions.

margins than other RRP segments.

In CIS+, total shipment volume decreased by 7.1%, due to

Our HTS leverage the strength of Winston and Camel brands

unfavorable inventory movements in Russia and industry

in Russia and Italy, respectively. In the U.K., our HTS are soldvolume decline. Excluding unfavorable inventory movements,

under the new brand Evo.

total shipment volume declined by 5.3%. Market share grew in
Kazakhstan, Romania, Serbia and Ukraine.

In all launch markets, we created a seamless consumer
journey using all touchpoints to walk adult smokers fromIn the Rest-of-the-World (RoW), total shipment volume

discovery to purchase and ultimately brand advocacy.

decreased by 5.0%, due mainly to travel restrictions negatively
impacting Duty-Free and lower industry volume in several

As part of our execution, we connected the offline and theemerging markets. Market share increased in Canada, Iran,online environments, with physical point of sales being

the Philippines and Taiwan, among others.

complemented by e-commerce and remote customer care.

In 2020, core revenue at constant currency increased in all

HTS demands a new era of brand building to keep pace withclusters, driven by a positive price/mix variance in CIS+ andconsumer expectations. As a result, we keep evolving our

RoW and a positive volume and price/mix variance in the two

operations making the best use of our consumer and digital

European clusters.

data insights, using it in an agile way and pivoting whennecessary to drive repurchase rates.

Except for South & West Europe, currency neutral adjusted
operating profit grew in all clusters fueled by top-line growth,
as well as a decrease in travel and marketing expenses
reflecting COVID-19 reality in the markets.

040

Japan Tobacco Inc. Integrated Report 2020

This section is intended only to explain the business operations of the JT Group, not to promote sales of tobacco orvaping products or encourage smoking or vaping among consumers.

in Moscow from mid-March 2020. But rapidly, we rebalanced our

CORPORATE PROFILE

For example, we started distributing Ploom S and Winston sticks

2021 outlook

commercial strategies towards digital as lockdowns were

The 2021 outlook for the international tobacco business sees

imposed as of early April. At the end of December, Ploom S

our total and GFB shipment volumes outperforming thereached a 2.6% share of the HTS category.

industry volume contraction, declining slightly more than 3%
versus a minimum industry decline of 4%.

In Italy and the U.K., where our offering was introduced only inCore revenue at constant currency is expected to increase 1%,

Palermo and London, JTI registered positive feedback fromsupported by strong share of market momentum and pricing,consumers and increasing repurchase rates.

more than offsetting the impacts from the anticipated partial

VALUE CREATION

November in a limited number of point of sales in Apulia,

reversal of market mix benefits, and the larger than average
We are only at the beginning of this journey and we are still

industry volume decline in Russia due to excise taxes.

building our know-how and expertise with these new
products. We will continue to monitor progress, embed ourCurrency neutral adjusted operating profit is forecast to growongoing learning, and ramp up as we see appropriate.

8%, driven by top-line growth and accelerated efficiencies

E-Vapor and nicotine pouches

from our Transformation initiatives. These are well on track
despite the pandemic, with newly established Global Business
Services centers in Warsaw, St. Petersburg and Manila alreadywe will adopt a more selective investment posture vis-à-vis

counting more than 800 employees.

E-Vapor and nicotine pouches, based on their scale andgrowth potential.

BUSINESSIn line with the redefined group resource allocation strategy,2021 guidance*+8%

In E-Vapor, JTI operates both in the open-tank and closed-tanksegments with the brand Logic. We are pleased by the adult+1%

consumer base built across different geographies and we willkeep innovating in this category to satisfy adult consumers’

~ -1%
~ -3%
JTI volume

GFB volume

Core revenue

SUSTAINABILITY

evolving needs.

AOP

JTI is also present in nicotine pouches with the brand Nordic
Spirit, which is sold in nine markets including Scandinavian

In line with the group mid-term plan, JTI will continue

countries, the U.K., Switzerland and Austria. Despite the small

investing behind both combustibles and HTS.

size of the category, we enjoy a leading position in the U.K.

This posture will be reinforced by the future consolidation ofwith a 70% share of segment.

the international tobacco and Japanese-domestic tobacco
businesses. It will enable us to work even more as one team,One focus remains common across our RRP portfolio: theprioritizing investments on a global basis and further improving

consumer-centric approach, which is deeply rooted in ourour product offering to adult smokers around the globe.

4S model two decades ago.

GOVERNANCE

culture and in our doing since the introduction of the Group’s
These initiatives will strengthen our business competitiveness,paving the way for more years of sustainable growth.

FINANCIAL INFORMATION/OTHERS* 2021 variance vs. prior year. Core revenue and adjusted operating profit (AOP)at constant FXJapan Tobacco Inc. Integrated Report 2020041

Business review

Japanese-Domestic Tobacco Business
The Japanese market is the source of roughly 30% of the JT
Group’s profit, and also the world's largest market for HTS.
The market will remain our top priority even after the consolidation of the Group’s international and Japanese-domestic
tobacco business starting in 2022. We will prioritize investments in HTS to increase our market presence. To ensure this,we will make efficient investments in cigarettes, our priority
business category, with more emphasis on financial returns.

Junichi Fukuchi
Senior Vice President,
Chief Executive Officer ofJapanese Tobacco Business,
Tobacco Business Planning,
Tobacco Business

HTS (heated tobacco sticks)

Business-related data
Industry volume* (BnU)

JT sales volume (BnU)
106.2
92.9

173.8
151.4

2016
RMC

2017

2.8

34.6

36.8

133.6

125.1

2018

2019

3.3

40.2
82.0

114.9

2020

RRP

2016
RMC

2017

2018

3.9

75.5

2019

68.7

2020

RRP

* JT estimate

Core revenue and Adjusted operating profit (JPY BN)

JT RRP sales volume (BnU)
3.9

649.7

590.6

260.2

2016
Core revenue

582.4

232.3

2017

568.9

209.0

2018

515.7

187.2

2019

2.8

3.3

168.1

2020

2018

2019

2020

AOP

Notes:
1. Cigarette industry volume and sales volume include little cigars since 2018
2. The data for RRP has been published since 2018. One pack of consumables is equivalent to 20 sticks of combustible cigarettes.

Business environment and total tobacco industry volume
The total tobacco industry volume in the Japanese market in 2020 stood at 155.0 billion sticks (JT estimate) due to a natural
decline trend, several tax hikes in recent years,* and tighter regulatory changes on smoking environment that impacted cigarettes
despite growth in the RRP (Reduced-Risk Products) category. The overall RRP market size in Japan grew rapidly from 2016 to
2018, then maintained a gradual increase from 2019. In 2020, the market size is estimated at approximately 26% (shipment basis)of the total tobacco industry volume.

042

Japan Tobacco Inc. Integrated Report 2020

Results for the year ended December 31, 2020

CORPORATE PROFILE

Japan is the world's largest market for HTS. The multi-year tobacco tax hikes have been conducted and planned since 2018 for the
first time in Japan. Cigarettes have been subject to the tax hikes during 2018 to 2021 (the increase in 2019 was consumption tax
only), while RRP has been subject to the increase during 2018 to 2022. As to regulation, the Health Promotion Law was fully
revised in April 2020. However, the impacts of COVID-19 make it difficult to estimate the negative impact of the regulation on the
total industry volume.
In April and May 2020, under the first state of emergency, total tobacco industry volume decreased due to the closure of smoking
areas. However, it started showing robust growth after the emergency lifted. We believe more shifts on RRP is caused by environ-

VALUE CREATION

mental changes including the restrictions on non-essential outings as well as working from home.
* Tax hikes:
All tobacco products sold in Japan are subject to national tobacco tax, national special tobacco surtax, and regional tobacco tax. Cigarettes were subject to bothnational and regional tax hikes totaling 1 yen per stick in October 2018, October 2020 and in October 2021. Little cigars are taxed per gram of weight, which isconsidered equivalent to a cigarette stick. However, all cigars lighter than 0.7 gram have been considered 0.7 stick of cigarette for tax purposes since October 2020.
From October 2021, all cigars under 1 gram will be taxed equivalent to a cigarette stick.
RRP was formerly classified for tax purposes as pipe tobacco and its weight converted to the equivalent number of cigarette sticks as the taxation unit. The category
was then reclassified as "heated tobacco" in October 2018 and taxed in a new way based on its product weight and price. The transition period lies between 2018 and2022, where the former calculation system will be incrementally reduced under the new system. In addition, under the Consumption Tax Act a 10% tax is levied on
manufactured tobacco products, which is included in the standard retail prices (please see “Fact Sheets” for more details).

JT shipment volume
BUSINESS

Due to the market environment dynamics, our cigarettes shipment volume decreased from 106.2 billion sticks in 2016 to 68.7
billion sticks in 2020. Since the price revision in October 2018, a downtrading trend has been growing, expanding the market shareof the value and super value segment from the second half of 2019. Responding to the change in consumer needs seen in thistrend, we have actively enhanced our value and super value segment product portfolio. We boosted our share in the segments to
44.2%, up by 13.1% year on year in 2020 by launching little cigars under the Camel brand in 2019. We also introduced the slim line
MEVIUS brand at an affordable price in October 2020. The segments also grew to 16.6% of the total tobacco industry volume in2020, up by 7.9% year on year.

SUSTAINABILITY

Our core brands are MEVIUS, Seven Stars, Winston, Natural American Spirit and Camel. We maintain our position as the cigarettemarket leader through continuous investments in the sub-premium, premium and prestige segments to raise brand equity. In thevalue and super value segment we are taking prompt, necessary action to adapt to environmental changes.
In 2017 we positioned RRP as a pillar for futurebusiness growth. We have prioritized resource
allocation in this category as well as strengthened its manufacturing capacity. We have

GOVERNANCE

steadily expanded our RRP portfolio, startingwith nationwide sales of our devices for
Infused (infused tobacco capsules), Ploom
TECH in 2018 and Ploom TECH+ in 2019, as
well as our HTS, Ploom S, in 2019. In July
2020, we launched Ploom S 2.0 nationwide asa result of overcoming the challenges of our

FINANCIAL INFORMATION/OTHERS

existing RRP products, which we identified
through direct communications with consumers. We also introduced Ploom TECH+ in Tokyo
as well as at the online store in November. Our
RRP shipment volume increased to 3.9 billion
units in 2020 led by the enhanced portfolio,
device upgrades and expansion of refill line.
This section is intended only to explain the business operations of the JT Group, not to promote sales of tobacco or vaping products or encourage smoking or vaping among consumers.

Japan Tobacco Inc. Integrated Report 2020043

Our performanceCore revenue for 2020 decreased by 9.3% year on year, to 515.7 billion yen, due to decreases in cigarette shipment volume,
RRP-related revenue, and shipment volume of Duty-Free products despite a positive cigarette price/mix variance led by pricerevision. RRP-related revenue was down by 8.3% year on year, to 55.9 billion yen, mainly due to a decrease in sales of devices. We
estimate the negative impact of the COVID-19 on the top line is about 30 billion yen.
Adjusted operating profit decreased by 10.2% year on year, to 168.1 billion yen, due to a decrease in the top line and an increase in
RRP and digital marketing investment. These factors outweighed a favorable comparison of the impairment loss related to theinfused tobacco capsule manufacturing machines accounted in the previous year and efficient cost savings despite the prolonged
impact of COVID-19.

Business Plan 2021
Business environment and total tobacco industry volume
We project that the total industry volume of Japanese-domestic tobacco will continue to have a steady low single digit decrease
due to a natural decline trend and the impact of price revisions. The cigarette industry volume is expected to decrease as well as
the total industry volume. On the other hand, the RRP market size will continue to gradually expand led by increased support fromconsumers as a result of regulatory changes and the products' potential to reduce the risks associated with smoking.

Redefining investment prioritization categories and strengthening the operating model
As set out in “The tobacco business management policy” on page 37, we redefined our investment prioritization categories. We
consolidate the existing tobacco businesses into one tobacco business to optimize the Group’s global resources, in order to prioritize
our management resources on HTS, our key category, and combustibles. Our current international tobacco business and Japanese-domestic tobacco business will merge under a unified management system in 2022. The Japanese market remains our mostimportant market, as it accounts for approximately one-third of the Group's profits and is the largest HTS market.

044

Japan Tobacco Inc. Integrated Report 2020

This section is intended only to explain the business operations of the JT Group, not to promote sales of tobacco orvaping products or encourage smoking or vaping among consumers.

CORPORATE PROFILE

Enhancing of the organization structure in Japan
We will establish an organization structure to enhance consumer satisfaction, pursuing sustainable profit growth in the mid to long termin the Japanese market. We have been constantly reviewing our actions based on consumer-centric principles. For example welaunched CLUB JT,*¹ and implemented call-center reforms. These initiatives result in increasing opportunities to directly communicate
with consumers and enable us to quickly reflect consumer demands into RRP product development. To assure further efficient andeffective communications with our consumers, we will continue enhancing our digital marketing. We will also strengthen our sales
activities at the locations where consumers purchase and use our products, in order to address the locally-diversified needs of consumers in each region.

VALUE CREATION

Meanwhile, we will also be revising our organizational structure in response to the decrease in sales volume resulting from thedecline in the industry volume, while ensuring that we remain competitive. This includes optimization of administrative tasks in thesales department; closing some tobacco factories to eliminate unutilized manufacturing capacity; and optimizing leaf procurement footprint with downsizing of tobacco farms in mind. Following these, we will offer early retirement packages at the affectedsites as well as voluntary retirement program.*²
To secure funds to invest in HTS, we will manage cost relentlessly and promote efficient spending practices that best suit theworkstyles of the post-pandemic era to come.

BUSINESS*1 CLUB JT is an online platform introduced in March 2020 to establish quality two-way communications with consumers. Through online sales we flexibly respond todiversified consumer behavior. We also offer content that enhance consumer experience, including explanations on the characteristics of our products and showing
locations of smoking areas. We are making effort to increase consumer contact points, while there are fewer opportunities for in-person communications underpandemic conditions.
*2 Please see “JT Group Announces New Operating Model Company Aims to Strengthen its Tobacco Business,” released in February 9, 2021, for more details about the
programs, including the start date.

2021 forecast
Early in the latter half of 2021 we plan to introduce a next-generaSUSTAINABILITY

tion HTS device. This new device not only offers significantly
enriched vaping experience but also showcases improvements
in basic specifications such as heating time. The evolution of the
sticks has also been contributing to the product’s improved
vaping experience. We are also planning to expand our flavor
portfolio to meet the diverse needs of our consumers, as well as
to develop various features to enhance consumer experience byincorporating IoT functionality. The next-generation device will
deliver greater value and we aim to increase our RRP shipment
volume and gain market share within the category through active

GOVERNANCE

marketing initiatives both in-person and virtually.

Financial forecastCore revenue is forecast to increase 0.8% year on year to 520
billion yen driven by a favorable cigarette price/mix contribution
led by price revision and an increase in RRP shipment volume,partially offset by an unfavorable cigarette volume contribution.

FINANCIAL INFORMATION/OTHERSThis also includes certain assumptions regarding partial
recovery of the domestic Duty-Free business.
Adjusted operating profit is also expected to increase by 4.7%
year on year to 176 billion yen driven by the top-line increase,partially offset by the strengthening of investment in the RRP
category and year on year increase of indirect expenses,
which was significantly lower in 2020 due to protracted
COVID-19 disruptions.
Japan Tobacco Inc. Integrated Report 2020045

Strategy and Business review

Pharmaceutical BusinessWe are committed to creating innovative, original drugs to
support patients in the shortest time possible. We areproud to have received manufacturing and marketing approval for CORECTIM® Ointment 0.5%, for an indication of
atopic dermatitis in Japan, and ENAROY® Tablets 2 mg •4 mg, for the treatment of anemia associated with chronic
kidney disease in Japan. We have been making steadyprogress in our R&D and will aim to contribute to sustainable profit growth.

Muneaki Fujimoto
Senior Vice President,
President ofPharmaceutical BusinessBusiness-related data
Worldwide pharmaceutical market* (USD BN)

1,104.0

1,161.7

1,187.8

1,222.3

Revenue and Adjusted operating profit (JPY BN)

1,262.4
104.7

114.0
88.5

87.2

24.1

28.4
15.9

9.7
2015

2016

2017

2018

* Copyright © 2021 IQVIA.
Created based on IQVIA World Review Executive 2015-2019
Reprinted with permission

2019

2016
Revenue

2017

79.0

2018

2019

17.2

2020

Adjusted operating profit

Industry overview
The global pharmaceutical market continued to grow, with an average annual increase of about 3.4% over the past five years, toUS$1,262.4 billion 2019, up 3.3% year on year.* Increasing health awareness, population growth and development of publichealthcare systems result in a higher demand for more advanced drugs. However, governments are strengthening their control on
drug prices by holding back medical costs, due to the rapidly aging society and fiscal deficits.
In order to control medical care expenses, the Japanese government has been promoting the use of generic drugs, leading thegeneric drugs market to expand in the Japanese pharmaceutical market. Additionally, a drastic reform of the drug pricing system
will lead to a gradual price reduction each year from 2021, creating challenges for the industry. The drug price reduction rate in
April 2020 was 4.4% on average.
Our pharmaceutical business competes with not only numerous Japanese domestic companies, but also with foreign companies,
including global mega pharma and start-up companies. We will continue to promote R&D and seek optimum timing to license out
our compounds in order to accelerate our R&D and swiftly provide new drugs to patients around the world.
* Created based on IQVIA World Review Executive 2015-2019046

Japan Tobacco Inc. Integrated Report 2020

Results for the year ended December 31, 2020

CORPORATE PROFILE

Our performance
In 2020, our revenue decreased by 10.8% year on year mainly due to lower overseas royalty income. The income has been decreasing
after reaching its peak in 2018 impacted by successor drugs. Adjusted operating profit grew by 7.6% year on year due to lower R&D
expenditures marked by the completion of trials for the clinical development of the product for which an application has been filed for
manufacturing and marketing approvals, as well as earnings growth in our subsidiary, Torii Pharmaceutical, which more than offset
the top-line decrease. The business has not experienced any material impact on the top line from COVID-19.

VALUE CREATION

In 2020, we steadily made progress in our R&D leading to continuous profit generation. We received manufacturing and marketing
approval for two original drugs in Japan, which are exclusively sold by Torii Pharmaceutical.
• In-house development (2020 progress)– Entered the clinical trial stage:
JTE-451 (RORγ antagonist/topical)- Phase 1 (Japan)– Manufacturing and marketing approved (Japan)
CORECTIM® Ointment 0.5% (JTE-052/delgocitinib)
ENAROY® Tablets 2 mg • 4 mg (JTZ-951/enarodustat)

BUSINESS

Please visit JTI.co.jp (Japanese only) for more details.

In January 2020, The JT Group signed an exclusive license agreement with Dermavant Sciences GmbH, a subsidiary of Roivant
Sciences Ltd., for the development and commercialization of tapinarof, a topical, therapeutic aryl hydrocarbon receptor modulating
agent (TAMA). We will continue to undertake similar efforts to acquire external resources.

Basic strategy
The role of the pharmaceutical business in the Group is to complement the JT Group’s profit growth.
SUSTAINABILITY

Our management policies in the pharmaceuticals business• Focus on drug discovery capabilities• Develop compound pipeline• Enhance both in- and out-licensing activities
Our R&D is focused mainly on metabolic diseases, autoimmune/inflammatory diseases, and viral infection.

2021 forecast
GOVERNANCE

Our revenue is forecast to decrease by 3.1% year on year mainly due to lower overseas royalty income, partially offset by
an increase in revenue in Torii Pharmaceutical and an increase in one-time compensation gains from licensed compounds. Adjusted operating profit is forecast to decrease by 59.2% due to the decrease in revenue in addition to anincrease in R&D expenditures following progress in compound pipeline.
We expect our business environment to remain challenging in 2021, as the downward trend in overseas royalty income contin-

FINANCIAL INFORMATION/OTHERS

ues. However, revenue losses will be partly balanced by solid Japanese-domestic sales by Torii Pharmaceutical of the new
drugs, CORECTIM® Ointment 0.5% and ENAROY® Tablets 2 mg • 4 mg and revenue growth in allergen-related drugs, such as
CEDARCURE® Japanese Cedar Pollen Sublingual Tablets and MITICURE® House Dust Mite Sublingual Tablets. We will continue
aiming to contribute to sustainable profit growth.

Japan Tobacco Inc. Integrated Report 2020047

Strategy and Business review

Processed Food BusinessWe have a mission of delivering safe, high quality food to
our consumers through our three businesses: frozen andambient food, seasonings and bakery. With focus on frozen and ambient business, we strive to achieve quality
revenue growth and aim to increase our contribution to theGroup’s mid- to long-term sustainable profit growth, while
optimizing manufacturing capabilities and enhancing the
profitable product portfolio.

Hiromasa Furukawa
Senior Vice President,
Food BusinessBusiness-related data
The Japanese frozen food market on a consumption basis (JPY BN)
1,015.6

2015

989.4

2016

1,057.7

2017

1,076.2

2018

1,076.9

Revenue and Adjusted operating profit (JPY BN)
164.1

2019
Revenue

163.1

161.4

158.6

149.3

5.0

5.4

4.1

5.4

2016

2017

2018

2019

-0.8
2020

Adjusted operating profit

Source: Japan Frozen Food Association

Industry overview
We expect the Japanese processed food industry to continue to grow as lifestyles change including an increase of double-income
households. This change leads to a growing consumer need for simpler and shorter cooking times. Frozen foods can help meetthe diverse needs of consumers with its abundant variety and convenience in recreating freshly served taste.
In 2019, annual consumption of frozen food in Japan increased 2.0% to 2,951,388 tons year on year, a record high. Domestic market size on a
consumption basis, including imports, grew 0.1% year on year to 1,076.9 billion yen, exceeding one trillion yen for the third consecutive year.*
Additionally, in 2020 the pandemic encouraged people to stay home and work from home, resulting in more opportunities to eat athome. This led to demand growth in frozen food, as consumers value its preservation and convenience factors.
Our subsidiary, TableMark Co., Ltd., is competing against major players like Maruha Nichiro, Nichirei Foods, AJINOMOTOFROZEN FOOD and Nippon Suisan Kaisha as well as a multitude of mid- or small-scale producers, although we are starting
to see gradual segregation of competition within the industry according to the product categories these competitors respectively own.

048

Japan Tobacco Inc. Integrated Report 2020

Results for the year ended December 31, 2020

CORPORATE PROFILE

These competitors are not the only ones we need to keep an eye out on. We believe it is necessary to monitor trends in sales
channels amid the expansion of private brand products by various distribution companies; and the reorganization of wholesale
entities. We also need to be aware of the continuing risk of price fluctuations in raw materials due to global food shortages.
* Source: Japan Frozen Food Association (2019)

Our performance
The sales of our core products, notably frozen udon noodles and okonomiyaki (Japanese savory pancakes), are steadily growing
VALUE CREATION

despite the slightly downward trend in our core revenue. Adjusted operating profit remains at a same level in recent years except
for 2018, when prices for raw materials and ingredients surged, and 2020, affected by the pandemic.
In 2020, COVID-19 impacted our core revenue, as it decreased by 5.8% due to the decline in sales related to significantly lower
demand for food-service products within the frozen and ambient food as well as the seasonings businesses, in addition to thesignificant decline of demand and sales in the bakery business. On the other hand, sales of household products in the frozen andambient food business increased due to stronger demand.
Adjusted operating profit decreased by 6.2 billion yen, due to the decrease in revenue, an increase in logistics costs in the frozen andambient food business and an impairment loss of assets such as factories and shops in the bakery business, partially offset by

BUSINESS

improvements in product mix. COVID-19 is estimated to have negatively impacted the top line by about 11 billion yen.
Despite this challenging year, the JT Group remains in the top tier in the categories of frozen udon noodles and aseptically packaged/
prepackaged retort rice.

Core strategies
Our processed food business operates based on the following core strategies in order to fulfill its role, which is to complement the
SUSTAINABILITY

JT Group’s profit growth.
• Expand sales of priority products with original technology and strengthen our product development capabilities of high valueadded products based on changing consumer demand• Increase profitability through optimization in manufacturing capabilities• Mitigate the impact of rising raw material costs and distribution costs
Our business primarily engages in frozen and ambient foods, notably frozen udon noodles, prepackaged rice and okonomiyaki;
seasonings including yeast extracts and oyster sauce; and products for bakery chain outlets mainly in the Tokyo metropolitan area.

GOVERNANCE

2021 forecasts
We expect the impact of COVID-19 will continue in 2021. Revenue is expected to increase 1.1% mainly due to the capturing
growing demand of household products, and expansion of business activities focused on the prioritized channels in food-service
products as well as further increasing the efficiency of bakery store operations.
Adjusted operating profit is forecast to increase by 3.8 billion yen year on year driven by the increase in revenue, efforts to improve

FINANCIAL INFORMATION/OTHERS

profitability such as cost reduction, and a favorable comparison of an impairment loss of assets such as factories and shops in
the bakery business.
We expect our business environment to remain challenging in 2021. We will aim to achieve quality top-line growth while flexibly
and quickly taking various initiatives with making use of each business’ strength, as well as strengthening the profitableproduct portfolio.

Japan Tobacco Inc. Integrated Report 2020

049

Risk factors
to switch to lower-priced products. They consequently could

The JT Group is a leading global tobaccocompany, selling products in more than 130
countries/regions. The Group is also present
in pharmaceutical and processed foodbusinesses. Our operations are subject tovarious risks stemming from their attributesand exogenous changes, among other factors.

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

Main measures to address risk
• Promote understanding among relevant authorities thatlarge or repeated tax increases may be counterproductivewith negative impact from decline in tax revenue due todecreased demand or increase in illicit trade.
• Optimize product portfolio for adaptability to changes in
consumer preferences and behavior.
• Strengthen and expand our global business foundation as

We identify risks that could inflict losses on us and closely

well as expand number of continuously profitable markets

monitor events that could affect our operations. We taketo avoid overdependence on profits from a few markets.

measures to prevent the materialization of the risks and• Further improve cost-efficiency to ensure adequate profitability.

mitigate the impact in case risks are materialized.

• Set prices appropriately to minimize tax increases’ impact in

We have established an integrated system for identificationand management of all of these risks and promote risk
management with the following four steps: 1) risk identification, 2) risk assessment, 3) planning to address risks and4) progress monitoring of the plan.
The risks enumerated below are not all-inclusive. Other risks
exist that could affect our operations and/or financial results.
This following discussion of risk factors should be read together
with the forward-looking statement disclaimer next to the tableof contents on the cover page.

affected markets.

2 Growth in illicit trade
Illicit trade is a problem for not only the tobacco industry but
society as a whole. It harms the tobacco industry by diverting
demand from law-abiding businesses. Its potential societal
harms include reduction in government tax revenues,
increased organized crime and adverse health consequences
due to poor production quality or inadequate post-production
quality controls. Together with the rest of the tobacco
industry, we continue to endeavor to eradicate illicit trade,particularly cigarette smuggling and counterfeiting.

1 Large or repeated tax increases

Illicit trade tends to grow following large or repeated tax

Tobacco products are subject to tobacco taxes or other similar

packaging may facilitate illicit trade by making cigarettes easiertaxes in addition to sales tax or VAT. Some countries, including

to counterfeit and illegitimate products harder to detect.

increases. Additionally, regulations on cigarette ingredients andJapan, have been raising tobacco taxes or discussing tax
increases from a fiscal and/or public health standpoint. Addition-

Risk description and potential impact

ally, VAT rates generally tend to increase over time. Our policy

Growth in illicit trade results in decreased demand for legiti-with respect to tax increases is to raise prices to pass throughmate products and may reduce our unit sales, revenue and/or

the tax increase to consumers, taking into account not only the

profits. Costs incurred to combat illicit trade may also weigh on

tax increase’s magnitude but also the price elasticity of demand

profits. Additionally, because of reasons including the fact thatfor tobacco products. In addition to this, measures to bolster thecounterfeit products are of low quality, circulation of such

top line and improve cost-efficiency are also taken to mitigate theproducts may undermine trust in legitimate products and, in

financial impact due to tax increases. Most governments haveturn, impair the value of both the brand and brand owner.

adopted a reasonable approach to taxation, recognizing thatlarge or repeated tax increases may end up reducing tax

Main measures to address risk

revenues. In some instances, however, past tax increases have

• Take action to eradicate illicit trade in cooperation withmaterially affected our business in certain markets.

governments, regulatory authorities and law
enforcement agencies.

Risk description and potential impact
Large or repeated increases in taxes on tobacco products

050• Do business only with reputable parties in accord withstringent compliance policies.

tend to lead to reduced consumption of and/or increased illicit• Engage with consumers to deepen their knowledge of

trade in tobacco products. They may also induce consumers

negative impacts in purchasing illegitimate products.

Japan Tobacco Inc. Integrated Report 2020

Two of our subsidiaries, JT International Holding B.V.
and JT International S.A., have entered into a cooperation agreement with the EU and EU-member countries
to address the illicit trade problem.

comply with regulations, resulting in our unit sales decreasing.

Main measures to address risk
• Expeditiously collect accurate information to learn ofregulatory developments.
• Pursue constructive dialogue with governments andregulatory authorities to encourage reasonable, unbiased
regulation that fulfills its intended objective.
Please see Regulation and key laws (P. 54) for more details.

4 Competition
We are engaged in fierce competition with global industry
markets.
Since Japan liberalized imports of tobacco products in 1985
and eliminated import tariffs on cigarettes in 1987, competition in the Japanese market has intensified year after year in

BUSINESS

We have taken the initiative to introduce a tobacco
product tracing system called Track and Trace, which
has been operated for over a decade as a part of ourcompliance program. In recent years, certain countries/
regions have legally mandated use of similar tracing
systems. We comply with such regulations also.

certain circumstances, additional costs may arise in order to

VALUE CREATION

Under the terms of the agreement, signed in 2007, thetwo subsidiaries agreed to contribute US$50 million
annually in 2007-11 and US$15 million annually in
2012-21 to support programs to combat contraband/counterfeit goods in the EU and EU-member countries.

CORPORATE PROFILE

Cooperation with authorities toward eradication ofillicit trade

the wake of our competitors’ aggressive sales promotions,Please see Tobacco Business: Regulatory environment and illegal trade (P. 77)
for more details.

3 Tightening tobacco regulations

diversified smoker preferences and, more recently, rapid
growth in the RRP (Reduced-Risk Products) market.
In overseas markets, we have been expanding our operations
through M&A, including acquisitions of RJR Nabisco Inc.’s
non-U.S. tobacco business and Gallaher Group Plc, in addition

notably on sales promotion activities (including advertising).

to organic growth. As a result of such acquisitions, weRegulatory developments may affect our operations and/or

compete with both global tobacco companies and local

financial results.

players with strong footholds in their respective markets.

For example, we may incur incremental costs in complying with

Market shares fluctuate in response to various factors,

product regulations on ingredients and packaging. Suchincluding regulatory changes, shifts in smoker preferences/

regulations could also lead to growth in illicit trade to the

behavior and local economic conditions. Market shares arepotential detriment of our law-abiding, above-board businesses.

also prone to short-term fluctuations in response to one-off

Additionally, if stricter regulations are imposed on communica-

events such as competitors’ new product launches andtions with consumers, they may preclude effective sales

accompanying sales promotion campaigns.

SUSTAINABILITY

The tobacco industry is subject to many regulations, most

GOVERNANCE

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

Risk description and potential impact
As a responsible company, we comply with the laws andMarket share fluctuations may affect our financial results.

regulations of every country/region in which we operate. We

Additionally, markets in which we operate sometimes become

believe laws and regulations should rightfully differ from one

embroiled in price competition due to events such as a brandcountry to another as a reflection of the countries’ respective

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

legal systems, cultures and social conditions. We pursue

may negatively impact our profit margins in individual markets.
FINANCIAL INFORMATION/OTHERS

constructive dialogue with governments and regulatory
authorities to encourage reasonable, unbiased regulation ofMain measures to address risk

tobacco products.

• Optimize product portfolio by offering products that meet
consumers’ needs and changing preferences/behavior and by

Risk description and potential impact
Imposition of stricter regulations on sales promotion activities
could undermine top-line growth strategies’ effectiveness bydepriving us of opportunities to grow brand equity. Underachieving strong brand positioning in every price segment.
• Strengthen sales capabilities and conduct effective
sales promotions.
• Further improve cost-efficiency to ensure profitability.
Japan Tobacco Inc. Integrated Report 2020051

• Strengthen and expand our global business foundation as

Many of our subsidiaries engage in transactions inwell as expand number of markets, which are capable ofcurrencies other than their own reporting currency in thecontinuously generating profit, to avoid overdependence onnormal course of business. They hedge such transactions

profits from a few markets.

in the aim of mitigating the associated currency risk but

5 Country risk

they cannot completely avert it.
Additionally, gains or losses on the sale or liquidation of

To realize long-term growth, we have continued to expand our

subsidiaries that were acquired in a transaction denominatedearnings foundation through M&A, new market entries andin a non-yen currency and impairment losses recognizedorganic growth in existing markets, mainly in our tobacco

against such subsidiaries are affected by changes in thebusiness. Such geographic expansion has been accompanied

acquisition currency’s exchange value against the yen

by increased exposure to country risk. If political, economic or

between the acquisition date and the date of the sale,social turmoil were to occur in a market in which we operate,liquidation or impairment.

our operations and/or financial results may be affected.

Risk description and potential impact
Risk description and potential impact

Our consolidated financial results are affected by changes in

Political instability, economic recession, social unrest orother currencies’ exchange value against the yen. The interna-

other such events could disrupt our operations in thetional tobacco business’s financial results, the reporting

market in question. If so, our unit sales, revenue and/or

currency for which is the U.S. dollar, are affected by changes in

profits may decrease.

other currencies’ exchange rate against U.S. dollar. Subsidiaries’
transactions in currencies other than their respective reporting

Main measures to address risk

currencies are also subject to currency risk.

• Collect and monitor information in relation to country risk of
the countries/regions where we operate, so as to keep theMain measures to address riskbusiness operation stable.

• Mitigate currency risk by hedging with foreign-currency debt

• Strengthen and expand our global business foundation asor other suitable instruments, in line with the hedging policy

well as expand number of continuously profitable markets

for foreign exchange, which is established after

to avoid overdependence on profits from a few markets.

comprehensively considering factors including the current

6 Currency risk
Our operations’ global scope exposes us to currency risk.

status of foreign exchange rates.

7 Pandemics
Our businesses operate in a number of countries/regions

While we prepare our consolidated financial statements inworldwide and pandemics could detrimentally impact on ourJapanese yen, our overseas subsidiaries prepare theiroperations. COVID-19 has resulted in global economic

financial statements in various other currencies, including

downturn/recession and unprecedented changes in the way

the Russian ruble, euro, pound sterling, Taiwanese dollar,of living. We closely monitor the situation, including consump-

U.S. dollar and Swiss franc. Changes in such foreigntion and demand trends at each of our businesses in the mid

currencies’ exchange value against the yen affect our

to long term. The pandemic has not caused any material

reported earnings. In addition, in our international tobacco

impact on our business operations, however, any pandemic inbusiness, JT International Holding B.V. consolidates its

the future, not only COVID-19, could have a potential impact

foreign subsidiaries’ financial statements and such perfor-

on our financial results.

mance data are affected by changes in exchange rates
between U.S. dollar and other local currencies used by those

Risk description and potential impact

foreign subsidiaries. We generally do not hedge risks

Pandemics could have detrimental impact on our operations

stemming from such currency translation of financial

and financial results through, for example, a downturn in thestatements except to hedge the currency risk posed by

global economy and changes in the way of living.

translating foreign subsidiaries’ equity into yen. We hedge
this risk with foreign-currency debt, a portion of which isMain measures to address risk

designated as net-investment hedges.

• Implement prevention measures against pandemics, suchas work-from-home capability and hygiene management in

052

Japan Tobacco Inc. Integrated Report 2020

Risk description and potential impact

our employees and their family members.

Natural disasters could disrupt not only our own operations• Establish a stable supply chain by ensuring the continuity ofbut also any of our value-chain partners’ operations. Such

manufacturing operations with the enforcement of safety

disruptions could adversely affect our financial results.

CORPORATE PROFILE

the office, so as to prevent infection and ensure the safety ofmeasures, such as hygiene management, as well as dealing
with multiple suppliers.

8

Unfavorable litigation developments

tobacco products and exposure to secondhand smoke. There are• Establish manufacturing systems in various locations andback-up systems such as reserve power installation toensure a stable product supply.
• Periodically review the business continuity plans and revise
them as warranted.

lawsuits involving smoking-related health claims pending against• Conduct initiatives such as disaster preparedness drills

JT Group companies, including suits where we may be found toand foster a disaster-preparedness mindset among

have indemnity obligations under the agreement whereby weemployees.

acquired RJR Nabisco Inc.’s non-U.S. tobacco business. We

VALUE CREATION

We are being sued for damages due to smoking, marketing ofMain measures to address risk

10 Climate change

Additionally, we may be sued on grounds other than smoking-re-Climate change ensuing from global warming has various

lated health claims. For example, we could be sued on a productadverse impacts, including flooding and landslides due toliability claim if some product-quality problem were to arise.

abnormal weather events such as torrential rainfall; intense heat

BUSINESS

cannot predict the outcome of any current or future lawsuits.

waves, heavy snowfall and drought due to anomalous weather;water-resource change and biodiversity loss. Those impacts

If a lawsuit is decided against us, we may bear significant

could raise issues such as change in environmental conditions ofcompensation liability for damages, and/or incur other

our key raw materials including tobacco and disruption in ourconsequences, that could adversely affect our financial results.

supply chain. This may adversely affect our manufacturing

Additionally, critical media coverage of the ongoing lawsuits

operations and financial results through deterioration in quality

against us could make the public less tolerant of our products

and increase in price/sourcing cost of those raw materials.

SUSTAINABILITY

Risk description and potential impact

and trigger a strengthening of public regulation for smoking.
Such media coverage could also lead to more such lawsuits

Additionally, in transition to a net zero carbon society, aiming toagainst us and potentially litigation expenses.

mitigate climate-related impact, carbon taxes on energy
generated from fossil fuels may be raised, which could increase

Main measures to address risk

operating cost and adversely affect our profit.

• Establish an internal and external coordination scheme andRisk description and potential impact

well as reporting to managements and relevant functions.

Climate change could adversely affect our operations and/or• Continue to appropriately defend against litigation claims invalue chains and, in turn, our financial results. Transition to acoordination with external legal counsel.

net zero carbon society could result in increased operating

Please see Litigation (P. 57) for more details.

cost and adversely affect our financial results.

9 Natural disasters

Main measures to address risk

GOVERNANCE

swiftly act on information gathering of litigation claims as• Conduct climate scenario analysis in line with the TCFD
Recommendations, identify potential climate-related impact

earthquakes, typhoons and floods. Our financial results couldon the Group more accurately, and take adequate action to

be adversely affected by consequences of natural disasters,

mitigate the impact.

such as damage to our employees, suppliers, public transportation, distribution service and sales channel: utilities disruption and decrease in demand for our products.

FINANCIAL INFORMATION/OTHERS

Our operations may be disrupted by natural disasters such as• Reduce greenhouse gas emissions across our value chain,so as to mitigate climate-related impact on society.
• Take measures described in “9. Natural disasters” toaddress natural disasters that may intensify due to

To minimize natural disasters’ impact on our operations, weclimate change.

have adopted a Business Continuity Plan, the scope of which

Please see Improving our environmental impact (P. 66) for more details.

includes global supply-chain optimization.
Japan Tobacco Inc. Integrated Report 2020053

Regulation and key laws
Tobacco Businessname printed in a standardized font and color. Plain packaging

Regulation in overseas markets

and the U.K. A number of other countries are exploring theregulations have since been adopted elsewhere, including in France
possibility of following suit or have already decided to follow.

The tobacco regulatory environment has been becoming
increasingly stringent since the WHO Framework Convention

In relation to RRP (Reduced-Risk Products), the U.S. andon Tobacco Control (FCTC) took effect in February 2005.

European countries are starting to establish new guidelines andframeworks for scientifically assessing reduction in health risks

The FCTC’s objective is to “reduce continually and substantiallyassociated with smoking. Tobacco makers have been stepping

the prevalence of tobacco use and exposure to tobacco smoke.”

up activities to obtain official certification of risk-reduction

The FCTC covers price and tax measures to reduce tobacco

benefits. Some countries have applied existing tobacco productdemand, non-price measures to reduce tobacco demand (e.g.,

regulations to RRP while others have newly adopted separate

protection from exposure to secondhand smoke, regulation ofregulations. The U.S., for example, banned the sale of certain

tobacco products’ contents and emissions, regulation of tobacco

flavored E-Vapor cartridges in February 2020. With a global

product disclosures, regulation of tobacco products’ packaging

regulatory consensus yet to take shape, regulatory treatment ofand labeling, regulation of tobacco advertising, promotion and

RRP varies widely among markets/countries.

sponsorship) and measures to reduce the supply of tobacco
products (measures to prevent, e.g., illicit trade in tobacco

Regulation in Japanese market

products and sales of tobacco products to minors). The
Japanese government ratified the FCTC in June 2004.

Tobacco product sales and promotional activities in Japan are
regulated under the Tobacco Business Act (TBA), related laws/

While the FCTC requires its signatory countries to develop,

regulations and voluntary industry standards. One regulatory

implement, periodically update and review national tobacco

requirement is that advertisements and product packaging

control strategies, plans and programs, it leaves to the discretionmust carry a cautionary statement about the health implicationsof each country the specifics of national regulations’ content,of consuming tobacco products.

scope and methods. The FCTC’s governing body, the Conferenceof the Parties (COP), has been meeting regularly since the FCTC

The mandatory cautionary statement’s wording was revised

first took effect. The COP is a forum for ongoing discussions

when the TBA’s enforcement ordinance was amended inamong FCTC-signatory countries on issues such as formulating

November 2003. All tobacco products sold in Japan since July

FCTC Article-specific guidelines and protocols (which must be2005 have carried the revised cautionary statement. Additionally,

separately ratified or otherwise agreed to by the parties).

tobacco product advertising guidelines (the “Advertising
Guidelines”) issued by the Minister of Finance pursuant to theAmong FCTC-signatory countries, Russia, one of our key

TBA’s Articles 39 and 40 (on the cautionary statement andmarkets, enacted a comprehensive tobacco control law inregulation of advertising, respectively) were revised in March

February 2013 and phased it in from June 2013. The law

2004 to conform with the amended TBA enforcement ordinance.

restricts retail sales locations and point-of-sale displays of
tobacco products; prohibits advertising, sales promotions

The Tobacco Institute of Japan (TIOJ) has set voluntaryand sponsorship; sets minimum retail prices; bans smoking

standards for tobacco product advertising and sales promo-

in public; and combats illicit trade in tobacco products.

tions. We comply with these standards together with all other
TIOJ members. The Fiscal System Council established a

The EU revised its July 2001 Tobacco Products Directive (TPD)

labeling sub-subcommittee under its tobacco business subcom-

effective May 2014. The revised TPD tightened restrictions on

mittee in February 2016. The sub-subcommittee studied best

tobacco product packaging and labeling, added new regulations

practices with respect to the Advertising Guidelines andon tobacco product additives and E-Vapor products and included

reported its findings to the tobacco business subcommittee inmeasures to address illicit trade also. EU-member countries haveJune 2016. Following further deliberations by the tobacco

implemented regulations associated with the revised EU TPD.

business subcommittee, recommendations on revising
advertising and cautionary statement regulations were published054

Australia mandates generic packaging of tobacco products underon December 28, 2018. The TBA enforcement ordinance, theits Tobacco Plain Packaging Act, which took effect in December

Advertising Guidelines and some related directives were amend-

2012. The law prohibits tobacco packaging from bearing logos,

ed on June 14, 2019, in accord with the recommendations. On thebrand images, promotional text or anything else except the productsame day, the TIOJ revised its voluntary standards. In addition to

Japan Tobacco Inc. Integrated Report 2020

be adversely affected by contraction in tobacco productstandards on T-Vapor tobacco products, non-tobacco T-Vapor

demand, loss of market share and/or increased regulatory

products (tobacco-heating devices), tobacco-related businesscompliance expenses.

activities, and TV advertising to promote better smoking etiquette.

CORPORATE PROFILE

revising its standards on tobacco products, the TIOJ set new

Tobacco Business Act

The revised standard for the cautionary statement on tobacco
In Japan, designated tobacco product distributors (sellers ofwording, enlarged the area occupied by the cautionary state-self-imported tobacco products) and tobacco product wholesal-

ment by a minimum of 50% and added new content consistenters must register with the Minister of Finance; tobacco productwith the latest scientific knowledge, all effective from July 1,

retailers must be licensed by the Minister of Finance. Our

2020. Revisions to the TIOJ’s advertising voluntary standard

tobacco products and tobacco products imported by a desig-

included measures to more effectively shield minors from

nated distributor may be sold by retailers only at prices ap-

tobacco product ads, including online, and new restrictions on

proved by the Minister of Finance. Retailers’ pricing requests arepoint-of-sale ad size and display methods.

mandatorily approved by the Minister of Finance unless deemed

VALUE CREATION

product packaging changed the cautionary statement’s

inimical to consumers’ interests.
In July 2018, the Health Promotion Act (HPA) was amended torequired by the Tobacco Business Act to annually enter into

facilities into three categories: Class-1 facilities (e.g., schools,

purchase agreements with the growers. Such agreements must

hospitals, government offices), Class-2 facilities (restaurants,

specify the planted acreage by tobacco variety and purchase

offices, factories and other facilities not in either of the other two

prices by tobacco variety and grade. We are obligated tocategories) and facilities intended for smoking (e.g., publicpurchase the grower’s entire tobacco crop produced pursuant tosmoking lounges, bars and other establishments that cater tosuch agreements, excluding any portion not suitable forsmokers, tobacco shops that permit smoking on premises). At

manufacturing tobacco products. Before entering into any such

Class-1 facilities, on-site smoking is prohibited unless the facility

agreement, we confer with the Leaf Tobacco Deliberative

has an outdoor smoking area that meets certain requirements.

Council (LTDC), a body comprising representatives of domestic

At Class-2 facilities, indoor smoking is prohibited unless thegrowers and tobacco market experts approved by the Minister

facility has a separate smoking room that meets certainof Finance, about total acreage to be planted and tobacco leaf

requirements. Additionally, restaurants that meet certain

pricing. We are required to honor the LTDC’s opinions. Like manyrequirements may permit smoking throughout their premises.

other agricultural crops, tobacco leaf costs more to produce in

At facilities intended for smoking, indoor smoking is allowed.

Japan than overseas. The prices we pay for domestically grown

We recognize public places that allow smoking are going totobacco leaf (before re-drying) are roughly three times higher

decrease in number under the amended HPA, which fully took

than re-dried foreign-grown tobacco leaf prices.

effect from April 1, 2020. While it is difficult to predict smoking
environment changes in detail, we expect our financial results to

SUSTAINABILITY

When purchasing domestically grown tobacco leaf, we arefacilities frequented by the public. The amended HPA classifies

BUSINESS

better prevent unwanted exposure to secondhand smoke inJapan Tobacco Inc. Act

Regulatory impacts on our operating performance

GOVERNANCE

be affected to some extent.
JT was established pursuant to the Japan Tobacco Inc. Act (the“JT Act”) to manufacture, sell and import tobacco products.
Under the JT Act, the Japanese government must always own
at least one-third of our total issued shares (excluding any

guidelines on smoking, tobacco products and tobacco productnon-voting share classes*¹). The Minister of Finance must

marketing, sales promotions, packaging and labeling is impossi-

approve any offerings of newly issued stock or subscription

ble to accurately predict, we expect the regulations discussed

rights to shares and any issuance of stock, subscription rights toabove to expand in scope and/or new regulations (including

shares or bonds cum subscription rights to shares in conjunc-

municipal regulations) to be imposed in Japan and overseas

tion with a stock swap. In addition to manufacturing, selling andmarkets in which we sell products.

importing tobacco products and operating businesses inciden-

FINANCIAL INFORMATION/OTHERS

While the future content of laws, regulations and industry

tal thereto, we are permitted by the JT Act to engage in otherWe are supportive of reasonable and appropriate regulation ofbusinesses as required to fulfill our purpose and subject to thetobacco, but if tobacco regulations like those described above

Minister of Finance’s approval. Other matters requiring theare tightened or if we are not afforded enough time to adequate-

Minister of Finance’s approval include appointment/dismissal ofly adapt to such regulatory tightening, our financial results may

directors, executive officers and Audit & Supervisory Board
Japan Tobacco Inc. Integrated Report 2020055

members, amendments to our Articles of Incorporation,and Safety of Products Including Pharmaceuticals and Medical

appropriations of capital surplus (excluding appropriations to

Devices (the “Pharmaceutical and Medical Device (PMD) Act”).

rectify an accumulated deficit), mergers, split-ups and dissolu-

The PMD Act requires companies that manufacture and selltion. We are also required to submit a statement of financial

pharmaceuticals to be licensed in every prefecture in which they

position, statement of income and business report to theoperate and to renew those licenses every five years. Additionally,

Minister of Finance within three months of every fiscal year-end.

every pharmaceutical manufactured or sold in Japan must be
approved by the MHLW.

The Reconstruction Financing Act*², which took effect on
December 2, 2011, directed the government to reassess state

Japan’s National Health Insurance (NHI) program maintains a

involvement in the tobacco industry under the Tobacco

drug formulary and sets official drug prices. NHI is planning toBusiness Act by March 31, 2023, and to explore the possibility ofradically reform drug pricing. The planned reforms include

divesting its JT shareholdings.

annual drug price revisions, paring-down of the list of drugs*1 Defined as classes of shares with no right to vote on any resolutions at general
meetings of shareholders.
*2 The Act on Special Measures for Securing Financial Resources Necessary for
Reconstruction from the Great East Japan Earthquake.

qualifying for premium pricing intended to incentivize drug

Self-regulation of marketing

discovery and reduce off-label drug use, and tiered reductions
in long-listed drug prices based on generic substitution rates.

Processed Food BusinessIn addition to complying with the regulations of every country
in which we operate, we also operate in accord with our own

Our processed food business is regulated as a food product

Global Marketing Principles (GMPs), four principles based on

manufacturer and distributor, mainly under the Food Safety

our recognition of the importance of responsibly marketing

Basic Act, Food Sanitation Act and Food Labeling Act.

tobacco products. Our GMPs include not marketing to minors
and not encouraging anyone, including adults, to start

The Food Safety Basic Act, enacted and effective from 2003 withsmoking or dissuading anyone from quitting. We believe thatthe purpose to ensure food safety and protect consumers,

preventing minors from smoking is an issue that requires

charges food companies with a responsibility to implement

society-wide engagement. We are pursuing various initiatives

safeguards necessary to ensure food safety from a scientificto address this issue in coordination with governments andstandpoint through risk control, assessment and communication

concerned organizations in addition to appropriately operating

at each stage of their entire supply chains. The Food Sanitationin accord with our GMPs.

Act aims to keep food and beverages free of hygienic hazards

Please visit JTI.co.jp (Japanese only) for more details.

and protect the health of consumers. It requires food companies
to acquire knowledge and technology, verify ingredient safety,

Pharmaceutical BusinessPharmaceutical R&D, manufacturing, sales and marketing are
stringently regulated in Japan and major overseas markets.
Additionally, regulatory authorities globally have been reviewing
new drug applications (NDA) increasingly rigorously in recent
years in response to a growing imperative to ensure drug safety.
Given the need to demonstrate safety in larger sample sizes oversufficiently long timeframes, clinical trials are growing in bothscale and duration. Meanwhile, with required NDA documentation
being internationally standardized both qualitatively and quantitatively, drug companies now commonly use a single set of data
available in multiple countries for drug development, a practicethat increases development efficiency and reduces costs.
In Japan, pharmaceutical manufacturing and sales are regulatedby the Ministry of Health, Labour and Welfare (MHLW) and/or
prefectural authorities under the Act on Securing Quality, Efficacy

056

Japan Tobacco Inc. Integrated Report 2020

inspect their facilities, and otherwise act diligently to fulfill their
responsibilities to ensure the safety of their food products,
additives, utensils, containers and/or packaging. As part of therevision in 2018, additional requirements such as hygiene
management in line with the HACCP (Hazard Analysis andCritical Control Point) are in place. The Food Labeling Act, aiming
to uphold consumer interests and contribute to make foodproduction to support protection/promotion of health of
consumers, sets labeling standards for food products offered for
sale, including with respect to allergen content, shelf life,
ingredients and place of origin. Food companies are required tolabel their products in compliance with the standards.
In addition to meticulously complying with these and otherapplicable laws and regulations, our processed food businessis working to upgrade our safety management from fourstandpoints: food safety, food defense, food quality and foodcommunication, so that it can provide consumers with safe andquality food products with which consumers can feel secure.

JT and/or some of its subsidiaries are defendants in

its early stages. We believe that we have valid grounds tolawsuits filed by plaintiffs seeking damages for harm

defend this claim and intend to do so vigorously.

CORPORATE PROFILE

Litigation
allegedly caused by smoking or vaping, the marketing of
tobacco products or exposure to tobacco smoke. There are

Even now, the scale of the JT Group’s U.S. tobacco businesslawsuits involving smoking/vaping and health-related cases

remains small. Hence, we believe that litigation in the U.S.

pending in which one or more members of the JT Group arewill not materially affect its businesses in the near future.

named as defendants or for which JT may have certain
Please see "Contingent Liabilities" of our Consolidated

acquisition of RJR Nabisco Inc.’s non-U.S. tobacco business.

Financial Statements’ “Contingencies” note for major

In addition, JT and/or some of its subsidiaries are also

lawsuits to which JT and some of its subsidiaries are named

defendants in lawsuits other than the smoking/vaping andas defendants.

VALUE CREATION

indemnity obligations pursuant to the agreement for JT’s

health-related cases.
To date, JT Group have never lost a case or paid any settlement award in connection with smoking/vaping and health-re-Canada pending against JTI-Macdonald Corp. (hereinafter

lated litigation. However, the Group is unable to predict thereferred to as JTI-Mac), our Canadian subsidiary and JT’s

outcome of currently pending or future lawsuits. A decisionindemnitees (RJR Nabisco Inc.’s affiliates), brought byunfavorable to the JT Group and payment of substantial

Canadian provinces. In addition, there are 8 pending classamount of monetary compensation could materially affect its

actions in Canada where plaintiffs are seeking damages forfinancial performance. Moreover, regardless of the results ofharm allegedly caused by smoking of cigarettes. Damages

these lawsuits, critical media coverage may reduce social

claimed in some of these cases reach sums in the multi-bil-tolerance of smoking, strengthen public regulations concern-lion-dollar range. We will continue to take all appropriate

ing smoking and prompt the filing of a number of similaractions to defend such claims vigorously and believe there arelawsuits against the JT Group, forcing it to bear litigation

a number of valid defenses.

costs and materially affecting its business performance.

BUSINESS

There are ten ongoing health care cost recovery cases in

Apart from smoking/vaping and health-related ones, the JT
Group also may become the defendant in further litigation.

under Canada’s Companies’ Creditors Arrangement Act (CCAA).

When any problems arise on the Group’s product quality, thisThe Ontario Superior Court granted the CCAA application on

will lead to a claim seeking profit liability. Such litigation cases

the same date and extended the protection in favor of JTI-Mac.

may negatively affect its business performance or manufac-

All the Canadian matters against JTI-Mac referred to hereinture, sale and import and export of its products, should their

have been stayed by the court order. JTI-Mac carries on

outcomes prove unfavorable.

SUSTAINABILITYOn March 8, 2019, JTI-Mac filed for protection from its creditors

business in the ordinary course under the CCAA.
In recent decades, numerous, large-scale, smoking andhealth-related cases have been brought against tobacco
GOVERNANCE

product manufactures in the U.S. and some of the cases
initially resulted in verdicts with massive damage awards. We
are not defendants in any of these lawsuits, nor are we
subject to any indemnity claims with respect to them. The JT
Group’s U.S. tobacco business does not include the businessthat it acquired from RJR Nabisco Inc. in 1999, as well as the
Natural American Spirits’ non-U.S. business that it acquired
from Reynolds American Inc. group in January 2016.

FINANCIAL INFORMATION/OTHERS

There are ongoing litigations in the U.S. alleging healtheffects associated with E-Vapor use and harm caused toconsumers by misleading representations and advertising
for which plaintiffs are seeking damages and/or demanding
health warnings against E-Vapor manufacturers in the U.S.
One such case has been brought against a number of
E-Vapor manufacturers including JT subsidiaries. This is inJapan Tobacco Inc. Integrated Report 2020

057

SUSTAINABILITY
The JT Group is working on various sustainability initiatives asa responsible member of society. This chapter introduces thefocus areas set for each business segment based on themateriality analysis. Also, the CSO discusses the Group's
sustainability initiatives to support the Group’s growth strategy
for sustainable value creation.

060 Our material issues
062 Sustainability strategy
064 Three absolute requirements for sustainability• Respect for human rights• Improving our social and environmental impact• Good governance and business standards
068 Investing in people/Health and safety
072 Focus areas by business segment• Tobacco Business• Pharmaceutical Business• Processed Food Business
082 Interview with the CSO

058

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

059

Japan Tobacco Inc. Integrated Report 2020

Our material issues
Sustainability is at the heart of managing our business. Our sustainability strategy is formulated
based on the 4S model, our management principle, and encompasses our materiality analysis.
We contribute to the related Sustainable Development Goals (SDGs) through our businessactivities and initiatives.

The 4S model

Materiality

Sustainability strategy

SDGs

To help the JT Group to grow, and to build a sustainable future

The COVID-19 pandemic obviously also had a major impact

as a member of the society in which we operate, we haveon our approach in 2020. From the onset of the global crisis,

identified a list of high-priority material issues. Our materiality

we have prioritized the safety of our employees and their fami-

is based on the JT Group’s management principle, the 4S

lies, and all of our other stakeholders. We have taken manymodel. In 2015, we performed a materiality assessment

different steps, such as strengthening occupational healthcovering the entire Group for the first time, selecting materialand safety measures to protect our employees and toissues through interviews with our internal and external

mitigate potential disruption to our consumers and partners.

stakeholders.

We have kept our business running by expanding existing

Read more about our materiality assessment process on JT.com.

systems such as remote working and flexible hours, andimplementing “New Ways of Working.” The JT Group will

Since 2015, we have continued to listen to our stakeholders

continue to support the communities where we operate in

and adapted our materiality according to the changing

any way we can.

external business environment.
In the tobacco business, which is our core business, we will
In 2020, we focused on the following key issues across thestrengthen our investments in RRP (Reduced-Risk Products),

entire JT Group.

the pillar of our future business growth, while realizing steadyprofit growth through RMC (Ready-Made Cigarettes). We will

• Environment: (a) Supporting the TCFD (Task Force on
Climate-related Financial Disclosures) and (b) thecontinue to work on “product innovation” as a material issue
to continue to provide new value to our consumers.

appropriate use and responsible disposal of materials,
including plastics, used in our products and packaging.

The business environment surrounding the JT Group willcontinue to evolve rapidly in 2021 and beyond. We will carry• Investing in people: Equality and diversity in our workplace.

out periodic materiality assessments, reviewing and updating
the priorities as necessary to ensure that they remain relevant
and up-to-date.

060

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Laws andregulations

Product safety
and productresponsibility

Supply chain
management

Product
innovation andintellectual
property

Environment

BUSINESS

Importance to external stakeholders

Corporate
governanceandtransparency

VALUE CREATIONHighThe JT Group’s materiality

Respecting
human rights

Litigation

Anti-competitive
behavior

Being aresponsible
employer

Anti-bribery
and corruption

Illegal trade

Workplacehealth and safety

Collaborations
andpartnerships

Employeedevelopment
and talentmanagement

Equality anddiversity inthe workplace

Tax practices

Contributions
to society

Political andregulatory
decision-making
processes

MediumResponsible
marketingMediumGOVERNANCE

Information
security

SUSTAINABILITY

Environmental
impacts ofproducts

High

Importance to the JT Group

Value chain boundaries

Our supply chain

Our Company

Our customers and consumers

FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020061

Sustainability strategy
The JT Group’s sustainability strategy is basedon the 4S model, our management principle,
and encompasses our materiality analysis. It
encourages us to look beyond our usual
planning cycle period and think about thelongevity of our business, the future of ourplanet, and the society we live in. The
foundations of our sustainability strategy,
which apply across the Group, are as follows.

Three absolute requirements
for sustainability

Tobacco business sustainability strategy

We have selected the following four focus areas for the tobacco business, w

areas and have been reporting on progress since 2019. In 2020, we set a nematerials, including plastics, used in our products and packaging.
Focus areas

Aspirational goals

Products and services

We will be a total tob
products by focusing

PeopleWe will be the emplo

Supply chain

We will reduce envir
ble practices across

Regulatory environment and illegal trade

We will ensure the C
regulation, and enha

Respect for human rights
We are committed to respecting human rights across ourglobal operations and value chains, as expressed in the JT
Group Human Rights Policy.

Pharmaceutical business sustainability stra

The mission of our pharmaceutical business is to create innovative, origin

P. 64

mission, in 2019, we selected the following three focus areas. We set fiveH

UM

A N RI

GHTS

reporting on our progress towards achieving the targets.
Focus areas

Aspirational goals

Products and services

We will create innova

PeopleWe will strive to nur(FIC) drugs.

Product safety and responsibility

We will strictly comporder to deliver safe

Improving our social and environmental impact
We are committed to protecting the environment and making
a positive difference wherever we operate.
P. 65-67

Processed food business sustainability stra
Good governance and business standards

Our mission in the processed food business is to deliver safe, high-quality

We are committed to promoting transparent, fair and timely

Focus areas

Aspirational goals

Products and services

We will continue to p
our customer's need

PeopleWe will ensure work
people who can con

Supply chain

We will reduce socia
products to consume

decision-making that carefully considers the respective
interests of consumers, shareholders, employees and thewider society.

areas. We set eight specific targets for these focus areas and this is the fi

P. 86-103

062

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

which is our core business. We have set 11 specific targets for the focus

ew target relating to the appropriate use and responsible disposal of

VALUE CREATION

bacco company offering consumers an even greater choice ofg on quality, innovation, and reduced-risk potential.

oyer of choice by investing in people.

ronmental and social risks, and enable transparent and responsiour supply chain.

Company is included in policymaking leading to fair and balanced
ance our cooperation with governments to combat illegal trade.
BUSINESS

ategy

nal drugs to support patients in the shortest time possible. In view of thisspecific targets for these focus areas and this is the first time we arerture talent development which enables us to create first-in-classply with all relevant laws, regulations, and industry standards ine drugs to patients.

SUSTAINABILITY

ative, original drugs to support patients in the shortest time possible.

Contributing to the SDGs
The JT Group supports the Sustainable Development Goals(SDGs) adopted by the United Nations. Through our businessactivities, the JT Group will contribute to the SDGs related toour business and its environment. We have mapped related
SDGs against our initiatives for sustainable business, andidentified the nine SDGs to which our business can best
contribute.
Read more on JT.com.

GOVERNANCE

ategy

y products to consumers. In 2019, we selected the following three focus

first time we are reporting on our progress towards achieving the targets.
FINANCIAL INFORMATION/OTHERS

provide high-quality, technology-driven products in response tods, to satisfaction and trust.

kplace safety for our employees, while continuously investing in
ntribute to enhancing corporate value.

al and environmental impacts and continue to deliver safe
ers.

Japan Tobacco Inc. Integrated Report 2020063

Three absolute requirements
for sustainability

Respect for human rights
We respect human rights across our value chain and recognize
the International Bill of Human Rights and the International
Labour Organization’s Declaration on Fundamental Principles andRights at Work. The JT Group Human Rights Policy follows theframework provided by the UN Guiding Principles on Businessand Human Rights.

Our approach and progressEmbed
We are working hard to embed human rights thinking in ourthis, we provide regular training and continuously sharecorporate culture and to improve employees’ understanding of

information about human rights and the JT Group Human

the human rights implications of business decisions. To do

Rights Policy.

Identify and prioritize
We conduct Human Rights Impact Assessments to identify

Conducting human rights due diligence – through Humanand assess actual and potential human rights risks. In line

Rights Impact Assessments – is part of our corporate

with the UN Guiding Principles, these assessments focus on

responsibility to prevent adverse impacts on people andthe greatest risk to people, both within our own Company andensure that the highest standards of behavior are upheld

through business relationships with our suppliers, from farmwithin our business and value chain. To achieve this, we are

to store. As a result of the assessments, we aim to addresscommitted to assessing 100% of our high-risk countries by

the identified risks of rights-holders, meet our stakeholder

2025, in our tobacco business. We have also conducted due

expectations on respecting human rights, and mitigate

diligence in our processed food business, including high-risk

against the overall risks to people and the business.

countries identified such as China and Thailand, and ourpharmaceutical business.
Read more about our progress on JT.com.

Respond
We develop action plans to address issues identified throughconsistent manner. The plans have defined responsibilities,

Human Rights Impact Assessments and self-assessment

clear timelines for implementation, and key performancequestionnaires. These plans drive improvements and integrate

indicators to monitor progress.

human rights into our existing management processes in a

Read more about our findings from Human Rights Impact Assessments.

Putting people firstProtecting human rights was a vital element of our Group-

distribution, and other field-based jobs. So, we put in placewide response to the COVID-19 pandemic. We followed thestringent measures to ensure they can work safely. When

structured guidance for companies provided by the UN

making key decisions, we always took care to involve those

Development Program Human Rights Due Diligence anddirectly impacted. For example, in locations where conditions

COVID-19 Rapid Self-Assessment for Businesses.

allowed a return to the office, individuals could decide whether
they deem it is safe to return based on the new safety

For many of our employees and contractors, working-fromhome is not an option, because they work in factories, sales &064

Japan Tobacco Inc. Integrated Report 2020

measures in place.
Read more about our response to COVID-19 on page 10.

CORPORATE PROFILE

Improving our social impact

VALUE CREATION

For our Group to grow sustainably, it is vital for us to contribute to the sustainable
development of our society. Our community investment policy determines acommon goal across the JT Group: “To contribute to the development of inclusive
and sustainable communities.” We believe that everyone should have theopportunity to participate in society, and that inclusive societies are better forbusiness. In line with our community investment policy, and as a responsible local
community member, we recognize the value of nature, society, and human diversity,and work with a wide range of stakeholders to resolve social issues.

Our focus areas
Through long-term partnerships with local and internationalorganizations, we have around 500 community investment
programs in 66 countries. Based on global and local needs,
these programs help communities to become more inclusive,

1. Reducing inequalities, e.g., helping underprivileged people
gain access to food and education.

e.g., providing access to clean water.
3. Protecting the environment, e.g., replanting trees with thehelp of our employees.
BUSINESS

sustainable, and resilient. We focus on three specific issues:

2. Improving community resilience in disaster-prone areas,

In 2020, in spite of COVID-19 restrictions, we implemented
417 programs to reduce inequalities, 53 programs to
improve community resilience, and 34 programs to protect
the environment globally.

Measurement and evaluation

Our community investment programs continued throughout

Jones Sustainability Indices (DJSI), which recognizes us as the2020, with some adaptations due to the COVID-19 pandem-

industry leader in “corporate citizenship and philanthropy," with a

ic. Throughout the year, our communities needed specificperfect score of 100. To measure the social impact of our work,

support, so we had to think beyond our practices and find

we use the Business for Societal Impact* framework provided by

new ways to respond to their needs.

Corporate Citizenship.

SUSTAINABILITY

Our contribution to communities
in 2020

Our work is highly rated by external agencies, including the Dow

Read more about our response to COVID-19 on page 10.

* Global standard in measuring andmanaging a company's social impact

GOVERNANCE

Our target
Between 2015 and 2030 we will invest US$600 million to help make communities inclusive and resilient, with our employees
contributing 300,000 volunteer hours.
Please see page 69 for more details on our progress towards our targets.

49.5(US$ MM)

US$43.9 MM in cash

US$4.5 MM in management costs

19,199hours volunteered

551

FINANCIAL INFORMATION/OTHERS

Total:

organizations supported(includes volunteering during working hours only)

US$ 0.7 MM in employee volunteer hours

US$0.4 MM in kind

Note: We applied the average exchange rate for 2020 (US$1= 106.76 yen).
Learn more about our community investment activities on JT.com.

Japan Tobacco Inc. Integrated Report 2020065

Three absolute requirements
for sustainability

Improving our environmental impact
Climate change and other environmental issues are of increasingsocietal concern. Our operations impact the environment throughresource usage, emissions, and waste generation, as do most industries. The environment also has a direct impact on our business. As a
global organization, we recognize that we have a key role to play in
reducing our impacts in own operations and across our value chain.
Our sustainable business practices allow us to conserve resources,
reduce waste, manage costs, and meet the growing consumer
demand for eco-friendly products.
Read more about our approach in the JT Group Environment Policy.

The JT Group Environment Plan 2030
Our JT Group Environment Plan 2030 sets objectives and

The JT Group Environment Plan 2030 includes qualitative andtargets to address our key environmental risks and opportuni-

quantitative targets. Read more about our progress toward

ties across three focus areas: Energy and Emissions, Natural

quantified targets here. You can also read about our environ-Resources, and Waste. Our greenhouse gas emission

ment-related activities and our progress toward our qualitative

reduction target was approved as a science based target

targets on JT.com.

(SBT) by the Science Based Targets initiative (SBTi).

Energy and emissions

Natural resources

Waste

Improving sustainable product packaging and material use
To further reduce the environmental impacts of waste

More specifically, we will reduce our packaging (including

associated with our operations and products, we will

plastic) and ensure that the remaining is 88% reusable or

reduce the environmental impact of our products andrecyclable by 2025, rising to 100% by 2030. In total, recycled

packaging through:content will account for 20% of our tobacco business• Design solutions

packaging by 2025.

• Facilitating responsible collection and disposal• Consumer awareness and education

066

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

JT Group environment management
In our more complex operations, we align our approach toenvironmental management with internationally recognized
standards – ISO 14001 and ISO 50001.* In our smaller andless complex operations in Japan, we have implemented our* ISO 14001 and ISO 50001 are the internationally recognized standards forenvironmental management systems and energy management systems,
respectively. These standards do not prescribe absolute performancerequirements. Rather, they provide us with a framework to help build effective
management systems that deliver continual improvement in environmental
and energy performance.

own “JT Green System,” which promotes a simple andconsistent approach.
VALUE CREATION

Endorsing the TCFD recommendations
The potential for financial impact associated with climate

In December 2020, we endorsed the recommendations of thechange is now well known. As a result, concern is growing about

Task Force on Climate-related Financial Disclosures (TCFD).

the mid- to long-term impact of climate change on business

During the next stage, we will further develop our scenario analy-

operations and financial market stability. With this in mind, we

sis and improve our governance framework for this process.

have been conducting climate scenario analysis since 2019.

We will continue to use the results of the analysis to enhance
engagement with our stakeholders and corporate value. Read
BUSINESSthe results of our first round of analysis on JT.com.

Selected CDP "A List" for climate and water, and supplier engagement leader
for the second consecutive year
leader for engaging our supply chain on climate change. This

prestigious "A List" for tackling climate change and acting tomarks our second recognition for CDP Supplier Engagement

protect water security. We are also recognized as a global

Leader following 2019.

SUSTAINABILITY

For the second year running, we achieved a place on CDP's

GOVERNANCE
FINANCIAL INFORMATION/OTHERS

We are delighted to be included in the CDP’s “Climate A List” and “Water A List” for the second
consecutive year. This clearly reflects our continued efforts to reduce our environmental
footprint and our transparency in disclosing information. We are also pleased to announce that
we officially endorsed TCFD’s recommended approach to scenario analysis.
The climate-related risks and opportunities we identify through this process will help us to makeour business strategy even more resilient and optimize the way we disclose the information.
Kazuhito Yamashita

Member of the Board, Chief Sustainability Officer

Japan Tobacco Inc. Integrated Report 2020067

Focus areas

Investing in people
Our sustainability journey is dependent on the skills and spirit of
our employees and people in the communities impacted by ourbusiness. We will create positive impacts through our business.

The JT Group human resources management philosophy
TREAT ALLEMPLOYEES FAIRLYAND RESPECTFULLY

We believe that highly skilled and talented people form thefoundation of a company’s success and contribute to realsustainable growth. In light of this, the JT Group proactively takes

ENSUREPROVIDE ALL JT
TRANSPARENCY OF GROUP EMPLOYEESRULES AND
WITH GROWTH
STANDARDSOPPORTUNITIES

steps to secure long-term engagement and employee satisfaction.

Attracting and developing talent
Today’s business environment is evolving rapidly, and COVID-19

represents a growing proportion of our new hires and theiradds additional pressures. It requires flexibility and the adoption

unique skills will help drive innovation in the JT Group.

of new skills, such as remote ways of working.
Our international tobacco business launched its first global
We have implemented various global and regional learninginternship competition “Make It Bright” in 2019, in which

programs. In these unprecedented times, we supported

students from 17 countries pitched ideas for positive change

employees as they navigated new digital learning platforms andto our business. In 2020, we

courses. We constantly invest in our employees, including at a

expanded this initiative across 30

managerial level, to ensure they flourish in their careers.

countries, reaching 41 million
students around the globe. MoreOur commitment to talent development is seen in the fact thatthan 8,000 registered for the

we recruit existing employees to fill open positions. Our internal

competition. The local winninghire rate has now been above 90% for more than six years, andteams competed in virtual global

in 2020, 91.5% of employees were internally promoted.

finals to win a six-month paid
global internship in 2021.

Another priority for us is ensuring that we are chosen by thebest talent – particularly from Generation Z,* as this group* Generation born after the late 1990s.

Employee engagement
We carry out a Group-wide Employee Engagement Survey

helps us to understand our strengths, progress, and areas forevery three years, plus additional surveys at a regional or

improvement. It also helps us to maintain our reputation as adepartmental level. The feedback we receive from employees

top employer.

Our tobacco business

Employer ofchoice068

Aspirational goal

TargetProgress

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

We will be a certified employer ofchoice every year in at least 60
countries by focusing on talentmanagement, rewards, andempowerment.

We were certified as employer of choicein 67 countries (64 with Top Employer
and 3 with other local employer
certifications). In addition, 11 countries
hold more than one certification.

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Diversity and inclusion
Establishing a diverse and inclusive workplace is a top priority

brings a rich mix of viewpoints and perspectives, which canfor us, so that all of our employees can enjoy their work andinspire new ideas, lead to solutions to complex issues, andperform to the best of their abilities. We respect different

drive our business forward. These efforts have also been

backgrounds and values, such as age, gender, self-identifica-

recognized outside the company. Learn more about ourtion, sexual orientation, disability, ethnicity, religion, and nation-

external recognition on page 182.

ality, as well as experience and expertise. We believe this
VALUE CREATION

New Ways of Working (N-WOW)
Recognizing that different people have different working styles and needs, we promote a workplace environment that allows all
employees to fulfill their potential.

Working parents

We have a long-standing corporate culture of encouraging

In 2020, we launched a new family leave policy for our

flexible hours and remote working across the Company.

international tobacco business, which came into effect in

Fortunately, these practices enabled most of our office-based

January 2021. The policy grants 20 weeks of paid family

employees to seamlessly work from home soon after theleave, regardless of gender, sexual orientation, age, or

COVID-19 outbreak began in January 2020. In Japan, we

location, when an employee becomes a parent via natural

introduced full-time flexible working and no-limit remotebirth, surrogacy, or adoption.

BUSINESS

Flexible working

working in February 2020. These new ways of working willcontinue beyond the end of the pandemic. In our international

JT has been certified as a childcare-supporting company

tobacco business, our office-based employees in over 70(in Japanese) by the Japanese Ministry of Health, Labour

locations have been working from home.

and Welfare.

Learn more about our response to COVID-19 on page 10.

One of our commitments is to promote gender equality in the

Supporting our LGBT+ employees is vital for us to create aworkplace. To further empower women, we hold workshops

more equal JT Group, in which everyone is empowered to be

for top management and line managers, as well as training

themselves. All our job vacancies in our international tobaccoand seminars for female employees. Our new Group-widebusiness are now published on myGwork, a global networking

target, specifically representation of women in leadership, is

hub for LGBT+ professionals and graduates. We have madeto reach 25% by 2030. We find it desirable that this should bepositive progress in our Japanese operations too, achieving

more than 40% over time.

the highest-ranking Gold status in the PRIDE Index 2020 for

GOVERNANCE

LGBT+ inclusion

SUSTAINABILITY

Gender equality – women in leadershipthe fifth consecutive year.

The JT Group community investment
Our community investment programs contribute to the sustainable growth of societies while providing valuable volunteering

Community
investment

Aspirational goal

TargetProgress

We will be theemployer of choice byinvesting in people.

Between 2015 and 2030 we will invest
US$600 million to help make communities
inclusive and resilient, with our employees
contributing 300,000 volunteering hours.

Since 2015, we have invested US$349
million in our communities andemployees volunteered 137,882 hours
on company time.

FINANCIAL INFORMATION/OTHERS

opportunities for our employees.

Learn more about our community investment activities on page 65.
Note: “Investing in People” is also a strategic focus area for our pharmaceutical and processed food businesses.
Japan Tobacco Inc. Integrated Report 2020069

Focus areas

Investing in people: Health and safety
Our approach
Our employees have the right to be protected from work-related injuries
and illnesses, and it is our responsibility to provide a safe working
environment. We align our health and safety standards with ISO 45001(OHSAS 18001) and always meet or exceed legal requirements.
When our standards are stricter than local laws, we require our local
offices to comply with our standards. The scope of our standards
extends beyond our employees, covering contractors as well as visitors
to our operations.
In 2020, responding quickly and effectively to the COVID-19 pandemic
was a priority. We have taken considerable measures to ensure thesafety of all employees and their families, and all of our otherstakeholders, while mitigating the potential disruptions to ourconsumers and partners.
Learn more about our response to COVID-19 on page 10.

Three pillars of safety
Our safety programs are based on three fundamental pillars:

In some countries with poor infrastructure and traffic

safe workplaces, safety competence, and a Group-wide

management, our people are more at risk of being involved

culture where the safety of our people always comes first. The

in road traffic accidents.

highest risks across the JT Group are driving vehicles, riding
motorcycles, and working with machinery, as well as slips,

We have been implementing a motorcycle safety program intrips, and falls.

countries with a high vehicle accident rate (Zambia, Malawi,
and Tanzania) since 2016. This has led to a 50% reduction in

To mitigate these risks and prevent injuries, we conduct risk

work-related injuries.

assessments throughout the whole supply chain. This
enables us to identify hazards, implement appropriate

In 2019, we rolled out a new driver safety policy andmeasures, and ensure that our approach helps us to protect

implementation guidelines across our international tobacco

our employees. We also focus on raising awareness among

business. Focusing on driver behavior, the new guidelines

employees and thoroughly embedding our safety culture in

require local offices to conduct a risk assessment toour day-to-day work.

identify high-risk drivers. They must also send periodic
progress reports and action plans. In 2020, we completed a
Driver Safety Compliance Assessment. The results showedthat our markets comply with 80% of our global guidelines
on average.
Considering the growing number of female employees, thepolicy also includes maternity protection for female drivers.
Between 2019 and 2021, 30,000 employees will take a driver
training course.

070

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Ensuring the same standards around the world
We take a systematic and risk-based approach to acquired

have made acquisitions in new markets. Most of thesebusinesses from the outset. The Health and Safety teamacquired businesses operate in developing countries, with aconducts a risk assessment for potential new countries toraft of societal and economical challenges. We recognize thischeck whether their standards meet ours. Following an

and feel responsible for improving the working environment.

acquisition, we support local offices to identify key risks,That is why we introduce our policies firmly and immediately

develop and implement 18-month action plans, and alignafter each acquisition. We also visit the sites and support

policies with our standards.

VALUE CREATION

As part of our drive to expand the business geographically, we

local managers to ensure that our policies are endorsed andembedded across the Group.

Towards a better workplace
In Japan, we focus on mental health and preventing life-

our employees to feel comfortable and motivated every day.

style-related diseases such as diabetes. We encourage

We run a variety of well-being programs across the Group,

employees to attend stress management sessions andsuch as ergonomic assessments and ensuring generalindividual consultations with doctors. Following the onset ofoccupational hygiene.

COVID-19, these meetings took place via video call, and we

BUSINESSWe care deeply about employee well-being because we wantalso offered online exercise programs. Both measures were
To design these programs, we gather well-being data from ourdesigned to support our employees’ optimum health.

local offices. In 2018, we expanded our data scope by introducing new rules requiring all local offices to report their occupa-

Our programs have had a positive impact on employee

tional health cases to our headquarters. This will allow us to

productivity and the absenteeism rate in Japan, which has

understand our global risks and develop a consistent approach

recently been below 1%.
SUSTAINABILITY

to them, while strengthening our existing protection measures.
We are pleased to announce that JT was named as a “White
Local managers are responsible for investigating reported

500” company for the fifth year running. This award is present-

issues and identifying the causes. If the issues are attributed to

ed by Japan’s Ministry of Economy, Trade, and Industry. It

the work or workplace, we take appropriate measures immedi-

recognizes large enterprises that are making outstanding

ately to protect employees’ well-being and prevent recurrences.

progress towards better well-being among their employees.

Health and safety performance in our tobacco business
Progress

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

In line with our vision of zero
workplace injuries, we will
reduce injury rates by 25% by2023 and 50% by 2030.
(Baseline year: 2015).

Recordable injury rate* declined
58.9% from 0.72 in 2015 to 0.30 in
2020.

Employees

2015

2016

2017

2018

2019

2020

0.72

0.64

0.67

0.50

0.49

0.30

FINANCIAL INFORMATION/OTHERS

Recordable injury
rate

TargetGOVERNANCE

Zero injuries

Aspirational goal

* Recordable injury rate = recordable injuries/200,000 hours worked. Some data from newly acquired business has been excluded, as newly acquired business needs
18 months to integrate the JT Group Health and Safety Standards.
Learn more about our health and safety performance at JT.com.

Japan Tobacco Inc. Integrated Report 2020071

Tobacco business sustainability
four strategic focus areas• Investing in people• Products and services (RRP)• Building sustainable supply chains• Regulatory environment and illegal trade

Products and services (RRP)
We continue to strongly believe that alternatives to traditional
combustible products are a key way of offering consumers
reduced-risk potential. Between 2018 and 2020, we invested 100
billion yen in RRP (Reduced-Risk Products), and we plan to invest
further in the coming years.
We also believe that it is vital to focus on innovation and listen to
consumers’ needs. We have partnered with startups and incubators togive emerging technologies and ideas the opportunity to reach our
R&D centers.
In 2020, we launched our Ploom S product offerings in Russia, Italy,
and the U.K. with a positive response from consumers.

Our key T-Vapor products in 2020

This section is intended only to explain the business operations of the JT Group, not to promote sales of tobacco or vaping products or encourage smoking or vaping among consumers.

RRP attributes

SOCIAL CONSIDERATION

No smoke smell

Read more about our RRP portfolio at JT.com.

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Japan Tobacco Inc. Integrated Report 2020

CONVENIENCE

Easy to use

Minimal maintenanceContinuous use

CORPORATE PROFILE

JT Science: an online resource for all
JT Science is a valuable online resource for both scientists andthere is potential for them to reduce the risks associated with

non-scientists. Our mission is to inform, educate, and collabo-

smoking. That is why we’re committed to ensuring that all ourrate with anyone interested in learning about the science behind

RRP fulfill this potential.

RRP – from consumers to scientists and the regulatory
To realize the full potential of RRP, we follow the researchhealth effects of RRP, factors including the elimination ofprocess below.

VALUE CREATION

community. While it is still too early to understand the long-term
combustion and the fewer toxicants found in the vapor, suggest
RRP development and assessment: A six-step journey

2

1
Product design

Aerosol chemistry

3

4

Toxicological assessments

Clinical trials

5

6

Perception & behaviourLong term assessment

Read more about our research on the JT Science website.

We have established a dedicated supply chain for our RRP,

In 2018, we opened an e-liquid (E-Vapor) production facility

building strong supplier partnerships that support businessat our manufacturing site in Gostkow, Poland. We then

expansion and meet the demands of our increasingly sophis-

further boosted our in-house production in 2019 by bringing

ticated portfolio.

into service a new Ploom product plant at the same location.

BUSINESSRRP supply chain

These new facilities enable us to keep up with the demandfor e-liquids containing nicotine, tobacco capsules, and
SUSTAINABILITY

tobacco sticks in expanding markets across the world.

Responsible recycling and disposal schemes
We take our responsibility for the environment very seriously,

and safely recycle or dispose of our products.

providing consumers with advice and support to conveniently

Ploom return scheme in JapanThe sustainability of our products at every stage of their life cycle

capsules, and cartridges by introducing convenient collection

is important to us. In addition to RRP, read more about some ofboxes at around 300 shops selling Ploom in Tokyo.

our latest, other initiatives in the international tobacco business:

This program was a significant extension of a 2017-2018 pilot• Minimizing Winston packaging plastic waste in Germany

scheme, in which we sent out collection boxes to more than• #IGiveAButt campaign, for the responsible disposal of

250,000 people. In 2020, this program was expanded to include
the tobacco industry and we continue to be one of thecigarette butts in the U.K.
• Nordic Spirit — Sustainably made nicotine pouches
FINANCIAL INFORMATION/OTHERS

participating companies.

RRP

GOVERNANCE

In 2019, we collected around 400 kg of used Ploom devices,

Read more on JT.com.

Aspirational goal

TargetProgress

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

We will lead in providing the widest
range of consumer choice in the
RRP category.

At the end of 2020, we offered achoice of 6 tobacco vapor offerings(T-Vapor) and/or 5 types of
e-cigarettes (E-Vapor) in 27 countries.

Read more about our targets on the JT Group’s tobacco business sustainability strategy.

Japan Tobacco Inc. Integrated Report 2020073

Tobacco business sustainability
four strategic focus areas• Investing in people• Products and services (RRP)• Building sustainable supply chains• Regulatory environment and illegal trade

Building sustainable supply chains
Maintaining a well-managed supply chain is essential for thesustainability of our business. To ensure the highest levels ofsustainability and integrity at every stage, we work in close
cooperation with all of our suppliers. These include both thosefrom (a) the leaf supply chain and (b) suppliers of “non-tobacco
materials, other products and services.”

Our leaf supply chain
We manage our leaf supply chain through a supply chain due

emissions, forestry, and Agricultural Labor Practices (ALP).

diligence process that takes into account social, environ-

These targets are explained later in this section.

mental, and economic impacts. Since 2019, we have

Read more about our Leaf Supply Chain Due Diligence.

committed to specific targets tackling greenhouse gas

Leaf suppliers
We source tobacco through two supply models which are

Agricultural Labor Practices (ALP)

either directly contracted growers or third-party leaf mer-

Our ALP are based on the International Labour Organization’schants. These two models each supply approximately 50% ofconventions and recommendations. The program consists

the total volume.

of three pillars: tackling child labor, respecting worker rights,
and ensuring workplace health and safety.

In 2020, we worked with more than 76,000 directly contracted
growers in Bangladesh, Brazil, Ethiopia, Japan, Malawi, Serbia,

As part of our approach to continuous improvement, the ALPTanzania, Turkey, the U.S., and Zambia. Contracting leaf

program allows us and our suppliers to identify challenges on

growers directly enables us to produce a customized crop,

farms and improve growers’ labor and agricultural practices.

while improving growers’ productivity, leaf quality and leaf
integrity. The direct contracting model also allows us to

Our Agronomy Technicians carry out observations on themaintain verifiable provenance and traceability of leaf supply.

ground, and report through our online leaf portal. We
regularly review and act on these findings. We require ourAt the same time, contracting from third parties is essential tothird-party leaf merchants to agree to the same ALP stan-maintain a flexibility of leaf supply. Through our ALP program,dards before we enter into a contractual agreement, and wewe work closely with these suppliers and support them intrack ALP implementation reports yearly.

meeting our standards.

074Japan Tobacco Inc. Integrated Report 2020

Following our robust approach to the Supply Chain Due

Our international tobacco business is one of seven global

Diligence process (SCDD), we extended the assessments to

manufacturers on the Sustainable Tobacco Program (STP)

farming communities. One of the key human rights issues weSteering Committee. Since 2019, we have been working

aim to address as a priority is child labor. Through our flagshipwith third-party leaf merchants, external subject matter

program ARISE – Achieving Reduction of Child Labor inexperts, and various organizations on STP development.

Support of Education – we have been committed to tackling

One of the key themes of the STP is “Human and Labor

child labor in our tobacco growing communities since 2011.

Rights.” We carried out pilot self-assessments on thisThe program is forging real sustainable change by placing

subject in 2020, and the first on-site STP reviews arechildren into formal education and implementing robust

planned for 2021.

VALUE CREATION

Working together

CORPORATE PROFILE

Addressing child labor

solutions to prevent child labor.

Supporting and communicating with growers in 2020
In 2020, we introduced a new governance model for ARISE,

When COVID-19 struck, we quickly had to adapt our conven-transferring ownership of the program to the representatives

tional practice of visiting growers at regular intervals toof subsidiary’s local offices in countries where we grow our

include alternatives, such as providing technical support via

tobacco. These representatives are now responsible forphone or video call, instead of face-to-face. Where appropri-

managing local partnerships, assessing projects, andate, we did continue to visit our growers in person, following

implementing activities at a local level.

all of the relevant health and safety guidelines set by the

We also set up a new advisory committee, consisting ofmasks, using hand sanitizer, and keeping a safe social

relevant stakeholders in our international tobacco business,distance. We also took additional safety measures, such asexternal partners, and other experts. The purpose of theinstalling partitions and checking visitors’ temperatures atcommittee is to ensure the smooth implementation and devel-

our leaf buying stations in Japan, and strictly managing

opment of the program by identifying issues relating to child

grower movement and attendance at all our buying stations.

BUSINESSWorld Health Organization (WHO) – for example by wearing

labor in the leaf supply chain and other operations.
In our international tobacco business, we launched a new
online tool for processing grower contracts remotely,en our relationship with growers, and harmonize the programsupported growers with selling their crop in a timely manner;with other relevant community projects.

and we helped to print and distribute COVID-19 educational

SUSTAINABILITY

These changes will allow us to maximize efficiency, strength-materials in tobacco-growing communities.
Moving forward, we will embed the ARISE program within the“Respond” element of our SCDD process: Identify, Prioritize,

Protecting our employees and their families, our tobacco

Respond, Measure, Communicate and Report. We will also

growers and their communities will always be one of our top

integrate data requirements for child labor into our existingpriorities. We will continue to make every effort to sensitize

leaf monitoring system, Leaf Point.

communities to COVID-19 preventive measures, working in

Read more about the ARISE program.

partnership with local governments and other organizations.
GOVERNANCE
FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020075

Our non-tobacco materials, other products and services
We are just as committed to following social and environmental

services supply chain. All of our suppliers are required todue diligence in our non-tobacco materials, other products, andcomply with our Supplier Standards.

Supplier screening
Our Group-wide supplier screening process ensures that we

In 2020, we revised the JT Group Supplier Standards into aapply enhanced due diligence. Prior to entering into a com-

global, Group-wide Supplier Standards, reflecting an increase

mercial relationship, our key suppliers go through a detailed

in transactions with overseas suppliers. We have been

qualification and selection process, including screening andembedding these standards into all requests for proposals

onboarding. This process allows us to learn more about theand contracts, to ensure that all of our suppliers are aware of

supplier and understand any gaps versus our standards andour requirements.

requirements. In particular, it highlights any potential risks
relating to compliance, human rights, environment, and healthIn our international tobacco business, we are currently working

and safety.

on enhancing the reporting and monitoring tool, in order to havea more robust system in place by 2021.

If any risks are identified through this process, we offer support
and collaboration on how to mitigate the risks and makeIn our Japanese-domestic tobacco business, we also launchednecessary improvements. We follow progress on a yearly basis

a new supplier database listing suppliers’ D-U-N-S® Numbers*

and, if there is no improvement after an agreed duration, we

for efficiency purposes.

may consider terminating our relationship with the supplier.

* “D-U-N-S® Number” is a unique nine-digit identifier for businesses. This
number identifies a company as being unique from any other in the Dun &Bradstreet Data Cloud.

Supply chain aspirational goal and targets
Aspirational goal

ALP

We will reduce
environmental andsocial risks, andenable transparent
and responsible
practices acrossour supply chain.

Supplier
screening

Targets

Progress

We will implement our ALP
program in all sourcing countries
by 2025.
1. 1
 00% of our supplying entities
to report on ALP
2. 1
 00% of our growers to becovered by ALP
3. 1
 00% of tobacco leaf volumes
to be covered by ALP
We will screen all key suppliers
against environmental, social,and governance criteria by 2023.

In 2020, 87% of our supplying entities reported
against ALP.
[58% of our directly contracted growers and 92%*¹
of our leaf merchants’ growers were covered by
ALP; leaf merchants data come from reporting
entities only and excluding India and China.*²]
76% of our volumes were covered by ALP.

At the end of 2020, 64% of our key suppliers werescreened against ESG criteria.*³*1 The decrease from 98% in 2019 to 92% in 2020 is due to new suppliers reporting, who have not implemented ALP yet.
*2 Introducing ALP in China and India is challenging due to the way the market is structured in these countries. For instance, the third-party leaf merchants do nothave direct contracts with growers e.g. in India flue-cured tobacco is sourced via auction floors. We are working with leaf merchants to establish a tailor-madeapproach on how to run a leaf supply chain due diligence.
*3 The decrease from 67% in 2019 is due to “key supplier” definition change, resulting in increased number of key suppliers, however total number of suppliers
screened has increased.

Reducing our environmental impact in the tobacco supply chain
 ead more about our targets on “Greenhouse gas emissions,” “Water andR
waste” and “Forestry” in “Environment and our operations.”

076

Japan Tobacco Inc. Integrated Report 2020

 ead more about our programs and initiatives in our international
R
tobacco business.

Tobacco business sustainability
four strategic focus areas• Investing in people• Products and services (RRP)• Building sustainable supply chains• Regulatory environment and illegal trade

CORPORATE PROFILE

Regulatory environment and illegal trade

VALUE CREATION

Regulatory environment and illegal trade isone of the four pillars of our tobacco businesssustainability strategy and a key focus areafor us. We believe in fair and balanced
regulation, which gives adults the freedom tomake informed choices, and we proactively
engage in public policy debate. We also help
governments to combat illegal trade, which
poses numerous challenges for society andour business some of which have been
exacerbated by the COVID-19 pandemic.

Optimizing the regulatory environment
our attitude to smoking. We also work in a highly regulated

informed choices. We play our part by being transparent

operating environment, and we monitor regulatory trends inabout our products, and ensuring that all consumers under-order to anticipate future changes in regulation and prepare

stand the associated risks when deciding whether to use ourfor the implementation of those changes well in advance. This

products or not. That is why we are transparent about ouris done in line with our tobacco principles, so that we go

positions on smoking and health. It is also why, no matter

above and beyond our obligations.

BUSINESSWe value and support the freedom for adults to makewhat we do, we adhere to the five core principles that define

In 2020, we engaged openly and transparently in public policyof the impact of certain plastic products on the environment,

debate and made our views known to regulators, NGOs, andand the ban on characterizing flavors. We also participated inother relevant stakeholders in the countries where we operate.

public discussions around good governance, anti-illegal trade,

We responded on regulatory issues of concern to society andbetter regulation, transparency, and sustainability.

SUSTAINABILITY

Read more about our views on specific regulatory topics on JTI.com.

business, such as RRP (Reduced-Risk Products), the reduction
Global Tobacco and Nicotine Forum 2020 (GTNF)
six sessions and talked about the issues of illegal trade,

Forum (GTNF), a key international conference where

regulatory environment, sustainability of tobacco industry,

experts such as those from public health, academia,

as well as diversity and inclusion. We also set up a virtual

government, and members of the tobacco/nicotine

exhibition booth that presented in more details the issue ofindustries gathered to discuss the future of tobacco andillegal trade, its underlining causes and consequences tonicotine industry. Our representatives participated in thethe economy and society at large.

TargetProgress

We will ensure the Company isincluded in policymaking leading
to fair and balanced regulation,and enhance our cooperation
with governments to combat
illegal trade.

We will always protect our ability
to participate in public policy
debate with the aim to achievebalanced regulation that meets
societal concern and supportsbusiness growth.

During 2020, we engaged openly andtransparently in public policy debate
and made our views known toregulators, NGOs and other relevant
stakeholders in the countries where
we operate.

FINANCIAL INFORMATION/OTHERSEngagement

Aspirational goal

GOVERNANCE

We took part in the virtual Global Tobacco and Nicotine

Read more about our views on regulation and the latest regulatory developments in the industry at JT.com.

Japan Tobacco Inc. Integrated Report 2020077

Tobacco business sustainability
four strategic focus areas• Investing in people• Products and services (RRP)• Building sustainable supply chains• Regulatory environment and illegal trade

Tackling illegal trade
Illegal trade fuels modern slavery, organized crime, and terrorgroups. It causes harm to society and consumers, as
uncontrolled products circumvent regulations and quality
controls, and undermines legitimate tobacco businesses.
Tackling illegal trade is a top priority for us, and our Anti-Illicit
Trade team is recognized as the industry leader in this area.
This global team supports our long-term, sustainable future
by protecting our business and reputation — as well as ourconsumers and society — from criminal elements.
Working in partnership with our markets and law enforcement, the Anti-Illicit Trade team secures our supply chain andassists law enforcement in removing illegal tobacco from themarketplace. It maintains a robust dialogue with governments
and law enforcement agencies on the threat of illegal tobaccothrough public-private partnerships and provides counterfeit
awareness programs for law enforcement, globally.

Progress in 2020
In 2020, our Anti-Illicit Trade team provided 1,117 intelligence

consistently high over the past five years (over 97% ofreports to law enforcement agencies, leading to the seizure of

products seized are counterfeit). During the same period,

more than 3.22 billion illegal cigarettes. Based on our informa-

notified seizures of our own genuine products in the EU havetion, law enforcement raided more than 60 counterfeit

decreased by 88%, thanks to our markets’ efforts in securing

tobacco factories and storage locations.

our supply chain, with the support of the Anti-Illicit Trade team.
Both the EU and the U.K.’s HM Revenue and Customs recog-

As a direct result of our work to tackle illegal trade, notified

nized us as an industry leader in the fight against illegal trade.

seizures of counterfeit products in the EU have remained

A responsible approach078

In tackling illegal trade, the JT Group complies with all laws

proactive supply chain control mechanism to make sure thatand regulations while fulfilling its obligations under theplanned sales volumes are in line with LMD, and ensuring our

European Union Cooperation Agreement, signed in 2007.

compliance.

This means supplying tobacco products only in volumes

Compliance also means the implementation and operation ofthat correspond with the legitimate demand of the intended

our Track and Trace program, which helps us to track themarket of retail sale. Our international tobacco business has

movements of products along the supply chain, supporting ourdeveloped a global methodology to assist market authorities

supply chain analysis. The program has been an importantin taking a consistent and accurate approach to annual

element of our compliance policy for more than a decade,legitimate market demand (LMD) calculations. Our markets

firstly as a self-regulation measure and later to meet legal

perform these in conjunction with their annual plan, creating arequirements in a growing number of jurisdictions.

Japan Tobacco Inc. Integrated Report 2020

trade. Governments must also implement further measures towith these obligations, while limiting any negative impact on

address products which will, by nature, escape those obliga-

our business operations. We also firmly believe that the fighttions, such as counterfeits or illicit whites.*

against illegal trade can only be effective if measures such as
Track and Trace are implemented along with proper enforcement by authorities and sanctions for those involved in illegal

CORPORATE PROFILE

As with all other regulations, we make every effort to comply* “ Illicit whites” refer to tobacco products manufactured legitimately but
without any product flow control measures afterwards, and smuggled andsold in another market.

The current global pandemic is causing turmoil across

Regulatory changes may further exacerbate the situation.

the world. Against this backdrop of global social upheav-

For example, during the early stages of the pandemic, aal, organized criminals are planning ways to exploit publicnumber of governments chose to outlaw the sale ofanxiety and profit from the trade in illicit goods and otheralcohol and tobacco products. In South Africa, thisproducts, including personal protection equipment. Fromprohibition drove huge growth in illegal tobacco networks,

experience, we know that any decline in affordability fuels

which could cost hundreds of millions of U.S. dollars ina trade in illicit or counterfeit products, particularly wherelost government revenues.

VALUE CREATION

The perfect storm

this runs parallel to tax increases designed to boost
Read more about our approach to tackling illegal trade, thepublic finances.

BUSINESS

impact of COVID-19, and global trends at JTI.com.
Nowhere is this truer than when it comes to the illegal
tobacco trade, which is underpinned by criminals whowant to make money and consumers seeking to savemoney. The current crisis creates the conditions for a“perfect storm” that will find some consumers inadvertently,
and others willingly, consuming greater amounts of illegal
tobacco product from organized criminal groups.

SUSTAINABILITY

TargetProgress

We will ensure the Company isincluded in policymaking leading
to fair and balanced regulationand enhance our partnerships
with governments to combat
illegal trade.

We will engage in dialogue with law
enforcement agencies, with thegoal to exchange intelligence
regarding illegal tobacco products,
in order to support the reduction ofillegal tobacco products.

In 2020, our Anti-Illicit Trade teamprovided 1,117 intelligence reports tolaw enforcement agencies, andadvised 859 law enforcement officers
on counterfeit recognition.

GOVERNANCE

Illegal trade

Aspirational goal

Other key wins in 2020

reports provided by our team to law enforcement.

FINANCIAL INFORMATION/OTHERS• Over 3.22 billion illegal cigarettes seized thanks to intelligence• There was a 62% decrease in seizures of our genuine
products resulting from our efforts to ensure the security of
our supply chain.

Japan Tobacco Inc. Integrated Report 2020079

Pharmaceutical Business
Our pharmaceutical business aims to create innovative, original drugs
to support patients in the shortest time possible. We are committed
to the research and development of world-class, innovative drugs.
In view of this mission, in 2019, we selected three focus areas andset five specific targets for these focus areas. This is the first time
we are reporting on our progress towards achieving the targets.
Read more here.

Products and services
Aspirational goal
We will create innovative, original drugs to support patients in the shortest time possible.
As this business has a direct impact on human health and life, we not only strictly comply with all laws, regulations, and industry
standards, but are also guided by a strong sense of ethics and responsibility. This is particularly the case in areas such as clinical
trials and promoting drugs, as well as animal experiments and managing chemical substances. In 2020, we spent 25.2 billion yen
on our research and development activities.

PeopleAspirational goal
We will strive to nurture talent development which enables us to create first-in-class (FIC) drugs.
We strictly adhere to specific processes to ensure that our pharmaceutical business activities are always carried out in a responsible and appropriate way. We provide e-learning to help employees understand the importance of drug safety and quality assurance. All of the employees in our pharmaceutical business complete a mandatory e-learning course every year. We also have aninternal educational activity to foster employees’ ethical awareness and sense of responsibility towards saving patients.

Product safety and responsibility
Aspirational goal
We will strictly comply with all relevant laws, regulations, and industry standards in order to deliver safe drugs to patients.
We have developed our own guidelines on how to conduct annual inspections to ensure that our production methods fully comply
with government recommendations. We began implementing these inspections in selected factories in 2017 and no issues wereidentified. Since 2018, we have been steadily expanding the scope and now it covers 100% of our contracted factories. We willcontinue to operate these guidelines.
We also have our own standard on the ethical promotion of prescription drugs, based on the guidelines on sales information
provision activities by the Ministry of Health, Labour and Welfare. Medical Representatives of our subsidiary company Torii
Pharmaceutical Co., Ltd. provide and gather information on pharmaceutical drugs to/from medical professionals appropriately,
and regularly participate in training programs to ensure adherence to these guidelines. Through internal communication, we
provide relevant and detailed information to our Medical Representatives to keep them up to date with the latest guidelines.
Read more on JT.com.

080

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Processed Food BusinessIn the processed food business, we seek to provide safe and delicious
food for consumers, in the hope that they will choose our products fortheir loved ones. We will continue to aim to be highly evaluated by ourcustomers through the world of food, which is the source of our lives.

VALUE CREATION

In view of this mission, in 2019, we selected three focus areas and set
eight specific targets for these focus areas. This is the first time we arereporting on our progress towards achieving the targets. Read more here.

Our business operations and sustainability
To deliver safe, high-quality processed food for consumers, we have established four priorities to ensure that food safety is deeply
embedded within our operations. This helps us to ensure that our business makes a positive impact on society and the environment, today and in the future, by delivering safe and sustainable food products.

BUSINESS

Food safety standards
We make sure that all of our factories* are certified to the global food safety standard FSSC 22000. FSSC 22000 is recognized by
the Global Food Safety Initiative (GFSI), the food industry’s global body for promoting food safety management. All the factories
contracted to manufacture frozen food products on our behalf have been certified to the food safety standard ISO 22000 or
FSSC 22000, as an assurance of food safety.

SUSTAINABILITY

We also work with multiple independent advisors, who have helped to develop our approach to food safety since 2008. External
expertise enables us to provide our employees with a greater awareness of new developments and important topics in the field offood safety and/or quality control. In order to ensure food safety, we have introduced a system that records information about our
products at every stage of the process, from the raw materials and production to processing, distribution, and sales. This means
we can retrace our product to any point, if necessary.
* One of our factories, which started its operations in 2020, is on track to receive this certification. It will be in 2021.

Food defense practices

GOVERNANCE

Food defense is about protecting our manufacturing processes and products from intentional contamination. We apply robust
food defense guidelines across the supply chain, both in our own factories and our contracted factories, which are referred toduring our annual audits. We are continuously strengthening our food defense mechanisms. We are working on further utilizationof factory cameras and enhancement of our drug management system both in our own factories and our contracted factories.

Enhancing food quality

FINANCIAL INFORMATION/OTHERS

Food quality control is an essential element of our daily operations. Along with quality improvement efforts on factory floors, weensure that all of our employees receive training through customized e-learning materials. We also listen to our consumers’ suggestions for improving product quality, and swiftly share these with our factories and operations.

Further food communication
We are always willing to provide details about our food products. We respond to consumers’ requests for information and disclose
the precise factory where food products were made, or the country of origin of the main ingredients. We understand the importance of listening to consumers, and have introduced a new online tool to share consumer feedback with all of our employees. We
will continue to embed and reinforce this consumer-centric approach throughout our operations.
Read more on JT.com.
Japan Tobacco Inc. Integrated Report 2020081

Interview with the CSO

Kazuhito Yamashita

Ari Kubota

Director and Senior Vice President
Chief Sustainability Officer,
Compliance and General Affairs

JT Sustainability
Management DivisionInterviewer(Kubota) Looking back at 2020, how would you characterize

division. In the same year, a Senior Vice President responsible

the year?

for sustainability was appointed, and we set out our sustainability strategy for the whole Group.

(Yamashita) With the outbreak of COVID-19, 2020 was a year
like no other. To prevent the spread of the pandemic, we madeDuring 2020, we regularly organized online forums, providing

the safety of our employees a top priority by implementing

opportunities for the heads of our business divisions tothorough health and safety measures to ensure businessdiscuss sustainability initiatives within the Group. With thecontinuity. While the effect of the pandemic has proven to be

start of this forum, we set out an organizational framework tolimited for the JT Group, severe damages were inflicted on

discuss Group-widesociety. We have provided support to our local communities

sustainability issues andaround the world in countries where we operate. For example,

extended support to ourin Japan, we extended emergency aid to local authorities andbusiness functions, so that

local groups in need. We then organized support to sectors

they can pursue theiraffected by the prolonged effect of the pandemic such as

respective sustainability

restaurants and eateries as well as people in need, while also

strategies. We are also set

extending our support to essential workers.

to pursue risk management, with enterprise risk

(Kubota) Please discuss your role as CSO and the evolution

management playing aof our organization in pursuing sustainability.

pivotal part.

(Yamashita) It is essential to contribute to the sustainable(Kubota) What are the characteristics of the Group’s

development of our society through our business operations.

sustainability strategy?

Our business is underpinned by the 4S model, our management principle. As a member of the Board and CSO of the(Yamashita) Firstly, there are universal sustainability issues

company, it is my role to look to the future and to drivethat are important to all companies. Good governance is one.

sustainability management across our Group.

Improving social impact or environmental impact are othergood examples of universally important sustainability issues.

In 2015, we identified material issues relevant to the JT

082

Group and to our stakeholders, to achieve sustainable

We then have material issues that are unique to our tobacco

growth. Then, to build on our past sustainability initiatives

business. For example, tobacco leaf is the vital raw material

and to evolve further, in 2019 we reshaped our organization-for our Group, and maintaining a sustainable supply chain isal structure and established our sustainability management

paramount to us. We also operate in markets where humanJapan Tobacco Inc. Integrated Report 2020

Group-wide target for diversity and inclusion, specificallyhuman rights are respected is another key issue for our

representation of women in leadership. Our target is to reachGroup. Likewise, tackling illegal trade or dealing with tobacco

25% by 2030 and we find it desirable that this should be moreregulation are other important issues for our tobacco busi-

than 40% over time. As part of the JT Group Environment Planness, the core business of the JT Group.

2030, targets have been made for the appropriate use and

CORPORATE PROFILE

rights may be at risk. Having initiatives in place to ensure that

disposal of materials used in our products and packaging. Our
tobacco business has also set its target in this area. Moreover,somewhat limited. By taking strict safety precautions

I am very pleased to announce that we officially endorsed thethroughout our value chain, we were able to deliver our

TCFD recommendations, representing significant progress for

products to end consumers. I am very grateful that we were

this year.

VALUE CREATIONThe effect of COVID-19 on our tobacco business is at present

able to do so during this difficult time and that our consumers
In 2020, we were included in the CDP’s “Climate A List” andrealize that tobacco is a controversial product. Our mission is“Water A List” for the second consecutive year. Our Group has

to offer consumers an even wider choice by focusing on

also been selected as a member of DJSI Asia Pacific for thequality, innovation, and reduced-risk potential. We willseventh consecutive year, retaining the second position in thecontinue with an even greater focus on developing RRP

tobacco sector as we did last year. I am delighted that our(Reduced-Risk Products).

initiatives are recognized by external rating agencies.

It goes without saying that investing in people is critical to

For 2021, we will be looking at updating the JT Group’s

sustaining all these initiatives. Our pharmaceutical businessmaterial issues, bearing in mind the effect of COVID-19 andand processed food business have made “investing in people”

the longer-term changes that the pandemic will impose on

a key focus area. While the Group-wide sustainability issues

our society. We are in uncertain times with the prolonged

are the same across our Group, each business has chosen aeffect of the pandemic;

specific focus area, which reflects the specific characteristics

nevertheless, we will striveof the industry in which they operate.

to embed sustainability

BUSINESS

appreciated the value of our products. At the same time, I

into the root of ourbusiness, involve all

the challenges ahead.

members of the Group and

SUSTAINABILITY(Kubota) Please describe the progress made in 2020 andwork towards a sustain(Yamashita) In our tobacco business, this will be the second

able future for our society

year that we will report our progress on the sustainability

and for our business.

KPIs. For our pharmaceutical and processed food businesses,
this will be the first time. I am pleased to announce our newa cigarette butt cleaning exercise undertaken by our own

JT Group?

employees and later evolved into a community-wide

GOVERNANCE(Kubota) What does “inclusiveness” mean to theclean-up campaign. At present, local authorities, schools,(Yamashita) Inclusiveness is a concept advocated by thevolunteers, and committee members of local events andSDGs. It is about leaving no one behind and envisioning an

associations take part in the exercise. The campaign is run ininclusive, better future. It is the key element in the field ofvarious cities and places throughout Japan, even where ourcommunity investment and a concept that is pivotal as weGroup is not directly involved in the operation.

strive to improve our social impact. Inclusiveness goes
It is important that as we drive forward these new initiatives,

about proactively initiating projects.

we continue to cultivate, nurture and facilitate awareness

FINANCIAL INFORMATION/OTHERS

beyond the benefits of community investment – it is also

around inclusiveness within communities, leaving no one
A good example is a community clean-up campaign that webehind. If we can unite everyone around the desire for thesehave run in Japan since 2004. The project is called “Pick up

initiatives, we can be a strong force. In the long run, we canthe litter and you will love your city.” We wanted to raisebuild a legacy. Eventually, it becomes a part of the culture

awareness for problems associated with public littering

embedded into our society. I hope we can promote andthrough a rubbish collecting initiative. It originally started as

facilitate more examples of active inclusiveness like these.

Japan Tobacco Inc. Integrated Report 2020083

GOVERNANCE
Enhancement of corporate governance is a high management
priority for the JT Group as it works continuously tomake improvements.
This chapter provides an overview and outlines our initiatives toenhance the Group’s governance, which supports all of ourbusiness activities, setting out a framework for transparent, fair,timely and bold decision-making to pursue the 4S model. Readalso the interview with an Outside Director to learn more about
the JT Group’s governance from an objective standpoint.

086 Interview with the Outside Director
090 Corporate governance096 Management structure
100 Internal control system & risk management system

084

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

085

Japan Tobacco Inc. Integrated Report 2020

Interview with the Outside Director
Corporate governance is the foundation of the JT Group’s corporate management. Basedon that belief, to enhance supervisory function and raise management transparency, JT
employs the outside-director system and appoints as directors people who can help
increase its corporate value based on their affiliation with its management principle.
Yukiko Nagashima, whom we feature here, is one such person, working as a JT outside
director since 2019. She has a plethora of experiences and extensive knowledge inbusiness startups and corporate management as well as corporate audits. We asked her
to discuss the salient features of JT’s corporate governance, and its future challenges.

As an outside director, I support thecontinuous evolution of the JT Groupamid disruptions in our daily lives.

Yukiko Nagashima
Outside Director

086Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Operation and effectiveness of the Board of Directors
2020 was your second year as an outside director. What impressions do you have about the JT Board of Directors(hereinafter Board), discussions in its meetings, and how the Board operates?
I think the Board fully discusses agenda items that are thoughtfully selected. When going through each item on the agenda, we allconsider the promises we’ve made to our stakeholders, as stated in our management principle, mid-term and current plans, andthe like. The IR division regularly shares the latest market evaluations of the Company as well as the status of competitors and

VALUE CREATION

markets. These reports prepare us for meetings with clear understanding of the latest market evaluations and external environment. We make the most of these background information to deepen our discussions. I believe that such practices increase theeffectiveness of the Board. Based on the 4S model, we work to continuously evolve in order to be able to adapt to change.

What is your opinion on the assessment of the JT Board's effectiveness?
The assessment of Board effectiveness has been improving in terms of taking in outside opinions and objectivity. I haveparticipated in the assessment for the past two years. This time, the assessment was conducted about a month earlier thanlast time. I think this came out of efforts to quickly connect the results with our Plan/Do/See initiative, before moving on to thenext necessary actions.

BUSINESSIn addition to the improvement of speeding up assessment for greater effectiveness, the questions themselves changed.
Assessing Board effectiveness is not just a formality, and the questionnaire has become more specific leading to real improvement in the quality of Board meetings. In addition to numerical assessment, the reasons for each assessment must be written
in detail, providing the Board with insight for specific solutions to a given issue.

Coping with the pandemic
SUSTAINABILITY

A major change we experienced in 2020 was the spread of COVID-19 and its impacts. What sort of discussions did
you pursue in the Board meetings to cope with this change?
The overall impact of COVID-19 and related operational challenges were reported to the Board at an early stage of the pandemic, and their contents became more specific over time. I understand that we’ve become more precise about – looking from theemployee and consumer standpoints – whether we are actually doing what we are supposed to be doing. Beyond dealing withthe financial effects on operations, from the early stages, we worked to secure the safety of employees and established asystem for precise supplier surveys concerning impact and support. We also looked into the best ways to deliver our products
to consumers despite the adverse operating environment daily. I think what we have done were very convincing for our shareholders as well.

GOVERNANCE

To secure the functioning of the Board, the meetings have been held mainly online since April 2020. Did this change
in operation lead to any other changes?
We’ve had no problems at all with deliberating agenda items online. That said, in online meetings we’ve lost opportunities forexchanging information not directly related to the agenda during breaks and lunches, as we had when meeting in person. Those
were precious opportunities for outside people like me to better understand the reality of JT businesses and management

FINANCIAL INFORMATION/OTHERS

actions, so I thought it might be important in the remote-work environment to create opportunities for us to obtain peripheral
information and essential understanding of the issues, in other words, opportunities for supplementary communication.
For example, if there were opportunities for free dialogue, separate from the agenda of the Board meetings, to talk with executive officers or get input from them on mid- and long-term issues, that would help outside directors better understand JT and
increase our contribution to even better Board performance.

Japan Tobacco Inc. Integrated Report 2020087

Future of the Board of Directors
What challenges do you think will the Board face inthe future?
I would not necessarily call it a challenge, but I believethat it is our ability to respond to evolution that will
become even more important in the future. I think theBoard must enhance its functions of support for and oversight of those initiatives made by the executive officers. I
used the term “evolution” rather than “change,” because I
want to give this a positive spin and use it as an opportunity to further move up swiftly from our current position.
As is evident in the progress of digital transformation, DX
for short, during this pandemic, there has been what wemight call disruptions in our daily lives or major shortspan shifting of what we have taken for granted, something I have actually witnessed. CLUB JT* is an example
of DX. The state of management that decides how JT canbest offer which value in which way to satisfy dynamically changing consumer preferences is important, as is the state of the organization to carry forward those initiatives to achieve
our goals. In adapting to evolution, I think the true key to winning competition is how we define our challenges for that. Personally, I want to further deepen my understanding of the competitive environment and, from the oversight side, positively stimulate the executive side, while enhancing the supervisory role of the Board.
* CLUB JT is an online platform for high-quality two-way communication between JT and consumers. Refer to Our response to COVID-19 (P. 10) for the JT Group’s
DX initiative, including CLUB JT.

Diversity of the Board of Directors
What do you think of the Board in terms of diversity?
JT is a corporation that sells mainly tobacco products which are not necessities for everybody worldwide, so I think it’s good tohave directors who deeply understand the cultural backgrounds and differences of each market in advising the executive
officers. I think the JT motto, “Caring for your moments,” encourages the acceptance of values that may differ from person toperson. I think each of us needs a base that helps us express our individual uniqueness, in other words that allows us to be not
the same as everyone else.
Masato Kitera, who will soon become an outside director, has many years of experience abroad, and I look forward to him bringing those differences to the Board.

How are you applying your strengths to the Board?
I have about seven years of experience managing a listed company, which was subject to audit, in the Japanese market. In
corporate management, we sometimes decide to accept conflicting elements depending on the specific situation at a given
time. In terms of this kind of management responsiveness, I can say I have developed a rule of thumb. At Recruit Co., Ltd., I
developed a knack for evolution as we went through situations where only change would assure survival or, more simply, theflexibility to change. In addition I’ve been a member of Recruit’s Audit & Supervisory Board, and as such I follow rules of thumbfor presenting checkpoints to the Board. Through my experience of disrupting a successful model to create something new, I
learned that after every peak comes a decline. I state my opinions at the Board meetings to consciously encourage a kind ofsustainable management, for instance, preparing a new product on a different line rather than the same one.

088

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Succession Planning
What type of people do you think JT needs for management in the future?
To ensure sustainable growth and to grow corporate value in an uncertain operating environment, the ability to globally manage
the organization and lead its people is a must for any corporate executive. Given that, the Advisory Panel on Nomination andCompensation is discussing the future need for a remuneration plan designed to build a management team that makes theCompany a winner in global competition. JT introduced a new executive remuneration plan in 2020, but to make it truly

VALUE CREATION

effective we have to discuss the pay levels needed to attract talented people and ways to appoint foreign nationals as directors.
In times of complex, abrupt change, an executive succession plan is increasingly important for a corporation.

Message to the JT Group
From your standpoint as an outsider, how can the JT Group change to be a better company?
I think the most important thing is to nurture a culturethat is free of the fear of failure. Even failure can be an
asset if it results from what truly resourceful employ-

BUSINESS

ees, those who love and are committed to the business, have done as their best.
For the consumers who are at the heart of the 4S
model, bold, quick change when necessary is important, too. I think it will be good if I can encourage theCompany to change for consumers at lightning speed,
effortlessly.

SUSTAINABILITY

Note: This interview was conducted in the middle of January 2021. Yukiko Nagashima, the Outside Director and the interviewer, Keiko Nishimura, JT Media & Investor Relations

GOVERNANCE
FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020089

Corporate governanceCorporate governance structure
Basic policy

Our corporate governance system (As of March 24, 2021)

The JT Group believes that corporate governance is a framework
for transparent, fair, timely and decisive decision-making inpursuit of the 4S model, JT’s management principle. Pursuing the
4S model means striving to fulfill our responsibilities to our valued
consumers, shareholders, employees and the wider society,carefully considering the respective interests of these key
stakeholder groups, and exceeding their expectations wherever
we can.
We have established the JT Corporate Governance Policy inrecognition that improvement in corporate governance isconducive to sustainable profit growth and corporate value
over the mid to long term, benefits our stakeholders and, inturn, helps to move the economy and society forward. We will
endeavor to continuously enhance our corporate governanceas a key management priority.

General Meeting oS

Select or dismiss members
Audit report

Board of D
ReportIndependent
Auditors
Lawyers

Accounting
audit
Advicenine mem(including
Outside Dir

Report/Operational Review Proposal
and Business
Assurance Division

PresidenChief Exe
Offic

Internal
audit

Executive O

Group
audit

Please visit our website for more on the JT Corporate Governance Policy.

met 13 times with 100% attendance rate in 2020

met 4 times with 100 % attendance rate in 2020

Board of Directors

Advisory Panel on Nomination and Compensation

Our Board of Directors is responsible for setting JT
Group management strategies, making decisions onimportant matters and overseeing all operations. To
effectively fulfill its roles and responsibilities, the Board isconstituted as follows.

The Advisory Panel on Nomination and Compensation wasestablished on March 20, 2019 as a voluntary advisory armof the Board of Directors. It merges the former Meeting for
Talent Development and Compensation Advisory Panel’s
respective functions into a single entity. Its purpose is torender the Board’s decision-making more objective andtransparent and upgrade the Board’s oversight functions.
• The Board may have as many members as necessary
Its specific roles include supporting the growth of execuand appropriate, up to a maximum of 15. It comprises
tive candidates; deliberating on selection of nominees fordiverse professionals with a high sense of ethics andseats on the Board of Directors and Audit & Supervisory
integrity as well as knowledge, experience and skills.
Board and dismissal of executive directors; and reporting• The Board includes at least two independent outside
the results of the deliberation on remuneration of directors
directors with qualifications conductive to the Company’sand executive officers. Chaired by JT’s non-executive
sustainable profit growth and corporate value.
chairperson, the Panel has four members, three of whom
are independent outside directors, and meets at least once
The Board meets once a month as a general rule, and
株主総会
a year. In 2020, the Panel met to review proposed resolumeets promptly whenever necessary. The Board makes
選任・解任
選任・解任
選任・解任
tions on executive remuneration to be voted on at thedecisions on matters requiring Board approval under the
会計監査
・
業務監査
監査報告
監査役会
取締役会
Ordinary
General Meeting of Shareholders (hereinaftertheCompanies Act, including important business plans,
コンプライアンス事項の上程
報告
5名 levels, to
名9Annual General Meeting),JTtoreview remunerationmaterial asset divestments and acquisitions, materialグループ（社外監査役3名を含む）（社外取締役3名を含む）
取締役等のコンプライアンス委員会
review executive
candidates
and to deliberate on candiborrowings, large contracts and other important matters.
人事・報酬に
会計監査人
業務執行監督関する答申等
dates for Boardof Directors5名nominations.
To exercise oversight
会計監査 of operational execution, the Board（外部委員3名を含む）
requires its members to report at least once 報告
a quarteron・提言
コンプライアンス
社長
監査部
弁護士
人事・報酬諮問委員会
監査役室
統括室
the state of operational
execution.
助言・指導
内部監査
グループ
監査

090

Japan Tobacco Inc. Integrated Report 2020

執行役員
各部門
子会社

4名
（社外取締役3名を含む）
会計監査・業務監査

Departm

Subsidia

CORPORATE PROFILE

Rationale behind current governance regimeof Shareholders
Select or dismiss members

Select or dismiss members
Accounting audit/Operating audit

Directors

Introduce compliance-related matters

Supervise
performancent andecutivecer

Review of the
JT Group
policy and theCompliance Committee
rules relating tofive members
personnel and(including threecompensation for
external members)
Board Members

Advisory Panel on
Nomination andCompensation

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

Compliance Office

Board that appropriately oversees the job performance of executive
officers and members of the Board (hereinafter directors).
We have built an effective corporate governance regime under the
Audit & Supervisory Board’s oversight. It includes the JT Group
Compliance Committee and an Advisory Panel on Nomination and

Auditor’s Office

four members(including three
Outside Directors)

Officers

functions by positioning an independent and fair Audit & Supervisory

VALUE CREATIONmbers
g threerectors)

Audit & Supervisory
Board

We are strengthening objective and impartial management oversight

Accounting audit/Operating audit

Compensation, both established voluntarily. The former has outside
experts serving in key roles; the latter is predominantly comprised ofindependent outside directors. We have also streamlined our Board of
Directors and expedited operational execution by delegating authority
to executive officers.

ments

BUSINESS

We continuously seek to improve corporate governance and increase

iariesmanagement transparency and objectivity through, for instance, appointment of an additional outside director and outside Audit & Supervisory
Board member in 2019. Through such measures, we settled upon ourmet 13 times with 100% attendance rate in 2020

current corporate governance regime as we believe it functions effectively
with respect to operational execution and oversight.

Audit & Supervisory Board
Initiatives to upgrade corporate governance
Measures to strengthen
advisory function

Measures to optimize
decision-making
process and enhanceoversight function

Set up the Compliance
Committee in 2000

Delegated a part ofStreamlined the Board
authority to executiveof Directors in 2000
officers in 2001

Set up the Advisory
Committee*¹ in 2001

Reinforced authority delegation to executive
officers in 2000, 2008, 2011

Set up the Compensation
Advisory Panel*² in 2006

Implemented new
positions for outside
directors in 2012SUSTAINABILITY

Measures to promote
efficiency ofoperational execution

GOVERNANCE

Set up the Advisory Panel on Nomination andCompensation in 2019*1 Disbanded on June 30, 2014
*2 Consolidated into Advisory Panel on Nomination and Compensation on March 20, 2019Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERSThe Audit & Supervisory Board conducts operational andaccounting audits as an independent body serving theinterests of shareholders. It has five members, three ofwhom are outsiders, who all have experience in suchfields of corporate management, law, finance, accounting. To fulfill their duties, Audit & Supervisory Board
members have the authority to compel reports fromdirectors, executive officers and employees; seek
injunctive relief against illegal acts of directors; represent
the Company in any litigation between the Company anda director; and appoint and dismiss an independent
auditor. The Audit & Supervisory Board reports the resultsof its operational oversight and accounting audits to theAnnual General Meetings in the form of audit reports. Any
director or executive officer who learns of any fact that isor potentially could be materially detrimental to theCompany must report the fact and any other importantmatters regarding the Company’s operations to the Audit& Supervisory Board. Audit & Supervisory Board members may attend Board of Directors meetings and otherimportant meetings. Directors and others respondpromptly and appropriately to Audit & Supervisory Board
members’ requests for important documents, investigations and reports. Internal auditing and compliance staff
share information and otherwise cooperate with Audit &Supervisory Board members.

091

Evaluation of Board of Directors’ effectivenessWe annually evaluate our Board of Directors’ effectiveness through a multi-step process. First, all directors and Audit & Supervisory
Board members complete a self-assessment questionnaire with regards to factors including the Board’s operations, oversightfunction and dialogues with shareholders and investors. Second, the Board’s administrative staff interview the directors and Audit &Supervisory Board members individually to delve deeper into their questionnaire responses, and compile the evaluation results. Lastly,
the Board reviews and analyzes the self-assessment results in the aim of further improving its effectiveness.
We take advice from external consultants for drafting the questionnaire and analyzing the results in order to ensure objectivity andfurther improve the evaluation process.
The evaluation items are as follows.

Board’s operations

Composition (ratio between inside and outside members; diversity), Performance (frequency; stringency of agendas;
pre-meeting briefing), Support & Coordination (coordination among directors, Audit & Supervisory Board members andinternal auditing department; utilization of committees; information-sharing outside the Board), Discussion (fair and swift
decision-making in line with our management principle; unrestricted discussion), etc.

Oversight function

Reporting methods on business operations, Risk management system, Increase of the awareness of compliance,
Process of determining the executives’ remuneration, Succession planning, etc.

Dialogues withshareholders andinvestors

Sharing opinions from shareholders and investors, Optimization of dialogue methods, etc.

The Board effectiveness evaluation for 2019 yielded generally positive results across all evaluation items. It confirmed that the Board
is functioning not only effectively but increasingly so. On the other hand, the evaluation identified areas where further improvement iswarranted, including the Board’s operation for further increase in effectiveness and information-sharing to improve the quality ofBoard decision-making. In addition to these issues, we have incorporated the influence of the COVID-19 pandemic on our business
and worked on making the following improvements throughout 2020.
• Increased effectiveness and efficiency regarding the operations of the Board in and thereby its overall effectiveness of the Board– Held detailed pre-meeting briefings on material matters and enhanced deliberations and discussions.
– Utilized online meetings and digitalized discussion materials and meeting minutes.
• Carried out closer information-sharing for better quality decision-making by the Board.
– Shared enriched information on the following matters:

・ Updates on material measures concerning mid- to long-term strategies
・ Business conditions in important countries and regions
・ Updates on dialogues with shareholders and investors

・ Sustainability strategies of the JT Group and each business sector and their progresses, results of external evaluations, etc.
・ Impact of COVID-19 on our employees and each business, our countermeasures and updates

The 2020 Board effectiveness evaluation results similarly provided generally positive feedback and exhibited improvements in the
categories mentioned above – effectiveness and efficiency of the Board as well as closer information-sharing. In 2021, we willcontinue to pursue improvements required for the issues listed below, in order to constantly enhance the Board’s effectiveness.
Key issues
Quantitative and qualitative maintenance and increase incommunication among directors (considering less face-to-faceopportunities due to the pandemic)
Further in-depth discussions on corporate governance092

Japan Tobacco Inc. Integrated Report 2020

Our action plans going forward
Further discuss, exchange opinions, and share information on
updates on material measures concerning mid- to long-term
strategies; updates on each stakeholder in pursuit of the 4S model;
and corporate governanceCORPORATE PROFILE

Succession planning
We place priority on fostering successive generations of executives who will manage our future operations, expanding our pool of
executive candidates and improving its quality.
To develop a steady stream of highly skilled, highly qualified leaders capable of excelling in the global arena, we aim to upgrade our
executive development program, succession plan and succession planning process with input from both external consultants andthe independent outside directors on our Advisory Panel on Nomination and Compensation. Senior management, having our CEO

VALUE CREATION

at the core, are deeply involved in selecting executive candidates and supporting their growth.
We expand our executive talent pool by selecting groups of human resources who have the potential for being future executive
candidates by organizational rank through Group-wide recruitment and recommendations from management, particularly executive
officers. We develop selected personnel mainly through diverse and challenging job assignments based on individualized development plans formulated with input from outsourced objective assessments and periodic discussions with management.
As one example, our JT-Next Leaders Program, launched in 2013, aims to continuously cultivate young executives who will
spearhead the JT Group globally. It is open to employees in their 30s or younger, including new recruits not yet officially onboarded. Applicants are screened objectively based on the integrated assessment with internal/external opinions, such as humanassessment, 360-degree survey and interviews with executive officers. We preferentially support the successful applicants’

BUSINESS

personal growth on a Group-wide basis over multiple years. Through such programs, we are expanding our talent pool from thebottom up age-wise as we continue to pursue reinforcement of our human resources.

Our policy pertaining to listed subsidiary’s governance
We have a publicly listed subsidiary, namely Torii Pharmaceutical Co., Ltd. (hereinafter Torii), in light of the management benefitsof owning a subsidiary, including capital market discipline. Another motivation is for Torii to acquire increased competitive
advantage in its business through factors, such as credibility building and recruitment of excellent human resources, both of which
are important in the pharmaceutical business.

SUSTAINABILITY

Together with Torii, we have built an integrated value chain to collaborate efficiently with each other. Specifically, we conduct R&D
while Torii handles manufacturing, sales and promotional activities. From a Group-wide perspective, we continue to optimize ourpharmaceutical business model and deepen collaboration between JT and Torii by, for instance, having consolidated all R&D andclinical development functions into JT.
In regard to owning a listed subsidiary, we believe it is an indispensable prerequisite for the subsidiary to maintain independence interms of management and to duly protect its minority shareholders’ interests in order for, not only the subsidiary, but also for theGroup to grow in value. Therefore, we are striving to build an appropriate governance regime for Torii as a listed subsidiary.
We have instituted the Group’s Responsibility and Authority Regulations as an internal decision-making regulations. Torii has opted

GOVERNANCE

to adopt these regulations, thereby gaining autonomy in terms of decision-making authority. Such autonomy ensures its independence as a listed subsidiary. Additionally, Torii is upgrading its governance regime’s effectiveness by transiting to a majority-independent Board of Directors, which was approved at its Annual General Meeting of Shareholders on March 26, 2020.

Our policy pertaining to strategic shareholdings
We manage our strategic shareholdings appropriately. Our ownership policies and voting standards for strategic holdings of listed
FINANCIAL INFORMATION/OTHERS

equities are as follows.
• We own equities as strategic shareholdings only when we determined it is beneficial to our sustainable profit growth and toincrease corporate value in the mid to long term.
• Our Board of Directors examines all shareholdings each year to determine whether they are appropriate in terms of theirobjectives, as well as whether risks and benefits are commensurate with the capital cost.
• We appropriately sell equities that are no longer considered beneficial to hold as a result of this examination.
• We exercise our voting rights upon comprehensively determining the purpose of possession and potential detriments to thestock value of the subject company.
Japan Tobacco Inc. Integrated Report 2020093

Executive remuneration
Executive remuneration policy
In order to achieve sustainable profit growth and increase ofcompany value over the mid to long term by pursuing the 4S
model, our management principle, the Advisory Panel on
Nomination and Compensation reviews and provides advice on
the policy, framework and calculation method for remunerationof our directors and executive officers in response to inquiries of
the Board. The Panel also monitors whether our executive
remuneration level is reasonable.
Based on the recommendation of the Advisory Panel on
Nomination and Compensation, the key policy for our executive
remuneration is as follows:• Set remuneration at an adequate level to retain personnel
with superior capabilities.
• Link remuneration to the Company’s performance so as tomotivate executives to achieve performance targets.
• Link remuneration to the Company’s value in the mid tolong term.
• Ensure transparency by implementing objective andquantitative frameworks.

Process for determining executive remuneration
The amount of remuneration for our directors is benchmarked
based on third parties’ surveys of remuneration of directors,
taking into account the remuneration levels of major domestic
manufacturers that are expanding overseas with the similar
size and profits. Specifically, after benchmarking the basesalary level of the directors of peer companies and the percentage of variable remuneration for annual bonuses and mid- tolong-term incentives, the amount of remuneration for eachdirector is decided by a resolution of the Board of Directors,
based on the deliberations of the Advisory Panel on Nomination
and Compensation and within the maximum remuneration
approved at the Annual General Meeting. The remuneration of
Audit & Supervisory Board Members is also benchmarked in
the same way, and is determined by deliberation among the
Audit & Supervisory Board Members within the maximum
remuneration approved at the Annual General Meeting.

Composition of executive remuneration
Remuneration for the directors also serving as executive officers
Remuneration for the directors also serving as executive
officers (hereinafter eligible directors) comprises “base salary,”“executive bonus,” “restricted stock remuneration plan” and“performance share unit plan” as they are responsible for the

Ratio*¹

achievement of assigned annual targets through their
day-to-day management. On a 100% grant basis, the composition of executive bonus and performance share unit remuneration will be as per the following illustration.

Base salary

Short-term inventive

Base salary
Approx. 33~42%

Executive bonus
Approx. 31~35%

Payment
methodCash

Mid- to long-term incentive
Restricted stock
remuneration*2

Performance shareunit (PSU)*²

Approx. 25~33%
SharesShares & cash*3*1 The composition ratios vary depending on the duties of the directors and the ranges are indicated in the illustration.
*2 The ratio of restricted stock remuneration and performance share unit is about 3 to 1.
*3 Under performance share unit, 50% is paid as cash towards tax payment.
*4 The illustration above is based on certain assumptions of the Company’s performance and the share price. The ratios above could fluctuate depending on the
Company’s performance and the share price.

Remuneration for the directors who do not serve as
executive officers (excluding outside directors)
Remuneration for the directors who do not serve as executive
officers is composed of “base salary” alone and excludes
performance-linked remuneration, as they are responsible formonitoring the execution of mid- to long-term growth strategy
in addition to supervision of business and corporate activities.

094

Japan Tobacco Inc. Integrated Report 2020

Remuneration for the outside directors
Remuneration for the outside directors is composed of “basesalary” alone and does not include performance-linked
compensation to ensure their independence.

Remuneration for the Audit & Supervisory Board members
Remuneration for the Audit & Supervisory Board members
is composed of “base salary” alone in light of their key
responsibility for conducting audits.

CORPORATE PROFILE

Components of executive remuneration
Base salary

Executive bonus

Restricted stock remuneration plan

Performance share unit plan
The Performance share unit plan is a performance-linked stockcompensation system that aims to strengthen the shared value
with shareholders, to enhance the company value over the mid
to long term and to commit to achieving business results overthe mid term. Performance share unit plan offers monetary
remuneration claims and cash to the eligible directors, who
serve in their positions during the first year of the performance
evaluation period, as a performance-linked stock compensation. The amount of such remuneration is determined largely by
performance target attainment rates during rolling three-year
performance evaluation periods, coinciding with our rolling
three-year management planning horizon. Attainment rates foreach performance evaluation period are determined following areview by the Advisory Panel on Nomination and Compensation. As a general rule, eligible directors receive the cash andmonetary claims after the end of each performance evaluation
period. Eligible directors will receive monetary remuneration
claims towards the purchase of the Company shares and will
receive the Company’s common shares (the allotment will bemade from the treasury shares). Profit for the year has been set
as a KPI for the performance share unit plans starting in 2020 and
2021, performance-linked payout will be based on the KPI
achievement in the range of 0% - 200%.

SUSTAINABILITY

In case the Company acknowledges certain wrongful behavior
that the Board of Directors sets and any other illegal acts havebeen done by a director during the performance evaluation
period, the director is disqualified from receiving all or a part ofthe cash and monetary claims that are planned to be paid.

GOVERNANCE

Restricted stock remuneration plan is designed to further enhance
the shared value in the mid to long term between the eligible
directors and the shareholders. Eligible directors receive monetarycompensation claims every fiscal year towards restricted sharesand the eligible directors will receive the allocation of the Company’s common share by paying all of the monetary compensation
claims in kind in accordance with the resolution of the Board of
Directors (the allotment will be made from the treasury shares).
The Company will enter into an agreement with the eligible
directors with regards to the allotment of the shares. Although therestriction period is 30 years, in cases where any eligible director
retires due to expiration of the term or resigns due to reasonsdeemed reasonable by the Board of Directors, from a position as

In case the Company acknowledges certain wrongful behavior thatthe Board of Directors sets and any other illegal acts have been
done by a director who was allotted restricted stock remuneration
during the restriction period, all or a part of the allotted shares are
acquired by the Company without any compensation.

BUSINESS

Executive bonuses for eligible directors will be paid as monetary
remuneration reflecting the performance of the fiscal year.
Adjusted operating profit at constant FX and profit for the year
will be the key performance indicators (KPI), respectively
weighted at 75% and 25% in calculating the amounts of executive bonuses. Both of the KPIs form the foundation of thesustainable profit growth and shared value with the shareholders. Performance-linked payout will be based on the KPI
achievement in the range of 0% - 200%. In case the Company
acknowledges that an act of certain wrongful behavior has been
done by a director who is a recipient of the bonuses, a part of thereceived bonuses is subject to return to the Company.

director or any other positions separately specified by the Board of
Directors during the restriction period, the transfer restrictions will
be removed on the allotted shares.

VALUE CREATION

Executives are remunerated with monthly base salary as per
their responsibilities. They are individually evaluated forachievement of their performance targets through execution of
their duties that will lead to the sustainable profit growth.
Performance targets are set through interviews with the GroupCEO at the beginning of the fiscal year and evaluated at the endof year. The base salary for the following fiscal year will be set
within certain range reflecting the individual performance
evaluations. However, an individual performance evaluation is
not applicable for the Group CEO.

Total amount of remuneration in 2020
Total amount by its component (JPY MM)

Category

Total amount(JPY MM)

Base salary

Executive
bonuses

Stock option
grantsRestricted
stock remuneration

Performance
share unit

Directors (excluding outside directors)

1,193

504

438

30

188

33

6

Audit & Supervisory Board members(excluding outside members)

88

88

－

－

－

－

2

Outside executives

135

135

1,416

727

438

－

30

－

188

－

33

FINANCIAL INFORMATION/OTHERS

Total

－

Number of
persons

614Notes:
1. The amount of executive bonuses in the above table is the amount expected to be paid.
2. The amount of stock option grants in the above table is the amount booked as expense for 2020. The Company abolished the stock option grants plan and introduced
restricted stock remuneration plan & performance share unit plan in accordance with the resolution at the 35th Annual General Meeting held on March 19, 2020.
3. The amount of performance share unit in the above table is the amount booked as expenses for 2020.
Japan Tobacco Inc. Integrated Report 2020095

Management structure
Directors and Members of the Audit & Supervisory Board
Nine Directors (including three Outside Directors)

As of March 24, 2021

The Directors marked with * are also the Group’s Executive Officers.

Yasutake Tango

Chairperson of the Board

Date of birth: March 21, 1951
Term of office:2 years from March 2020
Number of shares held: 19,400

April
1974 Entered the Ministry of Finance Japan (hereinafter the Ministry)
October 2006 Director-General of the Financial Bureau, the MinistryJuly2007 Deputy Vice Minister, the MinistryJuly2008 Director-General of the Budget Bureau, the MinistryJuly2009 Administrative Vice Minister, the Ministry
December 2010	Corporate Auditor, The Yomiuri Shimbun Holdings
December 2012	Special Advisor to the Cabinet
June2014	Chairman of the Board of the Company (Current Position)June
2015 Outside Director, The Ogaki Kyoritsu Bank, Ltd. (Current Position)
June
2020	Outside Director, Audit & Supervisory Committee Member,
Mitsubishi UFJ Trust and Banking Corporation (Current Position)
Significant Concurrent Positions Outside the Company
Outside Director, The Ogaki Kyoritsu Bank, Ltd.
Outside Director, Audit & Supervisory Committee Member, Mitsubishi UFJ Trust andBanking Corporation
April

1983	Joined the Company(Previously, Japan Tobacco and Salt Public Corporation)
2003	Vice President, Corporate Planning Division
2004	Vice President, Corporate Strategy Division
2005	Senior Vice President; and President, Food Business2006	Member of the Board; Senior Vice President; and President,
Food Business
June
2008	Senior Vice President; and Chief Strategy Officer
June2010	Member of the Board; Senior Vice President; Chief Strategy
Officer; and President, Food BusinessJune
2011	Member of the Board, Japan Tobacco Inc.
		
Executive Vice President, JT International S.A.
June
2013	Senior Vice President; and Chief Strategy Officer
January 2016	Senior Vice President; and President, Tobacco BusinessMarch2016	Representative Director and Executive Vice President
January 2020	Member of the Board
March
2020	Deputy Chairperson of the Board (Current Position)
June
2020 Outside Director, Benesse Holdings, Inc. (Current Position)
June
July
June
June

Mutsuo Iwai

Deputy Chairperson of
the Board

Date of birth: October 29, 1960
Term of office:2 years from March 2020
Number of shares held: 31,600

Reasons for appointment
Mr. Tango has been chairperson of the Board of Directors
since June 2014. He possesses abundant knowledge andexperience on topics that include corporate governance,
gained through diverse networking throughout the public andprivate sectors and through his important positions as
Administrative Vice Minister of the Ministry of Finance in his
longstanding experience in ministries and bureaus. As he
currently serves as chairperson of the Board, chairperson of
the Advisory Panel on Nomination and Compensation, andchairperson of the JT Group Compliance Committee, we
believe his broad outlook and high standing in his field are
indispensable for the JT Group to better its corporate
governance going forward.

Reasons for appointment
Mr. Iwai has been the deputy Chairperson of the Board since
March 2020. He had been a driver of the tobacco business,
our core business, with his vigorous execution of theoperation backed by accurate decision-making, as therepresentative director and executive vice president, despite
volatile operating environments. In addition, his broad anddeep knowledge and insights cultivated through wide-ranging
experience both in Japan and overseas, in areas such as thefood business and Corporate Strategy, contributes to stronger
oversight functions in the JT Group and to strengthening therelationships with stakeholders. Therefore, we believe hisknowledge and insights are indispensable for the JT Group tobetter its corporate governance going forward.

Significant Concurrent Positions Outside the Company
Outside Director, Benesse Holdings, Inc.
April
July
July
June

Masamichi Terabatake*
Representative Director
and President,
Chief Executive Officer

Date of birth: November 26, 1965
Term of office:2 years from March 2020
Number of shares held: 77,800

Naohiro Minami*

Representative Director andExecutive Vice President,
Chief Financial Officer

June
June
January
March

1989	Joined the Company
2005	Vice President, Secretary’s Office2008	Vice President, Corporate Strategy Division2011	Senior Vice President; Chief Strategy Officer; and President,
Food Business2012	Senior Vice President; and Chief Strategy Officer
2013	Member of the Board, Japan Tobacco Inc.
Executive Vice President, JT International S.A.
2018	President and Chief Executive Officer
2018	Representative Director and President, Chief Executive Officer(Current Position)

Significant Concurrent Positions Outside the Company
Chairman and Managing Director, JT International Group Holding B.V.

1986	Joined the Company
April
December 2005	Controller
July
2010	Deputy Chief Financial Officer; and Controller
June2012	Senior Vice President; Chief Financial Officer; and Controller
July
2012 Senior Vice President; and Chief Financial Officer
January 2018	Executive Vice President
March2018	Representative Director and Executive Vice President(Current Position)
Significant Concurrent Positions Outside the Company
Supervisory Board Member, JT International Holding B.V.

Date of birth: January 21, 1964
Term of office:2 years from March 2020
Number of shares held: 31,700096Japan Tobacco Inc. Integrated Report 2020

Reasons for appointment
Mr. Terabatake has been President and Chief Executive Officerof the JT Group since January 2018 and was also named
Representative Director in March of the same year. He has
utilized his extensive experience and knowledge, as well as
strong leadership in relation to global business management,
into a range of duties such as the planning and execution ofmanagement strategies both in Japan and overseas, and theexecution of the business of the international tobacco
business as Executive Vice President of JT International S.A.,
which has been the Group’s growth driver. We acknowledge
that his extraordinary insights and wider vision, together withhis enhanced reforming capabilities, are indispensable for the
management of the Group going forward.

Reasons for appointment
Mr. Minami was appointed Executive Vice President of the
JT Group in January 2018, and has been Representative
Director and Executive Vice President since March of thesame year. He has fully leveraged the wide-ranging and deep
knowledge in the field of accounting and finance that hecultivated during his service as Controller as well as SeniorVice President and Chief Financial Officer, to play a key rolein the management of the Group and contribution to its
growth. We consider that his accurate decision-making andstrategic thinking based on his diverse experience make acontribution to maintaining and broadening themanagement foundation that supports the expansion of theGroup’s business. His skills are indispensable for driving theGroup’s management going forward.

Kiyohide Hirowatari*
Representative Director andExecutive Vice President

September 1995	Started independently as Novelist (Current)
January 2003	Member of Financial System Council, the Ministry of Finance Japan
April
2004	Visiting professor, Faculty of Economics, Shiga University
March2005	Member of the Council for Transport Policy, the 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
CorporationJune
2012	Outside Director of the Company (Current Position)June
2013	Outside Director, LIXIL Group CorporationJune
2016	Outside Director, Japan Exchange Group, Inc. (Current Position)
June
2018	Outside Director, Mitsubishi Motors Corporation (Current Position)

Reasons for appointment
Ms. Kohda has been our Outside Director since June 2012.
We have benefited from her in-depth knowledge ofinternational finance; her broad experience gained fromserving on government committees and similar positions;and her deep insight and objective point of view that she
has demonstrated through her activities as a novelist beingreflected in the management of the JT Group. She has
worked tirelessly to supervise our business execution froma fair and independent standpoint. She has also contributed
enormously to improving corporate governance in theGroup through actively providing proposals and advice tothe Board of Directors and the Advisory Panel on
Nomination and Compensation of the Group. We believe
her wide-ranging experience and broad knowledge areindispensable for our management going forward.

Date of birth: November 11, 1965
Term of office:2 years from March 2020
Number of shares held: 28,500

April
May
July
June

Kazuhito Yamashita*
Director
Date of birth: February 4, 1963
Term of office:2 years from March 2020
Number of shares held: 20,100

Main Kohda

Outside Director(Independent Outside Director)

Date of birth: April 25, 1951
Term of office:2 years from March 2020
Number of shares held: 0

January
JanuaryMarchSignificant Concurrent Positions Outside the Company
Novelist
Outside Director, Japan Exchange Group, Inc.
Outside Director, Mitsubishi Motors Corporation
April
April
January
OctoberJune

Yukiko Nagashima
Outside Director(Independent Outside Director)

MarchSignificant Concurrent Positions Outside the Company
Standing Audit and Supervisory Board Member, Recruit Holdings Co., Ltd.
Standing Audit and Supervisory Board Member, Recruit Co., Ltd.

April
January

Outside Director(Independent Outside Director)

Date of birth: October 10, 1952
Term of office:1 year from March 2021
Number of shares held: 0

Reasons for appointment
Mr. Kitera possesses abundant international experienceand knowledge concerning international affairs, gained
through his long diplomatic career including his important
positions as a government officer mostly in the Ministry ofForeign Affairs. We expect him to contribute his in-depth
knowledge on a global basis to the JT Group’s business
which operates in international environments where
geopolitical risks are currently increasing and to give
pertinent counsel and to supervise appropriately for further
enhancement of corporate governance.

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

Masato Kitera

1976 Entered the Ministry of Foreign Affairs Japan (hereinafter the Ministry)
2008	Director-General for Sub-Saharan African Affairs, Middle Easternand African Affairs Bureau, the Ministry
Secretary General, the Fourth Tokyo International Conference on
African Development
July
2008	Director-General, International Cooperation Bureau, the Ministry
January 2010	Deputy Vice-Minister, the Ministry
September 2012	Assistant Chief Cabinet Secretary
November 2012	Ambassador Extraordinary and Plenipotentiary of Japan toPeople’s Republic of China
April
2016	Ambassador Extraordinary and Plenipotentiary of Japan to the
French RepublicJune2016	Ambassador Extraordinary and Plenipotentiary of Japan to the
French Republic, Principality of Andorra and Principality of Monaco
April2020 Adviser of the Company
June2020	Outside Director, Marubeni Corporation (Current Position)
Outside Director, Nippon Steel Corporation (Current Position)
Significant Concurrent Positions Outside the Company
Outside Director, Marubeni Corporation
Outside Director, Nippon Steel Corporation

Reasons for appointment
Ms. Nagashima has been our Outside Director since March
2019. We have benefited from her experience in corporate
management and execution of business in a wide range offields, such as emerging businesses and temporary
staffing. Her objective point of view based on her
experience as a Member of the Audit & Supervisory Boards
is reflected in the management of the JT Group. She has
worked tirelessly to supervise business execution from afair and independent standpoint. She has also contributed
enormously to improving corporate governance in theGroup through actively providing proposals and advice tothe Board of Directors and the Advisory Panel on
Nomination and Compensation of the Group. We believethat her experience and knowledge from the perspectivesof both management and audit are indispensable in theGroup’s management going forward.

GOVERNANCE

Date of birth: April 4, 1961
Term of office:2 years from March 2020
Number of shares held: 0

April

1985	Joined Recruit Co., Ltd. (Current Recruit Holdings Co., Ltd.)
2006	Corporate Executive Officer, Recruit Co., Ltd.
2008	President and Representative Director, Recruit Staffing Co., Ltd.
2012	Corporate Executive Officer, Recruit Holdings Co., Ltd.
2016	Standing Audit and Supervisory Board Member,
Recruit Holdings Co., Ltd. (Current Position)2018	Standing Audit and Supervisory Board Member,
Recruit Co., Ltd. (Current Position)
2019	Outside Director of the Company (Current Position)

SUSTAINABILITY

Reasons for appointment
Mr. Yamashita has been our director and Senior Vice
President since March 2019. He has focused on promotingsocial and environmental issues and on the expansion of
the overseas business through his roles as Senior Vice
President, Chief Corporate, Scientific & Regulatory Affairs
Officer and Head of China Division. He has leveraged his
wide-ranging experience and knowledge to contribute toestablishing an environment conducive to the Group’sbusiness. We believe his leadership and the broad
knowledge are indispensable for the sustainability
management that will form the foundation of the Group’s
sustainable growth going forward.

January
JanuaryMarch

BUSINESS

1986	Joined the Company
2007	Vice President, Corporate, Scientific & Regulatory Affairs
Division, Tobacco Business2009	Vice President, Corporate Affairs Division, Tobacco Business2010	Senior Vice President; and Chief Corporate,
Scientific & Regulatory Affairs Officer, Tobacco Business2015	Senior Vice President; and Head of China Division, Tobacco Business2019	Senior Vice President, Compliance, Sustainability Management
and General Affairs
2019	Member of the Board and Senior Vice President (Current Position)

July
January

VALUE CREATION

Reasons for appointment
Mr. Hirowatari was appointed Executive Vice President of
the Company in January 2018, and has been
Representative Director and Executive Vice President since
March of the same year. He utilizes his leadership andwide-ranging knowledge in such areas of corporate law,business management and Human Resources, which hedeveloped during his term in diverse and important roles,(including Senior Vice President, Chief Legal Officer; Headof Tobacco Business Planning Division, Tobacco Businessand Senior Vice President, Human Resources) to maintaina foundation for the JT Group’s sustainable growth and toformulate strategies. We believe that his keen insight anddecision-making, cultivated from knowledge andexperience in a broad range of fields, are indispensable for
the Group’s management going forward.

CORPORATE PROFILE

1989	Joined the Company
2010	Vice President, Legal Division2012	Senior Vice President; Chief Legal Officer; and Vice President,
Legal Division2014	Senior Vice President; and Chief Legal Officer
2015	Senior Vice President; Head of Tobacco Business Planning
Division, Tobacco Business2017 Senior Vice President, Human Resources
2018	Executive Vice President
2018	Representative Director and Executive Vice President(Current Position)

April
July
June

097

Five Audit & Supervisory Board Members (including three Outside Audit & Supervisory Board Members)
April
April

1987	Joined the Company
2001	Vice President, Products Division, Food Business Division,
Food Business2008	Senior Vice President; Head of Beverage Business Division;and Vice President, Product Division, Food Business Division,
Food Business2008	Senior Vice President; and Head of Beverage Business,
Food Business2010	Senior Vice President; and Head of Beverage Business2013	Senior Vice President, CSR
2018	Senior Vice President, Assistant to President
2018	Standing Audit & Supervisory Board Member of the Company(Current Position)

Reasons for appointment
Ms. Nagata has been an Audit & Supervisory Board Memberof the JT Group since March 2018. She has contributed in theGroup’s auditing through leveraging her abundant experienceand her wide-ranging insights with regard to the Group’sbusiness operations across operational businesses andinternal departments. We believe her experience andknowledge are indispensable for the JT Group’s to better its
corporate governance going forward.

1987	Joined the Company
2008	Vice President, Non-Tobacco Material Procurement Division,
Tobacco Business2012	Vice President, Operational Review and Business Assurance
2019	Standing Audit & Supervisory Board Member of the Company(Current Position)

Reasons for appointment
Mr. Yamamoto has served in such roles as the Vice Presidentof the Non-Tobacco Material Procurement Division of the
Tobacco Business, and as Vice President of the Operational
Review and Business Assurance. He particularly played an
important role in the latter position by enhancing the Group’s
corporate governance in its business operations. We
acknowledge he has fulfilled his duties as an Audit &Supervisory Board Member in relation to the effective auditingof the Group through his detailed, deep and wide-ranging
knowledge as well as experience across all business
operations and in direct departments, making his knowledge
and experience indispensable for the JT Group to better its
corporate governance going forward.

1979	Entered the Ministry of Finance2010 Deputy Director-General of the Planning and Coordination Bureau;
Secretary-General of the Executive Bureau, Certified Public
Accountants; Auditing Oversight Board, Financial Services Agency
July2011	
Director General, Kinki Local Finance Bureau, the Ministry of Finance
January 2012	
Deputy Director-General, Minister's Secretariat, the Ministry of
Defense (hereinafter the Ministry)
September 2012	
Director General, Bureau of Personnel and Education, the Ministry
Director General, National Institute for Defense Studies, the Ministry
July
2013	
July
2014	
Director General, Bureau of Finance and Equipment, the Ministry
October 2015	Vice-Minister of Defense for International Affairs, the Ministry
September 2016	Chairman, Sompo Japan Nipponkoa Research Institute Inc.
October 2017	Director, Eltes Co.,Ltd.
March
2018	Registered as Attorney at Law
Standing Outside Audit & Supervisory Board Member of the Company
March2019	
(Current Position)

Reasons for appointment
Mr. Mimura has deep knowledge of such fields as finance, global risk
management, geopolitics and corporate law through his extensive experience
over many years of serving in a wide range of important positions in ministries
and bureaus, in addition to his role as research institute chairperson. His broadand deep knowledge have made a significant contribution to the effective
auditing of the JT Group in this highly uncertain business environment. We
believe his roles as Standing Audit & Supervisory Board Member and Outside
Audit & Supervisory Board Member have facilitated improvements to auditingfrom a third-party perspective, and led to strengthening the Group’s corporate
governance. Therefore, we deem his knowledge and experience to beindispensable for the JT Group to better its corporate governance going forward.

June

Ryoko Nagata

Standing Audit &Supervisory Board Member
Date of birth: July 14, 1963
Term of office:4 years from March 2019
Number of shares held: 12,400

July
July
June
January
March

April
July
June
March

Hiroshi Yamamoto

Standing Audit &Supervisory Board Member

Date of birth: November 29, 1963
Term of office:4 years from March 2019
Number of shares held: 2,600
April
July

Toru Mimura

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

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

Significant Concurrent Positions Outside the Company
Attorney at Law, Shiba International Law Offices
April
April
May

Hiroshi Obayashi

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

Date of birth: June 17, 1947
Term of office:4 years from March 2019
Number of shares held: 01970	
Judicial Apprentice
1972 Appointed as Public Prosecutor
2001 Director-General of theRehabilitation Bureau, the Ministryof Justice (hereinafter the Ministry)
January 2002 Deputy Vice-Minister of Justice,
the Ministry
June 2004 Director-General of the Criminal
Affairs Bureau, the Ministry
June 2006 Vice-Minister of Justice, the Ministry
July 2007 Superintending Prosecutor, Sapporo
High Public Prosecutors’ Office
July 2008	Superintending Prosecutor, Tokyo
High Public Prosecutors’ Office
June 2010	Prosecutor-General
March 2011 Registered as Attorney at Law
April 2011	
Outside Audit & Supervisory
Board Member, Daiwa Securities
Co., Ltd. (Current Position)
June 2013 Outside Director, Mitsubishi Electric
Corporation (Current Position)
April
June

Koji Yoshikuni

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

Date of birth:
September 7, 1952
Term of office:4 years from March 2019
Number of shares held: 0098

As of March 24, 2021

June2014	
Outside Audit & Supervisory Board
Member, Nippon Steel &Sumitomo Metal Corporation(Current Nippon Steel Corporation)
March 2015	
Outside Audit & Supervisory
Board Member of the Company(Current Position)
June 2020	
Outside Director, Audit & Supervisory
Committee Member, Nippon SteelCorporation (Current position)

Reasons for appointment
Mr. Obayashi has been our Audit & Supervisory Board Member
since March 2015. In addition to his extensive experience in thelegal circles, he has significant experience as an outside
director and outside Audit & Supervisory Board member acrossa wide range of industries. We consider his deep knowledge
and experience have greatly contributed to effective auditing on
the Group and are indispensable for the JT Group to better its
corporate governance going forward.

Significant 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 Director, Audit & Supervisory
Committee Member, Nippon Steel Corporation1975	
Joined Japan Broadcasting Corporation (hereinafter the Corporation)
2003	Director Responsible for Finance of News Department,
the CorporationJune
2005	Executive Director, Yokohama Broadcasting Station,
the CorporationJune
2007	Chief of Secretariat for Board of Governors, the Corporation
February 2010	Senior Director, the Corporation
April
2012	Executive Director, the Corporation
April
2017	Vice President and Professor, the Graduate School of Project
Design Auditor, Hosei University (Current Position)
Audit & Supervisory Board Member of the Company (Current Position)
March2019	
April
2019	President, the Graduate School of Information &Communication (Current Position)

Japan Tobacco Inc. Integrated Report 2020

Mr. Mimura meets all requirements for being appointed an independent
director prescribed by the Tokyo Stock Exchange, Inc. and complies with aset of internal independence criteria, which has been revised in accordancewith a resolution of the Board of the Directors on November 24, 2020.
Therefore, the JT Group will newly appoint him as our independent director
on March 24, 2021.

Reasons for appointment
Mr. Yoshikuni has served in such roles at Japan Broadcasting
Corporation as the Director Responsible for Finance of News
Department, Chief of Secretariat for Board of Governors, andExecutive Director. He has knowledge of politics andeconomics cultivated over long years in his journalist career
as well as management experience that makes him
well-versed with all business operations and internal
departments. His broad knowledge based on his experiencehas greatly contributed to effective auditing on the Group andwe believe it is indispensable for the JT Group to better its
corporate governance going forward.

CORPORATE PROFILE

Executive Officers and Members of JTI Executive Committee
As of January 1, 2021

Executive Officers
President

Senior Vice Presidents

Masamichi Terabatake

Yuki Maeda

Chief Financial Officer of Japanese Tobacco
Business, Tobacco Business

Executive Vice Presidents

Eiichi Kiyokawa

Naohiro Minami
Chief Financial Officer and Communications

Kiyohide Hirowatari

Legal, Corporate Strategy, Digitalization,
Human Resources, Operation Review &Business Assurance, PharmaceuticalBusiness and Food Business

Senior Vice Presidents
Chief Sustainability Officer, Complianceand General Affairs

Junichi Fukuchi

Chief Executive Officer of Japanese Tobacco
Business, Tobacco Business Planning,
Tobacco BusinessPresident, Pharmaceutical Business

Shigenori Ohkawa

Sales, Tobacco Business

Head of Central Pharmaceutical Research Institute,
Pharmaceutical Business

Kenji Ogura

Hiromasa Furukawa

Corporate, Scientific & Regulatory Affairs,
Tobacco Business

Chigusa Ogawa

Leaf Procurement, Tobacco BusinessYasuhiro Nakajima

Head of RRP Japan Office, Tobacco Business

Shuichi Hirosue

Marketing, Tobacco Business

Hiroyuki Miki
R&D, Tobacco BusinessAkihiro Koyanagi

Manufacturing, Tobacco Business

Toru Oguchi

Head of China Division, Tobacco Business

Toru Hijikata

Food Business

Kei Nakano

Corporate Strategy

Takehisa Shibayama
Digitalization

Takanori Kikuchi
General Affairs

BUSINESS

Kazuhito Yamashita

Muneaki Fujimoto

VALUE CREATION

Chief Executive Officer*

Koichi Mori

Human Resources

Hiroyuki Fukuda
Communications

Osamu Hirose
Legal

Hisato Imokawa

Sustainability Management

SUSTAINABILITY

Quality Assurance, Tobacco Business* Masamichi Terabatake concurrently serves as President, Tobacco Business.

As of January 1, 2021

Members of the JTI Executive Committee
Eddy Pirard

Daniel Torras

Senior Vice President, Reduced-Risk Products

Stefan Fitz

President and Chief Executive Officer

Koji Shimayoshi

Takehiko Tsutsui

Marchant Kuys

Roland Kostantos

Chief Operating Officer

Vassilis Vovos

Senior Vice President, Finance,
IT and Chief Financial Officer

Suzanne Wise

Senior Vice President, Corporate Affairs
and Communications

Bilgehan Anlas

Regional President, Middle East, Near East,
Africa, Turkey and Worldwide Duty-Free

Senior Vice President, People and Culture,& Chief Compliance Officer

Yves Barbier

John Fraser

Antoine Ernst

Senior Vice President, Legaland Regulatory Affairs

Senior Vice President, Marketing and Sales

Regional President, Americas

Hiroyuki Miki

Senior Vice President, R&D

Rob Stanworth

Regional President, Asia PacificPhil Livingston

Senior Vice President,
Global Supply Chain

FINANCIAL INFORMATION/OTHERS

Howard Parks

Senior Vice President, Business Development
and Corporate Strategy

GOVERNANCE

Executive Vice President and Deputy CEO

Regional President, Western Europe

Daniel Sciamma

Regional President, Eastern Europe

Senior Vice President,
Chief Transformation Officer

Tom Greene

Senior Vice President, Digitaland Information Technology

Japan Tobacco Inc. Integrated Report 2020099

Internal controls system & risk management system
Overview
We have implemented an internal control system to maintain proper operational execution, largely through compliance, internal
auditing and risk management. Our Board of Directors is kept apprised of these internal controls’ status through regular reports.
We have also set up channels, including a specialized organizational unit, to facilitate reporting to Audit & Supervisory Board
members to ensure the effectiveness of their auditing activities. In coordination with our subsidiaries, we have built a risk management system, a compliance system (including a concern reporting system), and an internal auditing system and implemented
controls to ensure the reliability of our financial reporting.
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

Assurance of reliability of financial reporting
We have implemented and operate internal controls over financial reporting in compliance with the Financial Instruments andExchange Act and other applicable laws and regulations. We have also allocated proper human resources to evaluate and reporton these controls. Through such measures, we ensure the reliability of financial reporting.

Risk management
We have instituted internal guidelines, rules and manuals on financial risk management. Our CFO reports on financial risks to our
CEO and the Board of Directors once a quarter. For other risks, every organizational unit appropriately monitors and reports onrisks as a secretariat division by establishing various types of committees in accordance with the Responsibility and Authority
Regulations, which stipulates each division’s responsibilities and authorities.
We comprehensively grasp and monitor all risks that might have an influence on the JT Group. The person in charge of risk
management for the monitored risks determines the material risks and reports them to the CEO. Each executive officer takes theinitiative to formulate countermeasures against material risks and promote/execute these measures after reporting measures andtheir progress to the person in charge of risk management and the CEO.
We have prepared crisis/disaster response manuals for such occurrences. We create a task force and swiftly take appropriate
action in close coordination with relevant organizational units and our subsidiaries under the direction of the top management.
Cases handled and other matters, as well as the corresponding measures taken, are reported to the Board of Directors in a timely
and appropriate matter.
Please see Risk factors (P. 50) for more on risks facing the JT Group.

100

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Compliance
We enforce strict compliance. We have instituted a Code of

The Board of Directors

Conduct that mandates that all directors and employees act
in compliance with applicable laws, government regulations,
our Articles of Incorporation and societal norms pursuant toregulations established by the Board of Directors. To ensure
fair and effective compliance practices, we have established

JT Group Compliance Committee*
Supervise/Advisethat reports directly to the Board of Directors.
The head of the JT Group Compliance Committee is the
Chairperson of the Board, and the Committee includes

VALUE CREATION

the JT Group Compliance Committee as a deliberative body

ReportCompliance Office

Approve initiatives

ReportEach business division & Corporate divisions

external experts as key members. The Committee meetsregularly every year. Among the matters discussed are

The Group companies

initiatives to promote compliance throughout the Group,
which will be executed based on the Annual Compliance
Action Plan.

* composed of 2 internal and 3 external members

BUSINESSThe Compliance Office administers our compliance system,
promotes compliance and endeavors to identify deficiencies.
It also conducts various training programs and othereducational activities for directors and employees in the aimof more effective compliance.

Compliance action plans
SUSTAINABILITY

The JT Group Compliance Committee formulates the Action Plan including maintenance/enhancement of compliance programs,
taking action on Company priority issues, carrying out trainings and seminars, handling the Reporting Concerns Mechanism andimplementing the Compliance Promotion Month.

Compliance surveys
We annually conduct a Group-wide questionnaire survey to check the status of compliance practices in our Japanese operations. In 2020, 95.5% of employees completed the survey. Using the survey’s findings, which are reported to directors and
GOVERNANCE

employees, the relevant departments introduce remediation plans to address any issues raised, formulate and implement
measures to improve compliance.

Internal reporting system (Whistle-blower system)
We have set up internal and external hotlines for reporting of concerns. Violations and potential violations of our Code of
Conduct are reported to compliance promotion departments via a hotline, as a report or request to investigate the details and

FINANCIAL INFORMATION/OTHERS

take necessary action, while working to prevent recurrence of the issues. Serious problems are referred to the JT Group
Compliance Committee for review and, as necessary, reported to the Board of Directors.

Japan Tobacco Inc. Integrated Report 2020

101

Quality control
We are committed to maintaining the public’s trust in our products. To do so, we have implemented quality assurance systems
across all of our businesses as described below.

Tobacco BusinessIn our Japanese-domestic tobacco business, we have adopted a basic quality assurance policy and configured our operations toprovide high-quality products and services in accord with this basic policy.
Although the quality assurance system was initially built to enable us to provide high-quality products, mainly combustibles, wehave established the Quality Assurance Group within the tobacco business headquarters in July 2017, in response to the recentchanges in the market environment, including the growing popularity of RRP (Reduced-Risk Products), in order to further strengthen
our quality assurance. Comprised of the Quality Assurance and Customer Satisfaction Promotion Divisions, the Quality AssuranceGroup works to turn consumer feedback into improvements in products and services by informing relevant divisions. It also
monitors market quality and investigates quality problems as they come to light, coordinating with concerned organizational units
to rectify quality deficiencies. To ensure the quality and safety of RRP in particular, the Quality Assurance Group commissions
safety and quality consultants to independently assess our RRP to make sure they meet safety standards. It also makes sure that
our RRP comply with laws and regulations that apply to sales of electronic devices.
In our international tobacco business, our Quality Assurance Group works together with JTI’s Quality Assurance staff as a unified
team under our global quality guidelines. JT and JTI collaborate on quality improvement initiatives also and periodically update
each other on quality issues.

Pharmaceutical BusinessIn our pharmaceutical business, we are strictly committed to safety and quality control in compliance with regulations such as the
Pharmaceutical and Medical Device Act and ministerial ordinances that govern pharmaceutical quality and safety.

Processed Food BusinessIn our processed food business, we place utmost priority on food safety management across the entire value chain from sourcing
ingredients to delivering products to consumers. We do so under our four-pronged framework, coined with the following categories: Food Safety, Food Defense, Food Quality and Food Communication.

102

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Information security
We have established an information security policy and related regulations to protect our information assets and promote safeand efficient information usage.
We proactively invest in information security on an ongoing basis to keep abreast of advances in information technology, adapt tochanges in our operating environment and defend against increasingly sophisticated security threats. We also educate our entire
global workforce on information security to ensure they treat information assets properly. In 2020, 99.7% of employees in our

VALUE CREATION

Japanese operations received security education. Our international tobacco business has a bespoke i-secure program in order toeducate employees on information security across all of its geographies.

Internal auditing
Our Operational Review and Business Assurance Division conducts internal audits from an objective standpoint independent oforganizational units involved in operational execution and reports directly to the CEO. To fulfill its responsibilities, it has unrestricted authority to observe all activities, inspect all records and question all personnel on a Group-wide basis.

BUSINESSIt formulates annual internal audit plans subject to the CEO’s approval. Its head mandatorily reports internal audit results to theCEO, reports annually to the Board of Directors also and may freely and regularly confer with the CEO and the heads of our
subsidiaries in regards to internal audit results, status of internal controls, and risk assessments.
Our subsidiaries may set up their own internal auditing organizations at their own discretion. Those that have done so include
major subsidiaries JTI, TS Network, Torii and TableMark. Subsidiaries’ internal audit plans are approved by, and their audit results
reported to, their respective presidents. JT’s Operational Review and Business Assurance Division coordinates internal audits withsubsidiaries’ internal auditing organizations. Subsidiaries’ annual internal audit plans and their internal audit results are reported to the

SUSTAINABILITY

Group CEO and our Board of Directors through our Operational Review and Business Assurance Division. To increase internal audits’
efficiency and effectiveness, we periodically hold meetings to improve audit quality through information-sharing among internal
auditing staff across the Group. We also conduct joint audits with and provide auditing assistance to subsidiaries as necessary.

GOVERNANCE
FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020

103

FINANCIAL
INFORMATION/
OTHERSThis chapter explains financial information, shareholder
information and others of the JT Group, as the result of its
business activities working toward value creation.

106 Financial review
114 Consolidated financial statements
180 Glossary of terms
182 Awards and recognitions
184 Shareholder information
185 List of key disclosures
185 Contact information

104

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

105

Japan Tobacco Inc. Integrated Report 2020

Financial review
Analysis of the results

Results for the year ended December 31, 2020

Revenue*1

Billions of yen

2,175.6

2019

–4.6

International Tobacco–55.9

Japanese-Domestic Tobacco–9.6

Pharmaceuticals–9.3

Processed Food

–3.7

Others2020

2,092.6

Revenue decreased by 3.8% to 2,092.6 billion yen due todecreases in revenue in the Japanese-domestic tobacco, pharmaceutical and processed food businesses. In the international
tobacco business, the positive momentum from the favorable

price/mix contributions were offset by unfavorable foreign­ urrency impacts. COVID-19 is estimated to have negativelycimpacted consolidated revenue by around 61 billion yen, or
about 3% of the total consolidated revenue.

Adjusted operating profit*2/Operating profit

Billions of yen

515.9

2019 Adjusted operating profit
International Tobacco: Business momentum(at constant FX)+57.7

International Tobacco: Local currency vs.
USD FX effect

–51.2
–6.4

International Tobacco: USD vs. Yen FX effectJapanese-Domestic Tobacco–19.1

Pharmaceuticals+1.2

Processed Food

–6.2
–5.0

Others2020 Adjusted operating profit

487.0
–17.9

Adjustments total
2020 Operating profit

At constant currency, adjusted operating profit increased by
5.5% driven by an increase in the pharmaceutical business, aswell as growth in the international tobacco business, partially
offset by decreases in the Japanese-domestic tobacco and­processed food businesses.
Adjusted operating profit including foreign exchange effects
decreased by 5.6% to 487.0 billion yen due to unfavorable­foreign currency impacts in the international tobacco business,
as well as decreases in the Japanese-domestic tobacco and­processed food businesses.

106Japan Tobacco Inc. Integrated Report 2020

469.1

Operating profit decreased by 6.6% to 469.1 billion yen, due tofactors including an unfavorable comparison from the one-timecompensation gains in the pharmaceutical business in the previous year. This was in spite of the increase in proceeds fromthe sales of real estate, mainly the former JT head office building, and a favorable comparison from transformation-related
restructuring costs in the international tobacco business in theprevious year.

Billions of yen

348.2

2019

Profit decreased by 10.9% to 310.3 billion yen due to factors including a decrease in operating profit and higher­financing costs.

–33.3

Operating profit–11.9

Income tax–4.4

Profit attributable tonon-controlling interests• Financial costs increased (negative impact in the graph)mainly due to an increase of foreign exchange losses.
• Income tax expenses increased (negative impact in thegraph) due to a higher effective tax rate despite decline inprofit before income tax.

+11.7
310.3

Revenue by business segment

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

Billions of yen

2019

2020

2019

2020

2,175.6

2,092.6

502.4

469.1

Consolidated: Operating profit

1,310.9

1,306.2

International Tobacco

274.0

296.4

Core revenue*4

1,253.0

1,250.8

Japanese-Domestic Tobacco

171.0

151.8

611.5

555.6

Pharmaceuticals

72.7

16.5

Core revenue*5

568.9

515.7

Processed Food

5.5

(0.8)

Pharmaceuticals

88.5

79.0

Others/Elimination(20.8)

5.1

Processed Food

158.6

149.3

Adjustments, Total*6(13.6)(17.9)

6.1

2.5

International Tobacco(66.7)(44.4)

Japanese-Domestic Tobacco(16.2)(16.2)

Pharmaceuticals

56.8

(0.7)

Japanese-Domestic Tobacco

OthersAverage exchange rate
2019

2020

USD/JPY

109.03106.76

USD/RUB

64.74

72.07

USD/GBP

0.78

0.78

USD/EUR

0.89

0.88

Processed Food

0.1

(0.0)

Others/Elimination

12.5

43.5

Consolidated: Adjusted operating profit

515.9

487.0

International Tobacco

340.8

340.9

Japanese-Domestic Tobacco

187.2

168.1

Pharmaceuticals

15.9

17.2

Processed Food

5.4

(0.8)

Others/Elimination(33.4)(38.4)SUSTAINABILITY

International Tobacco

BUSINESS

Revenue

VALUE CREATION

Financial income/financial cost

2020

CORPORATE PROFILE

Profit*3

GOVERNANCE• Please see Business strategy/Business review (P.34) for the
analysis of revenue, core revenue and adjusted operating­profit of each business segment.

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS*1 Excludes tobacco excise and other similar taxes, as well as agency transactions, for which the JT Group acts as an agent.
*2 Adjusted operating profit = Operating profit + amortization cost of acquired intangibles arising from business acquisitions + adjusted items (income and costs).**3 Profit attributable to owners of the parent company*4 Includes waterpipe tobacco and RRP (Reduced-Risk Products), but excludes revenue from distribution, contract manufacturing and other peripheral businesses.
*5 Includes revenue from domestic Duty-Free, the China business, little cigars and RRP, but excludes revenue from distribution of imported tobacco in the Japanesedomestic tobacco business, among others.
*6 Amortization cost of acquired intangibles arising from business acquisitions ± adjusted items (income and costs).** Adjusted items (income and costs) = Impairment losses on goodwill ± restructuring income and costs ± others.

107Consolidated statement of financial position (Assets)

Billions of yen

5,553.1

December 31, 2019

+181.7

Cash and cash equivalents–46.4

Trade and other receivables–43.9

Inventory–43.9

Property, plant and equipment–93.2

Goodwill–76.8

Intangible assets–49.0

Other assets
December 31, 2020

5,381.4

Total assets decreased 171.7 billion yen to 5,381.4 billion yen,mainly due to the decrease in goodwill as a result of negative

foreign currency impacts and in amortization cost of acquired
intangible arising from business acquisition.

Consolidated statement of financial position (Liabilities and Equity)

Billions of yen

5,553.1

December 31, 2019
Trade and other payables

+27.9

Bonds

+35.7

Borrowings–51.3

Income tax payables

–23.1
–16.8

Other liabilities+33.2

Retained earnings+1.0

Treasury shares–178.3

Other equity total
December 31, 2020

5,381.4

Total liabilities decreased 27.6 billion yen to 2,781.9 billion yen
mainly due to repayment of short-term borrowings, redemptionof bonds and decrease in tobacco excise tax payables, despite
the proceeds from issuance of the subordinated bonds andborrowings of the subordinated loan.

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Japan Tobacco Inc. Integrated Report 2020

Total equity decreased 144.1 billion yen to 2,599.5 billion yen
mainly due to dividend payments and decrease in exchange
differences on translation of foreign operations, despite anincrease in retained earnings as a result of the recording of
profit attributable to owners of the parent company.

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

2. Non-GAAP financial measures

Core revenue

3. C onsolidated financial results for 2020
Please refer to pages 106 and 107 for analysis of “Revenue,”“Adjusted operating profit,” “Operating profit” and “Profit attributable to owners of the parent company.” For analysis of “Assets,”“Liability” and “Equity,” please refer to page 108. Please refer to“Business strategy/Business review” for analysis of financial
results by business segment.

Capital expenditures

Capital expenditures include outlays on property, plant andequipment such as land, buildings, and structures, machinery
as well as vehicles and others; and intangible assets such as
goodwill, trademark, software, and others. These capital expenditures are necessary for enhancing the productivity of the JT
Group’s factories and other facilities; strengthening its competitiveness; and operating in various business fields. In 2020, total
capital expenditures amounted to 112.9 billion yen.
Capital expenditureBillions of yen
2019

2020

Total

131.4

112.9

International Tobacco

78.3

66.6

Japanese-Domestic Tobacco

34.8

21.1

Pharmaceuticals

7.0

9.1

Processed Food

6.1

8.0

Others/Elimination

5.2

8.2

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERSThe JT Group makes accounting adjustments to the financial
statements of subsidiaries that operate in hyperinflationary
economies according to the requirements stipulated in IAS 29“Financial Reporting in Hyperinflationary Economies” (hereinafter referred to as “IAS 29”). However, the impact of IAS 29 is notincluded in core revenue at constant FX.

The JT Group makes accounting adjustments to the financial
statements of subsidiaries that operate in hyperinflationary
economies according to the requirements stipulated in IAS 29.
However, the impact of IAS 29 is not included in adjusted­operating profit at constant FX.

GOVERNANCE

For the tobacco business, core revenue is disclosed additionally asa breakdown of revenue. Specifically, core revenue for the international tobacco business excludes the revenue from distribution, contract manufacturing and other peripheral businesses,
but includes revenue from waterpipe tobacco and RRP.
Furthermore, growth rate in core revenue at constant FX isalso presented in U.S. dollars as additional information. Core
revenue for the Japanese-domestic tobacco business includes
revenue from domestic Duty-Free, the China business, RRP(Reduced-Risk Products) and little cigars, but excludes revenue
from distribution of imported tobacco in the Japanese-domestic
tobacco business, among others.

Furthermore, for the performance of the JT Group and theinternational tobacco business, adjusted operating profit atconstant FX, is also presented as additional information.
Adjusted operating profit at constant FX for a ­relevant period in
the international ­tobacco business is ­calculated using the foreign exchange rates of the prior year and excludes ­foreignexchange effects.

SUSTAINABILITY

For the international tobacco business, its consolidated financial statements reported in U.S. dollars are internally reviewed,
and therefore revenue and adjusted operating profit are externally communicated in U.S. dollars. These non-GAAP financial
measures should be treated as supplementary information,rather than alternative measures, for corresponding financial
numbers reported in accordance with IFRS.

In order to provide useful comparative information on
the JT Group’s business performance, adjusted operating profit
is presented as operating profit plus amortization cost of
acquired intangibles arising from business acquisitions
and adjusted items (income and costs). Adjusted items(income and costs) are impairment losses on goodwill
and restructuring income or costs, and other items.

BUSINESSThe JT Group discloses the consolidated financial statements
as well as certain additional financial measures that are notrequired or defined under IFRS (non-GAAP financial measures).
These measures help grasp the underlying performance ofeach business and are used for internal performance management in view of the Group’s ­target for mid- to long-term sustainable growth. The JT Group considers that they are useful
information for users of the ­financial ­statements to assess theGroup’s performance.

Adjusted operating profit

VALUE CREATION

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

CORPORATE PROFILE

1. Significant accounting policies

109

In the international tobacco business, capital expenditures
amounted to 66.6 billion yen, which was spent on investments
related to compliance with regulations in addition to improvements in product specifications. In the Japanese-domestic
tobacco business, capital expenditures amounted to 21.1 billion
yen which was mainly spent on investments on manufacturing
process maintenance, productivity improvements, adaptions
for new products and, product-specification improvements.
In the pharmaceutical business, capital expenditures amounted
to 9.1 billion yen which was primarily spent on enhancing andstrengthening R&D structures. In the ­processed food business,
capital expenditures amounted to 8.0 billion yen, which wasspent on improvement, maintenance and renewals of production capability. These capital expenditures were funded throughcash generated by operations and borrowings.

are recorded in the financial statements for 2020. For moredetails, please refer to Note 24 to the consolidated financial
statements “Dividends.”

Plans for new installations and disposal of facilities

The JT Group’s financial policy is to maintain a solid financialbase. This provides us with the capacity to withstand any adversity arising out of a volatile environment, such as economic­crisis. It also ensures sufficient flexibility to capture attractive
investment opportunities. The JT Group monitors financial indicators in order to maintain a well-balanced capital structure that
ensures an appropriate return on equity and a stable and flexible
financial condition for future investment. We monitor credit­ratings for a solid financial base, and ROE (Return on Equity) for
profitability, as well as change in internal and external environments. The JT Group monitors net interest-bearing debt, where
cash and cash equivalents are deducted from interest-bearing
debt, as well as capital (the part attributable to owners of theparent company). Please see below in the table for the eachyear-end figures of those monitored financial indicators.

Based on the JT Group’s management principle, the resource
allocation policy in the mid to long term is to prioritize on­business investments for mid- to long-term sustainable profit
growth. The international and Japanese-domestic tobacco
businesses are positioned as the JT Group’s core businessand profit growth driver and place top priority on business­investments that will lead to their sustainable profit growth.
Regarding the pharmaceutical and processed food businesses,
we will strive to strengthen foundations that will lead to future
profit contribution, and will make investments to that end.
Based on this policy, the JT Group’s capital expenditure are
estimated to be a total of 147.5 billion yen for 2021.
As the JT Group companies have wide-ranging plans for theircapital expenditure, we disclose the figures by segment. Our
actual capital expenditures may significantly differ from theplanned figures mentioned above, due to a number of ­factors,
including those mentioned on “Risk factors.”

4. Dividends
The year-end dividends for 2020 were 77 yen per share.
Including interim dividends per share of 77 yen, total annual­dividends per share were 154 yen.

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

Capital management
Billions of yen
As of Dec.
31, 2019

As of Dec.
31, 2020

Interest-bearing debt

974.5

958.9

Cash and cash equivalents(357.2)(538.8)Net interest-bearing debt

617.3

420.0

2,662.7

2,522.8

Capital (equity attributable to ownersof the parent company)

The year-end dividends related to the current year are recognized in the following year for accounting purposes. The yearend dividend for 2019 (record date of December 31, 2019) andthe interim dividends for 2020 (record date of June 30, 2020)

Capital expenditure plan
2021 (Billions of yen)

Main purpose of investing

Funding

92.0

Improvement in product specifications,
RRP-related investment andfacilities renewal

Internally funded

30.0

RRP-related investment andmanufacturing facilities repair

Same as above

5.0

Maintenance andreinforcement of R&D

Same as above

14.5

Increase in production capacity,
increase of productivity,
maintenance andreplacement of facilities

Same as above

International Tobacco
Japanese-Domestic Tobacco
Pharmaceuticals
Processed Food

110

Japan Tobacco Inc. Integrated Report 2020

The JT Group held 225,754,671 shares of common stock as
treasury stock as of December 31, 2020, amounting to 11.29%of the total number of shares issued.

6. Financial activities

To maximize the JT Group’s overall cash efficiency, we prioritize utilizing internal financing mainly through theCash Management Systems (CMS) within the Group,
where legally permissible and economically viable.

7. Cash flow results
2020 and 2019 cash flow results

Cash and cash equivalents at the end of 2020 increased by
181.7 billion yen from the end of 2019 to 538.8 billion yen.
Cash and cash equivalents at the end of 2019 were 357.2­billion yen.

Cash flows in operating activities

Net cash flows from operating activities during 2020 were519.8 billion yen provided, while it was 540.4 billion yen provided in 2019. This was mainly due to the generation of a stable
cash inflow from the tobacco business, despite payments ofboth national and international tobacco excise taxes as well as
income taxes.

Cash flows in investing activities

Net cash flows provided in investing activities during 2020
were 5.4 billion yen, compared with 123.6 billion yen spent in2019. This was mainly due to sales of investment properties
estates as well as shares of subsidiaries and associates,
despite purchase of property, plant and equipment and­intangible assets.

Cash flows in financing activities

SUSTAINABILITY

Intra-group cash management

The JT Group always makes its financial investments by taking
into account safety, liquidity and optimal yield. It does not allow
any speculative dealings in pursuit of profit margin. The investment results is reported to the Group CEO and the Board of
Directors on a regular basis.

BUSINESSThe JT Group’s Treasury Division formulates financial­strategies based on optimal financial risk management andprovides Group-wide support to enable secure and efficientfinancing activities. The Group is exposed to various financial
risks: credit risks, liquidity risks, foreign exchange risks, interest
rate risks, and market price fluctuation risks. In order to avoid
or reduce said risks, we conduct our treasury activities pursuant to a set of Group-wide financial risk management policies
and the results of risk management are reported to the GroupCEO and the Board of Directors on a regular basis. For moredetails on financial risk management, please refer to from “(2)Financial Risk Management” to “(8) Market Price Fluctuation
Risk” of Note 34 to the consolidated financial statements“Financial Instruments.”

External investments

VALUE CREATION

A repurchase of its shares requires cash outlays. In order torepurchase its shares in a flexible manner, it amended the
Articles of Incorporation at the Ordinary General Meeting of
Shareholders held on June 24, 2004 allowing us to repurchase
based on a decision made by the Board of Directors. We may
continue to hold the repurchased shares as treasury stock or
use them for other purposes. Stock repurchase provides ourmanagement with an additional option for increasing flexibility
and speed in capital management in order to adapt to a rapidlychanging business environment.

CORPORATE PROFILE

Share buy-back

Net cash flows spent in financing activities during 2020 were297.4 billion yen compared with 333.8 billion yen spent in 2019.
This was mainly due to the payment of cash dividends
and repayments of borrowings, despite the proceeds from­issuance of the subordinated bonds and borrowing of the­subordinated loan.

External funding

GOVERNANCE

The JT Group basically funds its short-term working capitalneeds through short-term borrowings from financial institutions, commercial paper, or a combination of both. We fund the
mid- to long-term capital needs through long-term borrowings
from financial institutions, bonds, equity, or a combination of
those previously stated.

FINANCIAL INFORMATION/OTHERSThe JT Group continues to diversify the financing method andcorrespondent financial institutions to secure stable and­efficient funding sources through activities such as the­establishment of committed facilities. The status of Groupwide external debt is reported to the Group CEO and the Boardof Directors on a regular basis.

Japan Tobacco Inc. Integrated Report 2020

111

8. Liquidity
The JT Group has historically had, and expect to continue tohave, significant cash flows from operating activities. It is
expected that cash generated from operating activities will­continue to be stable and cover funds needed for daily­business activities. The JT Group had 478.2 billion yen as­committed facilities for both domestic and international major­financial institutions as of December 31, 2020, of which 100%
was unused. In addition, it has a commercial paper program,
uncommitted facilities, a domestic bond shelf registration and
EMTN ­program.

Long-term debt

Bonds issued (including the current portion) as of December
31, 2019 and December 31, 2020 accounted for 666.6 billion
yen and 702.3 billion yen respectively. Long-term borrowings asloans from financial institutions (including the current portion)accounted for 115.3 billion yen in 2019 and 205.0 billion yen in
2020. Long-term lease liabilities totaled 40.2 billion yen as ofDecember 31, 2019 and 49.4 billion yen as of December 31, 2020.

As of December 31, 2020, the long-term debt was rated A1 by
Moody’s Japan K.K. (Moody’s), AA- by S&P Global Ratings
Japan Inc. (S&P), and AA by Rating and Investment Information
Inc. (R&I), with a “negative” outlook from Moody’s, a “negative”­outlook from S&P and a “stable” ­outlook from R&I.
These ratings are affected by a number of factors such as
developments in our major markets, the JT Group’s businessstrategies and general economic trends that are beyond its
control. The ratings may be withdrawn or revised at any time.
Each rating should be evaluated separately from other ratings.
Under the Japan Tobacco Inc. Act, the bondholders of the JT
Group can enjoy statutory preferential rights over unsecured
creditors in seeking repayment, with the exception of national
and local taxes and other statutory obligations.

Short-term debt

Short-term borrowings from financial institutions totaled 192.6
billion yen as of December 31, 2019 and 51.6 billion yen as ofDecember 31, 2020. There was no balance of commercial
paper on both periods. Short-term lease liabilities totaled 13.5
billion yen as of December 31, 2019 and 17.1 billion yen as ofDecember 31, 2020.

Liquidity
Billions of yen

Year ended December 31, 2020

Book Value

Due within
1 yearDue after
1 yearthrough
2 years

51.6

51.6

—

Short-term borrowings as loans

Due after
3 years
through
4 years

Due after
4 years
through
5 years

Due after
5 years

—

—

—

—

Long-term borrowings as loans(current portion)

12.2

12.2

—

—

—

—

—

Bonds (current portion)

77.6

77.6

—

—

—

—

—

Long-term borrowings as loans

192.7

—

41.9

11.6

20.1

0.0

120.1

Bonds

624.7

—

30.0

114.3

—

94.7

389.6

Total

958.9

141.5

71.9

125.9

20.1

94.8

509.7

Note: Lease obligations are excluded.

112

Due after
2 years
through
3 years

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

113

Japan Tobacco Inc. Integrated Report 2020

Consolidated Financial Statements
Consolidated Statement of Financial Position

Japan Tobacco Inc. and Consolidated Subsidiaries
As of December 31, 2019 and 2020

Millions of yen

114

AssetsCurrent assets
Cash and cash equivalents (Note 7)
Trade and other receivables (Note 8)Inventories (Note 9)
Other financial assets (Note 10)
Other current assets (Note 11)
Subtotal
Non-current assets held for sale (Note 12)
Total current assets

2019

2020

357,158
458,513583,695
21,943504,334
1,925,643
30
1,925,673

538,844
412,144539,762
18,828493,992
2,003,570
348
2,003,919

Non-current assets
Property, plant and equipment (Notes 13, 15)
Goodwill (Note 14)
Intangible assets (Note 14)
Investment property (Note 16)
Retirement benefit assets (Note 22)
Investments accounted for using the equity method
Other financial assets (Note 10)
Deferred tax assets (Note 17)
Total non-current assets

803,239
2,002,595
440,434
16,58867,37752,903
109,568
134,696
3,627,397

759,2901,909,392
363,604
4,744
70,52840,230107,143
122,534
3,377,464

Total assets

5,553,071

5,381,382

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Millions of yen

Liabilities and equity
Liabilities
Current liabilities
Trade and other payables (Note 18)

408,597
284,135
69,543
21,862
18,289699,3311,501,757

436,540
141,469
46,462
27,58819,420652,314
1,323,793

Non-current liabilities
Bonds and borrowings (Note 19)
Other financial liabilities (Note 19)
Retirement benefit liabilities (Note 22)
Provisions (Note 20)
Other non-current liabilities (Note 21)
Deferred tax liabilities (Note 17)
Total non-current liabilities

690,367
41,062
320,614
40,164135,066
80,4301,307,702

817,41250,164
331,752
31,338
162,982
64,447
1,458,095

2,809,459

2,781,888

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

100,000
736,400(492,469)(431,741)
2,750,506
2,662,696
80,916
2,743,611

100,000
736,400(491,507)(605,776)
2,783,718
2,522,834
76,6602,599,495

Total liabilities and equity

5,553,071

5,381,382

Total liabilities

SUSTAINABILITY

Bonds and borrowings (Note 19)
Income tax payables
Other financial liabilities (Note 19)
Provisions (Note 20)
Other current liabilities (Note 21)
Total current liabilities

BUSINESS2020

VALUE CREATION

2019

GOVERNANCE
FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020115

Consolidated Statement of Income

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2019 and 2020

Millions of yen
2019

2020

Revenue (Notes 6, 25)
Cost of sales (Notes 14, 22)
Gross profit

2,175,626(942,299)
1,233,326

2,092,561(898,001)
1,194,560

Other operating income (Note 26)
Share of profit in investments accounted for using the equity method
Selling, general and administrative expenses (Notes 12, 13, 14, 16, 22, 27, 32)
Operating profit (Note 6)

95,7255,011(831,707)
502,355

54,924
4,042(784,472)
469,054

Financial income (Notes 28, 33)
Financial costs (Notes 22, 28, 33)
Profit before income taxes

8,402(45,526)465,232

12,353(61,344)420,063

Income taxes (Note 17)
Profit for the period(103,609)
361,622(108,034)
312,029

Attributable to
Owners of the parent company
Non-controlling interests
Profit for the period

348,190
13,432361,622

310,253
1,775
312,029

Earnings per share
Basic (Yen) (Note 30)
Diluted (Yen) (Note 30)

195.97
195.87174.88174.80Reconciliation from “Operating profit” to “Adjusted operating profit”
Millions of yen

Operating profit
Amortization cost of acquired intangibles arising from business acquisitions
Adjustment items (income)
Adjustment items (costs)
Adjusted operating profit (Note 6)116

Japan Tobacco Inc. Integrated Report 2020

2019

2020

502,355
69,623(84,467)
28,415515,927

469,054
63,160(51,978)
6,716
486,952

CORPORATE PROFILE

Consolidated Statement of Comprehensive Income

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2019 and 2020

Millions of yen
2019

2020

361,622

312,029

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)
Remeasurements of defined benefit plans (Notes 22, 29)
Total of items that will not be reclassified to profit or loss

(2,484)(2,811)(5,295)(2,702)(5,957)(8,659)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

9,879
(391)
9,489

(170,711)
224(170,486)

4,194
365,816(179,145)
132,883

352,953
12,863365,816

131,965919
132,883

Profit for the period
Other comprehensive income

BUSINESS

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

VALUE CREATIONOther comprehensive income (loss), net of taxes
Comprehensive income (loss) for the period

SUSTAINABILITY
GOVERNANCE
FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020

117

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2019 and 2020

Consolidated Statement of Changes in Equity

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

As of January 1, 2019
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, 2019
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, 2020

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
—
—
—
—
—
—
—
—

(442,829)———(50,001)
361
—
—
—

1,547
—
—
—
—
(281)
290
—
—

(454,918)—
10,553
10,553
—
—
—
—
—

443
—
(391)
(391)
—
—
—
—
—

29,570—(2,486)(2,486)
—
—
—
—
—

—
—
—
—
100,000
—
—
—
—
—
—
—
—

—
—
—
—
736,400
—
—
—
—
—
—
—
—

—
—
—
(49,640)(492,469)
—
—
—
(1)
963
—
—
—

—
—
—
10
1,556
—
—
—
—
(334)
30
—
—

—
—
—
—
(444,366)—(170,009)(170,009)
—
—
—
—
—

—
—
(185)
(185)
(132)
—
224
224
—
—
—
—
—

—
(15,883)—(15,883)
11,201—(2,577)(2,577)
—
—
—
—
—

—
—
—
—
100,000————
736,400———
962(491,507)

—
—
—
(304)
1,252

—
—
—
—
(614,374)

—
—
30
30
122

—
(1,399)—(1,399)
7,224
Millions of yen

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

As of January 1, 2019
Profit for the period
Other comprehensive income (loss)

Comprehensive income (loss) for the period

Total

Retainedearnings

Total

Non-controllinginterests

Total equity—(423,357)

2,660,381

2,630,594

69,8512,700,445
361,622——

348,190

348,190

13,432(2,913)

4,763

—

4,763

(569)

4,194

(2,913)

4,763

348,190352,953

12,863365,816(50,001)

Acquisition of treasury shares (Note 23)

—

—

—

(50,001)—

Disposal of treasury shares (Note 23)

—

(281)

(80)

0

—

0

Share-based payments (Note 32)

—

290

(19)

271

47

319

Dividends (Note 24)——(270,936)(270,936)(2,051)(272,987)

Changes in the scope of consolidation
Changes in the ownership interest in a subsidiary without a lossof control

—

—

—

—

—

—

—

—

(1)

(1)

206

205

Transfer from other components of equity to retained earnings

2,913(12,971)

12,971———Other increase (decrease)

—
2,913
—
—
(5,927)(5,927)
—
—
—
—
—

(185)
(13,146)(431,741)—(178,289)(178,289)
—
(334)
30
—
—

—
(258,065)
2,750,506
310,253—
310,253—(629)
469(273,200)—(185)(320,851)
2,662,696
310,253(178,289)
131,965(1)0498(273,200)——(1,798)80,916
1,775
(857)
919
—
—
35
(1,276)8(185)(322,650)
2,743,611
312,029(179,145)
132,883(1)0533(274,476)
8

—
5,927
—
5,927
—

—
4,528
30
4,254
(605,776)

846(4,528)—(277,042)
2,783,718846—
30(271,826)
2,522,834(3,941)——(5,174)76,660(3,095)—30(277,000)
2,599,495

Total transactions with the owners
As of December 31, 2019
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, 2020

118

Remeasurementsof defined
benefit plans

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Consolidated Statement of Cash Flows

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2019 and 2020

Millions of yen(8,299)10,673(9,046)28,294(9,526)(21,864)
3,891
29,592(7,005)696,521
15,340(24,346)(147,105)
540,410(40,821)
21,554748
39,288(5,788)(29,996)(18,038)
9,762
49,132
649,305
14,589(19,549)(124,511)
519,833(45,401)
77,200(111,366)
15,863(22,004)(218)
409(40,127)—
2,073(123,571)(39,991)
49,802(85,319)
86,263(23,301)(491)
334(1,140)17,413
1,785
5,354(270,871)(1,913)358(44,976)—(11,568)
59,435—(14,294)(50,001)(1)0(333,832)
83,008282,063(7,913)357,158(273,134)(1,404)
117(132,462)
100,101(11,948)
122,201(80,000)(17,741)(1)(3,132)
0(297,404)
227,784
357,158(46,098)
538,844

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

420,063
179,654
12,571(7,318)22,535(4,042)

GOVERNANCE

465,232
183,852
16,124(7,944)27,557(5,011)SUSTAINABILITY

2020

BUSINESS2019

VALUE CREATIONCash flows from operating activities
Profit before income taxes
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(Increase) decrease in trade and other receivables(Increase) decrease in inventories
Increase (decrease) in trade and other payables
Increase (decrease) in retirement benefit liabilities(Increase) decrease in prepaid tobacco excise taxes
Increase (decrease) in tobacco excise tax payables
Increase (decrease) in consumption tax payables
Other
SubtotalInterest and dividends received
Interest paid
Income taxes paid
Net cash flows from operating activities
Cash flows from investing activities
Purchase of securities
Proceeds from sale and redemption of securities
Purchase of property, plant and equipment
Proceeds from sale of investment property
Purchase of intangible assets
Payments into time deposits
Proceeds from withdrawal of time deposits
Subsequent payments for past fiscal years' business combinations
Proceeds from sale of investments in associates
Other
Net cash flows from investing activities
Cash flows from financing activities
Dividends paid to owners of the parent company (Note 24)
Dividends paid to non-controlling interests
Capital contribution from non-controlling interests
Increase (decrease) in short-term borrowings and commercial paper (Note 31)
Proceeds from long-term borrowings (Note 31)
Repayments of long-term borrowings (Note 31)
Proceeds from issuance of bonds (Note 31)
Redemption of bonds (Note 31)
Repayments of lease liabilities (Note 31)
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)

119Notes to Consolidated Financial Statements
1. Reporting Entity

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2019 and 2020

In cases where the accounting policies applied by a subsidiary are
different from those applied by the Group, adjustments are made to

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 businesslocated in Japan since its incorporation. The addresses of thethe subsidiary’s financial statements, if necessary.
All intergroup balances, transactions, income and expenses
are eliminated on consolidation.
Comprehensive income for ­subsidiaries is attributed to owners ofCompany’s registered head office and principal business offices are

the parent company and non-controlling interests even if this results inavailable on the Company’s website (https://www.jt.com/).

the non-controlling interests having a deficit balance.

The details of businesses and principal business activities of
the Company and its subsidiaries (hereinafter referred to as the

B. Associates“Group”) are stated in “6. Operating Segments.”

An associate is an entity over which the Group has significant influ-

The Group’s consolidated financial statements for the year

ence. The Group has significant influence over the entity if it has theended December 31, 2020 were approved on March 24, 2021

power to participate in the financial and operating policy decisions ofby Masamichi Terabatake, President and Chief Executive Officer.

the investee but it does not have control or joint control over the

2. Basis of Preparation

investee. Investments in associates are accounted for using the equity
method from the date on which the Group has the significant influence
until the date on which it ceases to have the significant influence.

(1) Compliance with IFRSThe Group’s consolidated financial statements are prepared in accor-

C. Joint Arrangements

dance with International Financial Reporting Standards (hereinafter

A joint arrangement is a contractual arrangement in which two

referred to as “IFRS”)

or more parties have joint control. Depending upon the rights andobligations of the parties to the arrangement, the Group classifies(2) Basis of Measurementa joint arrangement into a joint operation whereby the Group has rights

Except for the financial instruments, stated in “3. Significant

to the assets and obligations for the liabilities relating to the arrange-

Accounting Policies,” and the accounting adjustments, stated in “37.

ment, and a joint venture whereby the Group has rights to the net

Hyperinflationary Accounting Adjustments,” the Group’s consolidated

assets of the arrangement only. The Group recognizes the assets,financial statements are prepared on the historical cost basis.

liabilities, revenues and expenses relating to its interest in a joint­operation while a joint venture is accounted for using the equity method.

(3) Functional Currency and Presentation Currency
The Group’s consolidated financial statements are presented in(2) Business Combination

Japanese yen, which is the functional currency of the Company.

Business combinations are accounted for using the acquisition

The units are in millions of yen, and figures less than one million

method. Consideration transferred in a business combination is mea-

yen are rounded to the nearest million yen.

sured as the sum of the acquisition-date fair value of the assets trans-

3. Significant Accounting Policies

ferred, the liabilities assumed and equity instruments issued by theCompany in exchange for control over an acquiree. Any excess of theconsideration of acquisition over the fair value of identifiable assets(1) Basis of Consolidationand liabilities is recognized as goodwill in the consolidated statement

The consolidated financial statements include financial statements ofof financial position. If the consideration of acquisition is lower thanthe Company and its subsidiaries, and interests in investments inthe fair value of the identifiable assets and liabilities, the difference isassociates and joint arrangements.

immediately recognized as profit in the consolidated statement ofincome. If the amount of initial accounting for a business combination

120

A. Subsidiaries

is not determined by the end of the reporting period in which the com-A subsidiary is an entity that is controlled by the Group and the Group

bination occurs, the provisional amounts for the items for which thehas control over the entity if it is exposed, or has rights, to variableaccounting is incomplete are reported and are adjusted during thereturns from its involvement with the investee and has the ability tomeasurement period, which is one year from the acquisition date.

affect those returns through its power over the investee. The acquisi-

Acquisition-related costs incurred are recognized as expenses. Thetion date of a subsidiary is the date on which the Group obtains control

additional acquisition of non-­controlling interests after obtaining con-of the subsidiary, and the subsidiary is included in the consolidation

trol is accounted for as a capital transaction. Any difference between

from the date of acquisition until the date on which the Groupthe amount by which the non-controlling interests are adjusted and theloses control.

fair value of the consideration paid or received is recognized directly inJapan Tobacco Inc. Integrated Report 2020

such transaction.

CORPORATE PROFILE

retained earnings and no goodwill is recognized with respect to

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(3) Foreign Currency Translationfor equity instruments held for trading purposes that must be

Consolidated financial statements of the Group are presented in­measured at fair value through profit or loss. Such designations are

Japanese yen, which is the functional currency of the Company. Eachapplied consistently.

­measures transactions based on it.
Foreign currency transactions are translated into the functional

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 at fairvalue through profit or loss.

tions or an approximation of the rate. Monetary assets and liabilities(ii) Subsequent Measurement

denominated in foreign currencies are translated into the functional

After initial recognition, financial assets are measured based on thecurrency at the rates of exchange prevailing at year end. Differences

following classifications:arising from the translation and settlement are recognized as profit or(a) Financial Assets Measured at Amortized Cost

loss. However, exchange differences arising from the translation of

Financial assets measured at amortized cost are measured atfinancial instruments designated as hedging instruments for net­amortized cost using the effective interest method.

investment in foreign operations (foreign subsidiaries), financial assets(b) Other Financial Assets

measured at fair value through other comprehensive income, and cash

Financial assets other than those measured at amortized cost areflow hedges are recognized as other comprehensive income.

measured at fair value.

Japanese yen at the rates of exchange prevailing at year end, while
income and expenses of foreign operations are translated into

Changes in the fair value of financial assets measured at fair value
are recognized as profit or loss.
However, changes in the fair value of equity instruments
income are recognized as other comprehensive income and thedifferences are recognized as other comprehensive income. However,amount in other comprehensive income is transferred to retained

the income and expenses of the Group's subsidiaries in the hyperinfla-

earnings when equity instruments are derecognized or the decline intionary economy are translated into Japanese yen at the rates of

its fair value compared to its acquisition cost is significant. Dividends

exchange prevailing at the fiscal year end date in accordance with theon the financial assets are recognized in profit or loss for the year.

hyperinflationary accounting. In cases where foreign operations are(iii) Derecognition

disposed of, the cumulative amount of translation differences related

Financial assets are derecognized when the rights to receive ­benefits

to the foreign operations is recognized as profit or loss in the period

from them expire or are transferred, or when substantially all the risksof disposition.

and rewards of the ownership are transferred.

(4) Financial Instruments

B. Impairment of Financial Assets

A. Financial Assets

With respect to financial assets measured at amortized cost, the(i) Initial Recognition and Measurement

Group recognizes an allowance for doubtful accounts for expected

Financial assets are classified into financial assets measured at faircredit losses. The expected credit losses are calculated based onvalue through profit or loss, fair value through other comprehensive

historical loss experience or future recoverable amounts.

at initial recognition.
Financial assets are classified as financial assets measured

An allowance for doubtful accounts for trade receivables is always
recognized in an amount equal to the full lifetime expected credit
losses. In principle, with respect to financial assets except for tradereceivables, an allowance for doubtful accounts is measured at an

Otherwise, they are classified as financial assets measured at

amount equal to the 12-month expected credit losses. However, thefair value.

allowance for doubtful accounts is measured at an amount equal to• The asset is held within a business model whose objective is to holdthe full lifetime expected credit losses if a credit risk on the financial

FINANCIAL INFORMATION/OTHERS

at amortized cost if both of the following conditions are met.

assets in order to collect contractual cash flows

GOVERNANCE­designated as measured at fair value through other comprehensive

SUSTAINABILITY

Japanese yen at the rates of exchange prevailing at the dates of­transactions or an approximation of the rate. The resulting translation

income, and amortized cost. The Group determines the classification

BUSINESS

currency at the rates of exchange prevailing at the dates of transac-

The assets and liabilities of foreign operations are translated into

VALUE CREATION

company in the Group specifies its own functional currency andasset has increased significantly since initial recognition.

• The contractual terms of the financial asset give rise on specified

The Group assesses whether a credit risk on a financial asset has

dates to cash flows that are solely payments of principal andincreased significantly based on a change of the default risk considering­interest on the principal amount outstanding

past due information, financial difficulties of obligors or downgradesof the internal credit rating.

Japan Tobacco Inc. Integrated Report 2020

121

The Group assesses a whole or part of the financial asset which isdeemed extremely difficult to be collected as a default and recognizes

E. Derivatives and Hedge Accounting
The Group utilizes derivatives, including forward foreign exchange

it as a credit-impaired financial asset. If the Group reasonably deter-

contracts and interest rate swap contracts, to hedge foreign exchange

mines that a whole or part of the financial asset is uncollectible, theand interest rate risks. These derivatives are initially ­measured at faircarrying amounts of financial assets are written-off directly.

value when the contract is entered into, and are subsequently remea-

The expected credit losses on trade receivables which are notsured at fair value. Changes in the fair value of derivatives are recog-

assessed as credit-impaired financial assets are measured collectively by

nized as profit or loss in the consolidated statement of income.

an asset group consisting of a number of homogeneous counterparties.

However, the gains or losses on the hedging instrument relating to theAn allowance for doubtful accounts for financial assets is recog-

effective portion of cash flow hedges and hedges of net investment in

nized in profit or loss. If an event which causes a reduction in theforeign operations are recognized as other comprehensive income inallowance for doubtful accounts occurs, a reversal of an allowance forthe consolidated statement of comprehensive income.

doubtful accounts is recognized in profit or loss.

At the inception of the hedge, the Group formally designatesand documents the hedging relationship to which hedge accounting is

C. Financial Liabilities

applied and the objectives and strategies of risk management for(i) Initial Recognition and Measurement

undertaking the hedge. The documentation includes identification

Financial liabilities are classified into financial liabilities measured at fairof the hedging instruments, the hedged items, the nature of the risks

value through profit or loss and financial liabilities measured at amor-

being hedged and how the hedging relationship’s effectiveness istized cost. The Group determines the classification at initial recognition.

assessed. These hedges are assessed on an ongoing basis to deter-

All financial liabilities are measured at fair value at initial recog­

mine whether the hedging relationship is effective prospectively, evennition. However, financial liabilities measured at amortized costthough it is expected that there is an economic relationship between

are measured at cost after deducting transaction costs that are

the hedged item and the hedging instrument, that the effect of credit

directly attributable to the financial liabilities.

risk does not dominate the value changes that result from that eco-(ii) Subsequent Measurement

nomic relationship, and that the hedge ratio of the hedging relationship

After initial recognition, financial liabilities are measured based on theis the same as that resulting from the quantity of the hedged item that

following classifications:

the Group actually hedges and the quantity of the hedging instrument(a) Financial Liabilities Measured at Fair Value through Profit or Lossthat the Group actually uses to hedge that quantity of the hedged item.

Financial liabilities measured at fair value through profit or loss include

If a hedging relationship ceases to meet the hedge effectivenessfinancial liabilities held for trading and financial liabilities designated as

requirement relating to the hedge ratio due to changes in an economic

measured at fair value through profit or loss at initial recognition.

relationship between the hedged item and the hedging instrument but(b) Financial Liabilities Measured at Amortized Cost

the risk management objective remains the same, the Group would

After initial recognition, financial liabilities measured at amortized costadjust the hedge ratio so that it meets the qualifying criteria again. The

are measured at amortized cost using the effective interest method.

Group discontinues hedge accounting for the portion that does not

Amortization under the effective interest method and gains or losses

meet the requirement when the hedging relationship ceases to meeton derecognition are recognized as profit or loss in the consolidated

the qualifying criteria even after adjusting the hedge ratio.

statement of income.
After initial recognition, financial guarantee contracts are ­measured

Hedges that meet the stringent requirements for hedge accounting
are classified in the following categories and accounted for inat the higher of:­accordance with IFRS 9 “Financial Instruments.”• The amount of an allowance for doubtful accounts calculated in(i) Fair Value Hedge

accordance with “B Impairment of Financial Assets” above, andThe gain or loss on the hedging instrument is recognized as profit• The amount initially measured less cumulative revenue recognized inor loss in the consolidated statement of income. However, changes inaccordance with IFRS 15 “Revenue from Contracts with Customers.”

the fair value of the hedging instrument are recognized as other com-(iii) Derecognitionprehensive income in the consolidated statement of comprehensive

Financial liabilities are derecognized when the obligation is ­discharged,

income if the hedging instrument hedges an equity instrument desig-

canceled or expired.

nated as at fair value through other comprehensive income. Regarding
the hedging gain or loss on the hedged item, the carrying amount of

D. Offsetting of Financial Instruments

the hedged item is adjusted and the change is recognized as profit or

Financial assets and financial liabilities are offset and presented

loss in the consolidated statement of income. However, changes in theas a net amount in the consolidated statement of financial position

fair value of an equity instrument which the Group elected to present

only when there is a legally enforceable right to set off the recognizedin other comprehensive income are recognized as other comprehen-amounts and the Group intends either to settle on a net basis or tosive income.

realize the asset and settle the liability simultaneously.

122

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE(ii) Cash Flow Hedge

Leaf tobacco which is stored for more than 12 months before

The effective portion of gains or losses on hedging instruments isbeing used for production is included in current assets since it is held

recognized as other comprehensive income in the consolidated

within the normal operating cycle.

­statement of comprehensive income, while the ineffective portionis recognized immediately as profit or loss in the consolidated(7) Property, Plant and Equipment­statement of income.

Property, plant and equipment is measured by using the cost modeland is stated at cost less accumulated depreciation and accumulated
impairment losses.

transactions of the hedged items affect profit or loss. In cases where

The acquisition cost includes any costs directly attributable to thehedged items result in the recognition of non-financial assets or liabili-acquisition of the asset and dismantlement, removal and restorationties, the amounts recognized as other comprehensive income arecosts, as well as borrowing costs eligible for capitalization.

accounted for as adjustments to the original carrying amount of­non-financial assets or liabilities.
If the hedged future cash flows are no longer expected to occur,

Except for assets that are not subject to depreciation such as land,
assets are depreciated using the straight-line method over their estimated useful lives. The estimated useful lives of major asset items are

any related cumulative gain or loss that has been recognized in equity

as follows:

as other comprehensive income is reclassified to profit or loss. If the• Buildings and structures: 38 to 50 years

hedged future cash flows are still expected to occur, amounts that

• Machinery and vehicles:

be recognized in other comprehensive income until the future cash

10 to 15 years
BUSINESS

have been recognized in other comprehensive income are continued to

VALUE CREATION

The amounts of hedging instruments recognized in other­comprehensive income are reclassified to profit or loss when the

The estimated useful lives and depreciation method are reviewed
at each year end and if there are any changes made to the estimatedflows occur.

useful lives and depreciation method, such changes are applied(iii) Hedge of Net Investment in Foreign Operations­prospectively as changes in estimate.

Translation differences resulting from the hedge of net investment inforeign operations are accounted for similarly to a cash flow hedge.

(8) Goodwill and Intangible Assets

The effective portion of gains or losses on hedging instruments is

A. Goodwill

recognized as other comprehensive income in the ­consolidated

Goodwill is stated at acquisition cost less accumulated impairment losses.
Goodwill is not amortized. It is allocated to cash-generating units thatrecognized as profit or loss in the consolidated statement of income.

are identified according to locations and types of businesses and tested

At the time of the disposal of the foreign operations, any related

for impairment annually or whenever there is any indication of impairment.

­cumulative gain or loss that has been recognized in equity as other

Impairment losses on goodwill are recognized in the consolidated

comprehensive income is reclassified to profit or loss.

­statement of income and no subsequent reversal is made.

F. Fair Value of Financial Instruments

B. Intangible Assets

Fair value of financial instruments that are traded in active financial

Intangible assets are measured by using the cost model and aremarkets at year end refers to quoted prices or dealer quotations.

stated at cost less accumulated amortization and accumulated

If there is no active market, fair value of financial instruments isdetermined using appropriate valuation models.

SUSTAINABILITY­statement of comprehensive income, while the ineffective portion is

impairment losses.
Intangible assets acquired separately are measured at cost at
GOVERNANCE

the initial recognition, and the costs of intangible assets acquired(5) Cash and Cash Equivalents

through business combinations are recognized at fair value at the

Cash and cash equivalents consist of cash on hand, demand deposits,

acquisition date. Expenditures on internally generated intangible

and short-term investments that are readily convertible to known

assets are recognized as expense in the period when incurred, except

amounts of cash and subject to insignificant risk of change in value andfor development expenses that satisfy the capitalization criteria.

due within three months from the date of acquisition.

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 cost of inventories includes all costs of purchase, costs of

The estimated useful lives and amortization method of intangible­conversion and other costs incurred in bringing the inventories to theirassets with finite useful lives are reviewed at each year end, and thepresent location and condition.

effect of any changes in estimate would be accounted for on

Inventories are measured at the lower of cost or net realizable value,
and the costs are determined by using the weighted-average method.

FINANCIAL INFORMATION/OTHERS(6) Inventoriesa ­prospective basis.
The estimated useful lives of major intangible assets with finite

Net realizable value is determined as the estimated selling price in theuseful lives are as follows:

ordinary course of business less the estimated costs of completion• Trademarks: 10 to 20 years

and estimated costs necessary to make the sale.

• Software:

5 years

Japan Tobacco Inc. Integrated Report 2020123

Intangible assets with indefinite useful lives and intangibleusing pretax discount rates that reflect current market assessments ofassets that are not ready to use are not amortized, but they are tested

the time value of money and the risks specific to the asset. In determining

for impairment individually or by cash-generating unit ­annually or

the fair value less costs of disposal, the Group uses an appropriate

whenever there is any indication of impairment.

valuation model supported by available fair value indicators.

(9) Leases

ment loss recognized in prior years for an asset other than goodwill

At inception of a contract, the Group assesses whether the contract is,may no longer exist or may have decreased, such as any changes inor contains, a lease if the contract conveys the right to control the use

assumptions used for the determination of the recoverable amount. Ifof an identified asset for a period of time in exchange for consider-

any such indication exists, the recoverable amount of the asset oration. The Group elects not to recognize right-of-use assets and leasecash-generating unit is estimated. In cases that the recoverable

liabilities for short-term leases within 12 months and leases ofamount exceeds the carrying amount of the asset or cash-generating­low-value assets.

unit, impairment losses are reversed up to the lower of the estimated

The Group assesses whether there is any indication that an impair-

If a contract is, or contains, a lease, except for short-term leases

recoverable amount or the carrying amount (net of depreciation) thatand leases of low-value assets, the Group recognizes right-of-use

would have been determined if no impairment losses had beenassets and lease liabilities on the consolidated statement of financial­recognized in prior years.

position at the commencement date. The Group recognizes the lease
payments associated with short-term leases and leases of low-value(12) Non-current Assets Held for Sale

assets as an expense on a straight-line basis over the lease term.

An asset or asset group for which the value is expected to be recov-

Right-of-use asset is measured by using the cost model and isered through a sales transaction rather than through continuing use isstated at cost less accumulated depreciation and accumulatedclassified into a non-current asset or disposal group held for sale

­impairment losses.

when the following conditions are met: it is highly probable that theAn acquisition cost of a right-of-use asset includes the amount ofasset or asset group will be sold within one year, the asset or asset

the initial measurement of the lease liability, any lease payments madegroup is available for immediate sale in its present condition, and theat or before the commencement date, and any initial direct costs. The

Group management commits to the sale plan. In such cases, theright-of-use asset is depreciated using the straight-line method over its

non-current asset is not depreciated or amortized and is measured at

estimated useful life or lease term, whichever is shorter. The lease

the lower of its carrying amount or its fair value less costs of disposal.

liability is initially measured at the present value of the lease paymentthat is not paid at the commencement date. The lease payments are(13) Post-employment Benefits

apportioned between the financial cost and the reduction in the lease

The Group sponsors defined benefit plans and defined contribution

liability based on the effective interest method. The financial costs areplans as employee retirement benefit plans.

recognized in the consolidated statement of income.

The Company is obligated to bear pension expenses for a mutual
assistance association incurred with respect to services in or before(10) Investment Property

June 1956 (prior to the enforcement of the Act on the Mutual Aid

Investment property is property held to earn rentals or for capital

Association of Public Corporation Employees). Such obligations areappreciation or both.

calculated and included in liabilities related to the retirement benefits.

Investment property is measured by using the cost model and is

For each plan, the Group calculates the present value of definedstated at cost less accumulated depreciation and accumulated

benefit obligations, related current service cost and past service cost

­impairment losses.

using the projected unit credit method. For a discount rate, a discountperiod is determined based on the period until the expected date of(11) Impairment of Non-financial Assets

benefit payment in each year, and the d­ iscount rate is determined by

The Group assesses for each year whether there is any indication thatreference to market yields for the period corresponding to the discountan asset may be impaired. If any such indication exists, or in cases

period at the end of the year on high quality corporate bonds orwhere the impairment test is required to be performed each year, the­government bonds. Liabilities or assets for defined benefit plans arerecoverable amount of the asset is estimated. In cases that the recov-

calculated by the present value of the defined benefit obligation,

erable amount cannot be estimated for each asset, it is estimated bydeducting the fair value of any plan assets (including adjustments forthe cash-generating unit to which the asset belongs. The recoverable

the asset ceiling for defined benefit plans and minimum funding

amount of an asset or a cash-generating unit is determined at therequirements, if necessary). Expected interest costs and interest

higher of its fair value less costs of disposal or its value in use. If theincome are recognized as financial costs.

carrying amount of the asset or cash-generating unit exceeds the124

Remeasurements of defined benefit plans are recognized in full as­recoverable amount, impairment losses are recognized and the carrying

other comprehensive income in the period when they are incurred andamount is reduced to the recoverable amount. In determining the valuetransferred to retained earnings immediately. Past service costs arein use, estimated future cash flows are discounted to the present value,

recognized as profit or loss in the period when incurred.

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

The cost for retirement benefits for defined contribution plans is
recognized as an expense at the time of contribution.

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

The Group has a share option plan and a restricted stock remuneration

expenditures arising from the restructuring, which meet both of theplan as an equity-settled share-based payment plan. Share options arefollowing criteria:

estimated at fair value at the grant date and are recognized as an• necessarily entailed by the restructuring;

expense over the vesting period in the consolidated statement of• not associated with the ongoing activities of the entity.

VALUE CREATION(14) Share-based Payments

income after considering the number of share options that are expected
to be eventually vested. The corresponding amount is recognized as(16) Revenue

an increase in equity in the consolidated statement of financial posi-

A. Revenue from Contracts with Customers

tion. Restricted stock remuneration is estimated at fair value at the

Revenue is recognized based on the following five-step approach.

grant date and is recognized as an expense from the grant date overthe vesting period in the consolidated statement of income, and theStep 1: Identify the contract with a customer

corresponding amount is recognized as an increase in equity in the

Step 2: Identify the performance obligations in the contract

consolidated statement of financial position.

Step 3: Determine the transaction price

The Group has a performance share unit plan as a share-based
accounted as a cash-settled share-based payment transaction if, andto the extent that, the entity has incurred a liability to settle in cash or

Step 4: Allocate the transaction price to the performance obligations in
the contract

BUSINESS

payment plan with cash alternatives. Performance share units are

Step 5: Recognize revenue when the entity satisfies a performanceobligation

other assets, or as an equity-settled share-based payment transaction
The Group mainly engages in the sale of tobacco products, prescrip-

as an equity-settled share-based payment transaction is estimated attion drugs, and processed foods. Revenue is recognized upon delivery

fair value of granted shares of the Company and is recognized as anof the products because the customer obtains control of the products

expense over the vesting period in the consolidated statement of

upon delivery, by which the Group evaluates that the performance

income, and the corresponding amount is recognized as an increase in

obligation is satisfied. Revenue is measured at the consideration

equity in the consolidated statement of financial position. As for a

promised in a contract with a customer, less discounts, rebates andportion as a cash-settled share-based payment transaction, the ser-taxes, including consumption tax.

vices received and liability incurred are estimated at fair value of the

SUSTAINABILITY

if, and to the extent that, no such liability has been incurred. A portion

The tobacco excise taxes and other transactions in which the Group isliability and are recognized as an expense over the vesting period in

involved as an agency are excluded from revenue. The amount after

the consolidated statement of income, and the corresponding amountdeducting the tobacco excise taxes and other transactions is presented as

is recognized as an increase in liability in the consolidated statement“Revenue” in the consolidated statement of income.

of financial position.
The fair value of the liability is remeasured at the end of reporting
period and at the date of settlement with any changes in fair value

B. Interest Income
Interest income is recognized using the effective interest rate method.

recognized in profit or loss.
Dividend income is recognized when the shareholders’ right to receive

The Group has present obligations (legal or constructive) resulting

payment is established.

GOVERNANCE

C. Dividend Income(15) Provisions
from past events and recognizes provisions when it is probable thatthe obligations are required to be settled and the amount of the(17) Government Grants­obligations can be estimated reliably.

Government grants are recognized at fair value when there is a reason-

Where the effect of the time value of money is material, the amountof provisions is measured at the present value of the expendituresable 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 expensepresent value, the Group uses the pretax discount rate reflecting cur-items, they are recognized in profit or loss on a systematic basis overrent market assessments of the time value of money and the risks

the period in which the related costs for which the grants are intended

specific to the liability.

to compensate are recognized. With regard to government grants for

In accordance with IAS 37 “Provisions, Contingent Liabilities andContingent Assets,” the Group recognizes a provision for restructuring

FINANCIAL INFORMATION/OTHERS

expected to be required to settle the obligations. In calculating theassets, the amount of the grants is deducted from the acquisition costof the assets.

Japan Tobacco Inc. Integrated Report 2020125

(18) Borrowing Costs(20) Treasury SharesWith respect to assets that necessarily take a substantial period

Treasury shares are recognized at cost and deducted from equity.

of time to get ready for their intended use or sale, the borrowing costs

No gain or loss is recognized on the purchase, sale or cancellationthat are directly attributable to the acquisition, construction or produc-of the treasury shares. Any difference between the carrying amounttion of the assets are capitalized as part of the acquisition cost of theand the consideration paid is recognized in capital surplus.

assets. Other borrowing costs are recognized as an expense in the
period when they are incurred.

(21) Earnings per Share
Basic earnings per share are calculated by dividing profit or loss(19) Income Taxes­attributable to ordinary shareholders of the parent company by the

Income taxes in the consolidated statement of income are presented

weighted-average number of ordinary shares outstanding during theas the total of current income taxes and deferred income taxes.

year, adjusted by the number of treasury shares. Diluted earnings per

Current income taxes are measured at the amount that is expected
to be paid to or refunded from the taxation authorities. For the calcula-share are calculated by adjusting the effects of dilutive potential­ordinary shares.

tion of the tax amount, the Group uses the tax rates and tax laws thathave been enacted or substantively enacted by the end of the year.

(22) Dividends

The current income taxes are recognized in profit or loss, except for

Dividend distributions to the shareholders of the Company are recog-

taxes arising from items that are recognized in other comprehensive

nized as liabilities in the period in which, for year end dividends, theincome or directly in equity and taxes arising from business combinations.

Annual Shareholders’ Meeting approves the distribution and, forDeferred income taxes are calculated based on the temporaryinterim dividends, the Board of Directors approves the distribution.

differences between the tax base for assets and liabilities and thecarrying amount at year end. Deferred tax assets are recognized for(23) Contingencies

deductible temporary differences, carryforward of unused tax credits

A. Contingent Liabilities

and unused tax losses to the extent that it is probable that future

The Group discloses contingent liabilities in the notes to consolidated

taxable profit will be available against which they can be utilized.

financial statements if it has possible obligations at year end, whose

Deferred tax liabilities are recognized for ­taxable temporary differences.

existence cannot be confirmed at that date, or if the obligations do not

The deferred tax assets or liabilities are not recognized for themeet the recognition criteria of a provision described in “20. Provisions.”

following temporary differences:• the initial recognition of goodwill

B. Contingent Assets• the initial recognition of assets or liabilities in transactions that are

The Group discloses contingent assets in the notes to consolidated

not business combinations and at the time of transaction, affectfinancial statements if an inflow of future economic benefits to theneither accounting profit nor taxable profit or tax loss

Group is probable, but not virtually certain at year end.

• deductible temporary differences arising from investments in subsidiaries and associates, and interests in joint ventures to the extent(24) Adjusted Financial Measuresthat it is probable that the timing of the reversal of the temporary

The adjusted financial measures are calculated by adding certain

difference in the foreseeable future and it is not probable that futureadjustment items to the non-adjusted financial data or by deducting

taxable profits will be available against which they can be utilized

the items from the non-adjusted financial data.

• taxable temporary differences arising from investments in subsidiar-

The adjustment items are determined by management’s judgment,

ies and associates, and interests in joint ventures to the extent thattaking into consideration the nature and frequency of the income andthe timing of the reversal of the temporary difference is controlled

costs such that they provide effective comparative information on theand that it is probable the temporary difference will not reverse inGroup performance and that they reflect the way of managing our

the foreseeable future.

business appropriately. Adjusted financial measures are presented inDeferred tax assets and liabilities are measured at the tax rates

the consolidated statement of income and “6. Operating Segments.”

that are expected to apply to the year when the asset is realized or theliability is settled, based on tax rates that have been enacted or­substantively enacted by year end.
Assets and liabilities are recognized as estimated amounts if
uncertain tax position of income taxes arising from interpretation of
tax laws and regulations is probable.
The Company and certain subsidiaries apply for the consolidated
taxation system.

126

Japan Tobacco Inc. Integrated Report 2020

The adjusted financial measures are not defined under IFRS and are
not comparable with equivalent indicators for other entities.

estimates and judgments made by management. However, there is

The Group has adopted the following new accounting standards,a ­possibility that these assumptions will be affected by changes inamended standards and new interpretations from the year ended­uncertain future economic conditions, which may have a material impact

December 31, 2020.

on the consolidated financial statements in future periods.

IFRS

Description of new standards and amendments

Business
Combinations

Amendments to definition of “business”

IFRS
16

LeasesAmendments to permit a practical expedient for COVID-19-related rent concessions

The adoption of the above standards and interpretations does nothave a material impact on the consolidated financial statements.

The method for calculating the recoverable amount is described in “13.
Property, Plant and Equipment,” “14. Goodwill and Intangible Assets” and“16. Investment Property.” With regard to goodwill, the sensitivity analysis is

VALUE CREATIONIFRS3CORPORATE PROFILE(Changes in Accounting Policies)

described in “14. Goodwill and Intangible Assets.”
B. Post-employment Benefits
The Group has various types of retirement benefit plans, includingPart of the consolidated financial statements for the year ended

defined benefit plans. In addition, the mutual pension benefits plan ofDecember 31, 2019 has been reclassified to conform with the presen-

the Company is one of the public pension systems under the jurisdic-

tation for the year ended December 31, 2020.

tion of the government of Japan and the Company is legally obligatedto 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
BUSINESS

4. S
 ignificant Accounting Estimatesand Judgments

assumptions. These actuarial assumptions make use of estimates
Preparation of consolidated financial statements of the Group requires

and judgments on a number of variables, including discount rates andmanagement estimates and assumptions in order to ­measure income,inflation rate.

expenses, assets and liabilities, and disclose ­contingencies as of the

The Group obtains advice from external pension actuaries withyear end. These estimates and assumptions are based on the best

respect to the appropriateness of their actuarial assumptions including

judgment of management in light of historical experience and various

the aforementioned variables.

factors deemed to be reasonable as of the year end. Given their nature,

The actuarial assumptions are determined based on the best estimates and judgments made by management. However, there is a pos-

The estimates and assumptions are continuously reviewed bysibility that these assumptions will be affected by changes in uncertain

management. The effects of a change in estimates and assumptions

future economic conditions, or by the publication or amendment ofare recognized in the period of the change or the period of the change

related laws, which may have a material impact on the consolidated

and future periods.

financial statements in future periods.

Among the above estimates and assumptions, the following are
items that may have a material effect on the amounts recognized in

SUSTAINABILITY

actual results may differ from those estimates and assumptions.

These actuarial assumptions and the related sensitivity analysis
are described in “22. Employee Benefits.”

the consolidated financial statements of the Group:
C. Provisions
A. I mpairment of Property, Plant and Equipment, Goodwill, Intangible
Assets and Investment Properties
With regard to property, plant and equipment, goodwill, intangible

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 best estimates of therecoverable amount has declined below the carrying amount, theexpenditure required to settle the obligations, taking into account theGroup performs an impairment test.

pertinent risks and uncertainties which exist at the year-end for

Such indications include, but are not limited to significant changes
with adverse effect on the results of past or projected business perfor-

those obligations.
Expenditures required to settle the obligations are calculated

business strategy, and significant deteriorations in industry or eco-

may be affected by the occurrence of unexpected events or changes

nomic trends. With regard to goodwill, an impairment test is con-in conditions which may have a material impact on the consolidated

ducted at least once a year, regardless of whether there are any

financial statements in future periods.

An impairment test is performed by comparing the carrying amount to

FINANCIAL INFORMATION/OTHERS

mance, significant changes in the use of acquired assets or in overall

by taking possible results into account comprehensively; however, they

indicators of impairment.

GOVERNANCE

assets and investment properties, if there is any indication that the

The nature and amount of recognized provisions are describedin “20. Provisions.”

the recoverable amount of the asset under assessment. If the recoverable
amount is below the carrying amount, impairment losses are recognized.

D. Income Taxes

The recoverable amount is calculated based primarily on a discounted

The Group operates business activities around the world, and it recog-

cash flow model. Certain assumptions must be made for the useful lives

nizes current tax liabilities and income taxes as the estimatedand future cash flows of the assets, the applicable discount rates as wellamounts to be paid to the tax authorities, based on the estimation in

as long-term growth rates. These assumptions are based on the best

accordance with their laws and regulations.
Japan Tobacco Inc. Integrated Report 2020127

Calculating current tax liabilities and income taxes requires esti-

evidence as of the year end and by taking into account the probability ofmates and judgment on various factors, including the interpretation oftax regulations by taxable entities and the tax authority in the jurisdictionor the experience of past tax audits.

these contingencies and their impact on financial reporting.
The content of contingencies is described in “38. Contingencies.”
The spread of COVID-19 has affected the Group businesses in the

Therefore, there may be differences between the amountcurrent fiscal year, causing a decrease in duty-free sales in the tobaccor­ecognized as tax liabilities and income taxes and the amount of actual

business and changes in consumer trends in the Domestic Tobacco

tax liabilities and income taxes. These differences may have a material

Business and the Processed Food Business.

impact on the consolidated financial statements in future periods.

The Group anticipates that although the impact of the spread of

In addition, deferred tax assets are recognized to the extent that it

COVID-19 will continue to certain extent from 2021 onward, the econo-

is probable that taxable income will be available against which deductible

mies of countries around the world will gradually recover. At present,

temporary differences can be utilized.

there is no material impact on accounting estimates and judgements.

In recognizing the deferred tax assets, when judging the possibilityof the future taxable income, we reasonably estimate the timing andamount of future taxable income based on the business plan.

5. N ew Accounting Standards Not Yet Adopted by
the Group

The timing when taxable income arises and the amount of suchincome may be affected by changes in uncertain future economic

By the date of approval of the consolidated financial statements, newconditions. Therefore, this may have a material impact on the consoli-

accounting standards, amended standards and new interpre­tations

dated financial statements in future periods.

that have been issued, but have not been early adopted by the GroupThe content and amount related to income taxes are described in“17. Income Taxes.”

are as follows.
The implications from adoption of these standards and interpretations
are assessed by the Group; however, we evaluate that none of them will

E. Contingencies

have a material impact on our operating results and financial condition.

With regard to contingencies, any items that may have a material
impact on business in the future are disclosed in light of all the available
Mandatory adoption(From the year
beginning)

IFRS

To be adopted
by the Group

Description of new standards and amendments

IFRS 1First-time Adoption of International
Financial Reporting Standards

January 1, 2022

Year ending
December 2022

Amendments to accounting treatment for measurement of­cumulative translation differences if a subsidiary becomesa ­first-time adopter of IFRS later than its parent

IFRS 3Business Combinations

January 1, 2022

Year ending
December 2022

Amendments to update references to the conceptual framework

IFRS 4

Insurance Contracts

January 1, 2021

Year ending
December 2021

Amendments to replace an existing interest rate benchmark withan alternative benchmark rate

IFRS 7

Financial Instruments Disclosures

January 1, 2021

Year ending
December 2021

Amendments to replace an existing interest rate benchmark withan alternative benchmark rate

IFRS 9Financial Instruments

January 1, 2021

Year ending
December 2021

Amendments to replace an existing interest rate benchmark withan alternative benchmark rate

January 1, 2022

Year ending
December 2022

Clarifying fees and costs to be included in the 10 per cent test for
derecognition of financial liabilities

IFRS 16

LeasesJanuary 1, 2021

Year ending
December 2021

Amendments to replace an existing interest rate benchmark withan alternative benchmark rate

IFRS 17

Insurance Contracts

January 1, 2023

Year ending
December 2023

Amendments to accounting treatment for insurance contracts

IAS 1

Presentation of Financial Statements

January 1, 2023

Year ending
December 2023

Clarifying classification of liabilities into current liabilities or
non-current liabilities
Amendments to require companies to disclose their material
accounting policy information rather than their significant
accounting policies

128

IAS 8

Accounting Policies, Changes in
Accounting Estimates and Errors

January 1, 2023

Year ending
December 2023

Amendments to clarify how companies should distinguish changes inaccounting policies from changes in accounting estimates

IAS 16

Property, Plant and Equipment

January 1, 2022

Year ending
December 2022

Amendments to accounting treatment regarding proceeds fromselling items produced while bringing the asset to the condition to
be capable of operating in the manner intended

IAS 37

Provisions, Contingent Liabilities andContingent Assets

January 1, 2022

Year ending
December 2022

Clarifying the cost of fulfilling a contract for the purpose of
assessing whether the contract is onerous

IAS 39Financial Instruments Recognition
and Measurement

January 1, 2021

Year ending
December 2021

Amendments to replace an existing interest rate benchmark withan alternative benchmark rate

IAS 41Agriculture

January 1, 2022

Year ending
December 2022

Removal of the requirement to use pre-tax exclude taxation cash
flows when measuring the fair value of a biological assets

IFRS 10
IAS 28

Sale or Contribution of Assets
between an Investor and its
Associate or Joint Venture

Not yet determined

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

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

6. Operating Segments

and markets in China, Hong Kong, and Macau where the Company’s
China Division operates). The “International Tobacco Business” manufactures and sells tobacco products overseas mainly through JT

The reportable segments of the Group are determined based on

International S.A., which controls manufacturing and sales operations.

the operating segments that are components of the Group for which

The “Pharmaceutical Business” consists of research and development,

separate financial information is available and are evaluated regularly

and the manufacture and sale of prescription drugs. The “Processedby the Board of Directors in deciding how to allocate resources and in

Food Business” consists of the manufacture and sale of frozen andassessing performance.

ambient processed foods, bakery products and seasonings.

VALUE CREATION(1) Outline of Reportable Segments

The Group is mainly engaged in the manufacture and sale oftobacco products, prescription drugs and processed foods. With

(2) Revenues and Performances of Reportable Segments

respect to tobacco products, operations are managed separately

Revenues and performances of reportable segments are as follows.

for domestic and overseas markets. The reportable segments of

The Board of Directors assesses segment performance and deter-

the Group are composed of four segments: “Domestic Tobacco

mines resource allocation after reviewing revenues and adjusted oper-

Business,” “International Tobacco Business,” “Pharmaceuticalating profit. Since financial income, financial costs and income taxes

Business,” and “Processed Food Business.” They are determined by theare managed by the Group head office, these income and expense

type of products sold, their characteristics, and their markets.

categories are excluded from segmental performance. Transactions

The “Domestic Tobacco Business” manufactures and sells tobacco

within segments are primarily based upon prevailing market prices.
BUSINESS

products in domestic areas (which include duty-free shops in Japan.

Year ended December 31, 2019
Millions of yen
Reportable Segments
Domestic
TobaccoInternational
TobaccoPharmaceuticals

Processed
Food

Total

Other (Note 2)

611,494

1,310,877

88,528

158,586

2,169,485

7,270

27,626—

1

34,897618,764

1,338,503

88,528

158,587

187,180

340,752

15,943

Depreciation and amortization (Note 3)

59,276108,378

Impairment losses on other thanfinancial assets

7,751

Reversal of impairment losses
on other than financial assets—

Elimination

Consolidated

6,140

—

2,175,626

7,333(42,229)—2,204,382

13,473(42,229)

2,175,626

5,432

549,308(33,478)97515,927

5,936

7,586

181,176

2,909

(233)

183,852

5,765

1,471

220

15,207917—

16,124

91

—

—

91

—

—

91

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

SUSTAINABILITY

Intersegment revenue

Other items

Capital expenditures (Note 4)

16

4,863

—

10

4,889

122

—

5,011

34,79378,295

6,979

6,142

126,209

5,609

(383)

131,434

GOVERNANCE

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

FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020129

Year ended December 31, 2020
Millions of yen
Reportable Segments
Domestic
TobaccoInternational
TobaccoPharmaceuticals

Processed
Food

Total

Other (Note 2)

555,568

1,306,233

78,957

149,3292,090,087

7,674

24,606—1

32,282563,242

1,330,839

78,957

149,330

168,069

340,867

17,161Elimination

Consolidated

2,474

—

2,092,561

5,317(37,599)—

2,122,369

7,791(37,599) 2,092,561(793)

525,304(38,201)(152)

486,952

Revenue
External revenue
Intersegment revenue
Total revenue
Segment profit (loss)Adjusted operating profit (Note 1)
Other items
Depreciation and amortization (Note 3)

56,576105,654

5,427

7,554

175,210

4,679

(234)

179,654

Impairment losses on other thanfinancial assets

—

7,538

—

3,841

11,378

1,193—

12,571

Reversal of impairment losses
on other than financial assets

—

49

—

—

49

—

—

49

Share of profit (loss) in investments
accounted for using
the equity method
Capital expenditures (Note 4)

15

3,963

—

21

3,999

42

—

4,042

21,053

66,598

9,087

7,972

104,709

8,301

(127)

112,883

Reconciliation from “Adjusted operating profit” to “Profit before income taxes”
Year ended December 31, 2019
Millions of yen
Reportable Segments

Adjusted operating profit(Note 1)

Amortization cost of acquired­intangibles arising frombusiness acquisitions

International
TobaccoPharmaceuticals

Processed
Food

Total

Other (Note 2)

Elimination

Consolidated

187,180

340,752

15,943

5,432

549,308(33,478)97515,927(69,623)(16,245)(53,378)——(69,623)——

Adjustment items (income) (Note 5)

24

8,776

61,018461

70,27814,189—84,467

Adjustment items (costs) (Note 6)—(22,141)(4,264)(365)(26,770)(1,646)—(28,415)

170,960

274,008

72,697

5,528

523,193(20,935)

97502,355

Operating profit (loss)

130

Domestic
TobaccoFinancial income

8,402

Financial costs(45,526)

Profit before income taxes

465,232

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Year ended December 31, 2020
Millions of yen
Reportable Segments

Adjusted operating profit(Note 1)

International
TobaccoPharmaceuticals

Processed
Food

Total

Other (Note 2)

Elimination

Consolidated

168,069

340,867

17,161(793)

525,304(38,201)(152)

486,952(16,245)(46,915)——(63,160)——(63,160)

—

5,774

150

1

5,926

46,053—

51,978Adjustment items (income) (Note 5)
Adjustment items (costs)—(3,280)

(822)

(44)

(4,147)(2,569)—(6,716)

151,824

296,446

16,488(836)

463,923

5,283

(152)

469,054(Note 6)

Operating profit (loss)
Financial income

12,353Financial costs(61,344)

Profit before income taxes

420,063

VALUE CREATION

Amortization cost of acquired­intangibles arising frombusiness acquisitions

Domestic
Tobacco(Note 1)	For adjusted operating profit, amortization cost of acquired intangibles arising from business acquisitions, and adjustment items (income and costs) areexcluded from operating profit (loss).
(Note 2)	“Other” includes business activities relating to real estate rental and corporate expenditure relating to corporate communication and operation of the head office.
(Note 3)	Depreciation of right-of-use assets included in “Depreciation and amortization” is as follows:

BUSINESS

Millions of yen
2019

2020

Domestic Tobacco

3,649

3,641

International Tobacco

10,314

11,923

Pharmaceuticals

456

439

Processed Food

741

867

Other

616

2,797

15,77819,667

Depreciation of right-of-use assets

SUSTAINABILITY(Note 4) The increase of right-of-use assets is excluded.
(Note 5) The breakdown of “Adjustment items (income)” is as follows:
Millions of yen
2019Gain on transfer of pharmaceutical licenses
Gain on sale of the former JT Building

2020

60,518——41,265

Restructuring incomes

15,197

4,803

Other

8,752

5,910

Adjustment items (income)

84,46751,978

		Restructuring incomes for the years ended December 31, 2019 and 2020 mainly relate to gains on sale of real estate. The breakdown of restructuringincomes is described in “26. Other Operating Income.” Other (income) for the year ended December 31, 2019 and 2020 mainly relate to gains on fair value
adjustment after the measurement period for assets and liabilities acquired in a business combination in the “International Tobacco Business.”

GOVERNANCE(Note 6) The breakdown of “Adjustment items (costs)” is as follows:
Millions of yen

Restructuring costs

2019

2020

26,182

3,116

Other

2,233

3,600

Adjustment items (costs)

28,415

6,716Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS			Restructuring costs for the year ended December 31, 2019 mainly relate to business operation transformation in the “International Tobacco Business” andbusiness restructuring in the “Pharmaceutical Business.” The breakdown of restructuring costs is described in “27. Selling, General and Administrative
Expenses.” Other (costs) for the year ended December 31, 2019 mainly relates to disposal of real estate.

131

(3) Geographic Information
The regional breakdown of non-current assets as of December 31 is as follows:
Non-current Assets
Millions of yen
2019

2020

Japan

812,083

751,673

Overseas2,450,772

2,285,357

Consolidated

3,262,855

3,037,030(Note) Non-current assets, exclusive of financial instruments, deferred tax assets and retirement benefits assets, are segmented by the location of the assets.

The regional breakdown of external revenue for each year is as follows:
External Revenue
Millions of yen
2019

2020

Japan

789,279

727,845

Overseas

1,386,347

1,364,716

Consolidated

2,175,626

2,092,561(Note) Revenue is segmented by the sales destination.

(4) Major Customers Information
The “International Tobacco Business” of the Group sells products to theGroup were ¥235,093 million (10.8% of consolidated revenue) for

Megapolis Group that engages in distribution and wholesale business inthe year ended December 31, 2019 and ¥210,834 million (10.1% of

Russia and other countries. The external revenues from the Megapolis

consolidated revenue) for the year ended December 31, 2020.

7. Cash and Cash Equivalents
The breakdown of “Cash and cash equivalents” as of December 31 is as follows:
Millions of yen
2019

2020

Cash and deposits

260,908

483,844

Short-term investments

96,24955,000357,158

538,844

Total

Cash and cash equivalents are classified as financial assets­measured at amortized cost.
The Group’s Iranian subsidiaries’ ability to remit funds outside of

the use of funds other than in the ordinary course of business due to

Iran is restricted mainly due to international sanctions imposed on

the adoption of the “Companies’ Creditors Arrangement Act.” “CashIran. “Cash and cash equivalents” include ¥48,675 million as ofand cash equivalents” include ¥19,085 million as of December 31,

December 31, 2019 and ¥42,807 million as of December 31, 2020 held

2019 and ¥43,735 million as of December 31, 2020 held by JTI-Mac.

by the Group’s Iranian subsidiaries.

132

JTI-Macdonald Corp. (hereinafter referred to as “JTI-Mac”), theCompany’s Canadian subsidiary, is subject to certain restrictions on

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

8. Trade and Other Receivables
The breakdown of “Trade and other receivables” as of December 31 is as follows:
Millions of yen
2020

Note and account receivables

432,874

404,720

Other

28,113

9,347

Allowance for doubtful accounts
Total
Trade and other receivables are presented net of allowance for
doubtful accounts in the consolidated statement of financial position.

(2,475)(1,923)

458,513412,144VALUE CREATION

2019

Trade and other receivables are classified as financial assets­measured at amortized cost.

9. Inventories
The breakdown of “Inventories” as of December 31 is as follows:
Millions of yen
2020

Merchandise and finished goods

142,343

130,718

Leaf tobacco (Note)

365,700

334,797

Other

75,652

74,247

583,695

539,762

Total

BUSINESS

2019(Note) Leaf tobacco includes those products that will be used after 12 months from the end of each year, but they are included in inventories since they are held within
the normal operating cycle.

SUSTAINABILITY

10. Other Financial Assets(1) The breakdown of “Other financial assets” as of December 31 is as follows:
Millions of yen
2019

2020

Derivative assets

2,564

8,608

Equity securities

32,747

26,704

Debt securities

18,616

18,776Time deposits

761

928

82,757

76,830Other
Allowance for doubtful accounts(5,935)(5,875)131,511

125,971

Current assets

21,943

18,828Non-current assets

109,568

107,143

131,511

125,971

Total
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 fairaccounting 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
FINANCIAL INFORMATION/OTHERS

value through profit or loss excluding those to which hedge

GOVERNANCE

Total

measured at amortized cost.

Japan Tobacco Inc. Integrated Report 2020133

(2) Names of major securities held as financial assets measured at fair value through other comprehensive income and their fair values as ofDecember 31 are as follows:
Millions of yen
Company name

2019

2020

Seven & i Holdings Co., Ltd.

3,424

3,129

Japan Airport Terminal Co., Ltd.

2,436

2,500

DOUTOR•NICHIRES Holdings Co., Ltd.

2,892

1,980

KATO SANGYO CO., LTD.

2,032

1,968

Mitsubishi Shokuhin Co., Ltd.

1,860

1,720

Central Japan Railway Company

2,200

1,459

NIPPON EXPRESS CO., Ltd.

1,111

1,199

Yoshimura Food Holdings K.K.

1,250

814

Daicel Corporation

891

640

Kanemi Co., Ltd.

638

624

Equity securities are held mainly for strengthening relationships

In order to pursue the efficiency of assets held and to use themwith investees. Therefore, they are designated as financial assets

effectively, sales of financial assets measured at fair value through­measured at fair value through other comprehensive income.

other comprehensive 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 each year is as follows:
Millions of yen
2019

2020

Fair Value

30,765

2,978

Cumulative gain or loss recognized in equity as other comprehensive income (Note)(15,883)(1,399)(Note) The figure represents the amount transferred to retained earnings.
The cumulative gain or loss recognized in equity as other comprehensive income is transferred to retained earnings when an equity instrument is sold or the
decline in its fair value compared to its acquisition cost is significant.

11. Other Current Assets
The breakdown of “Other current assets” as of December 31 is as follows:
Millions of yen
2019

2020

Prepaid tobacco excise taxes

337,166

336,109

Prepaid expenses

22,172

15,680Consumption tax receivables

15,243

14,960Other

129,753

127,242504,334

493,992Total

12. Non-current Assets Held for Sale
The breakdown of “Non-current assets held for sale” as of December 31 is as follows:
Breakdown of Major Assets
Millions of yen
2019

2020

Property, plant and equipment

14

348

Other

17

0

Total

30

348

Non-current assets held for sale

134

Japan Tobacco Inc. Integrated Report 2020

expenses” in the consolidated statement of income for the year ended

currently actively marketed for sale.

December 31, 2020.

CORPORATE PROFILE“Non-current assets held-for-sale” are mainly idle properties which areWith regard to such assets and assets sold, impairment losses of¥31 million are ­recognized in “Selling, general and administrative

VALUE CREATION

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, plantand equipment” are as follows:
Millions of yen
Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total

As of December 31, 2018362,586

288,587

44,333

63,335758,841

Carrying Amount

36,440

4,548

85

—

41,073399,027

293,135

44,41863,335799,914

Individual acquisition

29,05447,24715,80841,371

133,480

Transfer to investment property(1,095)

—

(21)

—

(1,116)

(14)

—

—

—

(14)

Depreciation(28,049)(55,775)(15,196)—(99,021)

Impairment losses(1,930)(9,506)

(304)

(44)

(11,784)

—

91

—

—

91

Sale or disposal(739)(5,148)(2,084)(21)(7,991)

Exchange differences on translation of foreign operations(741)(1,550)(81)(1,280)(3,652)

Transfer to non-current assets held for sale

Reversal of impairment losses

Other

30,172

1,357(47,657)(6,668)404,973

298,665

43,89755,704803,239

Individual acquisition

45,61833,073

11,43434,242

124,367

(979)

—

(1)

—

(980)

Transfer to non-current assets held for sale

(29,059)

(379)

(474)

(50)

(29,962)

Depreciation(31,160)(56,278)(13,658)—(101,096)

Impairment losses(4,405)(4,089)

(386)

(10)

(8,891)

—

34

2

—

36

(733)

(3,437)(1,081)(148)(5,399)(8,552)(8,667)(998)(1,880)(20,097)

Transfer to investment property

Reversal of impairment losses
Sale or disposal
Exchange differences on translation of foreign operations
Other
As of December 31, 2020

29,707850(38,205)(1,927)

288,629

39,58349,653759,290

Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total

707,874

778,384

152,878

63,443

1,702,578

GOVERNANCE

5,721
381,424SUSTAINABILITY

9,461

As of December 31, 2019

BUSINESS

Cumulative effect of changes in accounting policies
As of January 1, 2019, after cumulative effect of changes
in accounting policies

Millions of yen
Acquisition Cost

As of January 1, 2019

734,009826,909156,328

55,7091,772,954

As of December 31, 2020

686,208

826,889

152,000

49,653

1,714,751

Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total

308,847

485,249

108,460

107902,664

FINANCIAL INFORMATION/OTHERS

As of December 31, 2019

Millions of yen
Accumulated Depreciation and Accumulated Impairment Losses

As of January 1, 2019
As of December 31, 2019

329,036528,244

112,4315

969,715

As of December 31, 2020

304,783

538,261

112,417—955,461

Japan Tobacco Inc. Integrated Report 2020135

(2) Impairment Losses

recoverable amounts for buildings, structures, machinery and vehicles,

The grouping of property, plant and equipment for impairment test

due to the decision to demolish individual items, etc.

is the smallest cash-generating unit that independently generates

The recoverable amounts of these assets are calculated mainly bycash inflows.

their values in use, which are estimated at “zero.”

The Group recognized impairment losses of ¥11,784 million in the

Impairment losses recognized in the year ended December 31,

year ended December 31, 2019, and ¥8,891 million in the year ended

2020 represent losses incurred to reduce the carrying amounts to theDecember 31, 2020 in “Selling, general and administrative expenses” inrecoverable amounts for land, buildings, structures, machinery andthe consolidated statement of income.

vehicles, due to the decision to demolish individual items, etc.

Impairment losses recognized in the year ended December 31,

The recoverable amounts of these assets are calculated mainly by

2019 represent losses incurred to reduce the carrying amounts to thetheir values in use.

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

Goodwill

Trademarks

Software

Other

Total

As of January 1, 2019

2,008,416

421,276

31,91949,8822,511,492

Individual acquisition

—

4

8,778

13,112

21,893

Amortization (Note)—(63,380)(11,500)(9,418)(84,298)

Impairment losses

—

(791)

(130)

(2,501)(3,423)

Sale or disposal

—

(6)

(300)

(83)

(389)

(665)

3,536

(129)

121

2,863

Exchange differences on translation of foreign operations
Other
As of December 31, 2019

(5,155)

3

2,934(2,891)(5,109)2,002,595

360,641

31,572

48,221

2,443,029

Individual acquisition

—

447

7,176

15,601

23,224

Amortization (Note)—(57,737)(11,905)(8,555)(78,196)

Transfer to non-current assets held for sale

—

—

(20)

(0)

(20)

Impairment losses

—

(55)

(117)

(3,219)(3,390)

Reversal of impairment losses

—

—

13

—

13

Sale or disposal

—

(7)

(798)

(236)

(1,041)(93,203)(15,928)(486)(1,216)(110,833)

—

(17)

5,829

(5,602)210

1,909,392

287,344

31,26444,9952,272,996

Exchange differences on translation of foreign operations
Other
As of December 31, 2020

(Note) The amortization of intangible assets is included in “Cost of sales” and “Selling, general and administrative expenses” in the consolidated statement of income.

Millions of yen
Acquisition Cost

Goodwill

Trademarks

Software

Other

Total

As of January 1, 2019

2,008,416

1,078,596

As of December 31, 2019

2,002,595

1,087,865

157,191

94,6983,338,901

141,954

103,762

As of December 31, 2020

3,336,175

1,909,392

1,057,235

149,251

110,884

3,226,763

Goodwill

Trademarks

Software

Other

Total

As of January 1, 2019—657,320

125,272

44,817

827,409

As of December 31, 2019—727,224

110,382

55,540893,146

As of December 31, 2020—

769,891

117,987

65,889953,767

Millions of yen
Accumulated Amortization and Accumulated Impairment Losses

136

Japan Tobacco Inc. Integrated Report 2020

experiences and external information and that was approved by

Goodwill and intangible assets recognized in the consolidated ­statement­management. After the three-year business plan, the Group setsof financial position are mainly composed of goodwill and trademarks ina growth rate from 4.6% in the fourth year (2019: 5.7%) to 2.8% in thethe JTIH Group. The carrying amounts of goodwill as of December 31,

ninth year (2019: 3.3%), and the same growth rate as the ninth year

2019 and 2020 were ¥1,711,335 million and ¥1,618,133 million, respec-from the tenth year as a continued growth rate for inflation.

tively. The carrying amounts of trademarks as of December 31, 2019

The pre-tax discount rate is 9.0% (2019: 11.0%). The value in use
sufficiently exceeds the carrying amount of the cash-generating unit.

The majority of goodwill and trademark in the JTIH Group was

Therefore, even in cases where the discount rate and growth rate usedrecognized as a result of the acquisitions of RJR Nabisco’s non-U.S.

in calculating the value in use fluctuate within reasonable ranges, thetobacco operations in 1999 and Gallaher in 2007.

Group assumes that the value in use will not become less than the

Other than the above, goodwill and trademark in Domestic Tobacco

VALUE CREATION

and 2020 were ¥261,969 million and ¥205,223 million, respectively.

CORPORATE PROFILE(2) Material Goodwill and Intangible Assets

carrying amount.

business were recognized as a result of the acquisition of Natural
American Spirit’s non-U.S. tobacco operations in 2016. The carrying

C. Processed Food Cash-generating Unit

amounts of goodwill as of December 31, 2019 and 2020 were

The recoverable amount is calculated by the value in use based on the¥265,891 million and ¥265,891 million, respectively. The carrying

three-year business plan that was prepared by reflecting past experi-amounts of trademarks as of December 31, 2019 and 2020 wereences and external information and that was approved by manage-¥98,669 million and ¥82,120 million, respectively.

ment. After the three-year business plan, the Group sets a growth rate

the remaining amortization period is mainly from 5 to 6 years.

BUSINESSThe trademarks are amortized using the straight-line method andfrom 2.2% in the fourth year (2019: 2.5%) to 1.1% in the ninth year
(2019: 1.3%), and the same growth rate as the ninth year from thetenth year as a continued growth rate for inflation.

(3) Impairment Test for Goodwill

The pre-tax discount rate is 3.9% (2019: 3.8%). The value in use
sufficiently exceeds the carrying amount of the cash-generating unit.

majority of goodwill is allocated to the domestic tobacco cash-­

Therefore, even in cases where the discount rate and growth rate usedgenerating unit of ¥265,891 million (¥265,891 million for the year

in calculating the value in use fluctuate within reasonable ranges, theended December 31, 2019), the international tobacco cash-generatingGroup assumes that the value in use will not become less than theunit of ¥1,618,133 million (¥1,711,335 million for the year ended

carrying amount.

SUSTAINABILITY

For the year ended December 31, 2020, the carrying amount of the

December 31, 2019) and the processed food cash-generating unit of¥25,368 million (¥25,368 million for the year ended December 31,(4) Impairment Losses2019). Details of the result of impairment tests are as follows:

Goodwill is allocated to cash-generating units that are identified
according to locations and types of businesses. The grouping of intan-

A. Domestic Tobacco Cash-generating Unit

gible assets for impairment test is the smallest cash-­generating unit

The recoverable amount is calculated by the value in use based on thethat independently generates cash inflow.

three-year business plan that was prepared by reflecting past experi-

The Group recognized impairment losses of ¥3,423 million for theences and external information and that was approved by manage-

year ended December 31, 2019, and ¥3,390 million for the year ended

ment. After the three-year business plan, given the current domestic

December 31, 2020 in “Selling, general and administrative expenses” intobacco market situation, the Group calculates the value in use by

the consolidated statement of income.
Impairment losses recognized in the year ended December 31,

0% in the ninth year, and the same growth rate as the ninth year from2019 represent the losses incurred to reduce the carrying amounts

the tenth year as a continued growth rate. In the prior period, theto the recoverable amounts of trademarks, software and other intan-

Group's estimated growth rate of 0% is applied only from the fourth

gible assets since the recoverable amounts were lower than theyear of cash-flows onwards.

carrying amounts.

The pre-tax discount rate is 4.9% (2019: 4.3%). The value in use
sufficiently exceeds the carrying amount of the cash-generating unit.

GOVERNANCE

using cash flows with a growth rate from (1.3%) in the fourth year to

The recoverable amounts of these assets are calculated mainly by
their values in use.
Impairment losses recognized in the year ended December 31,

in calculating the value in use fluctuate within reasonable ranges, the2020 represent the losses incurred to reduce the carrying amounts

Group assumes that the value in use will not become less than theto the recoverable amounts of trademarks, software and other intan-

carrying amount.

gible assets since the recoverable amounts were lower than the

FINANCIAL INFORMATION/OTHERS

Therefore, even in cases where the discount rate and growth rate used­carrying amounts.
B. International Tobacco Cash-generating Unit
The recoverable amount is calculated by the value in use based on

The recoverable amounts of these assets are calculated mainly by
their values in use.

the three-year business plan that was prepared by reflecting past

Japan Tobacco Inc. Integrated Report 2020137

15. Lease Transactions
The Group leases buildings, factory sites, vehicles and other assets as

escalation clauses. There are no restrictions on additional debt anda lessee. Some of the lease contracts have renewal options orfurther leasing imposed by the lease arrangements.

(1) Addition, Depreciation and Carrying Amount of Right-of-use Assets
The breakdown of addition, depreciation and carrying amount of right-of-use assets is as follows:Year ended December 31, 2019
Millions of yen
Land, buildings
and structures

Machinery andvehiclesTools, furnitureand fixtures

Total

Addition

14,645

Depreciation

10,4499,404

72

24,121

5,210

119

15,778Land, buildings
and structures

Machinery andvehiclesTools, furnitureand fixtures

Total

43,772

12,813

126

56,711

Land, buildings
and structures

Machinery andvehiclesTools, furnitureand fixtures

As of December 31, 2019
Millions of yen

Carrying amountYear ended December 31, 2020

Millions of yen
Total

Addition

29,796

4,813

165

34,773

Depreciation

14,1495,435

84

19,667

Land, buildings
and structures

Machinery andvehiclesTools, furnitureand fixtures

Total

57,011

10,732

103

67,847

As of December 31, 2020
Millions of yen

Carrying amount(2) Expense Items Related to Lease
The breakdown of expense items related to lease is as follows:
Millions of yen

138

2019

2020

Financial cost on lease liabilities

1,506

1,462

Expense relating to short-term lease or leases of low-value assets

9,440

7,519

Expense relating to variable lease payments

2,182

1,654

Total cash outflow for leases

16,003

19,315

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

16. Investment Property(1) Schedule of Investment Property
The schedule of the carrying amount of “Investment property” for each year is as follows:
Millions of yen

Expenditure after acquisition
Transfer from property, plant and equipment

2020

17,558

16,588

182

65

1,116

980

Transfer to non-current assets held for sale(403)

(12,033)

Transfer to property, plant and equipment

(370)

(223)

Depreciation

(533)

(362)

Impairment losses

(917)

(259)

Sale or disposal

(34)

(11)

Exchange differences on translation of foreign operations

(10)

3

Other

—

(3)

16,5884,744

Acquisition cost as of January 1

38,35540,262

Accumulated depreciation and accumulated impairment losses as of January 1

20,797

23,674

Acquisition cost as of December 31

40,262

14,074

Accumulated depreciation and accumulated impairment losses
as of December 31

23,6749,331(2) Fair Value
The fair value of investment property is determined based on a valua-

BUSINESSAs of December 31

VALUE CREATIONAs of January 1

2019

The fair value hierarchy of investment property is categorized fromLevel 1 to Level 3 as follows:tion conducted by an external real estate appraiser. The valuation is
the investment property is located and based on market evidenceof transaction prices for similar assets.

Level 1: Fair value measured at the quoted price in the active

SUSTAINABILITY

made in accordance with the appraisal standards of the country where

marketLevel 2: Fair value that is calculated using the observable priceother than categorized in Level 1 directly or indirectly
Level 3: Fair value that is calculated based on valuation techniques
which include inputs that are not based on observable
market data

The fair value of investment property based on the fair value hierarchy as of December 31 is as follows:
Millions of yen

Investment property

Level 1

Level 2

Level 3

Total—

34,7881,416

36,204

GOVERNANCE

As of December 31, 2019

Millions of yen
As of December 31, 2020

Investment property

Level 1

Level 2

Level 3

Total—

12,467

1,489

13,956
FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020139

(3) Impairment Losses

the carrying amount for buildings as it was decided to demolish

The grouping of investment properties for impairment test is based on­certain idle properties. The recoverable amounts of these assets

the smallest cash-generating unit that independently generates cash

are calculated mainly by their values in use, which are estimatedinflows. Impairment tests for idle properties are ­carried out individually.

at “zero.”

The Group recognized impairment losses of ¥917 million for the

Impairment losses recognized for the year ended December 31,

year ended December 31, 2019, and ¥259 million for the year ended

2020 represent the difference between the recoverable amount andDecember 31, 2020 in “Selling, general and administrative expenses” inthe carrying amount for buildings as it was decided to demolishthe consolidated statement of income.

­certain idle properties. The recoverable amounts of these assets

Impairment losses recognized for the year ended December 31,
2019 represent the difference between the recoverable amount andare calculated mainly by their values in use, which are estimatedat “zero.”

17. 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 year are as follows:Year ended December 31, 2019
Millions of yen

Deferred Tax Assets

As ofJanuary 1,
2019

Recognized in
profit or loss

Fixed assets (Note 2)

120,129(2,528)Retirement benefits

72,248(3,996)

Carryforward of unused tax losses

53,126(10,070)—

Other

Recognized inother comprehensive income

Other (Note 1)

As ofDecember 31, 2019—16

117,616

3,854

(572)

71,534(648)

42,40984,215

2,635

1,103

(22)

87,931

329,717(13,959)

4,957(1,225)

319,490(65,986)

15,011(1,438)349(52,064)

263,731

1,053

3,519

(877)

267,426

As ofJanuary 1,
2019

Recognized in
profit or loss

Recognized inother comprehensive income

Fixed assets (Note 2)(99,298)

5,824

—

(495)

(93,968)

Retirement benefits(10,125)375(1,708)(174)(11,632)

Other(117,697)

3,938

6,773

(574)

(107,561)(227,120)

10,137

5,065(1,243)(213,160)

Deferred Tax Assets

As ofJanuary 1,
2020

Recognized in
profit or loss

Recognized inother comprehensive income

Other (Note 1)

As ofDecember 31, 2020

Fixed assets (Note 2)

117,616(12,394)—(332)

104,890

Retirement benefits

71,534(2,590)

3,243

841

73,028Carryforward of unused tax losses

42,4098,645—(4,966)46,087

Subtotal
Valuation allowance
Total

Millions of yen

Deferred Tax Liabilities

Total

Other (Note 1)

As ofDecember 31, 2019Year ended December 31, 2020
Millions of yen

Other
Subtotal
Valuation allowance
Total

140

Japan Tobacco Inc. Integrated Report 2020

87,931

10,770(1,626)(3,354)

93,722

319,490

4,431

1,617

(7,811)

317,726(52,064)(12,815)

(921)

4,356

(61,443)

267,426(8,384)696(3,455)

256,283

CORPORATE PROFILE

Millions of yen

Deferred Tax Liabilities

As ofJanuary 1,
2020

Recognized in
profit or loss

Fixed assets (Note 2)(93,968)

Retirement benefits(11,632)

Other

Other (Note 1)

As ofDecember 31, 2020

11,990—2,443(79,535)(826)(1,704)(5)(14,166)(107,561)

328

1,275

1,462

(104,496)(213,160)

11,492

(429)

3,900

(198,197)

VALUE CREATION

Total

Recognized inother comprehensive income(Note 1) “Other” includes exchange differences on translation of foreign operations.
(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¥38,953 million (including ¥20,743 million, for which the carryforward

to be recoverable on deductible temporary differences, carryforward of

expires after five years) as of December 31, 2020. Tax credits, forunused tax losses and tax credits by taking taxable temporary differ-

which the deferred tax assets are not recognized, were ¥4,201 million

ences and future taxable profits plan into account. The carryforward of(including ¥3,931 million, for which the carryforward expires after fiveunused tax losses, for which the deferred tax assets are not recog-

years) as of December 31, 2019, and ¥5,132 million (including ¥4,705

nized, was ¥31,555 million (including ¥19,252 million, for which themillion, for which the carryforward expires after five years) as ofcarryforward expires after five years) as of December 31, 2019, andDecember 31, 2020.
BUSINESS(2) Income Taxes
The breakdown of “Income taxes” for each year is as follows:
Millions of yen

Current income taxes

2019

2020

114,799

111,142

Deferred income taxes(11,189)(3,108)

Total income taxes

103,609108,034SUSTAINABILITY

Deferred income taxes decreased by ¥4,498 million and increasedby ¥1,624 million for the years ended December 31, 2019 and 2020,

respectively, due to the effect of changes in tax rates in Japan andother countries.

(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 for each year is
as follows:
The Company is subject mainly to corporate tax, inhabitant tax and enterprise tax, and the effective statutory tax rate for each year calculated
based on these taxes was 30.43%. Foreign subsidiaries are subject to income taxes at their locations.
%Different tax rates applied to foreign subsidiaries

2020

30.43

30.43

(9.08)(8.81)

1.48

1.53

2.04

2.40

Valuation allowance(2.90)

3.16

Tax credits(1.66)(1.04)

Withholding tax in foreign countries

1.79

1.25

Tax contingencies

1.21(1.11)

Other
Average actual tax rate

(1.05)(2.10)

22.27

25.72

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

Non-deductible expenses
Dividend income

GOVERNANCE

Effective statutory tax rate

2019

141

18. Trade and Other Payables
The breakdown of “Trade and other payables” as of December 31 is as follows:
Millions of yen
2019

2020

Accounts payable

229,914

233,723

Other payables

69,43972,588Other

109,245

130,228

408,597

436,540

Total

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 December 31 is as follows:
Millions of yen
2019

2020

Due

7,739

10,334—

Short-term borrowings

192,581

51,633—Current portion of long-term borrowings

11,554

12,226—

Current portion of bonds (Note 2)

80,00077,609—Long-term borrowings (Note 1)

103,743

192,7292022–2080

Bonds (Note 2)

586,623

624,683—

Lease liabilities

53,70566,531——

Derivative liabilities

Other

1,479

887

1,037,425

1,036,633

Current liabilities

305,997

169,057

Non-current liabilities

731,428

867,576

1,037,425

1,036,633

Total

Total

(Note 1) ¥99,085 million of the long-term borrowings is subordinated loans. (Due: 2080. The Company may, at its option, repay early all or a portion of the principal on
any interest payment date on or after the interest payment date in January 2025)

142

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE(Note 2) The summary of the issuing conditions of the bonds is as follows:
As of
December 31,
2019

Millions of yen

%

As of
December 31,
2020

Interest
rate

Date of issuance

Collateral

Date of maturity

Japan Tobacco Inc.

8th domestic
straight bondDecember 9, 2010

20,000(20,000)

—

1.300

Yes

December 9,
2020

Japan Tobacco Inc.

9th domestic
straight bondJuly 15, 2015

60,000(60,000)

—

0.217

Yes

July 15, 2020

Japan Tobacco Inc.

10th domestic
straight bondJuly 15, 2015

30,00030,0000.358

Yes

July 15, 2022

Japan Tobacco Inc.

11th domestic
straight bondJuly 15, 2015

25,00025,0000.599

Yes

July 15, 2025

Japan Tobacco Inc.

12th domestic
straight bondSeptember 10,
2018

60,00060,0000.110

Yes

September 8,
2023

Japan Tobacco Inc.

13th domestic
straight bondSeptember 10,
2018

30,00030,0000.355

Yes

September 8,
2028

Japan Tobacco Inc.

14th domestic
straight bondSeptember 10,
2018

10,00010,0000.758

Yes

September 10,
2038

Japan Tobacco Inc.

Straight bondin USD

April 13, 2016

82,0952.000

Yes

April 13, 2021

[USD 750 mil.]

77,609(77,609)[USD 750 mil.]

Straight bondin USD

April 13, 2016

54,580[USD 500 mil.]

51,589[USD 500 mil.]

2.800

Yes

April 13, 2026

JT International
Financial Services B.V.

Straight bondin USD

September 28,
201857,198[USD 525 mil.]

54,109[USD 525 mil.]

3.500

No

September 28,
2023

JT International
Financial Services B.V.

Straight bondin USD

September 28,
201854,172[USD 500 mil.]

51,231[USD 500 mil.]

3.875

No

September 28,
2028

JT International
Financial Services B.V.

Straight bondin EUR

September 28,
201866,772[EUR 550 mil.]

69,233[EUR 550 mil.]

1.125

No

September 28,
2025

JT International
Financial Services B.V.

Straight bondin EUR

November 26,
201960,639[EUR 500 mil.]

62,842[EUR 500 mil.]

1.000

No

November 26,
2029

JT International
Financial Services B.V.

Straight bondin GBP

September 28,
201856,168[GBP 400 mil.]

54,850[GBP 400 mil.]

2.750

No

September 28,
2033

JT International
Financial Services B.V.

Subordinatedbond in EUR

October 7, 2020—[—]

62,934[EUR 500 mil.]

2.375

No

April 7, 2081
(Note 3)

JT International
Financial Services B.V.

Subordinatedbond in EUR

October 7, 2020—[—]

62,896[EUR 500 mil.]

2.875

No

October 7, 2083
(Note 4)

666,623(80,000)

702,292(77,609)

Total

SUSTAINABILITY

Japan Tobacco Inc.

BUSINESSName of bond

VALUE CREATION

Company

Derivative liabilities are classified as financial liabilities measured at(2) Assets Pledged as Collateral for Liabilities

fair value through profit or loss excluding those to which hedge

Pursuant to the provisions of Article 6 of the Japan Tobacco Inc. Act, theaccounting is applied, and bonds and borrowings are classified as

Company’s properties are pledged as general collateral for bonds issued

financial liabilities measured at amortized cost.

by the Company. Bondholders are entitled to claim satisfaction in prefer-the bonds and borrowings of the Group.

FINANCIAL INFORMATION/OTHERS

There are no financial covenants that have a significant impact on

GOVERNANCE(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.
(Note 3) The Issuer may redeem the Bond at its own discretion in the 3-month period ending on and including April 7, 2026 and on each interest payment date thereafter.
(Note 4) The Issuer may redeem the Bond at its own discretion in the 3-month period ending on and including January 7, 2029 and on each interest payment date thereafter.

ence to unsecured creditors of the Company properties (with the exceptionof national and local taxes and ­certain other statutory obligations).

Japan Tobacco Inc. Integrated Report 2020143

20. Provisions
The breakdown and schedule of “Provisions” for each year are as follows:Year ended December 31, 2019
Millions of yen
Asset retirement provisions

Restructuringprovisions

Provisions forsales rebates

Other
provisions

Total

3,579

322

3,668

34,68942,258Provisions

2

25,3934,000

16,22545,621

Interest cost associated with passage of time

29

—

—

—

29

Provisions used

(9)(2,874)(3,668)(4,204)(10,754)

Provisions reversed

(4)

(95)

—

(18,406)(18,506)

Exchange differences on translation of foreign operations

—

490

—

(685)

(195)

3,598

23,2364,000

27,61958,453

—

7,565

4,000

6,723

18,2893,598

15,671—

20,89640,164

3,598

23,2364,000

27,61958,453

Asset retirement provisions

Restructuringprovisions

Provisions forsales rebates

Other
provisions

Total

As of January 1, 2020

3,598

23,2364,000

27,61958,453

Provisions

1,887

4,254

3,697

15,94925,787

As of January 1, 2019

As of December 31, 2019
Current liabilities
Non-current liabilities
Total

Year ended December 31, 2020
Millions of yen

Interest cost associated with passage of time

29

—

—

—

29

Provisions used

(173)

(7,246)(4,000)(5,362)(16,782)

Provisions reversed(108)(2,046)—(10,675)(12,828)

—

(538)

—

(3,363)(3,901)

5,232

17,6603,697

24,16950,758Exchange differences on translation of foreign operations
As of December 31, 2020
Current liabilities
Non-current liabilities
Total

10,637

3,697

5,043

19,420

7,023—

19,12531,338

5,232

17,6603,697

24,16950,758

A. Asset Retirement Provisions

C. Provisions for Sales Rebates

In order to settle the obligation of restoring and of removing ­hazardous

These provisions are for contracts which reward the customers with

substances from plant facilities and premises that the Group uses, thediscounts when the sales volume or sales amount in a given period

probable amount to be paid in the future is recognized based on past

exceeds a specified volume or amount and correspond to “Refund

performances. These expenses are expected to be paid after one year

liabilities” in IFRS 15 “Revenue from Contracts with Customers.” Theyor more; however, they may be affected by future business plans.

are expected to be paid within one year.

B. Restructuring Provisions
These provisions are mainly related to business integration and measures for the rationalization of the “International Tobacco Business.”
The timing of the payment may be affected by future business plans.

144

43
5,189

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

21. Other Liabilities
The breakdown of “Other current liabilities” and “Other non-current liabilities” as of December 31 is as follows:
Millions of yen
2020

Tobacco excise tax payables

302,965

268,608

Tobacco special excise tax payables

10,0608,536

Tobacco local excise tax payables

163,387

158,905

Consumption tax payables

124,693

129,782

Bonus to employees

49,47356,955

Employees’ unused paid vacations liabilities

19,48820,297

Other

164,331

172,213834,397815,295

Current liabilities

Total

699,331652,314

Non-current liabilities

135,066

162,982

834,397815,295

Total

VALUE CREATION

2019

BUSINESS

22. Employee Benefits(1) Post-employment Benefits(i) Investment risk

The Group sponsors funded or unfunded defined benefit plans and

The present value of the defined benefit obligations is calculated using

defined contribution plans as employee retirement benefit plans. The

a discount rate set with reference to a yield on high quality corporate

benefits of defined benefit plans are predetermined based on condi-

bonds or government bonds. If the return on the plan assets is below

tions, such as points employees have gained in compensation forthis yield, there is a possibility that the plan is underfunded.

each year of service, the payment rate, years of service, and average(ii) Interest rate risk

The Company is obligated to bear pension costs for a mutual

A decrease in a yield on high quality corporate bonds or government

assistance association incurred with respect to services in or before

bonds will increase the present value of the defined benefit obliga-

June 1956 (prior to enforcement of the Act on the Mutual Aid

tions. However, this will be partially offset by an increase in the fair

Association of Public Corporation Employees). Such obligations arevalue of the debt instruments (plan assets).

SUSTAINABILITY

salaries in their final years of service before retirement.

recognized as liabilities at their present value using the actuarial­valuation method and are included in retirement benefit liabilities.
Special termination benefits may be provided to employees on theirearly retirements under certain circumstances.
The funded defined benefit plans are administrated by the Group or(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.

statutory requirements. The Group, or the board of the pension fund(iv) Longevity risk

and the trustee of the plan, are required by law to act in the best inter-

Some defined benefit plans of the Group provide a lifetime annuity,

ests of the plan participants, and are responsible for managing theand the Group is obligated to provide pension benefits to the plan

plan assets in accordance with the designated investment strategy.

participants for the rest of their lives after their retirements. The pres-

The Group’s main defined benefit plans expose the Group to actu-

ent value of the defined benefit obligations is calculated by reference

arial risks, such as investment risk, interest rate risk, inflation risk, andto the best estimate of the mortality of plan participants during or

longevity risk.

after employment. An increase in average life expectancy of the plan

GOVERNANCE

the fund that is legally separated from the Group in accordance withJapan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

participants will increase the defined ­benefit obligations.

145

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

As of January 1, 2019 (Notes 1, 2)
Current service cost
Past service cost and settlement
Interest expense
Contributions by plan participants

Japan (Note 3)

Overseas

Total

216,223484,964

701,187

9,940

9,099

19,039—(4,190)(4,190)1,000

10,287

11,288

—

1,727

1,727

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

1,135(4,668)(3,533)

Actuarial gains and losses arising from changes in financial assumptions(1,282)

46,33645,053

Actuarial gains and losses arising from experience adjustments(2,914)(2,463)(5,378)(23,507)(21,110)(44,617)

Exchange differences on translation of foreign operations

—

(284)

(284)

Other

—

(608)

(608)

200,595

519,089

719,684

9,510

10,014

19,524

—

3,047

3,047

1,135

7,585

8,720

—

1,966

1,966

Benefits paid

As of December 31, 2019

(Notes 1, 2)

Current service cost
Past service cost and settlement
Interest expense
Contributions by plan participantsRemeasurement gains and losses:
Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Benefits paid
Exchange differences on translation of foreign operations
Other
As of December 31, 2020 (Notes 1, 2)(284)(2,110)(2,394)(3,618)39,62936,012

(678)

4,374

3,696

(21,434)(19,864)(41,298)
2,621

—

2,621

(629)

(8)

(637)

184,597566,343

750,940(Note 1) The Group’s weighted-average duration of the defined benefit obligations is 6.9 years for Japan and 15.5 years for overseas (2019: 6.9 years for Japan and15.5 years for overseas).
(Note 2) The Group’s breakdown of the defined benefit obligation by plan participant is as follows:
Millions of yen
As of December 31, 2019

As of December 31, 2020

Japan

Overseas

Total

Japan

Overseas

Total

Active members

135,200

172,637

307,837

129,281

198,735

328,016

Deferred members

10,427

76,19086,617

7,830

81,21889,048Pensioners

54,968270,263

325,230

47,485286,391

333,876

Total

200,595

519,089

719,684

184,597566,343

750,940(Note 3) The schedule of mutual pension benefits obligations included in the category of Japan is as follows:
Millions of yen

As of January 1
Interest expense

146

2019

2020

36,67531,090110

124

Remeasurement gains and losses(1,661)(1,596)

Benefits paid

(4,034)(3,565)

As of December 31

31,09026,054

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

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

Total

As of January 1, 201962,788373,702436,489

Interest income

296

8,207

8,503

1,064

30,122

31,185

959

6,465

7,424

—

1,727

1,727

(7,114)(16,402)(23,516)

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

Contributions by plan participants
Benefits paid
Exchange differences on translation of foreign operations
As of December 31, 2019
Interest income

—

4,634

4,634

57,992

408,455

466,447

333

6,215

6,548

380

29,43829,817VALUE CREATION

Remeasurement gains and losses:

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

Benefits paid
Exchange differences on translation of foreign operations
Other
As of December 31, 2020

879

7,536

8,414

—

1,966

1,966

(5,560)(15,100)(20,660)—(2,246)(2,246)

(571)

—

(571)

53,453436,263489,715

BUSINESS

Contributions by plan participants(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 forallocating future benefit and keeping the balance of the pension financing when the plan is underfunded.
(Note 2) The Group plans to pay contributions of ¥5,154 million in the year ending December 31, 2021.

C. Reconciliation of Defined Benefit Obligations and Plan Assets
SUSTAINABILITY

The reconciliation of the defined benefit obligations and plan assets to the net defined benefit liabilities (assets) recognized in the consolidated
statement of financial position as of December 31 is as follows:
As of December 31, 2019
Millions of yen
JapanOverseas

Total

Present value of the funded defined benefit obligations

53,201

366,845

420,046

Fair value of the plan assets(57,992)(408,455)(466,447)

Subtotal(41,610)(46,401)

147,394

152,244

299,638

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

142,603110,635

253,237

Retirement benefit liabilities

148,915

171,699

320,614Retirement benefit assets(6,312)(61,064)(67,377)

142,603110,635

253,237

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

GOVERNANCE(4,791)

Present value of the unfunded defined benefit obligations

FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020147

As of December 31, 2020
Millions of yen
JapanOverseas

Total

Present value of the funded defined benefit obligations

48,531

397,336445,868

Fair value of the plan assets(53,453)(436,263)(489,715)(4,921)(38,926)(43,847)

Present value of the unfunded defined benefit obligations

136,065

169,007305,072

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

131,144130,080

261,225

Retirement benefit liabilities

137,262

194,490

331,752

Retirement benefit assets(6,118)(64,410)(70,528)

131,144130,080

261,225

Subtotal

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 December 31 is as follows:Japan
Millions of yen
As of December 31, 2019Market price inan active market

As of December 31, 2020
Market price inan active market

QuotedUnquoted

Total

QuotedUnquoted

Total

Cash and cash equivalents

7,794

—

7,794

7,569

—

7,569

Equity instruments

3,078

—

3,078

3,524

—

3,524

Japan

1,509

—

1,509

1,653

—

1,653

Overseas

1,569

—

1,569

1,871

—

1,871
7,550

Debt instruments

8,819

—

8,819

7,550

—

Japan

7,572

—

7,572

6,299

—

6,299

Overseas

1,247

—

1,247

1,250

—

1,250
33,048General account of life insurance companies (Note)
Other
Total

—

36,49636,496—33,048

785

1,019

1,804

751

1,011

1,762

20,47737,51557,992

19,394

34,05953,453

Overseas
Millions of yen
As of December 31, 2019Market price inan active market

Market price inan active market

QuotedUnquoted

Total

QuotedUnquoted

Total

Cash and cash equivalents

15,622—

15,62233,999—33,999Equity instruments

59,536

059,537

63,683

063,683

United Kingdom

4,242

—

4,242

3,805

—

3,805

North America

23,397—23,39723,876—23,876

Other

31,8970

31,89736,0010

36,001

Debt instruments

294,759

5,334

300,093

296,597

6,079

302,676

United Kingdom

210,452—

210,452

206,048—

206,048

North America

33,186—33,186

31,588031,588

Other

51,1225,334

56,45658,962

6,079

65,04015,740Real estate

13,06066

13,126

15,67368

Other

10,395

9,683

20,078

10,571

9,592

20,164393,372

15,083

408,455

420,524

15,739436,263

Total

148

As of December 31, 2020

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Total
Millions of yen
As of December 31, 2019

As of December 31, 2020

Market price inan active market

Market price inan active market

Unquoted

Total

QuotedUnquoted

Total

Cash and cash equivalents

23,416—23,416

41,568—41,568Equity instruments

62,614062,615

67,206

0

67,207

Debt instruments

303,578

5,334

308,913304,147

6,079

310,226

Real estate

13,06066

13,126

15,67368

15,740—36,49636,496—33,04833,048

11,18010,702

21,882

11,323

10,60421,926

413,849

52,598466,447

439,917

49,798489,715

General account of life insurance companies (Note)
Other
Total

VALUE CREATION

Quoted(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:(Overseas)
The investment strategy for the foreign subsidiaries’ funded pension

The Company’s pension fund is managed in accordance with theplans is decided properly by the trustee of the plan and the manage-internal policy for securing stable profits in the middle- and long-term

ment of overseas subsidiaries according to local legislation. The

in order to ensure the redemption of the plan liability. Concretely, byCompany’s objective for the foreign subsidiaries’ funded pension planssetting a target rate of return and composition ratio of plan assets by

is to manage risks arising from its defined benefit obligation, andasset category within the risk tolerance that is annually assessed, themeanwhile to achieve a return on assets in excess of the movement in

Company invests plan assets consistently with the composition ratio.

the value of the defined benefit obligation.

When reviewing the composition ratio, the Company considers introduc-

The majority of the plan assets have been allocated to liability

ing an asset investment which has a high correlation with the liability.

matching bonds and the remaining parts of the plan assets are mainly

When an unexpected situation occurs in the market environment, it

BUSINESS(Japan)invested in equities targeting long-term return.
SUSTAINABILITY

is temporarily allowed to make a weighted adjustment to the risk
assets, complying with company policy.
E. Matters Related to Actuarial Assumptions
The major items of actuarial assumptions as of December 31 are as follows:%
As of December 31, 2019

As of December 31, 2020

Japan

Overseas

Japan

Overseas

Discount rate

0.6

1.5

0.8

1.0

Inflation rate

—

2.3

—

2.3
GOVERNANCE

As of December 31, 2019
Years
Japan
Males

Females23.6 (Note 2)

29.3 (Note 2)

Overseas
Males

Females21.8 (Note 3)

24.0 (Note 3)

23.1

25.3 (Note 4)

Average life expectancy at retirement (Note 1)
Current pensioners
Future pensioners(Note 4)

FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020149

As of December 31, 2020
Years
Japan
Males

Females24.5 (Note 2)

29.7 (Note 2)

Overseas
Males

Females

21.9 (Note 3)

24.2 (Note 3)

23.2

25.5 (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 theassumption 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 inmajor assumptions as of December 31 are as follows. Each of these sensitivities assumes that other variables remain fixed; however, in fact, they do notalways change independently. Negative figures represent a decrease in pension plan obligations, while positive figures represent an increase.

Millions of yen
As of December 31, 2019

Discount rate
Inflation rate
Mortality rate

As of December 31, 2020

Change inassumptions

Japan

Overseas

Japan

Overseas

Increase by 0.5%

(6,438)(38,101)(5,821)(41,376)

Decrease by 0.5%

6,917

42,4606,252

46,245

Increase by 0.5%—

25,757—31,073

Decrease by 0.5%—

(24,052)—(28,236)

Extended 1 year

3,834

20,155

3,367

21,707

Shortened 1 year

(3,696)(19,764)(3,231)(21,346)

F. Breakdown of Defined Benefit Cost
The breakdown of defined benefit cost for each year is as follows:Year ended December 31, 2019
Millions of yen

Current service cost
Past service cost and gains and losses on settlement

Overseas

Total

9,940

9,099

19,039(4,190)—(4,190)

704

2,080

2,785

Defined benefit cost through profit or loss

10,645

6,989

17,634

Actuarial gains and losses arising from changes in demographic assumptions

1,135(4,668)(3,533)

Actuarial gains and losses arising from changes in financial assumptions(1,282)

46,33645,053

Actuarial gains and losses arising from experience adjustments(2,914)(2,463)(5,378)Return on plan assets (excluding amounts included in interest income)(1,064)(30,122)(31,185)

Defined benefit cost through other comprehensive income(4,126)

9,083

4,957

Total of defined benefit cost

6,519

16,072

22,591

Interest expense (income)

150

Japan

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Year ended December 31, 2020
Millions of yen

Current service costJapan

Overseas

Total

9,510

10,014

19,524

Past service cost and gains and losses on settlement
Interest expense (income)Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions

3,047

3,047

1,370

2,172

10,312

14,431

24,742(284)(2,110)(2,394)36,012(3,618)39,629Actuarial gains and losses arising from experience adjustments

(678)

4,374

3,696

Return on plan assets (excluding amounts included in interest income)(380)(29,438)(29,817)

Defined benefit cost through other comprehensive income(4,960)12,456

7,496

Total of defined benefit cost

5,352

26,88632,238VALUE CREATION

Defined benefit cost through profit or loss—
802

(Note 1) The net amount of interest expense and interest income is included in “Financial costs.” Other expenses are included in “Cost of sales” and “Selling, general and­administrative expenses.”(Note 2) Contributions to the defined contribution plans were ¥9,269 million for the year ended December 31, 2019 and ¥9,698 million for the year ended December 31,
2020 and were not included in the table above.

BUSINESS(2) Other Employee Benefit Expenses
The employee benefit expenses other than post-employment benefits that are included in the consolidated statement of income for each year are
as follows:
Millions of yen
2020

Remuneration and salary

239,305

241,549

Bonus to employees

80,973

97,676

Legal welfare expenses

44,60745,458

Welfare expenses

38,62038,258Termination benefits

24,54185

SUSTAINABILITY

2019

23. Equity and Other Equity Items(1) Share Capital and Capital Surplus
A. Authorized Shares
The number of authorized shares as of December 31, 2019 and 2020 is 8,000,000 thousand ordinary shares.
B. Fully Paid Issued Shares
Thousands ofsharesMillions of yen

Number of ordinary
issued shares

Share capital

Capital surplus

As of January 1, 2019

2,000,000

100,000

736,400

Increase (decrease)

—

—

—

2,000,000

100,000

736,400

As of December 31, 2019
Increase (decrease)

—

—

—

2,000,000

100,000

736,400

FINANCIAL INFORMATION/OTHERS

As of December 31, 2020

GOVERNANCE

The schedule of the number of issued shares and share capital is as follows:(Note) The shares issued by the Company are non-par value ordinary shares that have no restriction on any content of rights.

Japan Tobacco Inc. Integrated Report 2020151

(2) Treasury Shares
The schedule of the number of treasury shares and its amount as of each year end is as follows:
Thousands ofsharesMillions of yen

Number of shares

Amount208,577

442,829

As of January 1, 2019
Increase (decrease) (Note 2)

17,62049,640226,197492,469

Increase (decrease) (Note 2)

(442)

(962)

As of December 31, 2020

225,755

491,507

As of December 31, 2019

(Note 1) The Company adopts share option plans, restricted stock remuneration plans and performance share unit plans and utilizes treasury shares for delivery ofshares due to their exercises. Contract conditions and amounts 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 is 17,788 thousand shares and the total purchase cost is¥50,000 million for the year ended December 31, 2019. Purchases of shares less than one unit are 0 thousand shares for the year ended December 31, 2019
and 0 thousand shares for the year ended December 31, 2020. Sale of shares less than one unit is 0 thousand shares for the year ended December 31, 2020.
The number of shares delivered upon exercise of share options is 168 thousand shares for the year ended December 31, 2019 and 203 thousand shares forthe year ended December 31, 2020. The number of shares disposed for restricted stock remuneration is 239 thousand shares for the year ended December
31, 2020.

(3) Other Components of Equity

D. Net Gain (Loss) on Revaluation of Financial Assets Measured at Fair

A. Subscription Rights to Shares

Value through Other Comprehensive Income

The Company adopts share option plans and issues subscription

This is the valuation difference in the fair value of financial assets

rights to shares based on the Companies Act. Contract conditions andmeasured at fair value through other comprehensive income.

amount are described in “32. Share-based Payments.”
E. Remeasurements of Defined Benefit Plans
B. Exchange Differences on Translation of Foreign Operations

Remeasurements of defined benefit plans comprise actuarial gains

Exchange differences on translation of foreign operations are com-and losses, the return on plan assets excluding amounts included

posed of foreign currency translation difference that occurs when

in interest income, and any change in the effect of the asset ceilingconsolidating financial statements of foreign subsidiaries prepared in

excluding amounts included in interest income. In addition, actuarial

foreign currencies, and the effective portion of net gain (loss) on thegains and losses are the effects of differences between the actuarial

hedging instruments designated as hedge of net investment.

assumptions at the beginning of the year and what has actuallyoccurred, and the effects of changes in actuarial assumptions.

C. Net Gain (Loss) on Derivatives Designated as Cash Flow Hedges

Remeasurements are recognized as other comprehensive income

The Group uses derivatives for hedging to avoid the risk of ­fluctuation

when they occur and are transferred immediately from other compo-

in future cash flows. This is the effective portion of changes in the fairnents of equity to retained earnings.

value of hedging instruments designated as cash flow hedges.

24. Dividends
Dividends paid for each year are as follows:Year ended December 31, 2019

Class of shares

Millions of
yen

Yen

Total
dividends

Dividends per
share

134,357
136,579

Basis date

Effective date75

December 31, 2018

March 22, 201977

June 30, 2019

September 2, 2019

(Resolution)
Annual Shareholders’ Meeting(March 20, 2019)
Board of Directors(July 31, 2019)152

OrdinarysharesOrdinarysharesJapan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

Year ended December 31, 2020
Millions of
yen

Yen

Class of shares

Total
dividends

Dividends per
share

Annual Shareholders’ Meeting(March 19, 2020)

Ordinaryshares136,583

Board of Directors(July 31, 2020)

Ordinaryshares136,617

Basis date

Effective date77

December 31, 2019

March 23, 2020

77

June 30, 2020

September 1, 2020

Basis date

Effective date

December 31, 2019

March 23, 2020

Basis date

Effective date

December 31, 2020

March 25, 2021

(Resolution)
VALUE CREATIONDividends for which the effective date falls in the following year are as follows:Year ended December 31, 2019
Millions of
yen

Yen

Class of shares

Total
dividends

Dividends per
share

Ordinaryshares136,583

77

Annual Shareholders’ Meeting(March 19, 2020)

BUSINESS(Resolution)

Year ended December 31, 2020
Millions of
yen

Yen

Class of shares

Total
dividends

Dividends per
share

Ordinaryshares136,617

77(Resolution)
SUSTAINABILITY

Annual Shareholders’ Meeting(March 24, 2021)

25. Revenue(1) Disaggregation of Revenue
The disaggregation of “Revenue” for each year is as follows. The amounts are presented after eliminations of intercompany transactions.
Year ended December 31, 2019
Millions of yen

GOVERNANCE

Reportable Segments
Domestic
Tobacco (Note 2)

International
Tobacco (Note 3)

Pharmaceuticals

Processed
Food

Other

ConsolidatedCore revenue from tobacco business (Note 1)

568,880

1,253,022———

1,821,902

Other42,61457,85588,528

158,5866,140

353,724

611,494

1,310,877

88,528

158,586

6,140

2,175,626

Total

Year ended December 31, 2020
FINANCIAL INFORMATION/OTHERS

Millions of yen
Reportable Segments
Domestic
Tobacco (Note 2)

International
Tobacco (Note 3)

Pharmaceuticals

Processed
Food

Other

ConsolidatedCore revenue from tobacco business (Note 1)

515,745

1,250,808———

1,766,554

Other

39,82255,42578,957

149,3292,474

326,007555,568

1,306,233

78,957

149,3292,474

2,092,561

Total(Note 1) The “Domestic Tobacco Business” does not include revenue related to imported tobacco delivery charges. In addition, the “International Tobacco Business”
does not include revenue related to the distribution business and contract manufacturing.

Japan Tobacco Inc. Integrated Report 2020

153

(Note 2) Revenues from RRP in core revenue from the “Domestic Tobacco Business” were ¥60,932 million and ¥55,891 million for the year ended December 31, 2019and 2020, respectively. RRP represents Reduced-Risk Products with potential to reduce the health risks associated with smoking.
(Note 3) Core revenue by cluster from the “International Tobacco Business” is as follows:
Millions of yen
2019

2020

South and West Europe

216,653

219,359

North and Central Europe

236,210

271,976CIS+

309,646

294,283

Rest-of-the-World

490,513465,190

1,253,022

1,250,808

TotalSouth and West Europe includes France, Italy and Spain. North and Central Europe includes Germany and the United Kingdom. CIS+ includes
Romania and Russia. Rest-of-the-World includes Iran, Taiwan and Turkey.
A. Domestic and International Tobacco Businesses

and sales-based royalties. Upfront income is recognized at the time

Domestic and international tobacco businesses engage in the sale ofthe customer obtains control of the license. Milestone revenue istobacco products.

recognized at the time the milestone agreed between the parties such

Revenue from sales of products is recognized upon delivery of theas the progress of development is achieved. Sales-based royalties areproducts because the customer obtains control of the products uponmeasured based on the Group’s licensees’ sales, and recognized bydelivery, by which the Group evaluates that the performance obligation

taking into consideration the timing of occurrence.

is satisfied. Revenue is measured at the consideration promised in

Considerations for transactions are received mainly within one year

a contract with a customer, less discounts, rebates and taxes, includingfrom satisfying their performance obligations and includes no significant

consumption tax. In addition, where the Group makes payments to thefinancial component.

customer, except the case when consideration payable to the customer
is a payment for a distinct product or service from the customer,

C. Processed Foods Business­­revenue is measured at the amount which is consideration promised

Processed foods business engages in the sale of frozen and ambientwith the customer, less consideration payable to the customer.

processed foods, bakery products and seasonings.

Considerations for transactions are received mainly within one year

Revenue from sales of products is recognized upon delivery of thefrom satisfying their performance obligations and includes no signifi-

products because the customer obtains control of the products uponcant financing components.

delivery, by which the Group evaluates that the performance obligation

The tobacco excise taxes and other transactions in which theis satisfied. Revenue is measured at the consideration promised inGroup is involved as an agency are excluded from revenue. The inflow

a contract with a customer, less discounts, rebates and taxes, includ-of economic benefits after deducting the tobacco excise taxes anding consumption tax. In addition, where the Group makes payments toother transactions is presented as “Revenue” in the consolidated

the customer, except the case when consideration payable to the cus-

­statement of income.

tomer is a payment for a distinct product or service from the customer,
revenue is measured at the amount which is consideration promised

B. Pharmaceutical BusinessPharmaceutical business mainly engages in the sale of prescription
drugs and licensing.
Revenue from sales of products is recognized upon delivery of thewith the customer, less consideration payable to the customer.
Considerations for transactions are received mainly within one year
from satisfying their performance obligations and includes no significant
financial component.

products because the customer obtains control of the products uponTransactions in which the Group is involved as an agency aredelivery, by which the Group evaluates that the performance obligation

excluded from revenue. The inflow of economic benefits after deducting

is satisfied. Revenue is measured at the consideration promised inthese transactions is presented as “Revenue” in the consolidated

a contract with a customer, less discounts, rebates and taxes, including

statement of income.

consumption tax. In addition, where the Group makes payments to theis a payment for a distinct product or service from the customer, rev-(2) Transaction Price Allocated to the Remaining
Performance Obligations

enue is measured at the amount which is consideration promised withThe Group uses the practical expedient and does not disclose informa-

the customer, less consideration payable to the customer.

tion on the remaining performance obligations because it has no

customer, except the case when consideration payable to the customer

154

Revenue from licensing is generated by licensing out the rights tosignificant transactions with initial expected contractual terms exceed-

develop and market of each compound to licensees in the develop-

ing one year. There are no significant amounts of considerations fromment stage, and the Group receives upfront income, milestone revenue

contracts with customers that are not included in ­transaction prices.

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE(3) Gross Turnover
The reconciliation from “Gross turnover” to “Revenue” for each year is as follows:
Millions of yen
2020

Gross turnover

7,581,071

7,555,062

Tobacco excise taxes and agency transaction amount(5,405,446)(5,462,501)

Revenue

2,175,626

2,092,561

The tobacco excise taxes and other transactions in which theGroup is involved as an agency are excluded from revenue. The inflow

VALUE CREATION

2019

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

of economic benefits after deducting the tobacco excise taxes andother transactions is presented as “Revenue” in the ­consolidated­statement of income.

26. Other Operating Income
BUSINESS

The breakdown of “Other operating income” for each year is as follows:
Millions of yen
2019Gain on transfer of pharmaceutical licenses

2020

60,518——41,265Gain on sale of property, plant and equipment, intangible assets
and investment property (Note)

15,605

5,332

Other (Note)

19,603

8,327

Total

95,72554,924Gain on sale of the former JT building

SUSTAINABILITY(Note) The amount of restructuring incomes included in each account is as follows:
Millions of yen

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

2019

2020

14,626

4,744

571

60

15,197

4,803

27. Selling, General and Administrative Expenses
GOVERNANCE

The breakdown of “Selling, general and administrative expenses” for each year is as follows:
Millions of yen
2019

2020

Advertising expenses

33,46727,254

Promotion expenses

102,095

92,149Commission

55,46957,614

309,623

307,181

Employee benefit expenses (Note 2)

64,07960,847

Depreciation and amortization

106,094

103,666

Impairment losses on other than financial assets (Note 2)

16,124

12,571

Losses on sale and disposal of property, plant and equipment, intangible assets
and investment property (Note 2)

9,432

7,591

Other (Note 2)

135,324

115,598

Total

831,707784,472

FINANCIAL INFORMATION/OTHERS

Research and development expenses(Note 1)

(Note 1) All research and development expenses are included in “Selling, general and administrative expenses.”

Japan Tobacco Inc. Integrated Report 2020

155

(Note 2) The amount of restructuring costs included in each account is as follows:
Millions of yen
2019

Employee benefit expenses

323

411

332

Impairment losses on other than financial assets
Losses on sale and disposal of property, plant and equipment, intangible assets
and investment property
Other
Total

2020

24,378

329

361

1,064

2,100

26,182

3,116

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

2019

2020

Dividend income
Financial assets measured at fair value through other comprehensive income
Investments derecognized during the year

1,275

46

Investments held at the end of the year

654

882

Interest income
Financial assets measured at amortized cost
Deposits and bonds

6,014

6,389

—

3,143

Gain on net monetary position
Other
Total

459

1,893

8,402

12,353
Millions of yen

Financial Costs

2019

2020

Bonds and borrowings

26,01921,039

Other

1,538

1,495

Foreign exchange losses (Note 1)

13,29735,812

Employee benefit expenses (Note 2)

2,785

2,172

Other

1,887

826

45,526

61,344

Interest expenses
Financial liabilities measured at amortized cost

Total

(Note 1) Valuation gain (loss) of currency derivatives is included in foreign exchange losses.
(Note 2) The employee benefit expenses are the net amount of interest cost and interest income related to employee benefits.

156

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

29. Other Comprehensive Income
Amount arising during the year, reclassification adjustments to profit or loss and tax effects for each component of “Other comprehensive
income” for each year are as follows:Year ended December 31, 2019

VALUE CREATION

Millions of yen
Amountarising

Reclassification
adjustments

Before tax
effects

Tax effects

Net oftax effects

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(2,209)—(2,209)(274)(2,484)Remeasurements of defined benefit plans(4,957)—(4,957)2,146(2,811)(7,166)—(7,166)

1,871(5,295)

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

7,521

2,591

10,112

(233)

9,879

(882)

320

(561)

171

(391)

Total of items that may be reclassified subsequently to profit
or loss

6,639

2,911

9,550

(62)

9,489

(527)

2,911

2,384

1,810

4,194

Amountarising

Reclassification
adjustments

Before tax
effects

Tax effects

Net oftax effects

Net gain (loss) on revaluation of financial assets measured
at fair value through other comprehensive income(3,886)—(3,886)

1,184(2,702)Remeasurements of defined benefit plans(7,496)—(7,496)

1,539(5,957)(11,383)—(11,383)

2,723(8,659)Total

BUSINESS

Exchange differences on translation of foreign operations
Net gain (loss) on derivatives designated as cash flow hedges

Year ended December 31, 2020
Millions of yen

Items that will not be reclassified to profit or loss
SUSTAINABILITY

Total of items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations(1)(167,964)(2,746)(170,711)

170

152

323

(98)

224

Total of items that may be reclassified subsequently to profit
or loss(167,793)

151(167,642)(2,844)(170,486)(179,175)

151(179,024)(121)(179,145)

Total

GOVERNANCE(167,963)

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

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 not attributable to ordinary shareholders of the parent company
Profit for the period used for calculation of basic earnings per share

2020

348,190

310,253——

348,190

310,253

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

Profit for the period attributable to owners of the parent company

2019

157

B. Weighted-average Number of Ordinary Shares Outstanding During the Period
Thousands of shares

Weighted-average number of shares during the period

2019

2020

1,776,782

1,774,128(2) 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

2019

2020

348,190

310,253—(0)348,190

310,253

Adjustment
Profit for the period used for calculation of diluted earnings per share

B. Weighted-average Number of Diluted Ordinary Shares Outstanding During the Period
Thousands of shares

Weighted-average number of ordinary shares during the period

2019

2020

1,776,782

1,774,128

Increased number of ordinary shares under subscription rights to shares
Weighted-average number of diluted ordinary shares during the period

857

792

1,777,639

1,774,921

31. Reconciliation of Liabilities Arising from Financing Activities
Reconciliation of liabilities arising from financing activities for each year is as follows:Year ended December 31, 2019
Millions of yen
As ofJanuary 1,
2019

Short-term borrowings and commercial paper

238,023

Long-term borrowings (Note)

Non-cash changes
Cash flows

Foreign exchange
movement

Other

As of
December 31,
2019(44,976)(1,563)

1,097

192,581

129,313(11,568)(2,475)27

115,297

Bonds (Note)

610,444

59,435(3,579)324

666,623

Lease liabilities

48,840(14,294)(394)

19,55253,705

1,026,621(11,403)(8,011)

21,0001,028,206

Total

Year ended December 31, 2020
Millions of yen

Cash flows

Foreign exchange
movement

Short-term borrowings and commercial paper

192,581(132,462)(8,525)39

51,633Long-term borrowings (Note)

115,297

88,1531,280

225

204,955

Bonds (Note)

666,623

42,201(7,000)468

702,292

Lease liabilities

53,705(17,741)(641)

31,20966,531

1,028,206(19,849)(14,886)

31,941

1,025,412

Total(Note) Current portion is included.

158

Non-cash changes

As ofJanuary 1,
2020

Japan Tobacco Inc. Integrated Report 2020

Other

As of
December 31,
2020

CORPORATE PROFILE

32. Share-based Payments
The explanation of the share-based payments of the Company and the Group is as follows.

(1) Share Option
The Company and Torii Pharmaceutical adopt share option plans.
based on the approvals at the Annual Shareholders’ Meeting.

(i)	The subscription rights to shares become exercisable when a

VALUE CREATION

Share options are granted by the resolutions of the Board of Directors

Conditions related to the exercise of share options are as follows:
holder of a subscription right to shares no longer holds a position

The outline of the share option plan of the Company is as follows.

as a director, an audit & supervisory board member or an executive

Due to the introduction of the restricted stock remuneration plan andofficer. In the subscription rights to shares allocation contract withthe performance share unit plan, share option plans are abolishedholders of such rights, it is provided for that the rights become

except share options already allotted and new share options will not

exercisable from the date following the date on which

be issued after 2020.

they no longer hold their positions.
(ii)	In the case where any holders of subscription rights to shares

A. Share Option Contract Conditions of the Company

waive such rights, they cannot exercise them.

Positions of persons granted: Directors and Executive

Settlement: Issuance of shares

Officers
BUSINESS

Effective period of granted share option : 30 years after the date of
grant
Vesting conditions: NoneB. Changes in the Number of Share Options of the Company
Shares2020

Directors

Executive
Officers

Balance as of January 1

195,400

634,000

Granted126,000

187,200

313,200

—

—

—

—

(168,000)(168,000)—(203,000)(203,000)

ExercisedTotal

829,400

Directors

Executive
Officers

Total

361,000

613,600

974,600

Transferred

39,600(39,600)

—

—

—

—

Balance as of December 31

361,000

613,600

974,600

361,000

410,600

771,600—

153,400

153,400—

85,20085,200Exercisable balance as of December 31

SUSTAINABILITY

2019

GOVERNANCE(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 20 executive officers for the year ended December 31, 2019.
“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 value per share of share options granted during the period was ¥940 for the year ended December 31, 2019.
(Note 5) The weighted-average share prices of share options at the time of exercise during the period were ¥2,544 and ¥2,256 for the years ended December 31, 2019and 2020, respectively.
(Note 6) The weighted-average remaining contract years of unexercised share options at the end of each period were 26.4 years and 25.6 years for the years ended
December 31, 2019 and 2020, respectively.

FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020

159

C. Method of Measuring Fair Value of Share Options Granted During the Period of the Company(i) Valuation Model
Black-Scholes Model(ii) Main Assumptions and Estimation
2019

2020

Share price¥2,401—Volatility of share price (Note 1)

31.2%

—

15 years—

Estimated remaining period (Note 2)
Estimated dividends (Note 3)¥150/share—

Risk free interest rate (Note 4)

0.07%

—

(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 be ­exercised at a midpoint of the exercise period.
(Note 3) Based on the latest dividends paid.
(Note 4) The yield on government bonds for a period of the expected remaining period.

(2) Restricted Stock Remuneration

restriction period is 30 years from the grant date. With regard to the

The Company has the restricted stock remuneration plan, which deliv-

allotted restricted stocks (hereinafter referred to as “Allotted Shares”)

ers the Company's ordinary shares which are subject to a certain

the restricted stock allotment agreement says that each Eligible

transfer restriction period, to Directors also serving as Executive

Directors and Executive Officers is prohibited to transfer Allotted

Officers and Executive Officers of the Company (hereinafter referred toShares to a third party, pledge them, mortgage them, or use anyas ”Eligible Directors and Executive Officers”). The plan aims to further

arrangement to dispose them, that the Company can acquire Allottedstrengthen the initiatives to enhance the corporate value over the mid

Shares without any compensation on certain conditions and so on. In

to long-term and to further develop the shared value with shareholders.

case any Eligible Directors and Executive Officers who receive allot-

The Company enters into the restricted stocks allotment agree-

ment retire due to expiration of the term or resign due to reasons

ment with the Eligible Directors and Executive Officers and thedeemed reasonable by the Company’s Board of Directors, from a

Company’s ordinary shares shall be delivered if the Eligible Directors

position as Member of the Board or any other positions separately

and Executive Officers, who continue to serve for a stipulated period,

specified by the Company’s Board of Directors even during the transfer

pay all of the monetary compensation claims provided by the

restriction period, the transfer restrictions shall be removed on all

Company by the method of contribution in kind. The transfer

Allotted Shares held by him/her.

Details of Restricted Stock Remuneration
Grant date

2019

2020

—

May 26, 2020—

Directors: 94,200
Executive Officers: 145,000

Number of allotted shares
Fair value at the grant date—

¥2,001—

Calculated based on the closing price of
the Company's ordinary share at
the Tokyo Stock Exchange as of the previous
business day of the resolution of the shareallotment by the Board of Directors

Calculation methodology of fair value(3) Performance Share Unit Remuneration

160

The Eligible Directors and Executive Officers shall be paid monetary

The Company has the performance share unit remuneration plan,compensation claims and monies for the delivery of the Company’s ordi-

which varies the number of allotted shares depending on the degree ofnary shares in accordance with the rate of achievement, etc. of numericalthe achievement of predetermined performance target, for Directors

targets such as performance during the performance evaluation period as

also serving as Executive Officers and Executive Officers of thedetermined through deliberations by the Advisory Panel on Nomination

Company (hereinafter referred to as ”Eligible Directors and Executive

and Compensation of the Company after the performance evaluation

Officers”). The plan aims to further strengthen the initiatives toperiod of 3 consecutive fiscal years on the condition that they continue toenhance the corporate value over the mid to long-term and to further

serve as Directors, etc. of the Company for a stipulated period. They shalldevelop the shared value with shareholders as with the restricted

receive the delivery of the Company’s ordinary shares by paying all of suchstock remuneration.

monetary compensation claims by the method of contribution in kind. The

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

number of allotted shares and the amount of cash to be paid are calcu-

The fair value in the plan is estimated based on the market price oflated by multiplying basic number of share units determined in accordance

the Company’s share, which is not revised in consideration of thewith duties of each Eligible Directors and Executive Officers by theestimated dividend. The weighted average fair value at the reporting

payment ratio calculated based on the rate of achievement, etc. ofdate for the year ended December 31, 2020 is ¥2,102.

numerical targets such as performance during the performance­evaluation period in the range of 0% - 200%.
VALUE CREATION(4) Share-based Payment Expenses
The costs included in “Selling, general and administrative expenses” in the consolidated statement of income are as follows.
Millions of yen
2019

Share options (equity-settled)

2020

291

30

Restricted stock remuneration (equity-settled)—479

Performance share unit remuneration (cash-settled)—84(5) Liabilities Arising from Share-based Payment
BUSINESSThe liabilities included in “Other non-current liabilities” in the consolidated statement of financial position as of December 31 are as follows.
Millions of yen

Carrying amounts of liability

2019

2020

—

84

33. Financial Instruments(1) Capital Management

the mid- to long-term, and is consequently in the best interest of all

The Group’s management principle is pursuit of the “4S” model: bal-stakeholders, including our shareholders.
For that reason, as its financial policy, the Group maintains a strong

society, and fulfilling our responsibilities towards them, aiming tofinancial base that secures stability in the case of changes in businessexceed their expectations.

environment such as economic crises, and flexibility enabling expeditious

The Group believes that sustainable profit growth in the mid- to

SUSTAINABILITY

ancing the interests of consumers, shareholders, employees and wider

responses to business investment opportunities.

long-term based on this principle will increase the Group’s value in
The Group manages net interest-bearing debt, where cash and cash equivalents are deducted from interest-bearing debt, and capital (the part
attributable to the owners of the parent company). The amounts as of December 31 are as follows:
Millions of yen
2019

Cash and cash equivalents
Net interest-bearing debt
Capital (equity attributable to owners of the parent company)

2020

974,502

958,881(357,158)(538,844)

617,344420,037

2,662,696

2,522,834

GOVERNANCE

Interest-bearing debt

(Note)(Note) Lease liabilities are excluded.

There are specific rules for shares of the Company under theJapan Tobacco Inc. Act, as follows:

shares, the Company shall obtain the approval of the Minister ofFinance (Article 2 (2)).

the shares issued by the Company (excluding the type of shares, for

Disposal of shares owned by the Japanese government shall bewhich it is stipulated that voting rights may not be exercised on any

within the limits on the number of shares decided by the Diet in thematters that can be resolved by the Annual Shareholders’ Meeting)relevant annual budget (Article 3).

(Article 2 (1)).

FINANCIAL INFORMATION/OTHERSThe Japanese government shall hold more than one-third of all ofbonds with subscription rights to shares) when exchanging withThe Group monitors financial indicators in order to maintain a

In cases where the Company intends to solicit persons to sub-well-balanced capital structure that ensures an appropriate return on

scribe for shares to be issued or subscription rights to shares or where

equity and a stable and flexible financial condition for future invest-

the Company intends to deliver shares (excluding treasury shares),ment. We monitor credit ratings for financial stability and flexibility, andsubscription rights to shares (excluding its own subscription rights to

ROE (return on equity) for profitability, while focusing on changes inshares) or bonds with subscription rights to shares (excluding its own

the domestic and overseas environment.
Japan Tobacco Inc. Integrated Report 2020161

(2) Financial Risk Management

In principle, the Group sets credit lines or transaction conditions

The Group is exposed to financial risks (credit risk, liquidity risk, foreign

with respect to trade receivables for counterparties based on theexchange risk, interest rate risk, and market price fluctuation risk) in

Credit Management Guidelines in order to control the credit risk relat-

the process of its management activities and it manages risks based

ing to counterparties. In addition, the receivable balances of counter-on a specific policy in order to avoid or reduce said risks. The results

parties with high credit risk are monitored. The Treasury Division of theof risk management are regularly reported by the Treasury Division toCompany regularly monitors the status of the occurrence and collec-

the president and the Board of Directors of the Company.

tion of bad debts, and reports them to the president and the Board of

The Group policy limits derivatives to transactions for the ­purpose

Directors of the Company.

of mitigating risks from transactions based on actual demand.

With regard to the investment of cash surpluses and derivatives,

Therefore, we do not transact derivatives for speculation purposes or

the Group invests in debt securities and other financial instruments

trading purposes.

with a certain credit rating and transacts with financial institutions
with a high credit rating in principle in order to prevent credit risks from

(3) Credit Risk

occurring and based on the Group Financial Operation Basic Policy. In

Receivables, such as note and account receivables, acquired from theaddition, the Treasury Division of the Company regularly monitors theoperating activities of the Group are exposed to customer credit risk.

performance of these transactions and reports the results to the

The Group holds mainly debt securities for surplus investment andpresident and the Board of Directors of the Company.

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 the Group conducts

The maximum exposure pertaining to credit risks for financial
assets is the carrying amount after considering impairment in the
consolidated financial statements.

in order to hedge foreign exchange fluctuation risks and interest rate
fluctuation risks, we are exposed to the credit risk of the financial

There is no excessive concentration of the credit risks to certain
counterparties.

­institutions which are counterparties to these transactions.
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
Other financial assets

As of January 1, 2019

Tradereceivables

Measured at
an amountequal to the
12-month
expected
credit losses

Measured at an amount equal
to the full lifetime expectedcredit losses
Noncreditimpaired
financialassetsCreditimpaired
financialassets

Total

1,650

—

269

5,839

7,758

Addition

1,163

—

18

1

1,182

Decrease (intended use)

(218)

—

—

(0)

(219)

Decrease (reversal)

(20)

—

(57)

(78)

(155)

Other

(100)

—

—

(56)

(156)

2,475

—

230

5,705

8,409

785

—

10

2

797

(1,003)

—

(0)

(55)

(1,059)As of December 31, 2019
Addition
Decrease (intended use)
Decrease (reversal)

(52)

—

(31)

(23)

(107)

Other

(281)

—

(117)

155

(244)

1,923

—

92

5,783

7,798

As of December 31, 2020

(Note) There is no significant change in the carrying amounts of financial assets which affects the change in the allowance for doubtful accounts.

(4) Liquidity Risk

and the Treasury Division of the Company regularly monitors and

The Group raises funds by borrowings, commercial paper and bonds;

collects information on the balance of liquidity-in‑hand and interest-

however, these liabilities are exposed to the liquidity risk that we would

bearing debt and reports it to the president and the Board of Directors

not be able to repay liabilities on the due date due to the deteriorationof the Company. In addition, the Group keeps necessary credit facilitiesof the financing environment.

to manage liquidity risk by having commitment lines with several

In accordance with the Group Financial Operation Basic Policy, theGroup establishes a finance plan based on the annual business plan

162

Japan Tobacco Inc. Integrated Report 2020

financial institutions.

CORPORATE PROFILE

The financial liability balance (including derivative financial instruments) by maturity as of December 31 is as follows:
As of December 31, 2019
Millions of yen

Contractual
cash flow

Due within
one year

Trade and other payables

408,597

408,597

408,597—

Due after
two years
throughthree years

Due after
three years
throughfour years

Due after
four years
throughfive years

Due after
five years

—

—

—

—

VALUE CREATION

Carrying
amountDue after
one yearthrough
two years

Non-derivative financial liabilities
Short-term borrowings

192,581

192,581

192,581

—

—

—

—

—

Current portion of long-term borrowings

11,554

11,554

11,554

—

—

—

—

—
20,187Long-term borrowings

103,743

103,847—

11,20941,211

11,17520,064Current portion of bonds

80,00080,00080,000

—

—

—

—

—

Bonds

586,623590,133—

82,17030,000117,519—

360,444

Lease liabilities
Subtotal

53,70558,18915,28910,985

6,482

4,183

2,751

18,497

1,436,804

1,444,901

708,022

104,364

77,694

132,877

22,815399,128

7,739

7,739

7,739

—

—

—

—

—

7,739

7,739

7,739

—

—

—

—

—

1,444,543

1,452,640

715,761

104,364

77,694

132,877

22,815399,128

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

Derivative financial liabilities
Subtotal
Total

BUSINESS

Foreign exchange forward contract

As of December 31, 2020
Millions of yen

Carrying
amountContractual
cash flow

Due within
one year

Trade and other payables

436,540

436,540

436,540

—

—

—

—

—

Short-term borrowings

51,633

51,633

51,633

—

—

—

—

—

Current portion of long-term borrowings

12,226

12,226

12,226

—

—

—

—

—

Long-term borrowings

192,729

193,722—

41,911

11,56020,064

49

120,140

Current portion of bonds

77,60977,62577,625

—

—

—

—

—

Bonds

624,683

628,628—

30,000114,338—

94,728389,563

Lease liabilities
Subtotal

66,531

70,383

19,031

12,896

9,336

7,132

3,223

18,764

1,461,952

1,470,757

597,055

84,807135,233

27,19698,000528,467

10,334

10,334

10,334

—

—

—

—

—

SUSTAINABILITY

Non-derivative financial liabilities

Derivative financial liabilities
Subtotal
Total

10,334

10,334

10,334

—

—

—

—

—

1,472,286

1,481,091

607,389

84,807135,233

27,19698,000528,467

GOVERNANCE

Foreign exchange forward contract

The total of commitment lines and withdrawal as of December 31 are as follows:
Millions of yen

Total committed line of credit
Unused balance(5) Foreign Exchange Risk
The Group operates businesses globally and, therefore, is exposed to
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 fluctuation2020

470,411478,200——

470,411478,200

FINANCIAL INFORMATION/OTHERS

Withdrawing

2019

including the payment and receipt of dividends, in currencies thatare different from each functional currency of the Group.
(ii) The risk that the equity of the Group is influenced by foreign exchange
fluctuation when equity denominated in each functional currency of theGroup is translated into Japanese yen and consolidated.

as a result of external transactions and intergroup transactions,Japan Tobacco Inc. Integrated Report 2020

163

(iii) The risk that the profit or loss of the Group is influenced by foreignexchange fluctuation when profit or loss denominated in eachon the assumption that currencies other than the currencies used forthe calculation do not fluctuate.

functional currency of the Group is translated into Japanese yen

Millions of yen

and consolidated.
The Group hedges against risk (i) using derivatives or foreign

Profit before income taxes

2019

2020

(1,594)(3,960)­currency-denominated interest-bearing debts for example, when future
cash flow is projected or when receivables and payables are fixed, andsome 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 these are designated as net investment
hedges. The Group does not hedge against risk (iii) in principle.
In order to mitigate risks mentioned above resulting from the foreign exchange fluctuation, in accordance with the Group Financial
Operation Basic Policy, and under the supervision of the Treasury
Committee of the Company, the Group establishes and implements aforeign currency hedge policy, taking into consideration the impact on
the Group’s performance and the current conditions of the foreignexchange market in a comprehensive manner. The Treasury Division of
the Company regularly reports the performances to the president andthe Board of Directors of the Company.

(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 to borrowings
and bonds, in accordance with the Group Financial Operation Basic Policy,
and under the supervision of the Treasury Committee of the Company, theGroup establishes and implements an interest rate hedging policy, taking
into consideration the impact on the Group’s performance and the ­current
condition of the interest rates in a comprehensive manner. The Treasury
Division of the Company reports the performances to the president andthe Board of Directors of the Company.
Interest Rate Sensitivity Analysis
In cases where the interest rate of financial instruments held by theForeign Exchange Sensitivity Analysis
In cases where each currency other than the functional currency that
denominates the financial instruments held by the Group as of eachyear end increases by 10% in value against the functional currency, theimpact on profit before income taxes in the consolidated statement ofincome is as follows:
The impact from the translation of functional currency-denominatedGroup as of each year end increases by 100bp, the impact on profit
before income taxes in the consolidated statement of income isas 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

financial instruments, and assets, liabilities, income and expenses offoreign operations into Japanese yen is not included. Also, it is based

Profit before income taxes

2019

2020

(566)

1,743

(7) Hedging Transactions
The Group’s policy for hedging transactions is stated in “3. Significant Accounting Policies.”
A. Cash Flow Hedges
The details of hedging instruments designated as cash flow hedges are as follows:
As of December 31, 2019
Carrying amount (Note)(Millions of yen)Contract amountOver one year

AssetsLiabilities

Average rate,
etc.

41

227

¥106.67

Foreign exchange risk
Foreign exchange forward contract
JPY/USD164

Japan Tobacco Inc. Integrated Report 2020

USD 187 mil.

USD—

CORPORATE PROFILE

As of December 31, 2020
Carrying amount (Note)(Millions of yen)Contract amountOver one year

AssetsLiabilities

Average rate,
etc.

324

176

¥105.31

Foreign exchange risk
Foreign exchange forward contract
USD 218 mil.

USD—

VALUE CREATIONJPY/USD(Note) Carrying amounts of derivatives are presented as “Other financial assets” or “Other financial liabilities” in the consolidated statement of financial position, andthe portion with over one year maturity is classified as “Non-current assets” or “Non-current liabilities.”

The schedule of net gains (losses) on hedging instrument designated as cash flow hedges is as follows:
Millions of yen
Effective portion of changes in thefair value of cash flow hedges
Foreign exchange risk

As of January 1, 2019

443

Other comprehensive income(882)

Reclassification adjustments (Note 2)320

Tax effects

BUSINESS

Amount arising (Note 1)

171

Other

(185)

As of December 31, 2019(132)

Other comprehensive income
Amount arising (Note 1)

170

Reclassification adjustments (Note 2)

152

Tax effects

(98)
30

As of December 31, 2020

122

SUSTAINABILITY

Other(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 the­consolidated statement of income. 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 mainly as follows:
As of December 31, 2019
Carrying amount (Note)(Millions of yen)
Liabilities

Average rate,etc.

USD 1,250 mil.

—

136,675¥109.41

EUR 567 mil.

—

69,132$1.11

GBP 400 mil.

—

56,089$1.32

Over one year

Bonds in USD

USD 1,250 mil.

Bonds in EUR

EUR 567 mil.

Bonds in GBP

GBP 400 mil.

GOVERNANCE

AssetsContract amountForeign exchange forward contract
RUB 29,502 mil.

RUB

—

—

930

€0.014JPY / USD

USD 400 mil.

USD

—

—

749

¥106.68

USD / TWD

TWD 7,518 mil.

TWD

—

—

399

$0.033

GBP / USD

USD 245 mil.

USD

—

15

395

£0.77

EUR / USD

USD 183 mil.

USD

—

—

358

€0.89

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERSEUR / RUB

165

As of December 31, 2020
Carrying amount (Note)(Millions of yen)Contract amountOver one year

AssetsLiabilities

Average rate,etc.

Bonds in USD

USD 1,250 mil.

USD 500 mil.

—

129,198¥109.41

Bonds in EUR

EUR 1,321 mil.

EUR 1,321 mil.

—

166,119$1.16

Bonds in GBP

GBP 400 mil.

GBP 400 mil.

—

54,704$1.32

Foreign exchange forward contract
EUR / RUB

RUB 20,294 mil.

RUB

—

543

289

€0.011

JPY / USD

USD 300 mil.

USD

—

519

—

¥105.03

GBP / USD

USD 523 mil.

USD

—

—

1,682

£0.76

(Note) Carrying amounts of bonds are presented as “Bonds and borrowings” in the consolidated statement of financial position, and the portion with over one year maturity isclassified as “Non-current liabilities.” Carrying amounts of derivatives are presented as “Other financial assets” or “Other financial liabilities” in the consolidated statementof financial position, and the portion with over one year maturity is classified as “Non-current assets” or “Non-current liabilities.”

The schedule of net gains (losses) on hedging instrument designated as hedge of net investment in foreign operations is as follows:
Millions of yen

As of January 1

2019

2020

17,842

10,338Other comprehensive income
Amount arising (Note 1)
Tax effects
As of December 31 (Note 2)(7,271)

3,887

(233)

(2,746)

10,338

11,480(Note 1) The change in value of the hedged item used as the basis for recognizing hedge ineffectiveness approximates the change in fair value of thehedging instrument.
(Note 2) Net gain arising from the hedging instruments for which hedge accounting is discontinued were ¥14,683 million and ¥21,026 million as of December 31,
2019 and 2020 respectively those which are included in the exchange differences on translation of foreign operations.

(8) Market Price Fluctuation Risk

(9) Fair Value of Financial Instruments

With respect to securities, the Group regularly assesses the fair value

The fair value hierarchy of financial instruments is categorized fromand financial conditions of the issuers, and each relevant department

Level 1 to Level 3 as follows:

reviews the portfolio held by taking into account the relationship withcounterparty entities as necessary.

Level 1: Fair value measured at the quoted price in the active
marketLevel 2: Fair value that is calculated using the observable priceother than categorized in Level 1 directly or indirectly
Level 3: Fair value that is calculated based on valuation techniques
which include inputs that are not based on observable
market data

A. Financial Instruments Measured at Amortized Cost
The carrying amount and fair value hierarchy of financial instruments measured at amortized cost as of December 31 are as follows:
As of December 31, 2019
Millions of yen
Fair value

166

Carrying
amountLevel 1

Level 2

Level 3Total

Long-term borrowings (Note)

115,297—

116,804—

116,804

Bonds (Note)

666,623

683,650——

683,650

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILE

As of December 31, 2020
Millions of yen
Fair value
Level 1

Level 2

Level 3Total

Long-term borrowings (Note)

204,955—

206,953—

206,953

Bonds (Note)702,292

750,417——750,417

VALUE CREATION

Carrying
amount(Note) Current portion is included.

With regard to short-term financial assets and short-term financial

The fair value of long-term borrowings is calculated based on theliabilities measured at amortized cost, their fair value approximatespresent value which is obtained by discounting the total of thethe carrying amount.

­principal and interest by the interest rate assumed in a case where thesame loan is newly made.

B. Financial Instruments Measured at Fair Value
The fair value hierarchy of financial instruments measured at fair value as of December 31 is as follows:

BUSINESSAs of December 31, 2019
Millions of yen
Level 2

Level 3 (Note)

Total

Derivative assets

—

2,564

—

2,564

Equity securities

25,829—6,919

32,747442

17,673

5,008

23,123

26,27020,238

11,92758,435

—

7,739

—

7,739

—

7,739

—

7,739

Level 1

Level 2

Level 3 (Note)

Total

Derivative assets

—

8,608

—

8,608

Equity securities

19,604—

7,100

26,704

451

8,650

5,357

14,457

20,055

17,257

12,45749,769—10,334—

10,334—

10,334—

10,334

Other
Total
Derivative liabilities
Total

SUSTAINABILITY

Level 1

As of December 31, 2020
Millions of yen

Other
Total
Derivative liabilities
Total

GOVERNANCE(Note) The schedule of financial instruments that are classified in Level 3 is as follows:
Millions of yen

As of January 1

2019

2020

10,351

11,927

Total gain (loss)
209

(930)

Other comprehensive income (Note 2)

(182)

(804)

Purchases

1,660

2,674

Sales

(140)

(410)

Other

29

—

11,927

12,457

As of December 31

FINANCIAL INFORMATION/OTHERS

Profit or loss (Note 1)(Note 1) Gains and losses included in profit or loss for the years ended December 31, 2019 and 2020 are related to financial assets measured at fair value throughprofit or loss as of the year end. These gains and losses are included in “Financial income” and “Financial costs.”(Note 2) Gains and losses included in other comprehensive income for the years ended December 31, 2019 and 2020 are related to financial assets measured at fairvalue through other comprehensive income as of the year end. These gains and losses are included in “Net gain (loss) on revaluation of ­financial assets
measured at fair value through other comprehensive income.”

Japan Tobacco Inc. Integrated Report 2020167

34. Related Parties
Based on the Japan Tobacco Inc. Act, the Japanese government shall(1) Related-party Transactions

hold more than one-third of all of the shares issued by the Company

Related-party transactions are conducted under the same conditions(excluding the type of shares, for which it is stipulated that voting rights

as regular business transactions.

may not be exercised on any matters that can be resolved by Annual

The Group’s revenue from CJSC TK Megapolis, the local Russian

Shareholders’ Meeting). As of December 31, 2020, the Japanesedistribution affiliate, was ¥202,780 million and ¥177,170 million for the­government held 33.35% of all outstanding shares of the Company.

years ended December 31, 2019 and 2020, respectively. The Group held
trade receivables of ¥38,640 million and ¥27,668 million from CJSC TK
Megapolis as of December 31, 2019 and 2020, respectively.

(2) Remuneration for Directors and Audit and Supervisory Board Members
Remuneration for directors and audit and supervisory board members for each year is as follows:
Millions of yen
2019

2020

Remuneration and bonuses

673

1,139

Share-based payments

115

251

788

1,390

Total

35. Subsidiaries, Associates and Others(The composition of the Group)
The composition of the Group by reportable segment as of December 31 is as follows:
2019

2020

Number ofsubsidiaries

Number of entities
accounted for using
the equity method (Note)

Number ofsubsidiaries

Number of entities
accounted for using
the equity method (Note)

Domestic Tobacco

13

1

13

1

International Tobacco

171

7

173

8

Pharmaceuticals

2

—

2

—

Processed Food

28

3

28

2

Other

17

2

19

2

Total

231

13

235

13

Reportable Segments(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 forthe year ended December 31, 2020.

Regarding the restrictions on the ability to use the assets of theGroup, please refer to “7. Cash and Cash Equivalents.”

36. Commitments(1) Commitments for the Acquisition of Assets
Commitments for the acquisition of assets as of December 31 are as follows:
Millions of yen
2019

2020

Acquisition of property, plant and equipment

35,74733,768Acquisition of intangible assets

1,602

3,130

37,34836,897

Total

168

Japan Tobacco Inc. Integrated Report 2020

The Company and some of its subsidiaries are defendants in ­lawsuits

Company, based on the Tobacco Business Act, the Company enters

filed by plaintiffs seeking damages for harm allegedly caused byinto purchase contracts with domestic leaf tobacco growers every

smoking or vaping, the marketing of tobacco products, or exposure toyear, and the contracts determine the area under cultivation by type of

tobacco smoke. As of December 31, 2020, there were a total of 21

tobacco and the prices by type and quality of tobacco leaf. Under thesmoking and health related cases pending in which one or more mem-

contracts, the Company is obligated to purchase all domestic leaf

bers of the Group were named as a defendant or for which thetobacco produced pursuant to such contracts, except for any domestic

Company may have certain indemnity obligations pursuant to theleaf tobacco not suited for the manufacture of tobacco products.

agreement such as for the Company’s acquisition of RJR Nabisco

37. Hyperinflationary Accounting Adjustments

VALUE CREATION(1) Smoking/Vaping and Health Related Litigation

With regard to the procurement of domestic leaf tobacco by the

CORPORATE PROFILE(2) Procurement of Domestic Leaf TobaccoInc.’s overseas (­non-U.S.) tobacco operations.
The major ongoing smoking and health related cases are
as follows:

As required by IAS 29, the Group’s consolidated financial statements

On March 8, 2019, JTI-Macdonald Corp. (hereinafter referred to as

include the financial statements of the subsidiaries in the hyperinfla-“JTI-Mac”), the Company’s Canadian subsidiary, filed for protection

tionary economy, restated in terms of the measuring unit current at

from its creditors under the Companies’ Creditors Arrangement Act

the end of the reporting period.

(CCAA). The Ontario Superior Court has granted the CCAA application

For the restatement of financial statements of the subsidiaries inand extended protection in favor of JTI-Mac (hereinafter referred to as“CCAA Proceedings”). All of the below Canadian matters against JTI-

Consumer Price Index of Iran published by the Statistical Centre of Iran.

Mac have been stayed by the CCAA Proceedings, under which JTI-Mac

Consumer Price Index and corresponding conversion coefficients

BUSINESS

Iran, the Group applies the conversion coefficient derived from thecarries on business in the ordinary course.

of Iran are presented below.
End of reporting period

ConsumerPrice Index

Conversion
coefficient

31 December 2015

93

300

31 December 2016

102

276

A. Individual Claim
There is one individual case brought against the Company’s indemnitee in South Africa.

South Africa Individual Claim (Joselowitz):

31 December 2017

112

251

31 December 2018

152

185

South Africa in October 2000. Plaintiff seeks compensatory and puni-

31 December 2019

194

145

tive damages, alleging that the Company’s indemnitee marketed prod-

31 December 2020

281

100

ucts which it knew to be dangerous to health, manipulated nicotine

restated their non-monetary items held at historical cost, such as
property, plant and equipment, by applying the conversion coefficientat the acquisition date. Monetary items and non-monetary items heldat current cost are not restated, as they are considered to be
expressed in terms of the measuring unit current at the end of the
For the purpose of consolidation, the financial statements of theGroup's subsidiaries in the hyperinflationary economy are translatedusing the spot exchange rates at the end of the reporting period.

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 case has been dormant
since February 2001.
In addition, there is one individual case (which is currently ­dormant)brought against the Company’s subsidiary in Ireland and one ongoing
individual case brought against the Company’s subsidiaries in the
United States.
B. Class Actions
There are eight ongoing class actions in Canada against the

38. Contingencies

Company’s subsidiary and/or indemnitees.

Contingent Liabilities

This class action was brought in September 1998 against three

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 in theseproceedings are based on substantial evidence and implement thesystem for the response to action with the assistance ofCanada Quebec Class Action (Cecilia Letourneau):
Canadian tobacco manufacturers including JTI-Mac. Plaintiffs were

FINANCIAL INFORMATION/OTHERSThe Company and some of its subsidiaries are defendants in legal

GOVERNANCE

reporting period.

SUSTAINABILITY

The Group's subsidiaries in the hyperinflationary economy have

The individual claim was brought against the Company’s indemnitee inseeking a total of approximately ¥371.1 billion (approximately CAD 4.6
billion) in compensatory damages, an amount for which all the defendants are jointly and severally liable, and a total amount of approximately ¥371.1 billion (approximately CAD 4.6 billion) in punitive
damages, to be divided among all the defendants based on theirrespective market shares.

external lawyers.

Japan Tobacco Inc. Integrated Report 2020

169

The Quebec Superior Court published the first instance judgment infavor of the plaintiffs in June 2015. In June 2015, JTI-Mac and otherpreliminary motions are pending. The case was dormant and is­currently stayed by the CCAA Proceedings.

tobacco manufacturers appealed the judgment to the Quebec Court ofAppeal, and the appeal on the merits was heard and concluded in

Canada Manitoba Class Action (Kunta):

November 2016.

This class action was brought against tobacco industry members

In March 2019, the Quebec Court of Appeal dismissed the appeal ofincluding JTI-Mac and the Company’s indemnitees in June 2009.

defendants by substantively upholding the first instance judgment andPlaintiffs are seeking unspecified compensatory and punitive damages

ordering a punitive damage award against the appellants of approxi-

on behalf of class members who allege to be or have been addicted tomately ¥13.0 billion (approximately CAD 161 million), in which the sharenicotine contained in cigarettes manufactured by the defendants. Theof the total damage award against JTI-Mac is approximately ¥1.2 billion

statement of claim was served on the Company’s indemnitees but not(approximately CAD 15 million). The time limit for seeking leave to

on JTI-Mac. The case was dormant and is currently stayed by theappeal the decision to the Supreme Court of Canada is suspended

CCAA Proceedings.

during the CCAA Proceedings. Enforcement of the judgement is stayedby the CCAA Proceedings.

Canada Nova Scotia Class Action (Semple):
This class action was brought against tobacco industry members

Canada Quebec Class Action (Conseil Québécois sur le tabac et la santé):

including JTI-Mac and the Company’s indemnitees in June 2009.

This class action was brought in November 1998 against three

Plaintiffs are seeking unspecified compensatory and punitive damages

Canadian tobacco manufacturers including JTI-Mac. Plaintiffs wereon behalf of class members who allege to be or have been addicted toseeking a total of approximately ¥1,005.4 billion (approximately CAD

nicotine contained in cigarettes manufactured by the defendants. The

12.4 billion) in compensatory damages, an amount for which all thestatement of claim was served on the Company’s indemnitees but not

defendants are jointly and severally liable, and a total amount of

on JTI-Mac. The case was dormant and is currently stayed by theapproximately ¥65.5 billion (approximately CAD 0.8 billion) in punitive

CCAA Proceedings.

damages, to be divided among all the defendants based on theirrespective market shares.
The Quebec Superior Court published the first instance judgment in

Canada British Columbia Class Action (Bourassa):
This class action was brought against tobacco industry members

favor of the plaintiffs in June 2015. In June 2015, JTI-Mac and otherincluding JTI-Mac and the Company’s indemnitees in June 2010.

tobacco manufacturers appealed the judgment to the Quebec Court of

Plaintiffs are seeking unspecified compensatory and punitive damages

Appeal, and the appeal on the merits was heard and concluded infor class members. The preliminary motions are pending. The case

November 2016.

was dormant and is currently stayed by the CCAA Proceedings.

In March 2019, the Quebec Court of Appeal dismissed the appeal ofthe defendants by substantively upholding the first instance judgment

Canada British Columbia Class Action (McDermid):and ordering a compensatory damage award jointly and severallyThis class action was brought against tobacco industry members

against the defendants of approximately ¥1,093.5 billion (approximately

including JTI-Mac and the Company’s indemnitees in June 2010.

CAD 13.5 billion), in which the share of the total damage award against

Plaintiffs are seeking unspecified compensatory and punitive damages

JTI-Mac is approximately ¥142.2 billion (approximately CAD 1.8 billion),for class members. The preliminary motions are pending. The caseand a punitive damage award of approximately ¥3 million (approxi-

was dormant and is currently stayed by the CCAA Proceedings.

mately CAD 0.04 million) per defendants. The time limit for seeking
leave to appeal the decision to the Supreme Court of Canada is sus-

Canada Ontario Class Action (Jacklin):pended during the CCAA Proceedings. Enforcement of the judgement

This class action was brought against tobacco industry members

is stayed by the CCAA Proceedings.

including JTI-Mac and the Company’s indemnitees in June 2012.

The Quebec Court of Appeal rendered one judgment for both class

Plaintiffs are seeking unspecified compensatory and punitive damages

actions against the defendants and ordered them to make an initial

for class members. The preliminary motions are pending. The casedeposit of approximately ¥93.9 billion (approximately CAD 1.2 billion), in

was dormant and is currently stayed by the CCAA Proceedings.

which the share of JTI-Mac is approximately ¥11.8 billion (approximately CAD 145 million). The obligation to pay the initial deposit is

C. Health-Care Cost Recovery Litigation

stayed by the CCAA Proceedings.

There are 10 ongoing health-care cost recovery cases in Canada pending against the Company’s subsidiary and indemnitees brought by all

170

Canada Saskatchewan Class Action (Adams):

the Canadian provinces (except three Canadian territories). These

This class action was brought against tobacco industry members

provinces filed lawsuits under their own provincial legislation which was

including JTI-Mac and the Company’s indemnitees in June 2009.

enacted exclusively for the purpose of authorizing the provincial govern-

Plaintiffs are seeking unspecified compensatory and punitive damages

ment to file a direct action against tobacco manufacturers to recoup theon behalf of class members who allege to be or have been addicted tohealth-care costs the government has allegedly incurred and will incur,

nicotine contained in cigarettes manufactured by the defendants. The

resulting from “tobacco related wrongs.”

Japan Tobacco Inc. Integrated Report 2020

This health-care cost recovery litigation was filed by the Province of Alberta

British Columbia in January 2001 against tobacco industry members

in June 2012 against tobacco industry members including JTI-Mac andincluding JTI-Mac and the Company’s indemnitees based on its provin-

the Company’s indemnitees based on legislation similar to that introduced

cial legislation, the “Tobacco Damages and Health-Care Costs Recovery

in the Province of British Columbia. The statement of claim contains

Act.” The claim amount is unspecified. In 2001, several defendants

allegations of joint and several liabilities among all the defendants but doeschallenged the legislation’s constitutionality, which was ultimately

not specify any individual amount or percentages within the total claimed

rejected by the Supreme Court of Canada in September 2005. The

amount of at least ¥808.3 billion (CAD 10.0 billion). The case is stayed byaction remains pending in the first instance. The case is stayed by thethe CCAA Proceedings.

VALUE CREATION

Canada Alberta Health-Care Cost Recovery Litigation:

This health-care cost recovery litigation was filed by the Province of

CORPORATE PROFILE

Canada British Columbia Health-Care Cost Recovery Litigation:

CCAA Proceedings.

Canada Saskatchewan Health-Care Cost Recovery Litigation:
Canada New Brunswick Health-Care Cost Recovery Litigation:

This health-care cost recovery litigation was filed by the Province ofThis health-care cost recovery litigation was filed by the Province of

Saskatchewan in June 2012 against tobacco industry members includ-

New Brunswick in March 2008 against tobacco industry members

ing JTI-Mac and the Company’s indemnitees based on legislation

including JTI-Mac and the Company’s indemnitees based on legislation

similar to that introduced in the Province of British Columbia. The claim

similar to that introduced in the Province of British Columbia. The claim

amount is unspecified. The case is stayed by the CCAA Proceedings.

amount is unspecified. The case is stayed by the CCAA Proceedings.
This health-care cost recovery litigation was filed by the Province ofThis health-care cost recovery litigation was filed by the Province

Prince Edward Island in September 2012 against tobacco industryof Ontario in September 2009 against tobacco industry members

members including JTI-Mac and the Company’s indemnitees based on

including JTI-Mac and the Company’s indemnitees based on legislation

legislation similar to that introduced in the Province of British

similar to that introduced in the Province of British Columbia. The

Columbia. The claim amount is unspecified. The case is stayed by thestatement of claim contains allegations of joint and several liabilities

CCAA Proceedings.

BUSINESS

Canada Prince Edward Island Health-Care Cost Recovery Litigation:
Canada Ontario Health-Care Cost Recovery Litigation:

among all the defendants but does not specify any individual amount

Canada Nova Scotia Health-Care Cost Recovery Litigation:(CAD 330 billion). The case is stayed by the CCAA Proceedings.

This health-care cost recovery litigation was filed by the Province of

SUSTAINABILITY

or percentages within the total claimed amount of ¥26,673.9 billion

Nova Scotia in January 2015 against tobacco industry members

Canada Newfoundland and Labrador Health-Care Cost Recovery Litigation:

including JTI-Mac and the Company’s indemnitees based on legislation

This health-care cost recovery litigation was filed by the Province ofsimilar to that introduced in the Province of British Columbia. The claim

Newfoundland and Labrador in February 2011 against tobacco indus-

amount is unspecified. The claim amount is unspecified. The case istry members including JTI-Mac and the Company’s indemnitees based

stayed by the CCAA Proceedings.

on legislation similar to that introduced in the Province of British
Columbia. The claim amount is unspecified. The case is stayed by the(2) Other Legal Proceedings

CCAA Proceedings.

The Company and some of its subsidiaries are also engaged in otherlegal proceedings such as commercial and tax disputes.

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 tothat introduced in the Province of British Columbia. The claim amountis unspecified. The case is stayed by the CCAA Proceedings.

Canada Quebec Health-Care Cost Recovery Litigation:
Quebec 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 amount of the claim approximately ¥4,902.9
billion (approximately CAD 60.7 billion). The case is stayed by the
CCAA Proceedings.

(Note) The amount of damages sought denominated in foreign currencies istranslated into Japanese yen at the rates as of December 31, 2020.

39. Subsequent Events
To strengthen our response to changes in the business environment
and to aim for sustainable growth in the tobacco business, the Groupdecided to strengthen the operating system of the tobacco business

FINANCIAL INFORMATION/OTHERSThis health-care cost recovery litigation was filed by the Province of

GOVERNANCE

Canada Manitoba Health-Care Cost Recovery Litigation:

towards further enhancement of its competitiveness and profitability
on February 9, 2021.
Rapid changes in the tobacco industry include the perception ofsmoking and health, heightened tobacco regulations and tax reforms
in various countries, increasingly diverse consumer preferences andexpansion as well as intense competition in product development in
the Reduced Risk Products (RRP) category. Having closely reviewed
the business environment from a long-term perspective, the Group

Japan Tobacco Inc. Integrated Report 2020171

concluded that a revision of its strategic focus in its tobacco business• Reform the Japan Market Head-office in January 2022 to further

is necessary. The Group’s objective going forward is to operate withstrengthen the marketing and sales function

a stronger consumer-centric mindset and prioritize investments in• Reform the sales organization structure to further promote sales

heated tobacco sticks in the RRP category while maintaining necessary

activities to address consumer needs in each of the regions, frominvestments towards combustible products. The combination of theApril 2022:

two tobacco businesses will enable efficient and effective deployment

Restructure the sales organization from 3-tier structure (Market HQof resources within the Group.

Regional sales office - branch) to 2-tier structure (Market HQ -In the Japanese market, the Group also plans to implement various

New sales office)measures, intending the enhancement of its competitiveness to maxi-

Migrate from a system of 15 regional sales offices and 145

mize the value offered to its customers and strengthening its businessbranches to a new system of 47 new sales offices

foundation, considering the latest industry volume decline and thehighly uncertain business environment.

Redefine the organizational structure in the Japanese market tocorrespond to the operating environment

Consolidate the existing tobacco businesses into one tobacco business

Objective:

Objectives:– Ensure competitiveness and adjust the operating model to meet

– Strengthen the competitiveness in the growing RRP category bydomestic sales volumes

leveraging global resources– Simplify the organization structure to improve speed in decisionmaking while building an effective and efficient organization structure– Maximize the value offered to consumers through timely resource
allocation in a prioritized manner, from a global perspective– Unify the tobacco business operations further into one team to

Actions:– The Company’s measures• Optimization of workforce reflecting the reorganization of the sales
operations and optimization of administrative tasks from April 2022
• The Company’s Kyushu Tobacco Factory (Chikushino city,

proactively offer a portfolio of products and services to anticipate

Fukuoka) will be closed at the end of March 2022

the needs of individual markets• Optimize Leaf procurement footprint– Share and deploy best practices on a global basis to accelerate thelearnings across different categories and markets

Integrate the Chu-Shikoku Leaf Tobacco Branch (Takamatsu city,
Kagawa) and Minami-Kyushu Leaf Tobacco Branch (Miyakonojo
city, Miyazaki) into the West Japan Leaf Services Headquarters

Actions:(Koshi city, Kumamoto) from April 2022

– Consolidate the headquarter functions of the tobacco business,– Group subsidiary measures

including the Japan market, currently in Tokyo into the existing• Filter factory Closure

headquarters of the international tobacco business in Geneva

Japan Filter Technology Co., Ltd. Tagawa Factory (Tagawa city,• Strategy development functions, performance management func-

Fukuoka) (hereinafter, “JFT Tagawa factory”) will be closed at thetions and decision-making processes for the tobacco business willend of March 2022

be consolidated• Liquidation of JT Engineering Inc.

– Operate the Japanese market as a key market in a new unified
tobacco business– Consolidate the reporting lines of supply chain functions of the
global tobacco business (manufacturing, leaf procurement, quality

Tobacco related functions will be consolidated into the Company
from April 2023. JT Engineering Inc. is expected to be liquidated
after termination of System Integration services and externalbusiness services

assurance, etc.) following the successful consolidation of the
R&D functions

Optimization of the Company’s workforce

The consolidation of the tobacco businesses is scheduled for

Objective:

January 2022.

– Optimization of workforce in line with the initiatives to strengthen
competitiveness and redefine the organizational structure in theStrengthen the competitiveness in the Japanese market

Japanese market

Objective:– Establish an organizational structure to enhance consumer satisfaction

Actions:– Offer voluntary retirement program and seek retirement of about

Actions:– Reform the Japanese Market Head-office and sales organization toaddress the changes in the operating environment, diverse consumer needs in a prompt and effective manner

172

Japan Tobacco Inc. Integrated Report 2020

1,000 employees

CORPORATE PROFILE– Remove field partner organizational structure (part-timers who

In addition, early retirement package will be offered for certain

support the sales activities); as a result, early retirement packages

employees of the group companies, following the closure of thewill be offered for about 1,600 field partners

Company's Kyushu and JFT Tagawa factories.

– Offer voluntary retirement program and seek retirement of about
150 senior employees (contractors or part-timers who are reem-

The impact of these initiatives on the consolidated financial state-ployed after their retirement)

ments for fiscal year ending December 31, 2021 is expected to beabout JPY 37 billion as a one-time expense, which is due to the factory

restructuring measures are expected to be completed at the end of

VALUE CREATION– The above voluntary retirement and field partner organization

closures and the offering of voluntary retirement programs.

March 2022

OthersA. Quarterly Information for the Year ended December 31, 2020
Millions of yen
Q2
January 1, 2020 toJune 30, 2020

Q3
January 1, 2020 to
September 30, 2020

2020
January 1, 2020 to
December 31, 2020

Revenue

519,620

1,030,218

1,592,097

2,092,561

115,102

225,961

345,558

420,063

86,373

172,495

257,948

310,253

Basic earnings per share for the period (year) (yen)

48.69

97.23

145.40174.88Q1January 1, 2020 toMarch 31, 2020

Q2
April 1, 2020 toJune 30, 2020

Q3
July 1, 2020 to
September 30, 2020

Q4
October 1, 2020 to
December 31, 2020

48.69

48.54

48.16

29.48

Basic earnings per share for the quarter (yen)SUSTAINABILITY

Profit before income taxes for the period (year)
Profit attributable to owners of the parent
company for the period (year)

BUSINESS

Q1
January 1, 2020 toMarch 31, 2020

B. Significant Lawsuits
The significant lawsuits of the Group are as stated in “38. Contingencies” in the notes to consolidated financial statements.

GOVERNANCE
FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020

173

174

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

175

Japan Tobacco Inc. Integrated Report 2020

176

Japan Tobacco Inc. Integrated Report 2020

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

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GOVERNANCE

FINANCIAL INFORMATION/OTHERS

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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 arising from business acquisitions +Adjusted items (income and costs).** Adjusted items (income and costs) = Impairment losses on goodwill ± restructuring income and costs ± others

Adjusted operating profit at constant FX: The same foreign exchange rates between local currencies vs USD as well as theexchange rates between JPY and USD are applied as in the equivalent period in the previous fiscal year for the international
tobacco business. Results on a constant FX are provided additionally and are not an alternative to financial reporting underInternational Financial Reporting Standards (IFRS).
At constant FX, Core revenue/Adjusted operating profit (International tobacco business): The same foreign exchange
rates between local currencies vs USD are applied as in the equivalent period in the previous fiscal year for the international
tobacco business. Results on a constant FX are provided additionally and are not an alternative to financial reporting underInternational Financial Reporting Standards (IFRS).
FCF (Free cash flow): FCF is sum of cash flows from operating activities and investing activities, but excludes thefollowing items:• From investing CF: Purchase of investment securities (both short-term and long-term), payments into time deposits,
Financials

proceeds from sale or redemption of investment securities (both short-term and long-term), proceeds from withdrawal oftime deposits and other investing activities not for business operation purposes• From operating CF: Depreciation from lease transactions, interest received, dividends received, interest paid and income
taxes related to these items excluding lease transactions, and other items
IFRS (International Financial Reporting Standards): The JT Group adopted IFRS from the fiscal year ended March 31, 2012.
Profit: Profit attributable to owners of the parent company.
Revenue: Excluding tobacco excise taxes and revenue from agent transactions.
• Core revenue (International tobacco business): Includes revenue from waterpipe tobacco and RRP (Reduced-Risk Products),
but excludes revenue from distribution, contract manufacturing and other peripheral businesses.
• Core revenue (Japanese-domestic tobacco business): Excludes revenue from distribution of imported tobacco in theJapanese-domestic tobacco business, among others, but includes revenue from domestic Duty-Free, the China business,
little cigars and RRP such as Ploom devices, capsules and sticks.
Volume, JT cigarette sales (Japanese-domestic tobacco business): Excludes sales volume of domestic Duty-Free,
the China business and RRP while including little cigars.
Volume, total shipment (International tobacco business): The shipment volume of tobacco-based products which includes
fine cut tobacco, cigars, pipe, oral (snus, nicotine pouch), kretek and T-Vapor but excludes contract manufactured products,
waterpipe tobacco and E-Vapor.

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Combustibles: Cigarettes + fine cut tobacco.
FCT (fine cut tobacco): FCT represents tobacco products which are packed in a loose, fine-cut form in pouches and are also
known as rolling tobacco, used for both RYO (roll-your-own) cigarettes made using rolling papers and MYO (make-your-own)
Products

cigarettes made by filling a filter tube with cut tobacco.
GFB (Global Flagship Brands): Winston, Camel, MEVIUS, LD.
RRP (Reduced-Risk Products): Products with the potential to reduce the risks associated with smoking.

VALUE CREATION• E-Vapor: a product which consumers use by heating its nicotine-based liquid without using tobacco leaf.
• T-Vapor: a product that contains tobacco leaf and creates a tobacco-enriched vapor by heating the tobacco without any combustion.
• HTS (heated tobacco sticks): High temperature T-Vapor• Infused (infused tobacco capsules): Low temperature T-Vapor
ALP: Agricultural Labor Practices.
CDP: Headquartered in London, CDP is the leading international non-profit organization that accelerates action to achieve asustainable economy, assessing disclosure and actions by companies from around the world.

BUSINESS

Contraband: Genuine products smuggled from abroad that are diverted from the legitimate supply chain and sold in acountry other than the intended retail market without payment of domestic duty in that country.
Counterfeit: Fake products appearing to be genuine brand products protected by intellectual property rights. Counterfeit
products are manufactured without authorization from the rights’ owners and with the intent to copy the genuine brand to
deceive the consumer. They are also sold without duties being paid.
DJSI (Dow Jones Sustainability Indices): The DJSI was created jointly by S&P Dow Jones Indices and SAM. It is a global
sustainability benchmark and tracks stock performance of the world’s leading companies in terms of economic,

Sustainability

SUSTAINABILITY

environmental and social criteria.
GHG emissions: Greenhouse gas emissions.
• Scope 1 emissions: Direct GHG emissions from corporate activities, such as burning of fossil fuels at factories• Scope 2 emissions: Indirect GHG emissions from consumption of purchased electricity, heat or steam• Scope 3 emissions: Other indirect emissions, including from manufacture of products bought from other companies
SBT (Science Based Targets): SBT is a joint initiative that enables businesses to take swift climate action by setting ambitious emission reduction targets.

GOVERNANCE

SDGs (Sustainable Development Goals): The SDGs were adopted by all United Nations Member States in 2015 as a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.
Self-assessment questionnaire: A questionnaire covering a broad spectrum of human rights issues to identify the greatest
potential risk in the operation. The questions include issues such as forced labor or environmental health and safety, particularly in relation to vulnerable groups.
TCFD (Task Force on Climate-related Financial Disclosures): TCFD was established by the Financial Stability Board (FSB) to

FINANCIAL INFORMATION/OTHERS

examine how climate-related information should be disclosed, and how financial institutions should respond. TCFD positions
climate change as a serious risk to the world's economy and publishes its recommendations for companies to identify anddisclose items such as “Governance,” “Strategy,” “Risk Management” and “Metrics and Targets.”

Others

BnU: Billion Units.
JPY BN: Billion Japanese yen.
USD MM: Million U.S. dollars.
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Awards and recognitions
Dow Jones Sustainability Indices (DJSI)
We are a member of the DJSI Asia Pacific Index for the seventh consecutive year. We achieved second place in the tobacco
industry for the second consecutive year and have been selected for the “SAM Bronze Class” and “SAM Industry Mover” for thesecond consecutive year.
JT Group press release November 2020
The Sustainability Yearbook 2021

FTSE Blossom Japan
We have been selected as a member of FTSE Blossom Japan Index every year since its launch in 2017.
FTSE Blossom Index (selected by GPIF as a core ESG benchmark) is designed to measure the performanceof Japanese companies that demonstrate strong sustainability practices.
FTSE Blossom Japan Index January 2021

CDP
We continued achieving a place on CDP’s “A List” for climate change and water security. We
were also recognized as a global leader for engaging our supply chain in tackling climatechange for the second time in a row.
JT Group press release December 2020

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

Global Child Forum
We were recognized as a “leader” by the Global Child Forum, in their “2019 Global Corporate Sector andChildren’s Rights Benchmark” report.
Final Scorecard November 2019

PRIDE Index
In the PRIDE Index, which recognizes the most LGBT-friendly companies, JT achieved Gold status, the highest ranking, in 2020 for
the fifth consecutive year.
work with Pride (in Japanese)
JT press release November 2020

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Swiss LGBTI LabelIn 2020, JTI, the headquarters of our international tobacco business, was awarded the “Swiss LGBTI Label,” a certification forcompanies and organizations with an open and inclusive structure.
Swiss LGBTI Label September 2020

VALUE CREATION

Platinum Kurumin Certification
JT has long been certified as a childcare-supporting company by the Japanese Ministry of Health,Labour and Welfare.
JT press release (in Japanese) November 2018

Top Employer
Our international tobacco business was certified as a Global Top Employer for the seventh
BUSINESS

consecutive year.
Top Employer January 2021

Nadeshiko Brand
JT was recognized as a “Nadeshiko Brand” in 2020 for the second consecutive year, for its
efforts to empower female employees in the workplace.
SUSTAINABILITY

JT press release March 2020

Equal Salary Employer
In January 2019, JTI, the headquarters of our international tobacco business, became the first Geneva-based multinational
company to be certified as an equal salary employer by the EQUAL-SALARY Foundation.
Equal-Salary Foundation January 2019

GOVERNANCE

White 500
In 2021, JT was recognized as a Certified Health and Productivity Management Outstanding Organization (“White 500”) for its
excellent health-conscious management since the launch of this recognition in 2017.
JT Press Release March 2021

FINANCIAL INFORMATION/OTHERS

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Shareholder information
Common stock

As of December 31, 2020

Principal shareholders

Authorized:

8,000,000,000

Issued:2,000,000,000

Number of shareholders:Name

Shares held

Minister of Finance

666,925,200

Master Trust Bank of Japan, Ltd. (Trust Account)

77,183,500

SMBC Nikko Securities Inc.

58,303,600

Custody Bank of Japan, Ltd. (Trust Account)

48,009,500

Custody Bank of Japan, Ltd. as trustee for Mizuho Bank, Ltd.
Retirement Benefit Trust Account re-entrusted by
Mizuho Trust and Banking Co., Ltd.

23,660,000

STATE STREET BANK WEST CLIENT-TREATY 505234

19,974,941

Barclays Securities Japan Limited

18,432,844

Individuals and others 22.7%

Custody Bank of Japan, Ltd. (Trust Account 5)

17,079,000

7.0%	Other Japanese companies1.7%
Foreign institutions, etc. 13.7%

Custody Bank of Japan, Ltd. (Trust Account 6)

15,416,800

JAPAN SECURITIES FINANCE CO., LTD.

14,114,400

638,716

Share registrar
Mitsubishi UFJ Trust and Banking Corporation
4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo
Listing
Tokyo Stock Exchange: First Section

Composition of shareholders (excluding treasury stock)

Minister of Finance

37.6%

Financial institutions

17.3%

Securities companies

Government offerings of JT shares
1st offering
MethodOffering by bids

Offering by non-bids

Offer price(Pricing date)

Bid price: From 1,362,000 yen to 2,110,000 yen
Weighted average price: 1,438,000 yen(August 29, 1994)

1,438,000 yen(August 31, 1994)

Number ofshares offered

229,920 shares

164,356 shares

Offer term

From August 15 to 18, 1994

From September 2 to 8, 1994

Note:
Listing date: October 27, 1994
Tokyo Stock Exchange: First Section

2nd and 3rd, 4th offering
2nd offering

3rd offering

4th offering

Offering by book-building formula

Offering by book-building formula

Offering by book-building formula

Offer price(Pricing date)

815,000 yen(June 17, 1996)

843,000 yen(June 7, 2004)

2,949 yen
(March 11, 2013)

Number ofshares offered

Japan: 237,390 sharesInternational: 35,000 shares(Total: 272,390 shares)

Japan: 198,334 sharesInternational: 91,000 shares(Total: 289,334 shares)

Japan: 145,625,500 sharesInternational: 107,636,300 shares(Total: 253,261,800 shares)

From June 18 to 19, 1996

From June 8 to 10, 2004

From March 12 to 13, 2013

MethodOffer term

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List of key disclosures
The following are the key disclosures we publish on our website.
Timing of
publication

Integrated Report

Demonstrates a scenario for sustainable growth of the JT Group over the mid tolong term, with a description of our value creation process both from financial
and non-financial perspectives.

March

Corporate Governance Report

Explains the policy, structure and system of the JT Group for corporate
governance, in line with the Corporate Governance Code of Japan.

MarchWebsite (Investors)

Provides comprehensive information to investors, including various financial
information and reports.

As needed

Website (Sustainability)

Provides relevant information for sustainability, including details of its initiatives
and data.

As needed

BUSINESS

Content

VALUE CREATION

Disclosures

SUSTAINABILITY

Contact information
Japan Tobacco Inc.

1-1, Toranomon 4-chome,
Minato-ku, Tokyo 105-6927, Japan
TEL: +81 (0)3-6636-2914
URL: https://www.jt.com/
JT International S.A.

GOVERNANCE

8, rue Kazem Radjavi
1202 Geneva, Switzerland
TEL: +41 (0)22-703-07-77
URL: https://www.jti.com/

FINANCIAL INFORMATION/OTHERS

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