002 Our management principle
004 A
 t a glance

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

VALUE
CREATION

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

022 Our value chains
024 Superior brand equity

BUSINESS

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

SUSTAINABILITY

060 Our material issues
062 S ustainability 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

GOVERNANCE

086 Interview with the Outside Director
090 C
 orporate governance096 M anagement structure
100 Internal control system &risk management system

FINANCIALINFORMATION/
OTHERS106 Financial review
114 C
 onsolidated financial statements
180 G
 lossary of terms
182 A
 wards and recognitions

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

CORPORATEPROFILEJapan Tobacco Inc.

Integrated Report
2020
Year ended December 31, 2020

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;
regulatory and political changes, such as nationalization, terrorism, wars and civil unrest, in countries
8. economic,‌in which we operate;
9. fluctuations‌in foreign exchange rates and the costs of raw materials; and10. ‌catastrophes, including natural disasters.

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.

CORPORATE PROFILECORPORATE PROFILEVALUE CREATIONThe JT Group is a leading global tobacco company operating inover 70 countries/regions and our products are sold in over 130
countries/regions.

BUSINESS

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
SUSTAINABILITY

004 At a glance
006 Key performance indicators• Financial performance review• Non-financial performance review

GOVERNANCE

010 Our response to COVID-19

FINANCIAL INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020001

Management principle

VISIONTo pursue the 4S model

To continue to be a growing global company thatprovides diverse value, unique to the JT Group.

CORPORATE PROFILEOur management principle

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

Based on our 4S model, our vision is to continue to be awherever we can.

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 a

Shareholders

diverse 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 sustain-

Consumers

able society.
BUSINESS

Employees

Society

By pursuing the 4S model, we aim to achieve sustainable profit growth over the mid to long term. We firmly believe that pursuingcommon interests.

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.

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.

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

Consumers

The JT Group WAY
SUSTAINABILITY

the 4S model is the best approach to continuously grow our corporate value and serve our four stakeholder constituencies’

The JT Group MISSION

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 ofSociety

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.

trust 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

Employees

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.

respects and embraces diverse values.

002

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Japan Tobacco Inc. Integrated Report 2020003

CORPORATE PROFILE

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.

Japanese-Domestic Tobacco BusinessPharmaceutical Business

Processed Food Business

The international tobacco business, headquartered in Geneva,

The Japanese-domestic tobacco business, headquartered

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

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

turing and sale of prescription drugs, concentrating on three

except Japan and a few Asian countries/regions.

for Japan.

specific therapeutic areas: metabolic diseases, autoimmune/

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-

CORECTIM Ointment, Riona Tablets and REMITCH

leading brands in cigarettes and FCT (fine cut tobacco), such

can Spirit, Winston and Camel in the cigarette category.

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

inflammatory diseases, and viral infection.
®

Processed foodOtherbusiness
The processed food business handles the frozen and ambient

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

VALUE CREATIONInternational Tobacco BusinessPharmaceuticalrice, and frozen okonomiyaki (Japanese savory pancakes); thebusinessseasonings business, focusing on seasonings including yeast

3.8%
extracts; and the bakery business through bakery chain®

®

2,092.6

outlets, mainly in the Tokyo metropolitan area.
(JPY BN)

as Winston, Camel, MEVIUS and LD, as well as in RRP

Major products include “Reito-Sanuki-Udon” (frozen noodles),(Reduced-Risk Products),* such as Logic and Ploom.

“Takitate-Gohan” (packaged cooked rice), and the “Vertex”

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

ITALY

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

26.5%

Processed foodbusiness

25.6%

Other

38.4%

Pharmaceuticalbusiness

3.8%

FRANCE

26.6%
47.7%

26.7%

1.7%

8.6%

Pharmaceuticalbusiness

2.4%

2,092.6

58,300employees

59.8%

Japanese-domestic
tobacco business

26.5%

International
tobacco business

62.4%

Processed foodbusiness

Japanese-domestic
tobacco business

17.8%

GOVERNANCETAIWAN
SPAIN

Other

JAPAN

TURKEY

27.1%

62.4%

Processed foodbusiness(JPY BN)

U.K.

International
tobacco business

SUSTAINABILITY

0.1%

7.1%
RUSSIA

45.0%

Japanese-domestic

Total revenue

BUSINESS(yeast extract seasonings) in particular.

International
tobacco business

69.6%

Other

FINANCIAL INFORMATION/OTHERS

1.7%

8.6%

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

004

Japan Tobacco Inc. Integrated Report 2020

2.4%

58,300employees

Japan Tobacco Inc. Integrated Report 2020005

CORPORATE PROFILE

Key performance indicators
Financial performance review
Revenue

Profit(JPY BN)(JPY BN)2,143.3

2,139.7

2,216.0

2,175.6

JPY

2,092.6

2,092.6 BN

392.4

JPY

385.7

10.9%

348.2

decrease year on year

310.3 BN

310.3

VALUE CREATION

3.8%

421.7

decrease year on year

Revenue on a consolidated basis. Excludes

Profit attributable to owners of the parent

excise and other similar taxes, as well as sales

company.

from transactions in which the JT Group acts
as an agent.

2017

2018

2019

2016

2020

Free cash flow

(JPY BN)(JPY BN)

586.8

585.3

595.5
515.9

+28.6

544.5

5.5% increase year

-57.6
487.0

5.6%
487.0

72.6

grew 5.5%. On a reported basis, AOP was down
FX

2020

130

140

150

154

154

2018

2019

2020

105.6

5.6% due to unfavorable foreign currency impacts.
Adjusted operating profit is calculated asfollows: Adjusted operating profit=Operating-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
and investing activities, but excludes the following items:

arising from business acquisitions+ adjusted• From operating cash flow: depreciation from lease transactions, interest* Adjusted items (income and costs) are impairment losses
on goodwill, restructuring income and costs and others.

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

FINANCIAL INFORMATION/OTHERS

profit+amortization cost of acquired intangibles
items (income and costs).*

2017

GOVERNANCE

constant FX, JT Group’s performance indicator,

Business 2020 at
momentum constant FX

(JPY)

2016

2016

2019

Dividend per share404.2

BN (reported basis)

Consolidated adjusted operating profit (AOP) at

2018

2020

on year at constant FX

JPY

2017

2019

503.9

decrease to

2016

2018

SUSTAINABILITY

Adjusted operating profit

2017

BUSINESS

2016

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

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007

CORPORATE PROFILE

Non-financial performance review
Dow Jones Sustainability Indices (DJSI)

Environment

We are proud to be included in the DJSI Asia Pacific Index for the seventh consecutive

We strive to further reduce environmental impacts, focusing on the most significant environmental risks and opportuni-

year, retaining second place in the tobacco industry.

ties for our business and stakeholders. For further information on our environmental data, please visit JT.com.

Highlights include:• Continued to be the industry leader in the social dimension, with a full score in Social Reporting and Corporate

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

Citizenship and Philanthropy

Combined Scope 1 and 2 GHG emissions• In the environmental dimension, earned perfect scores in Environmental Reporting and Climate Strategy

Tackling illegal trade494

As part of our constructive partnership with law
enforcement agencies around the world, we
provided them with information to effectively tackle
Combined Scope 1 and 2 GHG emissions

illegal trade in tobacco products, leading to:• More than 60 counterfeit tobacco factories and

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)
either directly or through leaf merchants, 87%
reported against ALP.

on their own time (Total of 4,889 hours volunteered)ComplianceMore than 99% of our employees in our Japanese
operations completed online training on the Code

Capital goods

tobacco business took advanced information
security training voluntarily.

397

405

390

378

373

344

2015

2016

2017

2018

2019

2020

Transportation and distribution
OthersScope 1

加工食品

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

10,802

10,523

10,712100

10,432

10,302
海外たばこ

2019

2020

3,000

2015

Waste generated (Thousand tons)
150

12,00010,864

Scope 2

その他

of Conduct.

Almost 2/3 of employees of our international

335

2016

2017

2018

70.8%

140

135

133

134

133

2015

2016

2017

2018

2019

50

126

GOVERNANCE

Of all the entities that provided us with tobacco leaf,

3,589: The number of employees who volunteered

383

SUSTAINABILITY

In 2020, with our ability to conduct in-person

401

Purchased goods and services• 3.22 billion illegal cigarettes seized
Contributing to our communities

396

74%

warehouses raided

Respect for human rights

434

500

Scope 3

(E-Vapor).

1,000

BUSINESS

offerings (T-Vapor) and/or 5 types of e-cigarettes(CO2e thousand tons)

7,656

consecutive year

in 27 countries, with a choice of 6 tobacco vapor

9%4%• Awarded the SAM Bronze Class and Industry Mover distinction in the Sustainability Yearbook 2021 for the second

At the end of 2020, our RRP portfolio was present

5%8%• Also earned a perfect score in Materiality in the social dimension

RRP (Reduced-Risk Products)

VALUE CREATION• Improved scores across all economic, environmental and social dimensions

2020

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

FINANCIAL INFORMATION/OTHERS

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

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

CORPORATE PROFILEOur response to COVID-19
Digital transformation (DX)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.

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
an increasingly important role.

We estimate the pandemic has reduced our consolidated revenue by about 3% for 2020. The headwind on the tobacco business

CLUB JT is a digital marketing platform launched in March

was concentrated in its Duty-Free operations, due to international travel restrictions. The processed food business has seen a2020 by the Japanese-domestic tobacco business in pursuit

falloff in food-service products within its frozen and ambient food as well as the seasonings business, in addition to the decline inof better two-way communication with consumers. It

demand in its bakery business.

features not only an online shop to meet diverse consumer

VALUE CREATIONCOVID-19 impact on our top line

needs but also useful content like a map showing nearby

Safety of our employees and support for our business partners

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

For employees, across the entire JT Group, we promptly encouraged working from home (WFH) to all the positions that did notcommunication.

BUSINESS

Under the COVID-19 pandemic, we have placed top priority on ensuring the safety of stakeholders involved in our operations.
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.

Tackling illegal trade

To enable such widespread WFH, we rapidly upgraded our IT infrastructure.
Tobacco is the JT Group's core business and tackling theillegal trade of tobacco products is one of our top priorities.

ing those working in sales roles, stores, factories, ware-

The outbreak of COVID-19 has caused serious damage tohouses and research facilities, we have sufficiently provided

economies around the world. With dwindling consumer

personal protective equipment (PPE) such as masks andconfidence and buying power, criminal groups are seeking toenforced strict requirements with respect to hand-washing/

exploit the decline in affordability. To assess the negative

sanitizing, mask-wearing, and checking body temperature.

impact of pandemics on illegal trade, we carried out an

We continue to operate with maximal safeguards against

analysis and shared our findings with law enforcement

infection in place.

agencies. We also published the report on our website.
Throughout the COVID-19 pandemic and beyond, we will

Keeping supply chains functioning even amid the pandemic

continue to combat illegal trade by working and engaging withis crucial to delivering products to consumers. We havethe relevant authorities.

been maintaining close communication with a host of
suppliers to prevent disruptions in product supplies. By

Please see Regulatory environment and illegal trade (P. 77) for more details.

Anti Illicit Trade Organisation 2020: The Gathering Storm

The
Gathering
Storm

SUSTAINABILITY

For all employees with jobs not conducive to WFH, includ-

How illegal tobacco plans to rideout the Covid-19 pandemic

supply disruptions.

GOVERNANCE

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

virtue of such efforts, we have so far averted major product1

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
better recovery. Visit our website* to find out more about our initiatives and programs to support those in need in Japan.

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

FINANCIAL INFORMATION/OTHERS

from local communities. We are also providing our support to solve issues caused by the prolonged effect of the pandemic for aWith the pandemic showing no sign of abating, we must not view its impact as something temporary, but instead be prepared
cooperation with our stakeholders.

* Available only in Japanese010

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Japan Tobacco Inc. Integrated Report 2020011

CORPORATE PROFILEVALUE CREATIONVALUE 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.

BUSINESSThis 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.

SUSTAINABILITY

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

GOVERNANCE

022 Our value chains
024 Superior brand equity

FINANCIAL INFORMATION/OTHERS

012

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013

CORPORATE PROFILE

Message from the CEO
JT Group value creation
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.

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.
In the midst of an operating environment that has been undergoing drastic changes historically, we have continued to grow by

VALUE CREATIONThe 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.

Our operating environment has regularly been impacted by uncertainties stemming from multiple factors, including changing

proactively 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 a

Please see page 10 for more on the JT Group’s response to COVID-19.

diverse 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

Masamichi Terabatakesmoking 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 achieve

Representative Director and President,

sustainable growth amid such an environment, it is necessary to strengthen our competitiveness and profitability. Since I assumed

Chief Executive Officer

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.

014

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Japan Tobacco Inc. Integrated Report 2020015

son to the combustibles business for us. The combustibles business model is well established and it has been possible for the

CORPORATE PROFILEThe RRP category, especially HTS, which has been mainly growing in Japan in recent years, is an entirely new business in compari-

Sustainability initiatives for long-term business growthinternational tobacco business and the Japanese-domestic tobacco business to grow their respective contribution. However, ourSustainability initiatives are essential for attaining mid- to long-term profit growth of our business. These initiatives will in turncompetitors are concentrating their global resources in this new business. In order to strengthen our position in the RRP category,sustain growth in shareholder returns, as set out in Business Plan 2021. We have consistently placed importance on creating

it is essential to continue deploying a consistent strategy to offer products and services that meet consumers’ needs with agility

corporate values that will contribute to sustainable development of our society. The 4S model, our management principle, is about

and in a short turnaround.

our commitment to our valued consumers, shareholders, employees and the wider society. We believe the model has a closeaffinity to sustainability.

Recognizing these challenges, effective January 2022 we decided to transcend the boundaries of the international tobacco
Sustainability has always been at the core of our management initiatives. For example, as the JT Corporate Governance Policy sets

speed of business operations and break through the current uncertainties. Combining the existing tobacco businesses is an

out that the Board of Directors shall proactively address sustainability issues, we have appointed a chief sustainability officer who is a

important step toward nurturing the RRP category into our long-term growth driver. This combination will help us to focus ourboard member. Our Group Sustainability Strategy has been formulated based on material issues defined through materiality assess-resources on HTS and maintain a competitive organizational structure as our competitors.

ment. Specifically, we have set out three absolute requirements for sustainability which apply across the Group, while each business

VALUE CREATION

business and the Japanese-domestic tobacco business to operate as a single tobacco business in order to further enhance thehas 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 ofcombustibles, particularly on HTS, taking into account the further expansion of RRP category.

setting, monitoring and discussing the progress of our sustainability plans and targets on a regular basis.

Regarding business investments, over the past three years we focused on manufacturing capabilities. Going forward we have

The JT Group’s efforts in sustainability have been highly evaluated by external parties, and we have been selected as a member

decided to strengthen investments in areas closer to our consumers, such as R&D, marketing, and digital capabilities. We planof the Dow Jones Sustainability Asia Pacific Index, which is one of the international indicators for evaluating corporate sustain-

to increase total investment in RRP compared to the past three years. In addition, with regard to improving profitability toability from three perspectives: economic, environmental, and social. In addition, we feel honored that CDP, the global environ-support increased investment in RRP, we expect to realize cost savings of approximately 40 billion yen, compared to 2019, formental non-profit-organization, has named JT to its “Climate A List” as well as “Water A List” for the second consecutive year. In

the entire tobacco business in 2023 when JTI's transformation and review of the business operation model in the Japanese2019 we formulated the JT Group Environment Plan 2030, in which we set targets, concrete initiatives, and milestones. We also

market will be completed.

endorsed the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in December 2020. The JT

BUSINESSIn the Business Plan 2021, we have redefined the investment priorities in the tobacco business toward more focus on HTS andGroup 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 intobacco business are expected to be prepared by the middle of this year, under my leadership as a project owner. Through thisthe future. We believe sustainability initiatives are essential to support sustainable growth and development of society as wellintegration, we intend to enhance our competitiveness and deliver results through our collective efforts by enhancing the speed ofas the Group's long-term growth in business. We will further promote such initiatives and contribute to the Sustainable Devel-

decision-making and a more effective and efficient business management system based on a simplified organizational structure,

opment Goals (SDGs).

as well as by sharing the knowledge possessed by each market globally.

SUSTAINABILITY

The integration plan for the unification of the tobacco businesses and setting up the specific goals and strategies for the global

Please see page 58 for more on sustainability and page 84 for corporate governance.

The pharmaceutical and processed food businesses both face adverse operating environments in our view. Nonetheless, their role as

We believe the JT Group is now at its most important inflection point since its founding. One of my key roles as Group CEO issecondary profit growth drivers remains unchanged. The pharmaceutical business is committed to developing globally marketable,

to lay the groundwork for the future JT Group’s growth by anticipating changes in our operating environment and, to theinnovative drugs and making them available to patients as early as possible; the processed food business will focus on producing

extent feasible, taking decisive preemptive actions instead of waiting. As I mentioned, we have been steadily reconfiguring the

products that consumers and their loved ones can enjoy safely.

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

We have revised our shareholder return policy, effective from 2021. We did so partly from the standpoint of business continuity

global company from 2022.

across the entirety of our supply chain. With our revised shareholder return policy, we can better maintain a financial foundation able

We are confident we can maximize stake-to withstand major changes in our operating environment, like those caused by Lehman shock or the more recent COVID-19 pandem-

holder value through sustained profit growthic. A second motivation was to better align our shareholder return policy with our resource allocation policy, under which we prioritize

driven by business investment based on thebusiness investments that will lead to sustained profit growth over the mid to long term and seek to strike a balance between

management principle encapsulated in ourinvestment-driven profit growth and shareholder returns. Under our previous shareholder return policy, we aimed to steadily increase

pursuit of the 4S model. The key to doing so

dividend per share (DPS) every year. Going forward, will be targeting a dividend payout ratio of 75%.* For 2021, we are forecasting

is to earnestly engage with consumers, the

DPS of 130 yen. Even under our revised policy, our long-standing aim of increasing shareholder returns by achieving mid- to long-term

stakeholder constituency at the heart of the

profit growth through business investment remains unchanged.

4S model. The JT Group will increasingly add

Please see page 28 for more on Business Plan 2021 and Message from the CFO on page 30 for more on shareholder returns.

FINANCIAL INFORMATION/OTHERS* To be in the range of approximately ±5%

GOVERNANCE

Next, I would like to discuss changes to our shareholder return policy.

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.

016

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020017

CORPORATE PROFILE

Our history
The JT Group has achieved sustainable growth by globalizing and diversifying its businesses through both organic growth and M&A.

1990s

2000s

2010s

Origins of the modern
Japanese tobacco industry

Privatizing and creating
the base of the current
business portfolio

Growing to become the third largest global
tobacco company in volume by acquiring
the world’s leading brands through 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

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. tobacco
business, JT obtains competitive brands anda global business foundation.

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).

1949 J apan Tobacco and Salt Public

1985 J apan Tobacco Inc. is

1992 J
 T acquires Manchester Tobacco

Corporation is founded.

established.

1957 H OPE (10) is launched as1985 T he Business Development
Division is established toJapan's first domesticallypromote new businesses.

produced filter cigarette.

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

1993 T he Central Pharmaceutical Research

Hedges and more.

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

tobacco business increases by more than

2016 J
 T acquires Natural American Spirit’s non-U.S. tobacco• The sales volume of the international

Institute is established.

50% compared to the previous year,

1998 J
 T acquires a majority stake in Torii

making the international tobacco businessPharmaceutical Co., Ltd.

the main profit driver of the JT Group.

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

2013 M
 ILD SEVEN is renamed MEVIUS.

over the global brands of LD, Benson &2008 J
 T acquires a majority stake in Katokichi

1999 J
 T acquires RJR Nabisco Inc.’s non-U.S.
tobacco business, taking over the global

Co., Ltd. (currently TableMark Co., Ltd.) andbrands of Winston and Camel.

Fuji Foods Corporation.

• This realizes an exponential growth in theinternational tobacco business with sales

business from Reynolds American Inc. (U.S.).
2016 P loom TECH is launched in Japan.

SUSTAINABILITY

1969 S even Stars is launched as T acquires Gallaher Group Plc (U.K.), taking
2007 J

Company Ltd. (U.K.).

BUSINESS

1980s

VALUE CREATION

1970s and earlier

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.

volume expanding by over ninefold greaterthan the previous year.
GOVERNANCE

1999 J
 T acquires Asahi Kasei Corporation’s foodbusiness, including Asahi Foods and sevenother subsidiaries.

Superior brand equity• Sustainable profit growth backed by a combination of organic• High brand equity through continuous investment in MEVIUS,

growth and M&A• Ability to generate stable cash flows underpinned byprofit growth018

Japan Tobacco Inc. Integrated Report 2020

our leading brand in Japan, as well as in Winston, Camel, LD
and other global brands acquired through M&A

FINANCIAL INFORMATION/OTHERS

The three strengths underpinned byour history and accomplishments

Solid financial base

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

CORPORATE PROFILE

Our value creation process
Our management principle pursues the 4S model. This principle guides our efforts to achieve our vision by enhancing corporate value and creating social value. We provide awide range of products and services through business activities leveraging our three strengths: a solid financial base, superior brand equity and a diverse workforce.

Our core capital

Our products and services

The value we create

Business strategy

Tobacco BusinessCorporate value

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

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

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
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.

Tobaccoaverage growth of adjusted

P. 34
P. 46
P. 48

Pharmaceuticals
Processed Food

operating profit at constant FX

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

acturin g

A diverse
workforce

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

nuf

Superior
brand equity

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

Pharmaceutical BusinessSolidfinancial base/S

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

Three strengths driving
our global growth

M ark etin g

Manufacturing capital
Consumers

Employees

Society•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)

Processed Food Business
Our sustainability strategy
The JT Group’s three absolute requirements

Realizing the future of dining
in Japan through businesses that
support our diet

• Water resources	����������������������� 10,302 thousand m3 ofwater withdrawal (2020)• Forest......................................... Planted 6 million trees

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.

Respect for human rights
Improving our social and environmental impact

Strategic focus areas for sustainability
TobaccoPharmaceuticals
Processed Food

P.72
P. 80
P. 81

• Frozen and ambient foods• Seasonings• Bakery products

P. 66

Corporate governance and compliance supporting all of these processes
The external environment surrounding the JT Group
Japan Tobacco Inc. Integrated Report 2020

Social value

FINANCIAL INFORMATION/OTHERS

The natural environment is vital to our sustainable growth.

020

VISION

Good governance and business standards

Natural capital

Our measures to improve our environmental impact• Three key therapeutic areas– Metabolic diseases– Autoimmune/
inflammatory diseases– Viral infection

through business investments

GOVERNANCE

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.

By realizing sustainable profit

SUSTAINABILITY

Social and relationship capital

Pro
cu
re
m

Ma

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

D is t ri b u ti o n

Shareholders

D
R&

Improving shareholder returns
growth over the mid to long termten

The 4S model

Human capitalover the mid to long term

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

• 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 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.

Achieving consolidated
profit targets
Mid to high single digit annualIntellectual capital

Our management
principle

VALUE CREATION

Our business activities and growth strategies

P. 84

P. 50
Japan Tobacco Inc. Integrated Report 2020

021

CORPORATE PROFILE

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 management principle. Capitalizing on
our core strengths – a solid financial base, superior brand equity and a diverse workforce – we are endeavoring to continuously create value by developing
distinctive products and services.

R&D

Main
initiatives

t u ri n g

ufac
an

Pharmaceutical Business

les

M

/Sa

M a r k e ti n g

Processed Food Business

effective communication with
consumers

Priorities

Priorities

disease domains• Promotion of efficient and expeditious clinical development through coordination
among domestic and foreign R&D sites• Proactive pursuit of opportunities to out- and in-license compounds• 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• 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/Sales

pharmaceuticals stably• Improvement in R&D efficiency through concentration of resources in targetedMain
initiatives• Apply most effective marketing• Manufacture high-quality• Develop innovative drugs

conformity between drugs’ approved
specifications and actual
manufacturing processes• Continuation of annual inspections ofcontract manufacturing plants basedon the guidelines

Manufacturing• Strengthen supply chain to enable sourcing• Manufacture safe, high-quality• Verification of ingredients’ safety based on
quality specification certifications
submitted by suppliers• Monitoring of main ingredients’ pesticide
residue content and periodic inspections ofingredient production plants in accord withapplicable laws/regulations and our own
standards• Inspection of source farms’ soil and water
quality, verification of crop conditions,pesticide management checks andinspections of livestock and fish farms

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• Conduct detailing activities responsibly• Formulation of guidelines to verify

Procurementof safe, high-quality ingredients

share through sales initiatives tailored toindividual situation• Promote a broad range of localized,
consumer-centric activities

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

Japan Tobacco Inc. Integrated Report 2020

stable manufacturing/supply ofhigh-quality products• Expand sales networks and market

GOVERNANCE

022

contracted tobacco leaf growers on our vertical
integrated bases (in Africa, Brazil, etc.)• Enhance the sustainability of tobacco farmingby helping tobacco leaf growers to improve
productivity as well as taking initiatives tosupport their communities• Strengthening of relationships with tobacco leaf
growers and leaf merchants through dialoguebased resolution of issues around Agricultural
Labor Practices• Pursuit of improved efficiency through, e.g.,better lot-size management in sourcing of
non-tobacco materials• Improvement in responsiveness to changes inmarket prices and supply-demand fluctuations
through, e.g., purchasing management thatutilizes supply market intelligence

R&D

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.

• Enhance equity of brands throughDistribution/SalesSUSTAINABILITY

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• Optimize production operations for• Increase the proportion of leaves procured from• Analysis of trends in market

Pro
cu
re
m

D
R&

tobacco leaves• Maintain competitive prices and control
costs more effectively

Marketing

BUSINESS

Tobacco BusinessPriorities

capabilities and continuously
improve quality• Sustainable supply of high-quality

Manufacturing

VALUE CREATION• Innovate by strengthening R&D

Procurement023

CORPORATE PROFILE

Superior brand equity
Processed Food
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.

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

TobaccoWe have a broad portfolio of brands that meet diverse consumer needs globally. The nucleus of our brand portfolio is our GFB

Frozen foods offer time-saving convenience,(Global Flagship Brands)–Winston, Camel, MEVIUS and LD–all of which are globally recognized for their superior quality. To

the need for which is growing in tandem withgain mass consumer loyalty, we believe we must keep building more brand equity. We have been doing so worldwide throughthe working-single and DEWK (dually em-

various approaches, most notably including our rebranding of MILD SEVEN as MEVIUS. In the RRP (Reduced-Risk Products)

ployed with kids) populations. In 2020, wecategory, with devices under the Ploom brand, we offer HTS (heated tobacco sticks) in Russia, Italy and the U.K. while offering

focused on developing time-saving products.

both HTS and Infused (infused tobacco capsules)

I get a lot of fulfillment from creating products

in Japan’s large RRP market. We also have E-Vapor

that free up time for consumers.
BUSINESS

and oral such as Logic and Nordic Spirit.
Tomoko Uozumi
Product Development Department,
TableMark Co., Ltd.
KV 横矩形（H515×W725）1/2

TableMark is fastidious about flavor also. To obtain the flavors it seeks, it has developed original production processes and

なにと

installed a variety of specialty equipment. Its production process for frozen udon noodles, for instance, exactingly replicates an

する？

artisanal noodle-making method that yields firmly textured, eminently slurpable noodles that go down smoothly.

NEW

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 develop-

プルーム・テック・プラス
ウィズ

ment prowess, TableMark aims to keep incessantly developing new
products that can be consumed safely.

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。

TableMark’s Frozen Sanuki Udon

years. Even my father was a MEVIUS smoker back when MEVIUS was still MILD

TableMark had long sought to capture the delectability of authentic sanuki

SEVEN 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 thatudon 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
product with meticulous attention to detail across every single step from

FINANCIAL INFORMATION/OTHERS

always brings comfort to our consumers in moments of sorrow and in joy.

GOVERNANCE

Since its launch in 1977, MEVIUS has been a popular cigarette brand for over 40

selecting ingredients to designing the production process, all so families
throughout Japan could enjoy authentically delicious sanuki udon.
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

Japan Tobacco Inc. Integrated Report 2020025

CORPORATE PROFILE

BUSINESSVALUE CREATIONThe JT Group will pursue sustainable profit growth over the mid
to long term, providing a wide range of products and services ineach business.

BUSINESSThis 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.

SUSTAINABILITY

028 Business Plan 2021
030 Message from the CFO
034 Business strategy/Business review• Tobacco Business

GOVERNANCE– International Tobacco Business– Japanese-Domestic Tobacco Business• Pharmaceutical Business• Processed Food Business

FINANCIAL INFORMATION/OTHERS

050 Risk factors
054 Regulation and key laws
057 L itigation

026

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020027

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.

CORPORATE PROFILE

Business Plan 2021
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

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

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

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

Resource allocation policy
BUSINESS

mid to long term of AOP at constant FX.

– 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 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

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

Combustibles: cash-generation source

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).

JT Group's approach to sustainability

GOVERNANCE

on the tobacco business in the mid term. Additionally, we assume regulatory tightening and periodic tax increases will continue*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– 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
The 4S model

Materiality

Sustainability strategy

SDGs
FINANCIAL INFORMATION/OTHERS– Market size to continue to expand and competition to intensify• 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).

028

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CORPORATE PROFILE

Message from the CFO
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.

Financial policy: stability and flexibility

VALUE CREATION

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.

I will now explain our financial policy.

2020 Financial results

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 sustain-

Consolidated adjusted operating profit (AOP) at constant FX,

able profit growth through business investment.

our preferred metric for assessing operating performance,
This policy is shaped by how we think about capital structure and raising capital, as explained below.

growth. This achievement is in line with our aspired target of

JT was established under the Japan Tobacco Inc. Act (hereinafter JT Act), not the generic Companies Act. The JT Act requires the

mid to high single digit CAGR over the mid to long term in ourJapanese government to always own at least a one-third equity interest in JT. If JT were to raise equity capital, one-third of theBusiness Plan.

new shares must be issued to the government under the JT Act. JT consequently relies predominantly on debt financing from a

BUSINESS

grew 5.5%, driven by the international tobacco business’s

financial-agility standpoint. While we have the option of improving our financial stability by refinancing through sale of treasury

Naohiro Minami

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

Representative Director andExecutive Vice President,
Chief Financial Officer

shares, we believe such an offering would be appropriate only if we are confident we can grow the JT Group’s value enough toFactors behind its decline include decreases in the Japa-

more than offset the resultant dilution.

nese-domestic tobacco business’s cigarettes sales volume
Given the JT Act’s constraints on the equity component of our capital structure, we ascribe critical importance to maintaining a

reductions in domestic Duty-Free and China businesses due

manageable balance between assets and liabilities. We believe the key to doing so is to grow our assets while keeping liabilities atto the impact of COVID-19; sales decreases in the processed

an appropriate level. The main lever by which we regulate the balance between assets and liabilities is cash flow. By boosting ourfood business’s food-service products in the frozen and ambient food business, seasonings business as well as lower sales of the

cash-flow generation capacity, we aim to maintain or increase our debt capacity and use it to fund investments as efficiently as

bakery business in the wake of a major COVID-19-induced demand contraction; and a reduction in the pharmaceutical business’s

possible. We raise debt capital either from subordinated loans or through subordinated bond issuance by subsidiaries, depending

overseas royalty income. We analyze the negative impact of COVID-19 on the top line as around 61 billion yen.

on the capital market environment, to improve both our financial soundness and capital efficiency.

AOP was down 5.6% to 487.0 billion yen. The decrease was mainly attributable to the Japanese-domestic tobacco and processed foodWe 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 webusinesses in addition to adverse exchange rate movements in the international tobacco business.

consider appropriate. We periodically perform credit-rating simulations internally. Such simulations involve estimating future

SUSTAINABILITY

and RRP (Reduced-Risk Products)-related revenue; sales

operating cash requirements, modeling cash inflows from additional debt and acquirable assets and reviewing our shareholder
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 headreturn policy and investment opportunities from a financial standpoint while also taking into account credit-rating impacts.

office building’s sale and the non-recurrence of year-earlier restructuring cost in the international tobacco business. These two incremen-

Resource allocation policy

GOVERNANCE

tal 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.

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 andprofit and higher financing costs.

investment-driven profit growth.

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

As outlined in the JT Group history on page 18, we have made various business investments over the years, including M&A. In

cash inflow from the former JT head office building’s sale.

recent years, we have made a number of acquisitions to expand our brand and product portfolios and to enlarge our previously

Our response to COVID-19

FINANCIAL INFORMATION/OTHERS

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 operatingsmall 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

030

In the first quarter of 2020, we augmented our liquidity, largely through commercial paper issuance, as a buffer against unforeseenof various factors than in the past when expanding into emerging markets, including through M&A, over the next several years.

circumstances arising from COVID-19. We issued the commercial paper while leaving a committed line of credit substantially undrawn.

While appropriately assessing such factors, we will seek investment opportunities conducive to the JT Group’s growth. Additional-

As it is unpredictable to forecast the future with the ongoing COVID-19 pandemic, we decided it would be prudent to maintain thely, the fledgling RRP category has grown substantially over the past few years, particularly in Japan. We are currently stepping up

undrawn credit-line capacity while sourcing capital by other means.

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 2020

Japan Tobacco Inc. Integrated Report 2020031

We are forecasting operating profit at 363 billion yen, a 22.6% decrease year on year. The main factors behind the projectedcurrent source of earnings, we are counting on RRP as the pillar of our future business growth.

decrease, in addition to the forecasted decrease in AOP, are a reduction in proceeds from the sales of real estate and anticipatedShareholder return policy

CORPORATE PROFILE

combustibles to prioritize investments in the RRP category, especially HTS (heated tobacco sticks). While combustibles are ourcosts 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.

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.

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

any 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 sustainable

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

VALUE CREATION

From a business continuity perspective, maintaining a strong financial base is, more than ever before, a priority to withstand2021 shareholder returns

dividend 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 will

As you may note in “Message from the CEO,” we have redefined our investment priorities to better achieve sustainable profit

continue to pursue growth in adjusted operating profit at constant FX, which will contribute to the necessary growth in net

growth. While pursuing steady growth in profits from combustibles, our current source of earnings, we will invest more intensively

income in the mid to long term, and ultimately enhance shareholder returns.

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 constantResource allocation policy based on the 4S model

FX through business investment. This growth in adjusted operating profit at constant FX, in turn, will contribute to mid- to long-• Prioritize business investments*¹ for sustainable profit growth in the mid to long term

term growth in net income.
BUSINESS• Strike a balance between profit growth through business investments and shareholder returns
On the other hand, there is a certain time lag before investments contribute to profit growth. Therefore, we believe that it is

Shareholder return policy

necessary to secure room for investment during this period as well. In light of these circumstances, we have revised our annual– Aim to enhance shareholder returns by realizing the Group’s mid- to long-term profit growth, while maintaining a strong

dividend forecast for 2021 to 130 yen per share, which exceeds the target dividend payout ratio of 75% as explained in thefinancial base*²

shareholder return policy. In order to avoid a substantial decline in dividends per share, we have set it at a level at which the– Target a dividend payout ratio of about 75%,*³ a competitive level*4 in capital markets

dividend payout ratio will not exceed 100% and the dividend can be returned to our shareholders to the maximum extent possible,– Consider implementing a share buy-back program, mainly taking into account the Group’s financial outlook of thebased on our resource allocation policy.

respective year and mid-term capital needs
Going forward, by realizing profit growth through business investments, we will strive to strike a balance between profit and share-

SUSTAINABILITY*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 growthholder returns under the 4S model-guided resource allocation policy.

JT Group IR activities
Lastly, I will explain JT Group IR activities.

2021 earnings forecast

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

Next, I will explain our forecast’s underlying assumptions about the impact of COVID-19.

with shareholders and institutional investors.

The impact continues to heavily affect the global economy and our social lives. We currently do not have much clarity on when
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,assume the impact of COVID-19 on demand will persist to some extent in 2021 but attenuate relative to 2020.

meet individually with securities analysts and institutional investors to discuss the content of our earnings releases and other

GOVERNANCE

it will end. We assume national economies will gradually recover in 2021. In the tobacco and processed food businesses, we

disclosures as well as ESG matters. In 2020, we held approximately 380 meetings. Together with our IR team, our Group CEO and I
On a constant-FX basis, we are projecting 5.1% AOP growth driven partly by the Japanese-domestic tobacco business on top of

also take part in meetings with domestic and overseas institutional investors, including conferences sponsored by investment banks.

continued 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

Although we have switched from in-person meetings to conference calls and online conferencing, we still meet individually with

CAGR growth over the mid to long term.

European, North American, Japanese and other Asian institutional investors, just like we did before COVID-19. Moreover, we

Revenue is expected to be flat year on year, with revenue growth in the Japanese-domestic tobacco and processed foodhave been holding ESG specific meetings and in 2020, we broadly expanded our ESG meetings overseas also, enabling us tobusinesses offsetting a revenue decline in the pharmaceutical business and the impact of projected adverse exchange rate

engage with more investors. Lastly, we held our first individual investor-exclusive online briefing in 2020. There were approximately

movements in the international tobacco business.

1,800 investors participating in the program.

We are forecasting AOP at 475 billion yen, a 2.5% decrease year on year. We expect the pharmaceutical business’s AOP to

Feedback and opinions gathered from investors through IR activities are reported to all executive officers as well as relevant

decline and the international tobacco business’s to be reduced by adverse exchange rate movements.

departments, in addition to the periodic reports to the Board of Directors. We endeavor to further improve our decision-making and

FINANCIAL INFORMATION/OTHERS

participate in conferences held by brokers, both in Japan and overseas, to meet with institutional investors. Starting in 2019, weoversight functions in response to feedback from capital markets.

032

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Tobacco BusinessTobacco industry

Top market players ranked by combustibles* market share

Top 10 countries by combustibles volume*

Share of market (%)
2015

2016

2017

2018

2019

2015
China

25.6

British American
Tobacco Plc.

23.0

Japan Tobacco Inc.

16.0

Imperial Brands Plc.

25.0

23.3

16.3

7.7

7.5

24.3

23.6

16.1

7.6

24.3

23.9

23.3

22.7

15.7

16.2

7.4

7.4

2017

2018

2018

2019

Winston*

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)*E xcluding U.S. where Imperial Brands Plc. and British American Tobacco Plc.
own Winston and Camel respectively.

2019

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

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

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

121

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

Germany

117

114

112

110

109

Egypt

86

90

93

96

99

India

88

85

81

83

87

Bangladesh

83

84

84

81

81

which is focused primarily on oral products.
Another RRP subcategory is T-Vapor, which is gaining market

13.7
11.8

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.

expect HTS to further grow through innovation.

8.2
5.6

2016
Source: JT (2019 data)

SUSTAINABILITY

2017

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

2,344

(BnU)
2016

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

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

2,351

RRP category value (USD BN)

2015

of products. The best-known category is cigarettes. Other
(BnU)

2,490

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

JT Group’s top-selling cigarette brands

The RRP market, though smaller than the combustible

BUSINESS

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

2016

Today’s tobacco product market encompasses a diverse array

VALUE CREATION

Philip MorrisInternational Inc.

CORPORATE PROFILE

Business strategy/Business review

Following the global pandemic in 2020, the outlook for the

2017

2018

2019

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.

034

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Japan Tobacco Inc. Integrated Report 2020035

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

Maintaining and increasing shares in the key markets
through superior brand equity

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.

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.

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

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,
we will remain committed to a consumer-centric approach.

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

Strengthening cost competitivenessthe aforementioned perspective.

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

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.

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

tiveness on a global basis through the initiatives such as the

combustibles as a profit-generation source and RRP overall as

integration 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.

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.

reinforced the business foundation to build stronger competi-

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

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.

be completed.
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
business management structure.

FINANCIAL INFORMATION/OTHERS

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.

The importance of combustibles remains unchanged and we

GOVERNANCE

Geographic expansion

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

SUSTAINABILITY

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.

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.

BUSINESSThe 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.

The tobacco business management policy

VALUE CREATION

Strengthening RRP initiatives

CORPORATE PROFILE

Fundamental strategy

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.
Japan Tobacco Inc. Integrated Report 2020037

Business review

International Tobacco BusinessThis 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

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.

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
Pricing 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

2020 performance*¹

As a result, 2020 price/mix benefit was above JTI’s five-year

Chief Executive Officer,
JT International S.A.

JTI SoM*²

2016-2020 performance

JTI volume

Total shipment volume - BnU

GFB shipment volume - BnU

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
+2% CAGR

399

446

436

257

260

266

277

+7.0%

AOP

282

+16.8%

BUSINESS

399

Core revenue+2% CAGR

428

VALUE CREATION

complemented by the contribution from other markets.

Eddy Pirard

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

geographic footprint. We estimate the negative impact of

The 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.
2016

2017

2018

2019

2020

2016

2017

2018

2019

2020

*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.

Adjusted operating profit – YoY variance at constant FX, %*Core revenue – YoY variance at constant FX, %Notably, JTI increased both its share of market (SoM) and
The sustained strategic investment behind the equity of GFBs,

+17%

+12%
+9%

+11%

+10%

+9%

in both cigarettes and FCT (fine cut tobacco), was beneficial in

+14%

+13%

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

+7%

capturing 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
-0%
2016

2017

2018

2019

2016

2020

2017

2018

2019

SoM
+1.4ppt

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

28.4%

SoV
+1.7ppt

29.8%
27.4%
25.7%

FINANCIAL INFORMATION/OTHERSJTI 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

2019

2020

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

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.

For example, we started distributing Ploom S and Winston sticks

HTS

commercial strategies towards digital as lockdowns were

The 2021 outlook for the international tobacco business sees

France, Italy, Spain and Switzerland and more resilient

2020 marked the long-awaited international rollout of our HTS

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

our total and GFB shipment volumes outperforming theindustry volume in several markets.

offer, combined with our Ploom S device, in Russia, Italy andreached a 2.6% share of the HTS category.

industry volume contraction, declining slightly more than 3%

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

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

the U.K.

2021 outlook

versus a minimum industry decline of 4%.
In Italy and the U.K., where our offering was introduced only in

In North & Central Europe, total shipment volume increased byThis is in line with the group strategy to prioritize HTS, backed

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

Core revenue at constant currency is expected to increase 1%,

benefited from market share gains and higher industry volume

up by positive category development and higher grossPalermo and London, JTI registered positive feedback fromsupported by strong share of market momentum and pricing,margins than other RRP segments.

consumers and increasing repurchase rates.

more than offsetting the impacts from the anticipated partial

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

Our HTS leverage the strength of Winston and Camel brands

We are only at the beginning of this journey and we are still

unfavorable inventory movements in Russia and industry

in Russia and Italy, respectively. In the U.K., our HTS are soldbuilding our know-how and expertise with these newvolume decline. Excluding unfavorable inventory movements,

under the new brand Evo.

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

VALUE CREATION

13.5% driven by Austria, Germany, Ireland and the U.K. which
due to higher domestic purchases from travel restrictions.

CORPORATE PROFILERRP (Reduced-Risk Products)

Performance by cluster

reversal of market mix benefits, and the larger than average

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

industry volume decline in Russia due to excise taxes.

from our Transformation initiatives. These are well on track

journey using all touchpoints to walk adult smokers from

E-Vapor and nicotine pouches

discovery to purchase and ultimately brand advocacy.

In line with the redefined group resource allocation strategy,Services centers in Warsaw, St. Petersburg and Manila alreadydecreased by 5.0%, due mainly to travel restrictions negatively

we will adopt a more selective investment posture vis-à-vis

counting more than 800 employees.

impacting Duty-Free and lower industry volume in several

As part of our execution, we connected the offline and the

E-Vapor and nicotine pouches, based on their scale andemerging markets. Market share increased in Canada, Iran,online environments, with physical point of sales being

growth potential.

the Philippines and Taiwan, among others.

complemented by e-commerce and remote customer care.

In the Rest-of-the-World (RoW), total shipment volume

despite the pandemic, with newly established Global Business
BUSINESS

2021 guidance*+8%

In E-Vapor, JTI operates both in the open-tank and closed-tank
HTS demands a new era of brand building to keep pace withsegments with the brand Logic. We are pleased by the adultclusters, driven by a positive price/mix variance in CIS+ andconsumer expectations. As a result, we keep evolving ourconsumer base built across different geographies and we will

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

operations making the best use of our consumer and digital

keep innovating in this category to satisfy adult consumers’

European clusters.

data insights, using it in an agile way and pivoting whenevolving needs.

necessary to drive repurchase rates.

+1%
~ -1%
~ -3%
JTI volume

GFB volume

Core revenue

SUSTAINABILITY

In 2020, core revenue at constant currency increased in all

AOP

Except for South & West Europe, currency neutral adjusted

JTI is also present in nicotine pouches with the brand Nordic

operating profit grew in all clusters fueled by top-line growth,

Spirit, which is sold in nine markets including Scandinavian

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

as well as a decrease in travel and marketing expenses

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

investing behind both combustibles and HTS.

reflecting COVID-19 reality in the markets.

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 FX

040

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020041

Business review

Japanese-Domestic Tobacco BusinessResults 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

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.

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-

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

HTS (heated tobacco sticks)

Business-related data

* 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

JT sales volume (BnU)

BUSINESS

Industry volume* (BnU)

VALUE CREATION

mental changes including the restrictions on non-essential outings as well as working from home.

106.2

Due to the market environment dynamics, our cigarettes shipment volume decreased from 106.2 billion sticks in 2016 to 68.7

92.9

173.8
151.4

2.8

34.6

36.8

billion sticks in 2020. Since the price revision in October 2018, a downtrading trend has been growing, expanding the market share

3.3

40.2

3.9

of 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

133.6

125.1

82.0

114.9

75.5

68.7

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 in

RMC

2017

2018

2019

2020

RRP

2016
RMC

2017

2018

2019

2020

RRP

2020, up by 7.9% year on year.
SUSTAINABILITY

2016

Our core brands are MEVIUS, Seven Stars, Winston, Natural American Spirit and Camel. We maintain our position as the cigarette* JT estimate

market leader through continuous investments in the sub-premium, premium and prestige segments to raise brand equity. In theCore revenue and Adjusted operating profit (JPY BN)

value and super value segment we are taking prompt, necessary action to adapt to environmental changes.

JT RRP sales volume (BnU)
3.9

649.7

590.6

582.4

568.9

515.7

2.8

3.3

In 2017 we positioned RRP as a pillar for futurebusiness growth. We have prioritized resource
allocation in this category as well as strength-

260.2

232.3

209.0

ened its manufacturing capacity. We havesteadily expanded our RRP portfolio, starting

168.1

GOVERNANCE

187.2

with nationwide sales of our devices for2016Core revenue

2017

2018

2019

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.

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 ourBusiness 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)

042

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.

of the total tobacco industry volume.

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 2020

Japan Tobacco Inc. Integrated Report 2020043

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

Our performance

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 termCore revenue for 2020 decreased by 9.3% year on year, to 515.7 billion yen, due to decreases in cigarette shipment volume,in the Japanese market. We have been constantly reviewing our actions based on consumer-centric principles. For example we

RRP-related revenue, and shipment volume of Duty-Free products despite a positive cigarette price/mix variance led by pricelaunched CLUB JT,*¹ and implemented call-center reforms. These initiatives result in increasing opportunities to directly communicate

revision. 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

with consumers and enable us to quickly reflect consumer demands into RRP product development. To assure further efficient andestimate the negative impact of the COVID-19 on the top line is about 30 billion yen.

effective 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 consum-

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 iners in each region.

infused tobacco capsule manufacturing machines accounted in the previous year and efficient cost savings despite the prolonged

Meanwhile, we will also be revising our organizational structure in response to the decrease in sales volume resulting from theimpact of COVID-19.

decline in the industry volume, while ensuring that we remain competitive. This includes optimization of administrative tasks in the

VALUE CREATIONRRP and digital marketing investment. These factors outweighed a favorable comparison of the impairment loss related to thesales department; closing some tobacco factories to eliminate unutilized manufacturing capacity; and optimizing leaf procure-Business Plan 2021

ment 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

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

To secure funds to invest in HTS, we will manage cost relentlessly and promote efficient spending practices that best suit thedue to a natural decline trend and the impact of price revisions. The cigarette industry volume is expected to decrease as well asworkstyles of the post-pandemic era to come.

the total industry volume. On the other hand, the RRP market size will continue to gradually expand led by increased support from

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.

*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.

BUSINESS

consumers as a result of regulatory changes and the products' potential to reduce the risks associated with smoking.

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.

044

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Japan Tobacco Inc. Integrated Report 2020045

Strategy and Business review

Pharmaceutical BusinessResults for the year ended December 31, 2020

CORPORATE PROFILE

Our performance

We 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.

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.

Senior Vice President,
President ofPharmaceutical Business

VALUE CREATION

Muneaki Fujimoto

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)

Business-related data

ENAROY® Tablets 2 mg • 4 mg (JTZ-951/enarodustat)
Please visit JTI.co.jp (Japanese only) for more details.

Revenue and Adjusted operating profit (JPY BN)

BUSINESSWorldwide pharmaceutical market* (USD BN)

In January 2020, The JT Group signed an exclusive license agreement with Dermavant Sciences GmbH, a subsidiary of Roivant
1,104.0

1,161.7

1,187.8

1,222.3

1,262.4
104.7

Sciences Ltd., for the development and commercialization of tapinarof, a topical, therapeutic aryl hydrocarbon receptor modulating

114.0

agent (TAMA). We will continue to undertake similar efforts to acquire external resources.
88.5

87.2

Basic strategy

79.0

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

SUSTAINABILITY

24.1

28.4
17.2

Our management policies in the pharmaceuticals business• Focus on drug discovery capabilities

2017

2018

2019

2020

Adjusted operating profit• 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

The global pharmaceutical market continued to grow, with an average annual increase of about 3.4% over the past five years, to

Our revenue is forecast to decrease by 3.1% year on year mainly due to lower overseas royalty income, partially offset by

US$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 thewill 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,

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 continues. However, revenue losses will be partly balanced by solid Japanese-domestic sales by Torii Pharmaceutical of the new

FINANCIAL INFORMATION/OTHERS

generic drugs market to expand in the Japanese pharmaceutical market. Additionally, a drastic reform of the drug pricing system

GOVERNANCE

Industry overview

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.

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

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Japan Tobacco Inc. Integrated Report 2020047

Strategy and Business review

Processed Food BusinessResults 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

We 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.

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

Hiromasa Furukawa
Senior Vice President,
Food Business

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.

Business-related data
The Japanese frozen food market on a consumption basis (JPY BN)

989.4

1,076.2

1,076.9

ambient food business and an impairment loss of assets such as factories and shops in the bakery business, partially offset by
improvements in product mix. COVID-19 is estimated to have negatively impacted the top line by about 11 billion yen.

164.1

163.1

161.4

158.6

149.3

BUSINESS

1,015.6

1,057.7

Adjusted operating profit decreased by 6.2 billion yen, due to the decrease in revenue, an increase in logistics costs in the frozen andRevenue and Adjusted operating profit (JPY BN)

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

2015

2016

2017

2018

2019
Revenue

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

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.
We expect the Japanese processed food industry to continue to grow as lifestyles change including an increase of double-income

2021 forecasts

GOVERNANCE

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.

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

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.*products as well as further increasing the efficiency of bakery store operations.

Additionally, in 2020 the pandemic encouraged people to stay home and work from home, resulting in more opportunities to eat at

Adjusted operating profit is forecast to increase by 3.8 billion yen year on year driven by the increase in revenue, efforts to improvehome. This led to demand growth in frozen food, as consumers value its preservation and convenience factors.

profitability such as cost reduction, and a favorable comparison of an impairment loss of assets such as factories and shops in

FINANCIAL INFORMATION/OTHERS

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

the bakery business.
Our subsidiary, TableMark Co., Ltd., is competing against major players like Maruha Nichiro, Nichirei Foods, AJINOMOTO

048

FROZEN FOOD and Nippon Suisan Kaisha as well as a multitude of mid- or small-scale producers, although we are starting

We expect our business environment to remain challenging in 2021. We will aim to achieve quality top-line growth while flexibly

to see gradual segregation of competition within the industry according to the product categories these competitors respec-and quickly taking various initiatives with making use of each business’ strength, as well as strengthening the profitable

tively own.

product portfolio.

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020049

to switch to lower-priced products. They consequently could

Cooperation with authorities toward eradication ofillicit trade

Main measures to address risk

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.

• 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 risktion, 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

2

Growth in illicit tradedemand from law-abiding businesses. Its potential societal
harms include reduction in government tax revenues,
increased organized crime and adverse health consequences• 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
the wake of our competitors’ aggressive sales promotions,

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

Main measures to address risk

 lease see Tobacco Business: Regulatory environment and illegal trade (P. 77)
P
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

due to poor production quality or inadequate post-production
The tobacco industry is subject to many regulations, most

non-U.S. tobacco business and Gallaher Group Plc, in additionindustry, we continue to endeavor to eradicate illicit trade,notably on sales promotion activities (including advertising).

to organic growth. As a result of such acquisitions, weparticularly cigarette smuggling and counterfeiting.

Regulatory 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.

increases. Additionally, regulations on cigarette ingredients and

For example, we may incur incremental costs in complying with

Market shares fluctuate in response to various factors,

packaging may facilitate illicit trade by making cigarettes easierproduct regulations on ingredients and packaging. Suchincluding regulatory changes, shifts in smoker preferences/

to counterfeit and illegitimate products harder to detect.

regulations could also lead to growth in illicit trade to the

behavior and local economic conditions. Market shares are

Japan, have been raising tobacco taxes or discussing tax

potential detriment of our law-abiding, above-board businesses.

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

increases from a fiscal and/or public health standpoint. Addition-

Risk description and potential impact

Additionally, if stricter regulations are imposed on communica-

events such as competitors’ new product launches andally, VAT rates generally tend to increase over time. Our policy

Growth in illicit trade results in decreased demand for legiti-

tions with consumers, they may preclude effective sales

accompanying sales promotion campaigns.

with respect to tax increases is to raise prices to pass throughmate products and may reduce our unit sales, revenue and/or

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

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

profits. Costs incurred to combat illicit trade may also weigh onof contents on the cover page.

1

Large or repeated tax increases

Tobacco products are subject to tobacco taxes or other similartaxes in addition to sales tax or VAT. Some countries, including

Illicit trade tends to grow following large or repeated tax

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

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

Additionally, markets in which we operate sometimes become

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

believe laws and regulations should rightfully differ from one

embroiled in price competition due to events such as a brandfinancial impact due to tax increases. Most governments haveturn, impair the value of both the brand and brand owner.

country 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.

Market share fluctuations may affect our financial results.

large or repeated tax increases may end up reducing tax

Main measures to address risk

constructive dialogue with governments and regulatory

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

• Take action to eradicate illicit trade in cooperation withauthorities to encourage reasonable, unbiased regulation ofMain measures to address risk

tobacco products.

• Optimize product portfolio by offering products that meetgovernments, regulatory authorities and law
enforcement agencies.

Risk description and potential impact
Large or repeated increases in taxes on tobacco products
tend to lead to reduced consumption of and/or increased illicit
trade in tobacco products. They may also induce consumers
Japan Tobacco Inc. Integrated Report 2020

• Do business only with reputable parties in accord withstringent compliance policies.
• Engage with consumers to deepen their knowledge ofnegative impacts in purchasing illegitimate products.

FINANCIAL INFORMATION/OTHERS

adopted a reasonable approach to taxation, recognizing that

GOVERNANCE

Risk description and potential impact
As a responsible company, we comply with the laws andmaterially affected our business in certain markets.

SUSTAINABILITY

quality controls. Together with the rest of the tobaccowith the forward-looking statement disclaimer next to the table050

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.

comply with regulations, resulting in our unit sales decreasing.

BUSINESS

management with the following four steps: 1) risk identifica-

affected markets.

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.

certain circumstances, additional costs may arise in order to

VALUE CREATIONThe 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.

CORPORATE PROFILE

Risk factors

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

the office, so as to prevent infection and ensure the safety of

Risk description and potential impact

currencies other than their own reporting currency in the

our employees and their family members.

Natural disasters could disrupt not only our own operations

continuously generating profit, to avoid overdependence onnormal course of business. They hedge such transactions• Establish a stable supply chain by ensuring the continuity ofbut also any of our value-chain partners’ operations. Suchprofits from a few markets.

in the aim of mitigating the associated currency risk but

manufacturing operations with the enforcement of safety

disruptions could adversely affect our financial results.

they cannot completely avert it.

measures, such as hygiene management, as well as dealing

5 Country risk

with multiple suppliers.
Additionally, gains or losses on the sale or liquidation of

8

Unfavorable litigation developments• Establish manufacturing systems in various locations andsubsidiaries 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 the

We are being sued for damages due to smoking, marketing ofbusiness. Such geographic expansion has been accompanied

acquisition currency’s exchange value against the yen

tobacco products and exposure to secondhand smoke. There are

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

between the acquisition date and the date of the sale,lawsuits involving smoking-related health claims pending against• Conduct initiatives such as disaster preparedness drills

social turmoil were to occur in a market in which we operate,liquidation or impairment.

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.

back-up systems such as reserve power installation tothem as warranted.

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

Our consolidated financial results are affected by changes incannot predict the outcome of any current or future lawsuits.

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

10 Climate change

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

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

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

currency for which is the U.S. dollar, are affected by changes inlated health claims. For example, we could be sued on a productadverse impacts, including flooding and landslides due toprofits may decrease.

other currencies’ exchange rate against U.S. dollar. Subsidiaries’

liability claim if some product-quality problem were to arise.

abnormal weather events such as torrential rainfall; intense heatwaves, heavy snowfall and drought due to anomalous weather;transactions in currencies other than their respective reporting• Collect and monitor information in relation to country risk of

Risk description and potential impact

water-resource change and biodiversity loss. Those impacts
could raise issues such as change in environmental conditions ofMain measures to address risk

compensation liability for damages, and/or incur other

our key raw materials including tobacco and disruption in ourbusiness operation stable.

• Mitigate currency risk by hedging with foreign-currency debt

consequences, that could adversely affect our financial results.

supply chain. This may adversely affect our manufacturing

or other suitable instruments, in line with the hedging policy

Additionally, critical media coverage of the ongoing lawsuits

operations and financial results through deterioration in quality

well as expand number of continuously profitable markets

for foreign exchange, which is established after

against us could make the public less tolerant of our products

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

to avoid overdependence on profits from a few markets.

comprehensively considering factors including the current

and trigger a strengthening of public regulation for smoking.

status of foreign exchange rates.

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

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

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

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 aworldwide 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-coordination with external legal counsel.

net zero carbon society could result in increased operating

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

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

cost and adversely affect our financial results.

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 in

9 Natural disasters

Main measures to address riskbusiness, 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.

• Conduct climate scenario analysis in line with the TCFD
Our operations may be disrupted by natural disasters such as

Recommendations, identify potential climate-related impact
on the Group more accurately, and take adequate action to

Risk description and potential impact

be adversely affected by consequences of natural disasters,

mitigate the impact.

foreign subsidiaries. We generally do not hedge risks

Pandemics could have detrimental impact on our operations

such as damage to our employees, suppliers, public transpor-

stemming from such currency translation of financial

and financial results through, for example, a downturn in thetation, distribution service and sales channel: utilities disrup-

statements except to hedge the currency risk posed by

global economy and changes in the way of living.

tion and decrease in demand for our products.

FINANCIAL INFORMATION/OTHERS

earthquakes, typhoons and floods. Our financial results could

between U.S. dollar and other local currencies used by those• 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 totranslating foreign subsidiaries’ equity into yen. We hedge
this risk with foreign-currency debt, a portion of which isMain measures to address risk

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

designated as net-investment hedges.

• Implement prevention measures against pandemics, such

have adopted a Business Continuity Plan, the scope of which

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

as work-from-home capability and hygiene management inJapan Tobacco Inc. Integrated Report 2020

GOVERNANCE

swiftly act on information gathering of litigation claims as

While we prepare our consolidated financial statements inmance data are affected by changes in exchange rates

SUSTAINABILITY

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

the countries/regions where we operate, so as to keep the• Strengthen and expand our global business foundation as

BUSINESS

Risk description and potential impact

currencies are also subject to currency risk.

VALUE CREATION

ensure a stable product supply.
• Periodically review the business continuity plans and revise

Risk description and potential impact

Main measures to address risk

052

Main measures to address risk

To realize long-term growth, we have continued to expand ourour operations and/or financial results may be affected.

CORPORATE PROFILE

Many of our subsidiaries engage in transactions inwell as expand number of markets, which are capable of• Strengthen and expand our global business foundation as

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

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

revising its standards on tobacco products, the TIOJ set new

be adversely affected by contraction in tobacco productregulations have since been adopted elsewhere, including in France

standards on T-Vapor tobacco products, non-tobacco T-Vapor

demand, loss of market share and/or increased regulatory

Regulation in overseas markets

and the U.K. A number of other countries are exploring the

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

possibility of following suit or have already decided to follow.

activities, and TV advertising to promote better smoking etiquette.

increasingly stringent since the WHO Framework Convention

In relation to RRP (Reduced-Risk Products), the U.S. and

The revised standard for the cautionary statement on tobacco

on Tobacco Control (FCTC) took effect in February 2005.

European countries are starting to establish new guidelines andproduct packaging changed the cautionary statement’s

In Japan, designated tobacco product distributors (sellers offrameworks for scientifically assessing reduction in health risks

wording, enlarged the area occupied by the cautionary state-self-imported tobacco products) and tobacco product wholesal-

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

ment by a minimum of 50% and added new content consistenters must register with the Minister of Finance; tobacco productthe prevalence of tobacco use and exposure to tobacco smoke.”

up activities to obtain official certification of risk-reduction

with the latest scientific knowledge, all effective from July 1,

retailers must be licensed by the Minister of Finance. Our

The FCTC covers price and tax measures to reduce tobacco

benefits. Some countries have applied existing tobacco product2020. Revisions to the TIOJ’s advertising voluntary standard

tobacco products and tobacco products imported by a desig-

demand, non-price measures to reduce tobacco demand (e.g.,

regulations to RRP while others have newly adopted separate

included measures to more effectively shield minors from

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

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

tobacco product ads, including online, and new restrictions on

proved by the Minister of Finance. Retailers’ pricing requests aretobacco products’ contents and emissions, regulation of tobacco

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

point-of-sale ad size and display methods.

mandatorily approved by the Minister of Finance unless deemed

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.

The tobacco regulatory environment has been becoming

products (measures to prevent, e.g., illicit trade in tobacco

Regulation in Japanese market

inimical to consumers’ interests.
In July 2018, the Health Promotion Act (HPA) was amended tobetter prevent unwanted exposure to secondhand smoke in

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

required by the Tobacco Business Act to annually enter into
purchase agreements with the growers. Such agreements must

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

specify the planted acreage by tobacco variety and purchaseregulated under the Tobacco Business Act (TBA), related laws/

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

prices by tobacco variety and grade. We are obligated to

While the FCTC requires its signatory countries to develop,

regulations and voluntary industry standards. One regulatory

categories) and facilities intended for smoking (e.g., publicpurchase the grower’s entire tobacco crop produced pursuant toimplement, periodically update and review national tobacco

requirement is that advertisements and product packaging

smoking lounges, bars and other establishments that cater tosuch agreements, excluding any portion not suitable forcontrol strategies, plans and programs, it leaves to the discretionmust carry a cautionary statement about the health implications

smokers, tobacco shops that permit smoking on premises). At

manufacturing tobacco products. Before entering into any suchof each country the specifics of national regulations’ content,of consuming tobacco products.

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

Japanese government ratified the FCTC in June 2004.

scope and methods. The FCTC’s governing body, the Conference
The mandatory cautionary statement’s wording was revised

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

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

when the TBA’s enforcement ordinance was amended in

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

among FCTC-signatory countries on issues such as formulating

November 2003. All tobacco products sold in Japan since Julyrequirements. Additionally, restaurants that meet certain

pricing. We are required to honor the LTDC’s opinions. Like many

FCTC Article-specific guidelines and protocols (which must be2005 have carried the revised cautionary statement. Additionally,requirements may permit smoking throughout their premises.

other agricultural crops, tobacco leaf costs more to produce inseparately ratified or otherwise agreed to by the parties).

tobacco product advertising guidelines (the “Advertising

At facilities intended for smoking, indoor smoking is allowed.

Japan than overseas. The prices we pay for domestically grown

Guidelines”) issued by the Minister of Finance pursuant to the

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

Among FCTC-signatory countries, Russia, one of our key

TBA’s Articles 39 and 40 (on the cautionary statement anddecrease in number under the amended HPA, which fully took

than re-dried foreign-grown tobacco leaf prices.

markets, enacted a comprehensive tobacco control law inregulation of advertising, respectively) were revised in Marcheffect from April 1, 2020. While it is difficult to predict smoking

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

2004 to conform with the amended TBA enforcement ordinance.

environment changes in detail, we expect our financial results toJapan Tobacco Inc. Act

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

Regulatory impacts on our operating performance

GOVERNANCE

be affected to some extent.

restricts retail sales locations and point-of-sale displays of

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

While the future content of laws, regulations and industry

at least one-third of our total issued shares (excluding any

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

labeling sub-subcommittee under its tobacco business subcom-

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

effective May 2014. The revised TPD tightened restrictions on

mittee in February 2016. The sub-subcommittee studied best

marketing, sales promotions, packaging and labeling is impossi-

approve any offerings of newly issued stock or subscription

tobacco product packaging and labeling, added new regulations

practices with respect to the Advertising Guidelines andble to accurately predict, we expect the regulations discussed

rights to shares and any issuance of stock, subscription rights to

on tobacco product additives and E-Vapor products and included

reported its findings to the tobacco business subcommittee inabove to expand in scope and/or new regulations (including

shares or bonds cum subscription rights to shares in conjunc-

measures to address illicit trade also. EU-member countries haveJune 2016. Following further deliberations by the tobacco

municipal regulations) to be imposed in Japan and overseas

tion with a stock swap. In addition to manufacturing, selling andimplemented regulations associated with the revised EU TPD.

business subcommittee, recommendations on revisingmarkets in which we sell products.

importing tobacco products and operating businesses inciden-

FINANCIAL INFORMATION/OTHERSTIOJ members. The Fiscal System Council established atal thereto, we are permitted by the JT Act to engage in otheradvertising and cautionary statement regulations were published
Australia mandates generic packaging of tobacco products underon December 28, 2018. The TBA enforcement ordinance, theWe are supportive of reasonable and appropriate regulation ofbusinesses as required to fulfill our purpose and subject to theits Tobacco Plain Packaging Act, which took effect in December

Advertising Guidelines and some related directives were amend-

tobacco, but if tobacco regulations like those described above

Minister of Finance’s approval. Other matters requiring the2012. The law prohibits tobacco packaging from bearing logos,

ed on June 14, 2019, in accord with the recommendations. On theare tightened or if we are not afforded enough time to adequate-

Minister of Finance’s approval include appointment/dismissal ofbrand images, promotional text or anything else except the productsame day, the TIOJ revised its voluntary standards. In addition toly adapt to such regulatory tightening, our financial results may

directors, executive officers and Audit & Supervisory Board

Japan Tobacco Inc. Integrated Report 2020

SUSTAINABILITYof the Parties (COP), has been meeting regularly since the FCTC

BUSINESS

facilities into three categories: Class-1 facilities (e.g., schools,
Tobacco product sales and promotional activities in Japan are

products and sales of tobacco products to minors). The

054

Tobacco Business Act

VALUE CREATION

sponsorship) and measures to reduce the supply of tobacco

CORPORATE PROFILE

Regulation and key laws

Japan Tobacco Inc. Integrated Report 2020055

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

JT and/or some of its subsidiaries are defendants in

its early stages. We believe that we have valid grounds toappropriations of capital surplus (excluding appropriations to

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

lawsuits filed by plaintiffs seeking damages for harm

defend this claim and intend to do so vigorously.

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

The PMD Act requires companies that manufacture and sell

allegedly caused by smoking or vaping, the marketing oftion. We are also required to submit a statement of financial

pharmaceuticals to be licensed in every prefecture in which they

tobacco products or exposure to tobacco smoke. There are

Even now, the scale of the JT Group’s U.S. tobacco businessposition, statement of income and business report to theoperate and to renew those licenses every five years. Additionally,

lawsuits involving smoking/vaping and health-related cases

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

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

every pharmaceutical manufactured or sold in Japan must be

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

approved by the MHLW.

named as defendants or for which JT may have certain

The Reconstruction Financing Act*², which took effect on

Please see "Contingent Liabilities" of our Consolidated

Japan’s National Health Insurance (NHI) program maintains aacquisition of RJR Nabisco Inc.’s non-U.S. tobacco business.

Financial Statements’ “Contingencies” note for major

involvement in the tobacco industry under the Tobacco

drug formulary and sets official drug prices. NHI is planning to

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

lawsuits to which JT and some of its subsidiaries are named

Business Act by March 31, 2023, and to explore the possibility ofradically reform drug pricing. The planned reforms include

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

divesting its JT shareholdings.

annual drug price revisions, paring-down of the list of drugs

health-related cases.

*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

ment award in connection with smoking/vaping and health-re-in long-listed drug prices based on generic substitution rates.

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.

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
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
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
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
tively, 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

Japan Tobacco Inc. Integrated Report 2020

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.

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.

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

being internationally standardized both qualitatively and quantita-

responsibilities to ensure the safety of their food products,

Group also may become the defendant in further litigation.

GOVERNANCE

stringently regulated in Japan and major overseas markets.

inspect their facilities, and otherwise act diligently to fulfill their

Apart from smoking/vaping and health-related ones, the JT
On March 8, 2019, JTI-Mac filed for protection from its creditors

SUSTAINABILITY

and not encouraging anyone, including adults, to start

BUSINESS

There are ten ongoing health care cost recovery cases in

In addition to complying with the regulations of every country

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

To date, JT Group have never lost a case or paid any settle-

discovery and reduce off-label drug use, and tiered reductions

Processed Food Business

VALUE CREATION

December 2, 2011, directed the government to reassess state

Self-regulation of marketing056

indemnity obligations pursuant to the agreement for JT’s

CORPORATE PROFILE

Litigation

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 2020057

CORPORATE PROFILESUSTAINABILITYVALUE CREATIONThe 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.

BUSINESS

060 Our material issues
062 Sustainability strategy
SUSTAINABILITY

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

GOVERNANCE

072 Focus areas by business segment• Tobacco Business• Pharmaceutical Business

FINANCIAL INFORMATION/OTHERS• Processed Food Business
082 Interview with the CSO

058

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020059

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.

SDGs

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

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

Climate-related Financial Disclosures) and (b) thecontinue to work on “product innovation” as a material issue

Responsible
marketing

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

MediumThe business environment surrounding the JT Group willout periodic materiality assessments, reviewing and updating
the priorities as necessary to ensure that they remain relevant

High

Importance to the JT Group

continue to evolve rapidly in 2021 and beyond. We will carry• Investing in people: Equality and diversity in our workplace.

Environment

Information
security

to continue to provide new value to our consumers.

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

Product
innovation andintellectual
property

GOVERNANCE• Environment: (a) Supporting the TCFD (Task Force on

Supply chain
management

Environmental
impacts ofproducts

Mediumimplementing “New Ways of Working.” The JT Group willcontinue to support the communities where we operate in

Product safety
and productresponsibility

Respecting
human rights

systems such as remote working and flexible hours, andSince 2015, we have continued to listen to our stakeholders

Laws andregulationsSUSTAINABILITY

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

Corporate
governanceandtransparency

BUSINESSTo help the JT Group to grow, and to build a sustainable futureHigh

Sustainability strategy

Importance to external stakeholders

Materiality

The JT Group’s materiality

VALUE CREATIONThe 4S model

CORPORATE PROFILEOur material issues

Value chain boundaries

Our supply chain

Our Company

Our customers and consumers

060

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

and up-to-date.

Japan Tobacco Inc. Integrated Report 2020061

Three absolute requirements
for sustainability

Tobacco business sustainability strategy
We have selected the following four focus areas for the tobacco business, which is our core business. We have set 11 specific targets for the focus
areas and have been reporting on progress since 2019. In 2020, we set a new target relating to the appropriate use and responsible disposal ofmaterials, including plastics, used in our products and packaging.
Focus areas

Aspirational goals

Products and services

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

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

Supply chain

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

Regulatory environment and illegal trade

We will ensure the Company is included in policymaking leading to fair and balanced
regulation, and enhance our cooperation with governments to combat illegal trade.

VALUE CREATIONThe 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.

CORPORATE PROFILE

Sustainability strategy

Respect for human rights

global operations and value chains, as expressed in the JT
Group Human Rights Policy.

BUSINESS

We are committed to respecting human rights across our

Pharmaceutical business sustainability strategy
The mission of our pharmaceutical business is to create innovative, original drugs to support patients in the shortest time possible. In view of thisP. 64

mission, in 2019, we selected the following three focus areas. We set five specific targets for these focus areas and this is the first time we areHUM

A N RI

GHTS

reporting on our progress towards achieving the targets.
Aspirational goals

Contributing to the SDGs

Products and services

We will create innovative, original drugs to support patients in the shortest time possible.

The JT Group supports the Sustainable Development Goals

PeopleWe will strive to nurture talent development which enables us to create first-in-class(FIC) drugs.

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

Product safety and responsibility

We will strictly comply with all relevant laws, regulations, and industry standards inorder to deliver safe drugs to patients.

SUSTAINABILITY

Focus areas(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

Processed food business sustainability strategy
Good governance and business standards

Our mission in the processed food business is to deliver safe, high-quality products to consumers. In 2019, we selected the following three focus

We are committed to promoting transparent, fair and timely

Focus areas

Aspirational goals

Products and services

We will continue to provide high-quality, technology-driven products in response to
our customer's needs, to satisfaction and trust.

PeopleWe will ensure workplace safety for our employees, while continuously investing inpeople who can contribute to enhancing corporate value.

Supply chain

We will reduce social and environmental impacts and continue to deliver safe
products to consumers.

interests of consumers, shareholders, employees and thewider society.
P. 86-103

062

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

decision-making that carefully considers the respective

areas. We set eight specific targets for these focus areas and this is the first time we are reporting on our progress towards achieving the targets.

Japan Tobacco Inc. Integrated Report 2020063

Three absolute requirements
for sustainability

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.

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 approach and progress

Our focus areas

Embed

Through long-term partnerships with local and internationalorganizations, we have around 500 community investment
this, 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.

programs in 66 countries. Based on global and local needs,
these programs help communities to become more inclusive,
sustainable, and resilient. We focus on three specific issues:
1. Reducing inequalities, e.g., helping underprivileged people

Identify and prioritize

gain access to food and education.
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.

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.

help of our employees.
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

Our contribution to communities
in 2020

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.

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

consistent manner. The plans have defined responsibilities,

3. Protecting the environment, e.g., replanting trees with thethe environment globally.

Respond
We develop action plans to address issues identified throughe.g., providing access to clean water.

SUSTAINABILITY

We conduct Human Rights Impact Assessments to identify

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

BUSINESS

We are working hard to embed human rights thinking in our

VALUE CREATION

Improving our social impact

CORPORATE PROFILE

Respect for human rights

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.

Putting people first
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

Total:

49.5(US$ MM)

US$43.9 MM in cash

US$4.5 MM in management costs

19,199hours volunteered

551

FINANCIAL INFORMATION/OTHERS

Protecting human rights was a vital element of our Group-

organizations supported(includes volunteering during working hours only)

US$ 0.7 MM in employee volunteer hours

US$0.4 MM in kindthey 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.

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

JT Group environment management

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.

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

Our sustainable business practices allow us to conserve resources,
reduce waste, manage costs, and meet the growing consumer
demand for eco-friendly products.

Endorsing the TCFD recommendations

Read more about our approach in the JT Group Environment Policy.

The JT Group Environment Plan 2030

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

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).

Waste

Selected CDP "A List" for climate and water, and supplier engagement leader
for the second consecutive year
For the second year running, we achieved a place on CDP'sleader 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

Natural resources

BUSINESSthe results of our first round of analysis on JT.com.

Our JT Group Environment Plan 2030 sets objectives andEnergy and emissions

CORPORATE PROFILE

Improving our environmental impact

GOVERNANCE

Improving sustainable product packaging and material use
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

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.

FINANCIAL INFORMATION/OTHERS

To further reduce the environmental impacts of waste

Kazuhito Yamashita

Member of the Board, Chief Sustainability Officer

066

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020067

Focus areas

CORPORATE PROFILE

Investing in people
Diversity and inclusion

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.

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 thisNew Ways of Working (N-WOW)
TREAT ALLEMPLOYEES FAIRLYAND RESPECTFULLY

We believe that highly skilled and talented people form thefoundation of a company’s success and contribute to real

Recognizing that different people have different working styles and needs, we promote a workplace environment that allows all
employees to fulfill their potential.

sustainable 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 talentWorking 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

represents a growing proportion of our new hires and their

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

location, when an employee becomes a parent via natural

adds additional pressures. It requires flexibility and the adoption

unique skills will help drive innovation in the JT Group.

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

working in February 2020. These new ways of working willof new skills, such as remote ways of working.
Our international tobacco business launched its first global

continue beyond the end of the pandemic. In our international

JT has been certified as a childcare-supporting company

We have implemented various global and regional learninginternship competition “Make It Bright” in 2019, in which

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

programs. In these unprecedented times, we supported

students from 17 countries pitched ideas for positive change

locations have been working from home.

and Welfare.

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

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

Our 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 theLGBT+ inclusion

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
the fifth consecutive year.

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.

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

068

Japan Tobacco Inc. Integrated Report 2020

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

Progress
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.

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.

Our tobacco businessWe will be the employer of choice
by investing in people.

GOVERNANCE

best talent – particularly from Generation Z,* as this group* Generation born after the late 1990s.

Gender equality – women in leadership

SUSTAINABILITY

students around the globe. More

Employer ofchoiceBUSINESS

Flexible working

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

Aspirational goal

VALUE CREATIONThe JT Group human resources management philosophy

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

Our approach

CORPORATE PROFILE

Investing in people: Health and safety
Ensuring the same standards around the world

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.

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.

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

Towards a better workplace
We care deeply about employee well-being because we want

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

BUSINESSIn 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.

We take a systematic and risk-based approach to acquired

VALUE CREATION

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.

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

also offered online exercise programs. Both measures were

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

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 introduc-

Three pillars of safety
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.

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%.

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

motorcycles, and working with machinery, as well as slips,

We have been implementing a motorcycle safety program in

the work or workplace, we take appropriate measures immedi-

recognizes large enterprises that are making outstanding

trips, and falls.

countries with a high vehicle accident rate (Zambia, Malawi,

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

progress towards better well-being among their employees.

highest risks across the JT Group are driving vehicles, riding

SUSTAINABILITY

Our safety programs are based on three fundamental pillars:

ing new rules requiring all local offices to report their occupa-

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. ThisIn 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 showed

Zero injuries

TargetProgress

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 in2020.

that our markets comply with 80% of our global guidelines

FINANCIAL INFORMATION/OTHERS

Aspirational goal

GOVERNANCE

enables us to identify hazards, implement appropriate

Health and safety performance in our tobacco businesson 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.

Recordable injury
rate

Employees

2015

2016

2017

2018

2019

2020

0.72

0.64

0.67

0.50

0.49

0.30

* 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.

070

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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

CORPORATE PROFILE

Products and services (RRP)
JT Science: an online resource for all

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.

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 regulatorycommunity. While it is still too early to understand the long-term

To realize the full potential of RRP, we follow the researchhealth effects of RRP, factors including the elimination ofprocess below.

VALUE CREATIONWe 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.

combustion and the fewer toxicants found in the vapor, suggest
RRP development and assessment: A six-step journey21

In 2020, we launched our Ploom S product offerings in Russia, Italy,
and the U.K. with a positive response from consumers.

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.

Our key T-Vapor products in 2020

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,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.

and safely recycle or dispose of our products.

providing consumers with advice and support to conveniently

Ploom return scheme in Japan
RRP attributes

CONVENIENCE

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

The 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 the
Minimal maintenance072

Japan Tobacco Inc. Integrated Report 2020

Read more on JT.com.

Continuous use

RRP

Read more about our RRP portfolio at JT.com.

FINANCIAL INFORMATION/OTHERS

Easy to use

cigarette butts in the U.K.
• Nordic Spirit — Sustainably made nicotine pouches

participating companies.
No smoke smell

GOVERNANCE

SOCIAL CONSIDERATION

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

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.”

Working together

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

Addressing child labor

CORPORATE PROFILE

Building sustainable supply chains

solutions to prevent child labor.

Supporting and communicating with growers in 2020

Our leaf supply chain
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

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 theWorld Health Organization (WHO) – for example by wearing

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.

BUSINESSWe manage our leaf supply chain through a supply chain due

In 2020, we introduced a new governance model for ARISE,

labor in the leaf supply chain and other operations.

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

ground, and report through our online leaf portal. We

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
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

integrity. The direct contracting model also allows us to

In our international tobacco business, we launched a new
These changes will allow us to maximize efficiency, strength-

SUSTAINABILITY

We source tobacco through two supply models which are

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.
FINANCIAL INFORMATION/OTHERS

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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
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
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.

VALUE CREATIONOur Group-wide supplier screening process ensures that we

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.

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
In 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.

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.

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.

Read more about our views on specific regulatory topics on JTI.com.

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.

business, such as RRP (Reduced-Risk Products), the reduction
Global Tobacco and Nicotine Forum 2020 (GTNF)

At the end of 2020, 64% of our key suppliers werescreened against ESG criteria.*³

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.

Reducing our environmental impact in the tobacco supply chain
Engagement
 ead more about our targets on “Greenhouse gas emissions,” “Water andR
waste” and “Forestry” in “Environment and our operations.”

 ead more about our programs and initiatives in our international
R
tobacco business.

Aspirational goal

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/OTHERS*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.

We took part in the virtual Global Tobacco and Nicotine

GOVERNANCE

Supplier
screening

informed choices. We play our part by being transparent

SUSTAINABILITY

ALP

We will reduce
environmental andsocial risks, andenable transparent
and responsible
practices acrossour supply chain.

our attitude to smoking. We also work in a highly regulated

what we do, we adhere to the five core principles that define

Supply chain aspirational goal and targets
Aspirational goal

We value and support the freedom for adults to make

BUSINESS

and collaboration on how to mitigate the risks and make

Optimizing the regulatory environment

Read more about our views on regulation and the latest regulatory developments in the industry at JT.com.

076

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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

Illegal trade fuels modern slavery, organized crime, and terror

As with all other regulations, we make every effort to comply

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 asgroups. It causes harm to society and consumers, as

Track and Trace are implemented along with proper enforce-

uncontrolled products circumvent regulations and quality

ment by authorities and sanctions for those involved in illegal

controls, and undermines legitimate tobacco businesses.

CORPORATE PROFILE

Tackling illegal trade* “ Illicit whites” refer to tobacco products manufactured legitimately but
without any product flow control measures afterwards, and smuggled andsold in another market.

Tackling illegal trade is a top priority for us, and our Anti-Illicit
Trade team is recognized as the industry leader in this area.

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, aconsumers and society — from criminal elements.

al, 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, thisWorking in partnership with our markets and law enforce-

products, 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.

This global team supports our long-term, sustainable future
by protecting our business and reputation — as well as ourment, the Anti-Illicit Trade team secures our supply chain andassists law enforcement in removing illegal tobacco from the

VALUE CREATION

The perfect storm

this runs parallel to tax increases designed to boost

marketplace. It maintains a robust dialogue with governments

Read more about our approach to tackling illegal trade, thepublic finances.

and law enforcement agencies on the threat of illegal tobacco

BUSINESS

impact of COVID-19, and global trends at JTI.com.

through public-private partnerships and provides counterfeit

Nowhere is this truer than when it comes to the illegal

awareness programs for law enforcement, globally.

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

Progress in 2020

tobacco product from organized criminal groups.
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.

SUSTAINABILITY

In 2020, our Anti-Illicit Trade team provided 1,117 intelligence

Both the EU and the U.K.’s HM Revenue and Customs recogAs a direct result of our work to tackle illegal trade, notified
seizures of counterfeit products in the EU have remained
Illegal trade

Progress

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.

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.

Other key wins in 2020
• Over 3.22 billion illegal cigarettes seized thanks to intelligencereports provided by our team to law enforcement.

FINANCIAL INFORMATION/OTHERS

In tackling illegal trade, the JT Group complies with all laws

Japan Tobacco Inc. Integrated Report 2020

TargetGOVERNANCE

A responsible approach

078

Aspirational goal

nized us as an industry leader in the fight against illegal trade.

• 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

Processed Food 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 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.

CORPORATE PROFILE

Pharmaceutical BusinessIn 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.

Products and services

Our business operations and sustainability

Aspirational goal

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.

We will create innovative, original drugs to support patients in the shortest time possible.

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 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

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.
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

We have developed our own guidelines on how to conduct annual inspections to ensure that our production methods fully comply

Enhancing food quality

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.

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.

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.

FINANCIAL INFORMATION/OTHERS

We also have our own standard on the ethical promotion of prescription drugs, based on the guidelines on sales information

GOVERNANCE

We will strictly comply with all relevant laws, regulations, and industry standards in order to deliver safe drugs to patients.

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.

Aspirational goal

SUSTAINABILITY

We will strive to nurture talent development which enables us to create first-in-class (FIC) drugs.

BUSINESSAs this business has a direct impact on human health and life, we not only strictly comply with all laws, regulations, and industry

VALUE CREATION

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.

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.

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Japan Tobacco Inc. Integrated Report 2020081

rights may be at risk. Having initiatives in place to ensure thatGroup-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

Interview with the CSO

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

Kazuhito Yamashita

Ari Kubota

Director and Senior Vice President
Chief Sustainability Officer,
Compliance and General Affairs

JT Sustainability
Management DivisionInterviewer

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.
For 2021, we will be looking at updating the JT Group’s

division. In the same year, a Senior Vice President responsible

sustaining all these initiatives. Our pharmaceutical businessmaterial issues, bearing in mind the effect of COVID-19 andthe year?

for sustainability was appointed, and we set out our sustain-

and processed food business have made “investing in people”

the longer-term changes that the pandemic will impose on

ability strategy for the whole Group.

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;

like no other. To prevent the spread of the pandemic, we madeDuring 2020, we regularly organized online forums, providing

specific focus area, which reflects the specific characteristics

nevertheless, we will strive

the safety of our employees a top priority by implementing

opportunities for the heads of our business divisions toof the industry in which they operate.

to embed sustainability

thorough 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 to(Kubota) Please describe the progress made in 2020 andbusiness, involve all

limited for the JT Group, severe damages were inflicted on

discuss Group-wide

the challenges ahead.

members of the Group andsociety. We have provided support to our local communities

sustainability issues andaround the world in countries where we operate. For example,

extended support to our(Yamashita) In our tobacco business, this will be the second

able future for our society

in Japan, we extended emergency aid to local authorities andbusiness functions, so thatyear that we will report our progress on the sustainability

and for our business.

local groups in need. We then organized support to sectors

they can pursue their

KPIs. For our pharmaceutical and processed food businesses,

affected by the prolonged effect of the pandemic such as

respective sustainability

this will be the first time. I am pleased to announce our new

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 managemanagement playing aof our organization in pursuing sustainability.

pivotal part.

work towards a sustain-(Kubota) What does “inclusiveness” mean to thea cigarette butt cleaning exercise undertaken by our own

JT Group?

employees and later evolved into a community-wide
clean-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 in(Kubota) What are the characteristics of the Group’s

development of our society through our business operations.

sustainability strategy?

inclusive, 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.

ment principle. As a member of the Board and CSO of the(Yamashita) Firstly, there are universal sustainability issues

strive to improve our social impact. Inclusiveness goescompany, 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
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

beyond the benefits of community investment – it is also

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(Yamashita) It is essential to contribute to the sustainable
Our business is underpinned by the 4S model, our manage-

GOVERNANCE(Kubota) Please discuss your role as CSO and the evolution

into the root of our
SUSTAINABILITY

ment, with enterprise risk

BUSINESS

It goes without saying that investing in people is critical to(Kubota) Looking back at 2020, how would you characterize(Yamashita) With the outbreak of COVID-19, 2020 was a year082

appreciated the value of our products. At the same time, I

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 2020

083

CORPORATE PROFILE

GOVERNANCEVALUE CREATION

Enhancement of corporate governance is a high management
priority for the JT Group as it works continuously tomake improvements.

BUSINESSThis 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.

SUSTAINABILITY

086 Interview with the Outside Director
090 Corporate governance096 Management structure

GOVERNANCE

100 Internal control system & risk management system

FINANCIAL INFORMATION/OTHERS

084

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CORPORATE PROFILE

Interview with the Outside Director
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 andmarkets. These reports prepare us for meetings with clear understanding of the latest market evaluations and external environ-

VALUE CREATION

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.

ment. 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.

BUSINESSAs an outside director, I support thecontinuous evolution of the JT Groupamid disruptions in our daily lives.

In 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 execu-

Yukiko Nagashima
Outside Director

086Japan Tobacco Inc. Integrated Report 2020

tive 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.

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Succession Planning

What challenges do you think will the Board face inthe future?

What type of people do you think JT needs for management in the future?

CORPORATE PROFILE

Future of the Board of Directors

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 andthat it is our ability to respond to evolution that will

Compensation is discussing the future need for a remuneration plan designed to build a management team that makes the

become even more important in the future. I think theCompany a winner in global competition. JT introduced a new executive remuneration plan in 2020, but to make it truly

Board must enhance its functions of support for and overeffective we have to discuss the pay levels needed to attract talented people and ways to appoint foreign nationals as directors.

sight of those initiatives made by the executive officers. I

In times of complex, abrupt change, an executive succession plan is increasingly important for a corporation.

used the term “evolution” rather than “change,” because I
want to give this a positive spin and use it as an opportu-

VALUE CREATION

I would not necessarily call it a challenge, but I believe

Message to the JT Group

nity to further move up swiftly from our current position.

From your standpoint as an outsider, how can the JT Group change to be a better company?
As is evident in the progress of digital transformation, DX
I think the most important thing is to nurture a culture

might call disruptions in our daily lives or major short-that is free of the fear of failure. Even failure can be an

span shifting of what we have taken for granted, some-asset if it results from what truly resourceful employ-

thing I have actually witnessed. CLUB JT* is an example

ees, those who love and are committed to the busi-

of DX. The state of management that decides how JT canness, have done as their best.

BUSINESS

for short, during this pandemic, there has been what webest 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

For the consumers who are at the heart of the 4S

our goals. In adapting to evolution, I think the true key to winning competition is how we define our challenges for that. Person-model, bold, quick change when necessary is import-

ally, I want to further deepen my understanding of the competitive environment and, from the oversight side, positively stimu-

ant, too. I think it will be good if I can encourage thelate the executive side, while enhancing the supervisory role of the Board.

Company to change for consumers at lightning speed,
effortlessly.
SUSTAINABILITY* 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 to

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

person. 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?
FINANCIAL INFORMATION/OTHERS

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.

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CORPORATE PROFILE

Corporate governanceCorporate governance structure
Basic policy

Rationale behind current governance regime

Our corporate governance system (As of March 24, 2021)

Accounting audit/Operating audit

Audit report
Board of Directors
ReportIndependent
Auditors
Lawyers

nine members(including three
Outside Directors)

Report/Operational Review Proposal
and Business
Assurance DivisionInternal
audit

President andChief Executive
Officer

Audit & Supervisory
Board

Introduce compliance-related matters

Supervise
performance

Accounting
audit
AdviceSelect or dismiss members

Select or dismiss members

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

Group
audit

Please visit our website for more on the JT Corporate Governance Policy.

functions by positioning an independent and fair Audit & Supervisory
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)
Executive Officers

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.

Departments

We continuously seek to improve corporate governance and increase

Subsidiaries

BUSINESS

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 of Shareholders
Select or dismiss members

VALUE CREATIONThe 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.

management 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

met 4 times with 100 % attendance rate in 2020

Board of Directors

Advisory Panel on Nomination and Compensation

met 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

グループ
監査

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Japan Tobacco Inc. Integrated Report 2020

執行役員
各部門

会計監査・業務監査

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 2012

Measures to promote
efficiency ofoperational execution

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, 2019

FINANCIAL INFORMATION/OTHERS

内部監査

4名
（社外取締役3名を含む）

The 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.

GOVERNANCE

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

SUSTAINABILITY

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.

子会社

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Succession planning

We annually evaluate our Board of Directors’ effectiveness through a multi-step process. First, all directors and Audit & Supervisory

We place priority on fostering successive generations of executives who will manage our future operations, expanding our pool ofBoard members complete a self-assessment questionnaire with regards to factors including the Board’s operations, oversight

executive candidates and improving its quality.

function 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.

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
at the core, are deeply involved in selecting executive candidates and supporting their growth.

VALUE CREATION

We take advice from external consultants for drafting the questionnaire and analyzing the results in order to ensure objectivity and

CORPORATE PROFILE

Evaluation of Board of Directors’ effectivenessWe expand our executive talent pool by selecting groups of human resources who have the potential for being future executive

further improve the evaluation process.

candidates by organizational rank through Group-wide recruitment and recommendations from management, particularly executive
The evaluation items are as follows.

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.

Board’s operations

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.

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’personal growth on a Group-wide basis over multiple years. Through such programs, we are expanding our talent pool from the

BUSINESS

Dialogues withshareholders andinvestors

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.

bottom up age-wise as we continue to pursue reinforcement of our human resources.
Sharing opinions from shareholders and investors, Optimization of dialogue methods, etc.

Our policy pertaining to listed subsidiary’s governance

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• 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 regionsof 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.
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

・ Impact of COVID-19 on our employees and each business, our countermeasures and updates

dence as a listed subsidiary. Additionally, Torii is upgrading its governance regime’s effectiveness by transiting to a majority-inde-

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.

Quantitative and qualitative maintenance and increase incommunication among directors (considering less face-to-faceopportunities due to the pandemic)
Further in-depth discussions on corporate governanceOur 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 governanceto adopt these regulations, thereby gaining autonomy in terms of decision-making authority. Such autonomy ensures its indepenpendent 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
equities are as follows.

FINANCIAL INFORMATION/OTHERS

Key issues

GOVERNANCE

・ 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.

SUSTAINABILITY

and worked on making the following improvements throughout 2020.

We have a publicly listed subsidiary, namely Torii Pharmaceutical Co., Ltd. (hereinafter Torii), in light of the management benefits• 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.

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Components of executive remuneration

Executive remuneration policy

Base salary• 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.

Executive bonus

Process for determining executive remuneration
director 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

Restricted stock remuneration plan

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%

Cash

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 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.

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Japan Tobacco Inc. Integrated Report 2020

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.

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

Remuneration for the outside directors

Directors (excluding outside directors)

1,193

504

438

30

188

33

6

Remuneration for the outside directors is composed of “basesalary” alone and does not include performance-linked
compensation to ensure their independence.

Audit & Supervisory Board members(excluding outside members)

88

88

－

－

－

－

2

Outside executives

135

135

1,416

727

Total

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.

－

438

－

30

－

188

－

33

Number of
persons

FINANCIAL INFORMATION/OTHERS

Remuneration for the directors who do not serve as
executive officers (excluding outside directors)

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%.

GOVERNANCE

Payment
methodMid- to long-term incentive

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

Performance share unit plan

SUSTAINABILITY

Remuneration for the directors also serving as executive officers

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.

BUSINESSThe 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 each

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

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:

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.

CORPORATE PROFILE

Executive remuneration

614

Notes:
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

Directors and Members of the Audit & Supervisory Board
Nine Directors (including three Outside Directors)

As of March 24, 2021

Kiyohide Hirowatari*

Chairperson of the Board

Date of birth: March 21, 1951
Term of office:2 years from March 2020
Number of shares held: 19,400

Significant Concurrent Positions Outside the Company
Outside Director, The Ogaki Kyoritsu Bank, Ltd.
Outside Director, Audit & Supervisory Committee Member, Mitsubishi UFJ Trust andBanking Corporation

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

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

Representative Director andExecutive Vice President,
Chief Financial Officer

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.

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.

096

Japan Tobacco Inc. Integrated Report 2020

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
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.

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)

Date of birth: April 4, 1961
Term of office:2 years from March 2020
Number of shares held: 0

April
March

Significant Concurrent Positions Outside the Company
Standing Audit and Supervisory Board Member, Recruit Holdings Co., Ltd.
Standing Audit and Supervisory Board Member, Recruit Co., Ltd.

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
April
January

Masato Kitera
Outside Director(Independent Outside Director)

Date of birth: October 10, 1952
Term of office:1 year from March 2021
Number of shares held: 01985	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)

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.

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

Date of birth: January 21, 1964
Term of office:2 years from March 2020
Number of shares held: 31,700

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.

July
June

GOVERNANCE

Naohiro Minami*

January
March

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)

April
May

SUSTAINABILITY

Masamichi Terabatake*

June
June

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)

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.

Date of birth: November 11, 1965
Term of office:2 years from March 2020
Number of shares held: 28,500

Kazuhito Yamashita*

Significant Concurrent Positions Outside the Company
Outside Director, Benesse Holdings, Inc.
April
July
July
June

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)

January
JanuaryMarch

BUSINESS

1983	Joined the Company(Previously, Japan Tobacco and Salt Public Corporation)June
2003	Vice President, Corporate Planning Division
2004	Vice President, Corporate Strategy Division
July
June
2005	Senior Vice President; and President, Food Business
June
2006	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)

April

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.

Representative Director andExecutive Vice President

VALUE CREATION

Yasutake Tango

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.

July
January

The Directors marked with * are also the Group’s Executive Officers.

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)

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

CORPORATE PROFILEManagement structure097

AprilApril
June

Ryoko Nagata

Standing Audit &Supervisory Board Member

July
June
January
March

April
July
June
March

Hiroshi Yamamoto

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)

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

Toru Mimura

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

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)

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

2014	
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)
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

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.

Masamichi Terabatake

Yuki Maeda

Chief Executive Officer*

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
Kazuhito Yamashita

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

Koichi Mori

Human Resources

Hiroyuki Fukuda
Communications

Osamu Hirose
Legal

Hisato Imokawa

Sustainability Management

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

Executive Vice President and Deputy CEO

Roland Kostantos

Chief Operating Officer

Vassilis Vovos

Senior Vice President, Finance,
IT and Chief Financial Officer
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.

Muneaki Fujimoto

Howard Parks

Senior Vice President, Business Development
and Corporate Strategy

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, Western Europe

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

April
June

June

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.

Senior Vice Presidents

GOVERNANCE

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)

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.

President

SUSTAINABILITY

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

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.

As of January 1, 2021

Executive Officers

BUSINESS

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)
April
July

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.

Executive Officers and Members of JTI Executive Committee

VALUE CREATION

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

July

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)

As of March 24, 2021

CORPORATE PROFILE

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

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

Overview

Compliance

We have implemented an internal control system to maintain proper operational execution, largely through compliance, internal

We enforce strict compliance. We have instituted a Code of

auditing and risk management. Our Board of Directors is kept apprised of these internal controls’ status through regular reports.

Conduct that mandates that all directors and employees act

We have also set up channels, including a specialized organizational unit, to facilitate reporting to Audit & Supervisory Board

in compliance with applicable laws, government regulations,members to ensure the effectiveness of their auditing activities. In coordination with our subsidiaries, we have built a risk manage-

our Articles of Incorporation and societal norms pursuant toment system, a compliance system (including a concern reporting system), and an internal auditing system and implemented

regulations established by the Board of Directors. To ensure

controls to ensure the reliability of our financial reporting.

fair and effective compliance practices, we have established

The Board of Directors

JT Group Compliance Committee*
Supervise/Advisethat reports directly to the Board of Directors.
The Board of Directors
ReportingExternal Auditors

The head of the JT Group Compliance Committee is the
Chairperson of the Board, and the Committee includes

Monitoring

ReportVALUE CREATION

the JT Group Compliance Committee as a deliberative body

Internal control framework

CORPORATE PROFILE

Internal controls system & risk management system

Compliance Office
Approve initiatives

ReportEach business division & Corporate divisions

external experts as key members. The Committee meets
Crisis management/
Disaster response

Financial risks/Credit exposure

Compliance Policy andthe Compliance
Implementation Plan

Internal audit plan/Internal audit report

Internal control
reportInternal control
audit

regularly 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.

BUSINESS

Assurance of reliability of financial reporting* composed of 2 internal and 3 external members

The Compliance Office administers our compliance system,
promotes compliance and endeavors to identify deficiencies.

We have implemented and operate internal controls over financial reporting in compliance with the Financial Instruments and

It also conducts various training programs and other

Exchange Act and other applicable laws and regulations. We have also allocated proper human resources to evaluate and reporteducational activities for directors and employees in the aimon these controls. Through such measures, we ensure the reliability of financial reporting.

of more effective compliance.

Compliance action plans
SUSTAINABILITY

Risk management

The JT Group Compliance Committee formulates the Action Plan including maintenance/enhancement of compliance programs,
We have instituted internal guidelines, rules and manuals on financial risk management. Our CFO reports on financial risks to ourtaking action on Company priority issues, carrying out trainings and seminars, handling the Reporting Concerns Mechanism andCEO and the Board of Directors once a quarter. For other risks, every organizational unit appropriately monitors and reports on

implementing the Compliance Promotion Month.

risks as a secretariat division by establishing various types of committees in accordance with the Responsibility and Authority

Compliance surveys

We comprehensively grasp and monitor all risks that might have an influence on the JT Group. The person in charge of risk

We annually conduct a Group-wide questionnaire survey to check the status of compliance practices in our Japanese opera-

management for the monitored risks determines the material risks and reports them to the CEO. Each executive officer takes thetions. In 2020, 95.5% of employees completed the survey. Using the survey’s findings, which are reported to directors andinitiative to formulate countermeasures against material risks and promote/execute these measures after reporting measures andemployees, the relevant departments introduce remediation plans to address any issues raised, formulate and implement

their progress to the person in charge of risk management and the CEO.

measures to improve compliance.

We have prepared crisis/disaster response manuals for such occurrences. We create a task force and swiftly take appropriate

Internal reporting system (Whistle-blower system)

GOVERNANCE

Regulations, which stipulates each division’s responsibilities and authorities.

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

We have set up internal and external hotlines for reporting of concerns. Violations and potential violations of our Code ofand appropriate matter.

Conduct are reported to compliance promotion departments via a hotline, as a report or request to investigate the details and100

Japan Tobacco Inc. Integrated Report 2020

take necessary action, while working to prevent recurrence of the issues. Serious problems are referred to the JT GroupFINANCIAL INFORMATION/OTHERS

Please see Risk factors (P. 50) for more on risks facing the JT Group.

Compliance Committee for review and, as necessary, reported to the Board of Directors.

Japan Tobacco Inc. Integrated Report 2020101

Information security

We are committed to maintaining the public’s trust in our products. To do so, we have implemented quality assurance systems

We have established an information security policy and related regulations to protect our information assets and promote safe

across all of our businesses as described below.

and efficient information usage.

Tobacco BusinessWe proactively invest in information security on an ongoing basis to keep abreast of advances in information technology, adapt to

CORPORATE PROFILE

Quality control

changes 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

provide high-quality products and services in accord with this basic policy.

Japanese operations received security education. Our international tobacco business has a bespoke i-secure program in order to

Although the quality assurance system was initially built to enable us to provide high-quality products, mainly combustibles, we

educate employees on information security across all of its geographies.

VALUE CREATIONIn our Japanese-domestic tobacco business, we have adopted a basic quality assurance policy and configured our operations tohave 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 Assurance

Internal auditing

Group 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

Our Operational Review and Business Assurance Division conducts internal audits from an objective standpoint independent of

to rectify quality deficiencies. To ensure the quality and safety of RRP in particular, the Quality Assurance Group commissionsorganizational units involved in operational execution and reports directly to the CEO. To fulfill its responsibilities, it has unrestrict-safety and quality consultants to independently assess our RRP to make sure they meet safety standards. It also makes sure that

ed authority to observe all activities, inspect all records and question all personnel on a Group-wide basis.

our RRP comply with laws and regulations that apply to sales of electronic devices.
It formulates annual internal audit plans subject to the CEO’s approval. Its head mandatorily reports internal audit results to theteam under our global quality guidelines. JT and JTI collaborate on quality improvement initiatives also and periodically update

CEO, reports annually to the Board of Directors also and may freely and regularly confer with the CEO and the heads of oureach other on quality issues.

subsidiaries in regards to internal audit results, status of internal controls, and risk assessments.

Pharmaceutical Business

Our subsidiaries may set up their own internal auditing organizations at their own discretion. Those that have done so include

BUSINESSIn our international tobacco business, our Quality Assurance Group works together with JTI’s Quality Assurance staff as a unified

major subsidiaries JTI, TS Network, Torii and TableMark. Subsidiaries’ internal audit plans are approved by, and their audit results
In our pharmaceutical business, we are strictly committed to safety and quality control in compliance with regulations such as thereported to, their respective presidents. JT’s Operational Review and Business Assurance Division coordinates internal audits with

Pharmaceutical and Medical Device Act and ministerial ordinances that govern pharmaceutical quality and safety.

subsidiaries’ internal auditing organizations. Subsidiaries’ annual internal audit plans and their internal audit results are reported to the
SUSTAINABILITY

Processed Food BusinessGroup 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.

In 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.

GOVERNANCE
FINANCIAL INFORMATION/OTHERS

102

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020

103

CORPORATE PROFILEVALUE CREATIONFINANCIALINFORMATION/
OTHERS

BUSINESSThis 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
SUSTAINABILITY

114 Consolidated financial statements
180 Glossary of terms
182 Awards and recognitions
184 Shareholder information

GOVERNANCE

185 List of key disclosures
185 Contact information

FINANCIAL INFORMATION/OTHERS

104

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020

105

Analysis of the results

Results for the year ended December 31, 2020

Revenue*1

Billions of yen

2,175.6

2019

Profit*3

Operating profit–55.9

Financial income/financial cost

–11.9

Income tax

–4.4

–9.3

Processed Food

Profit attributable tonon-controlling interests–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

International Tobacco: Business momentum(at constant FX)

+57.7
–51.2
–6.4

International Tobacco: USD vs. Yen FX effectJapanese-Domestic Tobacco–19.1

Pharmaceuticals

+1.2
–6.2

Processed Food

–5.0

Others487.0

Revenue

2020 Operating profit

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

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

2019

2020

2019

2020

2,175.6

2,092.6

502.4

469.1

Consolidated: Operating profit

International Tobacco

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)

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)• Please see Business strategy/Business review (P.34) for the
analysis of revenue, core revenue and adjusted operating­profit of each business segment.

*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.

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

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.

469.1

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

GOVERNANCE

–17.9

310.3

SUSTAINABILITY

International Tobacco: Local currency vs.
USD FX effect+11.7

Revenue by business segment

Japanese-Domestic Tobacco
515.9• 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.

BUSINESS

2020

Profit decreased by 10.9% to 310.3 billion yen due to factors including a decrease in operating profit and higher­financing costs.

–33.3

–4.6

–9.6

Pharmaceuticals

Adjustments total

348.2

VALUE CREATION

Japanese-Domestic Tobacco

2019 Adjusted operating profit

Billions of yen

2019International Tobacco

2020 Adjusted operating profit

CORPORATE PROFILE

Financial review

107Billions of yen

5,553.1

December 31, 2019

+181.7

Cash and cash equivalents

–46.4
–43.9

Inventory–43.9

Property, plant and equipment–76.8

Intangible assets

2. Non-GAAP financial measures–49.0

Other assets
December 31, 2020

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

–93.2

Goodwill

5,381.4

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–51.3

Income tax payables–23.1

Core revenue

Trade and other payables

+27.9

Bonds

+35.7

–16.8

Other liabilities+33.2

Retained earnings+1.0

Treasury shares

December 31, 2020

5,381.4

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.

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“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.

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/OTHERS

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.

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–178.3

Other equity total

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

Borrowings

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.

5,553.1

December 31, 2019108

The 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.

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.

BUSINESS

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

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 m­ arkets and to diversify the Group’s sources offinancing through ­international capital markets.

Adjusted operating profit

VALUE CREATION

Trade and other receivables

1. Significant accounting policies

CORPORATE PROFILE

Consolidated statement of financial position (Assets)

109

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.

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)

Capital expenditure plan
Main purpose of investing

Funding

92.0

Improvement in product specifications,
RRP-related investment andfacilities renewal

Japanese-Domestic Tobacco

Internally funded

30.0

RRP-related investment andmanufacturing facilities repair

Pharmaceuticals

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

Processed Food

110

Japan Tobacco Inc. Integrated Report 2020

The 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.”

Intra-group cash management

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

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

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.
The 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.

FINANCIAL INFORMATION/OTHERS

2021 (Billions of yen)International Tobacco

6. Financial activities

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.

GOVERNANCE

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)

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.

External investments

SUSTAINABILITY

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.

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.

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.

BUSINESS

Plans for new installations and disposal of facilities

5. Capital management

Share buy-back

VALUE CREATION

are recorded in the financial statements for 2020. For moredetails, please refer to Note 24 to the consolidated financial
statements “Dividends.”

CORPORATE PROFILE

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.

Japan Tobacco Inc. Integrated Report 2020111

Long-term debt

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.

BUSINESS

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.

VALUE CREATIONThe 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.

CORPORATE PROFILE

8. Liquidity

Liquidity

Year ended December 31, 2020

Book Value

Due within
1 year

51.6

51.6

—

Short-term borrowings as loans

Due after
2 years
through
3 years

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

SUSTAINABILITY

Billions of yen
Due after
1 yearthrough
2 years

GOVERNANCE

Note: Lease obligations are excluded.

FINANCIAL INFORMATION/OTHERS

112

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020113

Consolidated Statement of Financial Position

Japan Tobacco Inc. and Consolidated Subsidiaries
As of December 31, 2019 and 2020

Millions of yen
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

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

2019

2020

Bonds and borrowings (Note 19)
Income tax payables
Other financial liabilities (Note 19)
Provisions (Note 20)
Other current liabilities (Note 21)
Total current liabilities

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

803,239
2,002,595
440,434
16,58867,37752,903
109,568
134,696
3,627,397

Liabilities and equity
Liabilities
Current liabilities
Trade and other payables (Note 18)

BUSINESS

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

Millions of yen

VALUE CREATION

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

CORPORATE PROFILE

Consolidated Financial Statements

GOVERNANCE
FINANCIAL INFORMATION/OTHERS

114

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020115

Consolidated Statement of Comprehensive Income

CORPORATE PROFILE

Consolidated Statement of Income

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2019 and 2020

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2019 and 2020

Millions of yen

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

Profit for the period

2019

2020

361,622

312,029

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

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)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

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)

Income taxes (Note 17)
Profit for the period(103,609)
361,622(108,034)
312,029

4,194
365,816(179,145)
132,883

Attributable to
Owners of the parent company
Non-controlling interests
Profit for the period

348,190
13,432361,622

310,253
1,775
312,029352,953
12,863365,816

131,965919
132,883

Earnings per share
Basic (Yen) (Note 30)
Diluted (Yen) (Note 30)

195.97
195.87174.88174.80

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

Reconciliation from “Operating profit” to “Adjusted operating profit”
Millions of yen
2019

2020

502,355
69,623(84,467)
28,415515,927

469,054
63,160(51,978)
6,716
486,952

GOVERNANCE

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

FINANCIAL INFORMATION/OTHERS

116

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020117

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2019 and 2020

Millions of yen

Millions of yen

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

As of January 1, 2019
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

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)

Capital surplus

Treasury 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)——(50,001)

—

—

(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

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
Japan Tobacco Inc. Integrated Report 2020

420,063
179,654
12,571(7,318)22,535(4,042)(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—

Disposal of treasury shares (Note 23)465,232
183,852
16,124(7,944)27,557(5,011)

GOVERNANCE

Acquisition of treasury shares (Note 23)

Total transactions with the owners
As of December 31, 2019118

Remeasurementsof defined
benefit plans

2020

SUSTAINABILITY

Total transactions with the owners
As of December 31, 2020

Share capital

2019

BUSINESS

Other comprehensive income (loss)

Comprehensive income (loss) for the period

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

Subscription
rights to shares

Cash 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)

VALUE CREATION

Profit for the period

Exchangedifferences ontranslation offoreign operations

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

CORPORATE PROFILE

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2019 and 2020

119

1. Reporting Entity

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 thesuch transaction.

the subsidiary’s financial statements, if necessary.
All intergroup balances, transactions, income and expenses
are eliminated on consolidation.
Comprehensive income for ­subsidiaries is attributed to owners of

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.

the parent company and non-controlling interests even if this results incompany in the Group specifies its own functional currency andavailable on the Company’s website (https://www.jt.com/).

the non-controlling interests having a deficit balance.

­measures transactions based on it.

the Company and its subsidiaries (hereinafter referred to as the

B. Associates

currency at the rates of exchange prevailing at the dates of transac-

value through profit or loss.

“Group”) are stated in “6. Operating Segments.”

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 fairtions or an approximation of the rate. Monetary assets and liabilities(ii) Subsequent Measurement

ence. The Group has significant influence over the entity if it has thedenominated in foreign currencies are translated into the functional

After initial recognition, financial assets are measured based on theended December 31, 2020 were approved on March 24, 2021

power to participate in the financial and operating policy decisions ofcurrency at the rates of exchange prevailing at year end. Differences

following classifications:by Masamichi Terabatake, President and Chief Executive Officer.

the investee but it does not have control or joint control over thearising from the translation and settlement are recognized as profit or(a) Financial Assets Measured at Amortized Cost

investee. Investments in associates are accounted for using the equity

loss. However, exchange differences arising from the translation of

Financial assets measured at amortized cost are measured atmethod from the date on which the Group has the significant influencefinancial instruments designated as hedging instruments for net­amortized cost using the effective interest method.

until the date on which it ceases to have the significant influence.

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.

The 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 andJapanese yen at the rates of exchange prevailing at year end, whileobligations of the parties to the arrangement, the Group classifies

income and expenses of foreign operations are translated into

The assets and liabilities 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 instrumentsa joint arrangement into a joint operation whereby the Group has rights

Japanese yen at the rates of exchange prevailing at the dates of­designated as measured at fair value through other comprehensive

Except for the financial instruments, stated in “3. Significant

to the assets and obligations for the liabilities relating to the arrange-­transactions or an approximation of the rate. The resulting translation

income are recognized as other comprehensive income and the

Accounting Policies,” and the accounting adjustments, stated in “37.

ment, and a joint venture whereby the Group has rights to the net

differences are recognized as other comprehensive income. However,amount in other comprehensive income is transferred to retained

Hyperinflationary Accounting Adjustments,” the Group’s consolidated

assets of the arrangement only. The Group recognizes the assets,

the income and expenses of the Group's subsidiaries in the hyperinfla-

earnings when equity instruments are derecognized or the decline infinancial statements are prepared on the historical cost basis.

liabilities, revenues and expenses relating to its interest in a joint

tionary economy are translated into Japanese yen at the rates of

its fair value compared to its acquisition cost is significant. Dividends­operation while a joint venture is accounted for using the equity method.

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(2) Business Combination

disposed of, the cumulative amount of translation differences related

Financial assets are derecognized when the rights to receive ­benefits

Japanese yen, which is the functional currency of the Company.

Business combinations are accounted for using the acquisition

to the foreign operations is recognized as profit or loss in the period

from them expire or are transferred, or when substantially all the risks

The units are in millions of yen, and figures less than one million

method. Consideration transferred in a business combination is mea-of disposition.

and rewards of the ownership are transferred.

yen are rounded to the nearest million yen.

sured as the sum of the acquisition-date fair value of the assets transferred, the liabilities assumed and equity instruments issued by the(4) Financial Instruments

B. Impairment of Financial Assets

Company in exchange for control over an acquiree. Any excess of theA. Financial Assets

With respect to financial assets measured at amortized cost, theconsideration of acquisition over the fair value of identifiable assets(i) Initial Recognition and Measurement

Group recognizes an allowance for doubtful accounts for expected(1) Basis of Consolidationand liabilities is recognized as goodwill in the consolidated statement

Financial assets are classified into financial assets measured at faircredit losses. The expected credit losses are calculated based on

The consolidated financial statements include financial statements ofof financial position. If the consideration of acquisition is lower thanvalue through profit or loss, fair value through other comprehensive

historical loss experience or future recoverable amounts.

the Company and its subsidiaries, and interests in investments inthe fair value of the identifiable assets and liabilities, the difference isincome, and amortized cost. The Group determines the classification

associates and joint arrangements.

immediately recognized as profit in the consolidated statement of

at initial recognition.

3. Significant Accounting Policies

income. If the amount of initial accounting for a business combination

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 trade

is not determined by the end of the reporting period in which the com-

at amortized cost if both of the following conditions are met.

receivables, an allowance for doubtful accounts is measured at an

A subsidiary is an entity that is controlled by the Group and the Group

bination occurs, the provisional amounts for the items for which the

Otherwise, they are classified as financial assets measured at

amount equal to the 12-month expected credit losses. However, thehas control over the entity if it is exposed, or has rights, to variableaccounting is incomplete are reported and are adjusted during thefair value.

allowance for doubtful accounts is measured at an amount equal toreturns from its involvement with the investee and has the ability tomeasurement period, which is one year from the acquisition date.

• 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

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-• The contractual terms of the financial asset give rise on specified

The Group assesses whether a credit risk on a financial asset hasof the subsidiary, and the subsidiary is included in the consolidation

trol is accounted for as a capital transaction. Any difference between

dates to cash flows that are solely payments of principal andincreased significantly based on a change of the default risk consideringfrom the date of acquisition until the date on which the Groupthe amount by which the non-controlling interests are adjusted and the­interest on the principal amount outstanding

past due information, financial difficulties of obligors or downgrades

loses control.

fair value of the consideration paid or received is recognized directly inJapan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

A. Subsidiaries

assets in order to collect contractual cash flows

GOVERNANCE

The Group’s consolidated financial statements are presented in

SUSTAINABILITY(2) Basis of Measurement(3) Functional Currency and Presentation Currency

BUSINESSAn associate is an entity over which the Group has significant influ-

The Group’s consolidated financial statements for the year

(1) Compliance with IFRSVALUE CREATION

The details of businesses and principal business activities of120

retained earnings and no goodwill is recognized with respect toCompany’s registered head office and principal business offices are

2. Basis of Preparation

CORPORATE PROFILE

Notes to Consolidated Financial Statements

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2019 and 2020

asset has increased significantly since initial recognition.

of the internal credit rating.

Japan Tobacco Inc. Integrated Report 2020

121

(ii) Cash Flow Hedge

The Group utilizes derivatives, including forward foreign exchange

The effective portion of gains or losses on hedging instruments isbeing used for production is included in current assets since it is held

it as a credit-impaired financial asset. If the Group reasonably deter-

contracts and interest rate swap contracts, to hedge foreign exchange

recognized as other comprehensive income in the consolidated

within the normal operating cycle.

mines that a whole or part of the financial asset is uncollectible, theand interest rate risks. These derivatives are initially ­measured at fair­statement of comprehensive income, while the ineffective portion

carrying amounts of financial assets are written-off directly.

value when the contract is entered into, and are subsequently remea-

is recognized immediately as profit or loss in the consolidated(7) Property, Plant and Equipment

sured at fair value. Changes in the fair value of derivatives are recog-­statement of income.

Property, plant and equipment is measured by using the cost model

The expected credit losses on trade receivables which are not

Leaf tobacco which is stored for more than 12 months before

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 the­comprehensive income are reclassified to profit or loss when the

An allowance for doubtful accounts for financial assets is recog-

effective portion of cash flow hedges and hedges of net investment intransactions of the hedged items affect profit or loss. In cases where

The acquisition cost includes any costs directly attributable to thenized in profit or loss. If an event which causes a reduction in theforeign operations are recognized as other comprehensive income inhedged items result in the recognition of non-financial assets or liabili-acquisition of the asset and dismantlement, removal and restoration

allowance for doubtful accounts occurs, a reversal of an allowance forthe consolidated statement of comprehensive income.

ties, the amounts recognized as other comprehensive income arecosts, as well as borrowing costs eligible for capitalization.

At the inception of the hedge, the Group formally designatesand documents the hedging relationship to which hedge accounting isaccounted for as adjustments to the original carrying amount of­non-financial assets or liabilities.

impairment losses.

Except for assets that are not subject to depreciation such as land,
assets are depreciated using the straight-line method over their esti-

C. Financial Liabilities

applied and the objectives and strategies of risk management forIf the hedged future cash flows are no longer expected to occur,(i) Initial Recognition and Measurement

undertaking the hedge. The documentation includes identification

any related cumulative gain or loss that has been recognized in equity

as follows:

Financial liabilities are classified into financial liabilities measured at fairof the hedging instruments, the hedged items, the nature of the risks

as other comprehensive income is reclassified to profit or loss. If the• Buildings and structures: 38 to 50 years

value through profit or loss and financial liabilities measured at amor-

being hedged and how the hedging relationship’s effectiveness ishedged future cash flows are still expected to occur, amounts that

• Machinery and vehicles:

tized cost. The Group determines the classification at initial recognition.

assessed. These hedges are assessed on an ongoing basis to deter-

have been recognized in other comprehensive income are continued tomated useful lives. The estimated useful lives of major asset items are

All financial liabilities are measured at fair value at initial recog­

10 to 15 years

be recognized in other comprehensive income until the future cash

though it is expected that there is an economic relationship between

flows occur.

useful lives and depreciation method, such changes are applied

are measured at cost after deducting transaction costs that are

the hedged item and the hedging instrument, that the effect of credit(iii) Hedge of Net Investment in Foreign Operations­prospectively as changes in estimate.

directly attributable to the financial liabilities.

risk does not dominate the value changes that result from that eco-Translation differences resulting from the hedge of net investment in(ii) Subsequent Measurement

nomic relationship, and that the hedge ratio of the hedging relationshipforeign operations are accounted for similarly to a cash flow hedge.

(8) Goodwill and Intangible Assets

After initial recognition, financial liabilities are measured based on theis the same as that resulting from the quantity of the hedged item that

The effective portion of gains or losses on hedging instruments is

A. Goodwill

following classifications:

the Group actually hedges and the quantity of the hedging instrument

recognized as other comprehensive income in the ­consolidated

Goodwill is stated at acquisition cost less accumulated impairment losses.

(a) Financial Liabilities Measured at Fair Value through Profit or Lossthat the Group actually uses to hedge that quantity of the hedged item.

­statement of comprehensive income, while the ineffective portion is

Goodwill is not amortized. It is allocated to cash-generating units that

Financial liabilities measured at fair value through profit or loss include

If a hedging relationship ceases to meet the hedge effectivenessrecognized as profit or loss in the consolidated statement of income.

are identified according to locations and types of businesses and tested

financial liabilities held for trading and financial liabilities designated as

requirement relating to the hedge ratio due to changes in an economic

At the time of the disposal of the foreign operations, any related

for impairment annually or whenever there is any indication of impairment.

measured at fair value through profit or loss at initial recognition.

relationship between the hedged item and the hedging instrument but­cumulative gain or loss that has been recognized in equity as other

Impairment losses on goodwill are recognized in the consolidated(b) Financial Liabilities Measured at Amortized Cost

the risk management objective remains the same, the Group would

comprehensive income is reclassified to profit or loss.

­statement of income and no subsequent reversal is made.

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

F. Fair Value of Financial Instruments

B. Intangible Assets

Amortization under the effective interest method and gains or losses

meet the requirement when the hedging relationship ceases to meet

Fair value of financial instruments that are traded in active financial

Intangible assets are measured by using the cost model and areon derecognition are recognized as profit or loss in the consolidated

the qualifying criteria even after adjusting the hedge ratio.

markets at year end refers to quoted prices or dealer quotations.

stated at cost less accumulated amortization and accumulated

Hedges that meet the stringent requirements for hedge accounting
are classified in the following categories and accounted for in

If there is no active market, fair value of financial instruments isdetermined using appropriate valuation models.

at each year end and if there are any changes made to the estimatedimpairment losses.
Intangible assets acquired separately are measured at cost at­accordance with IFRS 9 “Financial Instruments.”• The amount of an allowance for doubtful accounts calculated in(i) Fair Value Hedge(5) Cash and Cash Equivalents

through business combinations are recognized at fair value at the

The gain or loss on the hedging instrument is recognized as profit

Cash and cash equivalents consist of cash on hand, demand deposits,

acquisition date. Expenditures on internally generated intangible• The amount initially measured less cumulative revenue recognized inor loss in the consolidated statement of income. However, changes inand short-term investments that are readily convertible to known

assets are recognized as expense in the period when incurred, except

accordance with IFRS 15 “Revenue from Contracts with Customers.”

the fair value of the hedging instrument are recognized as other com-

amounts of cash and subject to insignificant risk of change in value andfor development expenses that satisfy the capitalization criteria.

(iii) Derecognitionprehensive income in the consolidated statement of comprehensive

due within three months from the date of acquisition.

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(6) Inventories

tested for impairment whenever there is any indication of impairment.

the hedging gain or loss on the hedged item, the carrying amount of

The cost of inventories includes all costs of purchase, costs of

The estimated useful lives and amortization method of intangible

D. Offsetting of Financial Instruments

the hedged item is adjusted and the change is recognized as profit or­conversion and other costs incurred in bringing the inventories to theirassets with finite useful lives are reviewed at each year end, and the

Financial assets and financial liabilities are offset and presented

loss in the consolidated statement of income. However, changes in thepresent location and condition.

effect of any changes in estimate would be accounted for on

as 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-

and the costs are determined by using the weighted-average method.

amounts and the Group intends either to settle on a net basis or tosive income.

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:

Japan Tobacco Inc. Integrated Report 2020

Intangible assets with finite useful lives are amortized using
the straight-line method over their estimated useful lives and are

Inventories are measured at the lower of cost or net realizable value,

FINANCIAL INFORMATION/OTHERS

realize the asset and settle the liability simultaneously.

GOVERNANCE

the initial recognition, and the costs of intangible assets acquiredat the higher of:accordance with “B Impairment of Financial Assets” above, and

SUSTAINABILITY

mine whether the hedging relationship is effective prospectively, evenAfter initial recognition, financial guarantee contracts are ­measured

BUSINESSThe estimated useful lives and depreciation method are reviewed

nition. However, financial liabilities measured at amortized coststatement of income.

VALUE CREATION

and is stated at cost less accumulated depreciation and accumulated

assessed as credit-impaired financial assets are measured collectively by

doubtful accounts is recognized in profit or loss.

122

The amounts of hedging instruments recognized in other

CORPORATE PROFILE

E. Derivatives and Hedge Accounting

The Group assesses a whole or part of the financial asset which isdeemed extremely difficult to be collected as a default and recognizesa ­prospective basis.
The estimated useful lives of major intangible assets with finite

5 years

Japan Tobacco Inc. Integrated Report 2020123

using pretax discount rates that reflect current market assessments offor 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,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(14) Share-based Payments

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:

may no longer exist or may have decreased, such as any changes in

estimated at fair value at the grant date and are recognized as an• necessarily entailed by the restructuring;or contains, a lease if the contract conveys the right to control the use

assumptions used for the determination of the recoverable amount. If

expense over the vesting period in the consolidated statement of• not associated with the ongoing activities of the entity.

of an identified asset for a period of time in exchange for consider-

any such indication exists, the recoverable amount of the asset orincome after considering the number of share options that are expectedation. The Group elects not to recognize right-of-use assets and leasecash-generating unit is estimated. In cases that the recoverable

to be eventually vested. The corresponding amount is recognized as(16) Revenue

liabilities for short-term leases within 12 months and leases ofamount exceeds the carrying amount of the asset or cash-generating

an increase in equity in the consolidated statement of financial posi-

A. Revenue from Contracts with Customers­low-value assets.

unit, impairment losses are reversed up to the lower of the estimatedtion. Restricted stock remuneration is estimated at fair value at the

Revenue is recognized based on the following five-step approach.

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) that

grant date and is recognized as an expense from the grant date overand leases of low-value assets, the Group recognizes right-of-use

would have been determined if no impairment losses had been

the vesting period in the consolidated statement of income, and theStep 1: Identify the contract with a customer

assets and lease liabilities on the consolidated statement of financial­recognized in prior years.

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 priceposition at the commencement date. The Group recognizes the lease(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-

payment plan with cash alternatives. Performance share units are

ered through a sales transaction rather than through continuing use isaccounted as a cash-settled share-based payment transaction if, andstated at cost less accumulated depreciation and accumulatedclassified into a non-current asset or disposal group held for saleto the extent that, the entity has incurred a liability to settle in cash or­impairment losses.

The Group has a performance share unit plan as a share-based

Step 4: Allocate the transaction price to the performance obligations in
the contract
Step 5: Recognize revenue when the entity satisfies a performanceobligation

other assets, or as an equity-settled share-based payment transaction

asset or asset group will be sold within one year, the asset or asset

if, and to the extent that, no such liability has been incurred. A portion

The Group mainly engages in the sale of tobacco products, prescrip-

the initial measurement of the lease liability, any lease payments madegroup is available for immediate sale in its present condition, and theas an equity-settled share-based payment transaction is estimated attion drugs, and processed foods. Revenue is recognized upon delivery

at or before the commencement date, and any initial direct costs. The

Group management commits to the sale plan. In such cases, thefair value of granted shares of the Company and is recognized as anof the products because the customer obtains control of the products

right-of-use asset is depreciated using the straight-line method over its

non-current asset is not depreciated or amortized and is measured at

expense over the vesting period in the consolidated statement of

upon delivery, by which the Group evaluates that the performance

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.

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 andtaxes, including consumption tax.

that is not paid at the commencement date. The lease payments are(13) Post-employment Benefits

portion as a cash-settled share-based payment transaction, the ser-apportioned between the financial cost and the reduction in the lease

The Group sponsors defined benefit plans and defined contribution

vices received and liability incurred are estimated at fair value of theliability based on the effective interest method. The financial costs areplans as employee retirement benefit plans.

liability and are recognized as an expense over the vesting period in

involved as an agency are excluded from revenue. The amount after

recognized in the consolidated statement of income.

The tobacco excise taxes and other transactions in which the Group is

The Company is obligated to bear pension expenses for a mutual

the consolidated statement of income, and the corresponding amountdeducting the tobacco excise taxes and other transactions is presented as

assistance association incurred with respect to services in or before

is recognized as an increase in liability in the consolidated statement“Revenue” in the consolidated statement of income.

(10) Investment Property

June 1956 (prior to the enforcement of the Act on the Mutual Aidof financial position.

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 defined

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.

benefit obligations, related current service cost and past service cost

­impairment losses.

using the projected unit credit method. For a discount rate, a discount(15) Provisions

C. Dividend Income
Dividend income is recognized when the shareholders’ right to receive

period is determined based on the period until the expected date of

The Group has present obligations (legal or constructive) resulting

payment is established.

(11) Impairment of Non-financial Assets

benefit payment in each year, and the d­ iscount rate is determined byfrom past events and recognizes provisions when it is probable that

The Group assesses for each year whether there is any indication thatreference to market yields for the period corresponding to the discountthe obligations are required to be settled and the amount of the(17) Government Grants

an asset may be impaired. If any such indication exists, or in cases

period at the end of the year on high quality corporate bonds or­obligations can be estimated reliably.

Government grants are recognized at fair value when there is a reason-

where 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,of provisions is measured at the present value of the expenditures

erable amount cannot be estimated for each asset, it is estimated bydeducting the fair value of any plan assets (including adjustments for

expected to be required to settle the obligations. In calculating the

In the case that the government grants are related to expense

the cash-generating unit to which the asset belongs. The recoverable

the asset ceiling for defined benefit plans and minimum funding

present value, the Group uses the pretax discount rate reflecting cur-items, they are recognized in profit or loss on a systematic basis overamount of an asset or a cash-generating unit is determined at therequirements, if necessary). Expected interest costs and interest

rent market assessments of the time value of money and the risks

the period in which the related costs for which the grants are intended

higher of its fair value less costs of disposal or its value in use. If theincome are recognized as financial costs.

specific to the liability.

to compensate are recognized. With regard to government grants for

Where the effect of the time value of money is material, the amountIn accordance with IAS 37 “Provisions, Contingent Liabilities andother comprehensive income in the period when they are incurred andContingent Assets,” the Group recognizes a provision for restructuring

amount 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

able assurance that the Group will comply with the conditions
attached to them and receive the grants.
FINANCIAL INFORMATION/OTHERS

Remeasurements of defined benefit plans are recognized in full as­recoverable amount, impairment losses are recognized and the carrying

GOVERNANCE

stated at cost less accumulated depreciation and accumulated

carrying amount of the asset or cash-generating unit exceeds the

SUSTAINABILITY

when the following conditions are met: it is highly probable that theAn acquisition cost of a right-of-use asset includes the amount ofliability is initially measured at the present value of the lease payment

BUSINESS

payments associated with short-term leases and leases of low-value
Right-of-use asset is measured by using the cost model and is124

The cost for retirement benefits for defined contribution plans is
recognized as an expense at the time of contribution.

VALUE CREATION

the time value of money and the risks specific to the asset. In determining

CORPORATE PROFILE

Intangible assets with indefinite useful lives and intangible
assets that are not ready to use are not amortized, but they are tested

assets, the amount of the grants is deducted from the acquisition costof the assets.

Japan Tobacco Inc. Integrated Report 2020125

(20) Treasury Shares(Changes in Accounting Policies)

estimates and judgments made by management. However, there isWith respect to assets that necessarily take a substantial period

Treasury shares are recognized at cost and deducted from equity.

The Group has adopted the following new accounting standards,a ­possibility that these assumptions will be affected by changes inof time to get ready for their intended use or sale, the borrowing costs

No gain or loss is recognized on the purchase, sale or cancellation

amended standards and new interpretations from the year ended­uncertain future economic conditions, which may have a material impactthat are directly attributable to the acquisition, construction or produc-of the treasury shares. Any difference between the carrying amount

December 31, 2020.

on the consolidated financial statements in future periods.

tion of the assets are capitalized as part of the acquisition cost of theand the consideration paid is recognized in capital surplus.

IFRS

Business
Combinations

Amendments to definition of “business”(21) Earnings per Share

IFRS
3
IFRS
16

LeasesAmendments to permit a practical expedient for COVID-19-related rent concessions

assets. Other borrowing costs are recognized as an expense in the
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.
Current income taxes are measured at the amount that is expected
to be paid to or refunded from the taxation authorities. For the calcula-year, adjusted by the number of treasury shares. Diluted earnings per
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 that(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

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.

4. S
 ignificant Accounting Estimatesand Judgments

The present value of defined benefit obligations on each of theseplans and the related service costs are calculated based on actuarial
assumptions. These actuarial assumptions 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 with

A. Contingent Liabilities

year end. These estimates and assumptions are based on the best

respect to the appropriateness of their actuarial assumptions including

and unused tax losses to the extent that it is probable that future

The Group discloses contingent liabilities in the notes to consolidated

judgment of management in light of historical experience and various

the aforementioned variables.

taxable profit will be available against which they can be utilized.

financial statements if it has possible obligations at year end, whose

factors deemed to be reasonable as of the year end. Given their nature,

Deferred tax liabilities are recognized for ­taxable temporary differences.

existence cannot be confirmed at that date, or if the obligations do not

actual results may differ from those estimates and assumptions.

mates and judgments made by management. However, there is a pos-

The deferred tax assets or liabilities are not recognized for themeet the recognition criteria of a provision described in “20. Provisions.”

The estimates and assumptions are continuously reviewed bysibility that these assumptions will be affected by changes in uncertain

The actuarial assumptions are determined based on the best esti-

future economic conditions, or by the publication or amendment of

B. Contingent Assets

are recognized in the period of the change or the period of the change

related laws, which may have a material impact on the consolidated• the initial recognition of assets or liabilities in transactions that are

The Group discloses contingent assets in the notes to consolidated

and future periods.

financial statements in future periods.

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.
The adjustment items are determined by management’s judgment,

ies and associates, and interests in joint ventures to the extent that

items that may have a material effect on the amounts recognized in

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.

assets and investment properties, if there is any indication that theThese provisions are recognized based on best estimates of thetaking into consideration the nature and frequency of the income andrecoverable amount has declined below the carrying amount, theexpenditure required to settle the obligations, taking into account thethe timing of the reversal of the temporary difference is controlled

costs such that they provide effective comparative information on theGroup performs an impairment test.

pertinent risks and uncertainties which exist at the year-end forand that it is probable the temporary difference will not reverse inGroup performance and that they reflect the way of managing ourSuch indications include, but are not limited to significant changes

the foreseeable future.

business appropriately. Adjusted financial measures are presented inwith adverse effect on the results of past or projected business perfor-

Deferred 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 the­substantively 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.

Japan Tobacco Inc. Integrated Report 2020

not comparable with equivalent indicators for other entities.

those obligations.
Expenditures required to settle the obligations are calculated

mance, significant changes in the use of acquired assets or in overall

by taking possible results into account comprehensively; however, theybusiness 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.

indicators of impairment.
An impairment test is performed by comparing the carrying amount to

FINANCIAL INFORMATION/OTHERS

liability is settled, based on tax rates that have been enacted or

The adjusted financial measures are not defined under IFRS and are

GOVERNANCE• taxable temporary differences arising from investments in subsidiar-

Among the above estimates and assumptions, the following are

SUSTAINABILITY

management. The effects of a change in estimates and assumptions• the initial recognition of goodwill

following temporary differences:

126“16. Investment Property.” With regard to goodwill, the sensitivity analysis is

BUSINESS

have been enacted or substantively enacted by the end of the year.

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” andVALUE CREATION

period when they are incurred.

Description of new standards and amendments

CORPORATE PROFILE(18) Borrowing Costs

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 2020

127

evidence as of the year end and by taking into account the probability of

6. Operating Segments

and markets in China, Hong Kong, and Macau where the Company’s

these contingencies and their impact on financial reporting.

China Division operates). The “International Tobacco Business” manu-

The content of contingencies is described in “38. Contingencies.”(1) Outline of Reportable Segments

factures and sells tobacco products overseas mainly through JTor the experience of past tax audits.

The spread of COVID-19 has affected the Group businesses in the

The reportable segments of the Group are determined based on

International S.A., which controls manufacturing and sales operations.

current fiscal year, causing a decrease in duty-free sales in the tobacco

the operating segments that are components of the Group for which

The “Pharmaceutical Business” consists of research and development,r­ecognized as tax liabilities and income taxes and the amount of actual

business and changes in consumer trends in the Domestic Tobacco

separate financial information is available and are evaluated regularly

and the manufacture and sale of prescription drugs. The “Processed

tax liabilities and income taxes. These differences may have a material

Business and the Processed Food Business.

by 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.

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-

The Group is mainly engaged in the manufacture and sale ofis probable that taxable income will be available against which deductible

mies of countries around the world will gradually recover. At present,

tobacco products, prescription drugs and processed foods. With

(2) Revenues and Performances of Reportable Segments

temporary differences can be utilized.

there is no material impact on accounting estimates and judgements.

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

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 such
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.”

The “Domestic Tobacco Business” manufactures and sells tobacco
products in domestic areas (which include duty-free shops in Japan

within segments are primarily based upon prevailing market prices.
BUSINESS

income may be affected by changes in uncertain future economic.

are as follows.
The implications from adoption of these standards and interpretations

Year ended December 31, 2019are assessed by the Group; however, we evaluate that none of them will
E. Contingencies

Millions of yen

have a material impact on our operating results and financial condition.

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—

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

IFRS

External revenue
To be adopted
by the Group

Description of new standards and amendments

Intersegment revenue
Total revenue

First-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

Segment profit (loss)Adjusted operating profit (Note 1)

IFRS 3Business Combinations

January 1, 2022

Year ending
December 2022

Amendments to update references to the conceptual framework

Other items

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

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

Financial Instruments

January 1, 2021

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—

16,124IFRS 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

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

91

—

—

91

—

—

91

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

GOVERNANCEIFRS 1IFRS 9Elimination

Revenue
SUSTAINABILITY

Mandatory adoption(From the year
beginning)

VALUE CREATION

tax regulations by taxable entities and the tax authority in the jurisdiction
Therefore, there may be differences between the amount

CORPORATE PROFILE

Calculating current tax liabilities and income taxes requires estimates and judgment on various factors, including the interpretation ofAmendments to require companies to disclose their material
accounting policy information rather than their significant
accounting policies
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

FINANCIAL INFORMATION/OTHERS

128

IAS 8

Japan Tobacco Inc. Integrated Report 2020129

Year ended December 31, 2020
Millions of yen

Millions of yen

Reportable Segments
Domestic
TobaccoInternational
TobaccoPharmaceuticals

Processed
Food

Total

Reportable Segments
Other (Note 2)

Elimination

Consolidated

Revenue

Adjusted operating profit
555,568

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

1,306,233

78,957

149,3292,090,087

2,474

—

2,092,561—

7,674

24,606—1

32,282

5,317(37,599)563,242

1,330,839

78,957

149,330

2,122,369

7,791(37,599) 2,092,561

168,069

340,867

17,161(793)

525,304(38,201)(152)

486,952

Amortization cost of acquired­intangibles arising frombusiness acquisitions

Depreciation and amortization (Note 3)
Impairment losses on other thanfinancial assets

56,576—105,654
7,538

5,427
—

7,554
3,841

175,210
11,378

4,679
1,193

(234)
—

179,654
12,571

—

49

—

—

49

—

—

49

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

15

3,963

—

21

3,999

42

—

4,042

21,053

66,598

9,087

7,972

104,709

8,301

(127)

112,883(Note 4)

Reconciliation from “Adjusted operating profit” to “Profit before income taxes”
Year ended December 31, 2019
Millions of yen
Reportable Segments

Amortization cost of acquired­intangibles arising frombusiness acquisitions
Adjustment items (income)(Note 5)Adjustment items (costs) (Note 6)
Operating profit (loss)

International
Tobacco187,180

340,752

Pharmaceuticals

Processed
Food

Total

15,943

5,432

549,308

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 (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)

Financial income

12,353Financial costs(61,344)

Profit before income taxes

420,063(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:
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(Note 2)

Other

Elimination

Consolidated(33,478)97515,927(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
2019(16,245)(53,378)——(69,623)

—

—

24

8,776

61,018—(22,141)(4,264)

170,960

274,008

72,697

5,528(69,623)

461

70,27814,189—84,467(365)(26,770)(1,646)—(28,415)

523,193(20,935)

97502,355

Financial income

8,402

Financial costs(45,526)

Profit before income taxes

465,232SUSTAINABILITY

Adjusted operating profit (Note 1)

Domestic
TobaccoPharmaceuticals

BUSINESS

Reversal of impairment losses
on other than financial assets

International
TobaccoAdjustment items (income) (Note 5)
Operating profit (loss)

Other items

Capital expenditures(Note 1)

Domestic
TobaccoVALUE CREATION

External revenue

CORPORATE PROFILE

Year ended December 31, 2020

Gain 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

6,716130Japan Tobacco Inc. Integrated Report 2020

Japan 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

CORPORATE PROFILE

8. Trade and Other Receivables(3) Geographic Information
The regional breakdown of non-current assets as of December 31 is as follows:
Non-current Assets

The breakdown of “Trade and other receivables” as of December 31 is as follows:
Millions of yen
2020

Japan

812,083

751,673

Overseas2,450,772

Consolidated

3,262,855

Millions of yen
2019

2020

Note and account receivables

432,874

404,720

2,285,357

Other

28,113

9,347

3,037,030

Allowance for doubtful accounts(Note) Non-current assets, exclusive of financial instruments, deferred tax assets and retirement benefits assets, are segmented by the location of the assets.

Total

The regional breakdown of external revenue for each year is as follows:

Trade and other receivables are presented net of allowance for
doubtful accounts in the consolidated statement of financial position.

External Revenue
Millions of yen
2019

2020

Japan

789,279

727,845

Overseas

1,386,347

1,364,716

Consolidated

2,175,626

2,092,561­measured at amortized cost.

9. Inventories
The breakdown of “Inventories” as of December 31 is as follows:
Millions of yen
2019

2020

Merchandise and finished goods

142,343

130,718

Leaf tobacco (Note)

365,700

334,797

Other

75,652

Group were ¥235,093 million (10.8% of consolidated revenue) for

74,247

Megapolis Group that engages in distribution and wholesale business inthe year ended December 31, 2019 and ¥210,834 million (10.1% of

583,695

539,762

Russia and other countries. The external revenues from the Megapolis(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.

consolidated revenue) for the year ended December 31, 2020.

7. Cash and Cash Equivalents

Millions of yen

Short-term investments
Total

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

2020

260,908

483,844

96,24955,000357,158

538,844

JTI-Macdonald Corp. (hereinafter referred to as “JTI-Mac”), theCompany’s Canadian subsidiary, is subject to certain restrictions on
the use of funds other than in the ordinary course of business due to(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
Total(5,935)(5,875)131,511

125,971

the adoption of the “Companies’ Creditors Arrangement Act.” “CashCurrent assets

21,943

18,828

Iran. “Cash and cash equivalents” include ¥48,675 million as ofand cash equivalents” include ¥19,085 million as of December 31,

Non-current assets

109,568

107,143

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.

131,511

125,971

Iran is restricted mainly due to international sanctions imposed on

Total

GOVERNANCE

The Group’s Iranian subsidiaries’ ability to remit funds outside of2019

SUSTAINABILITY

10. Other Financial Assets

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

Cash and deposits

Total

BUSINESSThe “International Tobacco Business” of the Group sells products to the(1,923)412,144

Trade and other receivables are classified as financial assets(Note) Revenue is segmented by the sales destination.

(4) Major Customers Information(2,475)458,513VALUE CREATION

2019

by the Group’s Iranian subsidiaries.
Other financial assets are presented net of allowance for doubtful
accounts in the consolidated statement of financial position.
Derivative assets are classified as financial assets measured at fair

132

Japan Tobacco Inc. Integrated Report 2020

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

accounting is applied, equity securities are classified as financial

measured at amortized cost.

Japan Tobacco Inc. Integrated Report 2020

133

December 31 are as follows:
Millions of yen
Company name2020

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

expenses” in the consolidated statement of income for the year ended

currently actively marketed for sale.

December 31, 2020.

With regard to such assets and assets sold, impairment losses of¥31 million are ­recognized in “Selling, general and administrative

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

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)(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.

Exchange differences on translation of foreign operations(741)(1,550)(81)(1,280)(3,652)

9,461

30,172

1,357(47,657)(6,668)

As of December 31, 2019404,973

298,665

43,89755,704803,239

11. Other Current Assets

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)

with 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)

Reversal of impairment losses

Other

Transfer to investment property

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

15,68015,243

14,960Other

129,753

127,242504,334

493,992

Reversal of impairment losses
Sale or disposal
Exchange differences on translation of foreign operations
Other
As of December 31, 2020

5,721

29,707850(38,205)(1,927)

381,424

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

Consumption tax receivables
Total

Transfer to non-current assets held for sale

SUSTAINABILITY

36,440In order to pursue the efficiency of assets held and to use them

BUSINESS

Cumulative effect of changes in accounting policies
As of January 1, 2019, after cumulative effect of changes
in accounting policies

Equity securities are held mainly for strengthening relationships

VALUE CREATION

2019“Non-current assets held-for-sale” are mainly idle properties which are

CORPORATE PROFILE(2) Names of major securities held as financial assets measured at fair value through other comprehensive income and their fair values as ofMillions of yen

12. Non-current Assets Held for Sale

Acquisition Cost

As of January 1, 2019

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

As of December 31, 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

2020

Millions of yen

Non-current assets held for sale

134

Property, plant and equipment

14

348

Other

17

0

Total

30

348

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

Millions of yen
2019

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

recoverable amounts for buildings, structures, machinery and vehicles,(2) Material Goodwill and Intangible Assets

experiences and external information and that was approved by

The grouping of property, plant and equipment for impairment test

due to the decision to demolish individual items, etc.

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

Impairment losses recognized in the year ended December 31,

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.

year ended December 31, 2019, and ¥8,891 million in the year ended

2020 represent losses incurred to reduce the carrying amounts to thetively. The carrying amounts of trademarks as of December 31, 2019

December 31, 2020 in “Selling, general and administrative expenses” inrecoverable amounts for land, buildings, structures, machinery andand 2020 were ¥261,969 million and ¥205,223 million, respectively.

the consolidated statement of income.

vehicles, 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

The recoverable amounts of these assets are calculated mainly by

2019 represent losses incurred to reduce the carrying amounts to thetheir values in use.

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(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:
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

(5,155)

3

2,934(2,891)(5,109)2,002,595

360,641

31,572

48,221

2,443,029

As of December 31, 2019
Individual acquisition

—

447

7,176

15,601

23,224

Amortization (Note)—(57,737)(11,905)(8,555)(78,196)

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 trademarks are amortized using the straight-line method andthe remaining amortization period is mainly from 5 to 6 years.

from 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

For the year ended December 31, 2020, the carrying amount of thesufficiently 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.

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

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

A. Domestic Tobacco Cash-generating Unit

gible assets for impairment test is the smallest cash-­generating unit

Sale or disposal

—

(7)

(798)

(236)

(1,041)

The recoverable amount is calculated by the value in use based on thethat independently generates cash inflow.

(93,203)(15,928)(486)(1,216)(110,833)

three-year business plan that was prepared by reflecting past experi-

The Group recognized impairment losses of ¥3,423 million for the

—

(17)

5,829

(5,602)210

ences and external information and that was approved by manage-

year ended December 31, 2019, and ¥3,390 million for the year ended

1,909,392

287,344

31,26444,9952,272,996

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.

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.

using cash flows with a growth rate from (1.3%) in the fourth year to

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

Trademarks

Software

Other

Total

the tenth year as a continued growth rate. In the prior period, theto the recoverable amounts of trademarks, software and other intan-

As of January 1, 2019

2,008,416

1,078,596

157,191

94,6983,338,901

Group's estimated growth rate of 0% is applied only from the fourth

gible assets since the recoverable amounts were lower than the

As of December 31, 2019

2,002,595

1,087,865

141,954

103,762

3,336,175

year of cash-flows onwards.

carrying amounts.

As of December 31, 2020

1,909,392

1,057,235

149,251

110,884

3,226,763

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.

Accumulated Amortization and Accumulated Impairment Losses

The recoverable amounts of these assets are calculated mainly by
their values in use.

Therefore, even in cases where the discount rate and growth rate used

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

Goodwill

Trademarks

Software

Other

Total

As of January 1, 2019—657,320

125,272

44,817

827,409

Group assumes that the value in use will not become less than theto the recoverable amounts of trademarks, software and other intan-

As of December 31, 2019—727,224

110,382

55,540893,146

carrying amount.

gible assets since the recoverable amounts were lower than the

As of December 31, 2020—

769,891

117,987

65,889953,767

FINANCIAL INFORMATION/OTHERS

Millions of yen

GOVERNANCE

Millions of yen

according to locations and types of businesses. The grouping of intan-

Goodwill

Acquisition Cost

SUSTAINABILITY

Goodwill

American Spirit’s non-U.S. tobacco operations in 2016. The carrying

BUSINESS

Millions of yen

Othercarrying amount.

business were recognized as a result of the acquisition of Natural

14. Goodwill and Intangible Assets

Exchange differences on translation of foreign operations

sufficiently exceeds the carrying amount of the cash-generating unit.

The majority of goodwill and trademark in the JTIH Group was

Other than the above, goodwill and trademark in Domestic Tobacco

Carrying AmountThe pre-tax discount rate is 9.0% (2019: 11.0%). The value in use
VALUE CREATION

Impairment losses recognized in the year ended December 31,

CORPORATE PROFILE(2) Impairment Losses­carrying 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

136

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020

137

CORPORATE PROFILE

15. Lease Transactions

16. Investment Property

The Group leases buildings, factory sites, vehicles and other assets as

escalation clauses. There are no restrictions on additional debt and(1) Schedule of Investment Property

a lessee. Some of the lease contracts have renewal options orfurther leasing imposed by the lease arrangements.

The schedule of the carrying amount of “Investment property” for each year is as follows:
Millions of yen(1) Addition, Depreciation and Carrying Amount of Right-of-use Assets
As of January 1

Year ended December 31, 2019

Expenditure after acquisition
Millions of yen
Land, buildings
and structures

Machinery andvehiclesTools, furnitureand fixtures

Total

Addition

14,6459,404

72

24,121

Depreciation

10,4495,210

119

15,778

As of December 31, 2019
Millions of yen
Machinery andvehiclesTools, furnitureand fixtures

Total

43,772

12,813

126

56,711

Year ended December 31, 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)

As of December 31

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

23,674

9,331

BUSINESS

Carrying amountLand, buildings
and structures

Transfer from property, plant and equipment

2020

VALUE CREATIONThe breakdown of addition, depreciation and carrying amount of right-of-use assets is as follows:

2019

Millions of yen
Land, buildings
and structures

Machinery andvehiclesTools, furnitureand fixtures

Total

Addition

29,796

4,813

165

34,773

The fair value of investment property is determined based on a valua-Depreciation

14,1495,435

84

19,667tion conducted by an external real estate appraiser. The valuation is(2) Fair Valuethe investment property is located and based on market evidence

As of December 31, 2020
Millions of yen

Carrying amountLand, buildings
and structures

Machinery andvehiclesTools, furnitureand fixtures

Total

57,011

10,732

103

67,847of 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

The fair value hierarchy of investment property is categorized fromLevel 1 to Level 3 as follows: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

(2) Expense Items Related to Lease

The fair value of investment property based on the fair value hierarchy as of December 31 is as follows:

The breakdown of expense items related to lease is as follows:

Millions of yen

Millions of yen
2020

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

19,315Investment property

Level 1

Level 2

Level 3

Total—

34,7881,416

36,204

GOVERNANCE

2019

Financial cost on lease liabilities

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

138

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020139

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.”
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 estimatedMillions 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
Total

Recognized inother comprehensive income

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)(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.

at “zero.”
The deferred tax assets are recognized for the amount considered

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:

Millions of yen

Deferred Tax Assets

Fixed assets (Note 2)

Other (Note 1)

As ofDecember 31, 2019

120,129(2,528)—

16

117,616

Retirement benefits

72,248(3,996)

3,854

(572)

71,534

Carryforward of unused tax losses

53,126(10,070)—(648)

42,409Other

84,215

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

Deferred Tax Liabilities

As ofJanuary 1,
2019

Recognized in
profit or loss

Recognized inother comprehensive income

Other (Note 1)

As ofDecember 31, 2019

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)

Subtotal
Valuation allowance
Total

Millions of yen

Total

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.

(2) Income Taxes
The breakdown of “Income taxes” for each year is as follows:
Millions of yen

Current income taxes(11,189)(3,108)103,609108,034

Deferred income taxes decreased by ¥4,498 million and increasedby ¥1,624 million for the years ended December 31, 2019 and 2020,

Recognized in
profit or loss

Fixed assets (Note 2)

117,616

Retirement benefits

71,534

Other (Note 1)

As ofDecember 31, 2020

(12,394)—(332)

104,890(2,590)

3,243

841

73,02842,4098,645—(4,966)46,08787,931

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

Valuation allowance
Total

Japan Tobacco Inc. Integrated Report 2020

other 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.
%
2019

2020

30.43

30.43

(9.08)(8.81)

Non-deductible expenses

1.48

1.53

Dividend income

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

Carryforward of unused tax losses
Other
Subtotal

140

Recognized inother comprehensive income

respectively, due to the effect of changes in tax rates in Japan and

GOVERNANCE

Deferred Tax Assets

As ofJanuary 1,
2020

111,142

Total income taxes

Different tax rates applied to foreign subsidiaries
Millions of yen

2020

114,799

Deferred income taxes

Effective statutory tax rate
Year ended December 31, 2020

2019

SUSTAINABILITY

Recognized in
profit or loss

Recognized inother comprehensive income¥38,953 million (including ¥20,743 million, for which the carryforward

to be recoverable on deductible temporary differences, carryforward of

BUSINESS

Year ended December 31, 2019
As ofJanuary 1,
2019

VALUE CREATIONThe Group recognized impairment losses of ¥917 million for the

CORPORATE PROFILE(3) Impairment Losses

141

CORPORATE PROFILE

18. Trade and Other Payables(Note 2) The summary of the issuing conditions of the bonds is as follows:
As of
December 31,
2019

The breakdown of “Trade and other payables” as of December 31 is as follows:

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.

September 10,
2018

60,00060,0000.110

Yes

19. Bonds and Borrowings (Including Other Financial Liabilities)

12th domestic
straight bondSeptember 8,
2023

Japan Tobacco Inc.

September 10,
2018

30,00030,000

0.355

Yes

(1)

13th domestic
straight bondSeptember 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.]

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.

Breakdown of Financial Liabilities

The breakdown of “Bonds and borrowings” and “Other financial liabilities” as of December 31 is as follows:
Millions of yen

Derivative liabilities
Short-term borrowings

2019

2020

Due

7,739

10,334—

192,581

51,633—

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

—

Other

1,479

887

—

1,037,425

1,036,633

305,997

169,057

Total
Current liabilities
Non-current liabilities
Total

731,428

867,576

1,037,425

1,036,633(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)

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

Current portion of long-term borrowings

Japan Tobacco Inc.

BUSINESSName of bond

VALUE CREATION

Company

Millions of yen

Derivative liabilities are classified as financial liabilities measured at

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-

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

the bonds and borrowings of the Group.

142(2) Assets Pledged as Collateral for Liabilities

fair value through profit or loss excluding those to which hedge

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 2020

143

CORPORATE PROFILE

20. Provisions

21. Other Liabilities

The breakdown and schedule of “Provisions” for each year are as follows:

The breakdown of “Other current liabilities” and “Other non-current liabilities” as of December 31 is as follows:
Millions of yen

Year ended December 31, 2019
Millions of yen
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

27,61958,453As of January 1, 2019

As of December 31, 2019
Current liabilities
Non-current liabilities

7,565

4,000

6,723

18,28915,671—

20,89640,164

3,598

23,2364,000

27,61958,453302,965

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

Total
Current liabilities

699,331652,314

Non-current liabilities

135,066

162,982

834,397815,295

Total

BUSINESS

Total

—
3,598

2020

Tobacco excise tax payables

VALUE CREATION

Asset retirement provisions

2019

22. Employee Benefits
Year ended December 31, 2020
Millions of yen(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

Asset retirement provisions

Restructuringprovisions

Provisions forsales rebates

Other
provisions

Total

defined contribution plans as employee retirement benefit plans. The

a discount rate set with reference to a yield on high quality corporate

As of January 1, 2020

3,598

23,2364,000

27,61958,453

Provisions

1,887

4,254

3,697

15,94925,787benefits of defined benefit plans are predetermined based on condi-

bonds or government bonds. If the return on the plan assets is below

29

—

—

—

29

tions, such as points employees have gained in compensation forthis yield, there is a possibility that the plan is underfunded.

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

24,16950,75843

10,637

3,697

5,043

19,420

5,189

7,023

—

19,12531,338

5,232

17,6603,697

24,16950,758Interest cost associated with passage of time

As of December 31, 2020
Current liabilities
Non-current liabilities
Total

salaries in their final years of service before retirement.

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).

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 their(iii) Inflation risk
The level of benefit for certain defined benefit plans of the Group

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

the fund that is legally separated from the Group in accordance withprobable amount to be paid in the future is recognized based on past

exceeds a specified volume or amount and correspond to “Refund

statutory requirements. The Group, or the board of the pension fund(iv) Longevity risk

performances. These expenses are expected to be paid after one year

liabilities” in IFRS 15 “Revenue from Contracts with Customers.” They

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,

or more; however, they may be affected by future business plans.

are expected to be paid within one year.

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

These provisions are mainly related to business integration and mea-arial risks, such as investment risk, interest rate risk, inflation risk, andto the best estimate of the mortality of plan participants during orsures for the rationalization of the “International Tobacco Business.”longevity risk.

after employment. An increase in average life expectancy of the plan

Japan Tobacco Inc. Integrated Report 2020

The funded defined benefit plans are administrated by the Group or

is linked to inflation. Accordingly, a rise in inflation will increase
the present value of the defined benefit obligations.

participants will increase the defined ­benefit obligations.

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

The timing of the payment may be affected by future business plans.

early retirements under certain circumstances.

GOVERNANCE

B. Restructuring Provisions

144(ii) Interest rate risk

The Company is obligated to bear pension costs for a mutual

SUSTAINABILITY

Exchange differences on translation of foreign operations

each year of service, the payment rate, years of service, and average145

B. Schedule of Plan Assets

The schedule of the defined benefit obligations is as follows:

The schedule of the plan assets is as follows:

CORPORATE PROFILE

A. Schedule of Defined Benefit Obligations
Millions of yen

As of January 1, 2019 (Notes 1, 2)
Current service cost
Interest expense
Contributions by plan participants

Overseas

Total

216,223484,964

701,187

9,940

9,099

—

(4,190)1,000

10,287

11,288

—

1,727

1,727

Millions of yen
JapanOverseas

Total

As of January 1, 201962,788373,702436,489

19,039Interest income

296

8,207

8,503

(4,190)Remeasurement gains and losses:
1,064

30,122

31,185

959

6,465

7,424

—

1,727

1,727

(7,114)(16,402)(23,516)

Remeasurement gains and losses:

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

Contributions by plan participants

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)Benefits paid

Benefits paid
Exchange differences on translation of foreign operations
As of December 31, 2019(23,507)(21,110)(44,617)

Exchange differences on translation of foreign operations

—

(284)

(284)

Other

—

(608)

(608)

200,595

519,089

719,684

Contributions by the employer

9,510

10,014

19,524Contributions by plan participants

As of December 31, 2019

(Notes 1, 2)

Past service cost and settlement
Interest expense
Contributions by plan participants

Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Benefits paid

(Notes 1, 2)

—

3,047

3,047

Benefits paid

7,585

8,720

Exchange differences on translation of foreign operations

—

1,966

1,966

Other

Other
(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:
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

81,21889,04854,968270,263

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
2020

As of January 1

36,67531,090Interest expense

110

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

380

29,43829,817

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

C. Reconciliation of Defined Benefit Obligations and Plan Assets
The reconciliation of the defined benefit obligations and plan assets to the net defined benefit liabilities (assets) recognized in the consolidated
statement of financial position as of December 31 is as follows:
As of December 31, 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)(4,791)(41,610)(46,401)

Present value of the unfunded defined benefit obligations

Subtotal

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

FINANCIAL INFORMATION/OTHERS

146

2019

6,548

GOVERNANCE

Pensioners

6,215(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.

Millions of yen
As of December 31, 2019333

SUSTAINABILITY

Exchange differences on translation of foreign operations
As of December 31, 2020

Return on plan assets (excluding amounts included in interest income)As of December 31, 2020

Actuarial gains and losses arising from changes in demographic assumptions

4,634
466,447

Remeasurement gains and losses:

1,135

Remeasurement gains and losses:

4,634
408,455

BUSINESS

Current service cost

Interest income—
57,992

VALUE CREATION

Past service cost and settlement

Japan (Note 3)

Japan Tobacco Inc. Integrated Report 2020

147

CORPORATE PROFILE

As of December 31, 2020

Total
Millions of yen
JapanOverseas

48,531

397,336445,868

Fair value of the plan assets(53,453)(436,263)(489,715)(4,921)(38,926)(43,847)

136,065

169,007305,072

Present value of the unfunded defined benefit obligations
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

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

As of December 31, 2019

As of December 31, 2020

Market price inan active market

Market price inan active market

QuotedUnquoted

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

Present value of the funded defined benefit obligations
Subtotal

Millions of yen

Total(Note) A certain interest rate and principal for the general account of life insurance are guaranteed by life insurance companies.

D. Major Breakdown of Plan Assets

The investment strategy for the Group’s major plans is as follows:

The breakdown of plan assets by major category as of December 31 is as follows:

Millions of yen
As of December 31, 2019Market price inan active market

As of December 31, 2020
Market price inan active market

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
the value of the defined benefit obligation.

QuotedUnquoted

Total

QuotedUnquoted

Total

Company invests plan assets consistently with the composition ratio.

Cash and cash equivalents

7,794

—

7,794

7,569

—

7,569

When reviewing the composition ratio, the Company considers introduc-

The majority of the plan assets have been allocated to liability

Equity instruments

3,078

—

3,078

3,524

—

3,524

ing an asset investment which has a high correlation with the liability.

matching bonds and the remaining parts of the plan assets are mainly

Japan

1,509

—

1,509

1,653

—

1,653

Overseas

1,569

—

1,569

1,871

—

1,871

8,819

—

8,819

7,550

—

7,550

Japan

7,572

—

7,572

6,299

—

6,299

Overseas

1,247

—

1,247

1,250

—

1,250

—

36,49636,496—33,04833,048

785

1,019

1,804

751

1,011

1,762

20,47737,51557,992

19,394

34,05953,453General account of life insurance companies (Note)
Other
Total

Overseas
Millions of yen

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

As of December 31, 2019

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

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

Unquoted

Japan Tobacco Inc. Integrated Report 2020

assets, complying with company policy.

As of December 31, 2020
Market price inan active market

QuotedTotal

invested in equities targeting long-term return.

is temporarily allowed to make a weighted adjustment to the risk

GOVERNANCE

As of December 31, 2019Market price inan active market

When an unexpected situation occurs in the market environment, it

SUSTAINABILITY

Debt instruments

148(Japan)BUSINESS

Japan(Overseas)

Japan Tobacco Inc. Integrated Report 2020149

Year ended December 31, 2020
Years
Japan
Males

Females

Females

21.9 (Note 3)

24.2 (Note 3)

Interest expense (income)23.2 (Note 4)

25.5 (Note 4)

Defined benefit cost through profit or loss

24.5 (Note 2)

Future pensioners

29.7 (Note 2)(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

Total

9,510

10,014

19,524As of December 31, 2020

Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions

—

3,047

3,047

802

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

26,88632,238(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.

Change inassumptions

Japan

Overseas

Japan

Overseas(2) Other Employee Benefit Expenses

Increase by 0.5%

(6,438)(38,101)(5,821)(41,376)

The employee benefit expenses other than post-employment benefits that are included in the consolidated statement of income for each year are

Decrease by 0.5%

6,917

42,4606,252

46,245

as follows:

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)

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
Interest expense (income)Japan

Overseas

Total

9,940

9,099

19,039—(4,190)(4,190)

704

2,080

2,785

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

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

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
The schedule of the number of issued shares and share capital is as follows:
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

Defined benefit cost through profit or loss

Millions of yen
2019

SUSTAINABILITY

F. Breakdown of Defined Benefit Cost

BUSINESS

Mortality rate

Current service cost

Overseas

VALUE CREATION

Males

Japan

Past service cost and gains and losses on settlement

Current pensioners

Inflation rate

Millions of yen

Overseas

Average life expectancy at retirement (Note 1)

Discount rate

CORPORATE PROFILE

As of December 31, 2020

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

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151

CORPORATE PROFILE(2) Treasury SharesYear ended December 31, 2020

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

Number of shares

Amount208,577

442,829

17,62049,640226,197492,469

Increase (decrease) (Note 2)

(442)

(962)

As of December 31, 2020

225,755

491,507

As of January 1, 2019
Increase (decrease) (Note 2)
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.

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.”

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)

Dividends 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(Resolution)
Annual Shareholders’ Meeting(March 19, 2020)

BUSINESS(3) Other Components of Equity

Millions ofyen

VALUE CREATION

Thousands ofsharesYear ended December 31, 2020
E. Remeasurements of Defined Benefit Plans

B. Exchange Differences on Translation of Foreign Operations

Millions of
yen

Yen

Class of shares

Total
dividends

Dividends per
share

Ordinaryshares136,61777

Remeasurements of defined benefit plans comprise actuarial gains
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.

(Resolution)
Annual Shareholders’ Meeting(March 24, 2021)

SUSTAINABILITY

Exchange differences on translation of foreign operations are com-

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.

value of hedging instruments designated as cash flow hedges.

Year ended December 31, 2019
Millions of yen
Reportable Segments

Dividends paid for each year are as follows:Year ended December 31, 2019

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

Millions of
yen

Yen

Total
dividends

Dividends per
share

Basis date

Effective dateYear ended December 31, 2020
Millions of yen(Resolution)

Board of Directors(July 31, 2019)

FINANCIAL INFORMATION/OTHERSClass of shares

Annual Shareholders’ Meeting(March 20, 2019)

GOVERNANCE

24. Dividends

OrdinarysharesOrdinarysharesReportable Segments

134,357
136,579

75
77

December 31, 2018
June 30, 2019

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

March 22, 2019
September 2, 2019

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.

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153

CORPORATE PROFILE(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:(3) Gross Turnover
The reconciliation from “Gross turnover” to “Revenue” for each year is as follows:
Millions of yen

Millions of yen

2020

Gross turnover

7,581,071

7,555,062

271,976

Tobacco excise taxes and agency transaction amount(5,405,446)(5,462,501)

294,283

Revenue

2,175,626

2,092,561

2020

South and West Europe

216,653

219,359

North and Central Europe

236,210CIS+

309,646

Rest-of-the-World
Total

490,513465,190

1,253,022

1,250,808

The tobacco excise taxes and other transactions in which theSouth and West Europe includes France, Italy and Spain. North and Central Europe includes Germany and the United Kingdom. CIS+ includes

Group is involved as an agency are excluded from revenue. The inflow

Romania and Russia. Rest-of-the-World includes Iran, Taiwan and Turkey.

of economic benefits after deducting the tobacco excise taxes and

VALUE CREATION

2019

2019

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

other transactions is presented as “Revenue” in the ­consolidated
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 aremeasured 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

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

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

2019

Gain on transfer of pharmaceutical licenses
Gain on sale of the former JT building

2020

60,518——41,265
5,332

is a payment for a distinct product or service from the customer,

C. Processed Foods Business

Gain on sale of property, plant and equipment, intangible assets
and investment property (Note)

15,605­­revenue is measured at the amount which is consideration promised

Processed foods business engages in the sale of frozen and ambient

Other (Note)

19,603

8,327

with the customer, less consideration payable to the customer.

processed foods, bakery products and seasonings.

Total

95,72554,924

Revenue from sales of products is recognized upon delivery of the
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,(Note) The amount of restructuring incomes included in each account is as follows:

SUSTAINABILITY

Considerations for transactions are received mainly within one year
from satisfying their performance obligations and includes no signifi-

BUSINESS

products because the customer obtains control of the products upon­statement of income.

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

revenue is measured at the amount which is consideration promised
B. Pharmaceutical Businessdrugs and licensing.
Revenue from sales of products is recognized upon delivery of theConsiderations 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 the(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

The breakdown of “Selling, general and administrative expenses” for each year is as follows:
Millions of yen
2019

2020

Advertising expenses

33,46727,254
92,149Promotion expenses

102,095

Commission

55,46957,614

Employee benefit expenses (Note 2)309,623

307,181

Research and development expenses (Note 1)

64,07960,847

Depreciation and amortization

106,094

103,666

Impairment losses on other than financial assets (Note 2)

16,124

12,571

Revenue from licensing is generated by licensing out the rights tosignificant transactions with initial expected contractual terms exceed-

Losses on sale and disposal of property, plant and equipment, intangible assets
and investment property (Note 2)

9,432

7,591

develop and market of each compound to licensees in the develop-

ing one year. There are no significant amounts of considerations from

Other (Note 2)

135,324

115,598

ment stage, and the Group receives upfront income, milestone revenue

contracts with customers that are not included in ­transaction prices.

Total

831,707784,472

FINANCIAL INFORMATION/OTHERS

is a payment for a distinct product or service from the customer, rev-

customer, except the case when consideration payable to the customer

27. Selling, General and Administrative Expenses
GOVERNANCE

Pharmaceutical business mainly engages in the sale of prescription

with the customer, less consideration payable to the customer.

(Note 1) All research and development expenses are included in “Selling, general and administrative expenses.”

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155

Millions of yen
2019

2020

24,378323

Impairment losses on other than financial assets

411

332

Losses on sale and disposal of property, plant and equipment, intangible assets
and investment property

329

361

Employee benefit expenses

Total

1,064

2,100

26,182

3,116

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 CREATIONOtherCORPORATE PROFILE(Note 2) The amount of restructuring costs included in each account is as follows:

Millions of yen
Amountarising

Reclassification
adjustments

Before tax
effects

Tax effects

Net oftax effects

Items that will not be reclassified to profit or loss

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
1,275

46

Investments held at the end of the year

654

882

Interest income
6,014

6,389

—

3,143

459

1,893

8,402

12,353Gain on net monetary position
Other
Total

2019

2020

Interest expenses
Financial liabilities measured at amortized cost
Bonds and borrowings

26,019

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

Total(2,209)(274)(2,484)—(4,957)2,146(2,811)(7,166)—(7,166)

1,871(5,295)

Exchange differences on translation of foreign operations

7,521

2,591

10,112

(233)

9,879

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

(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 of items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss

Millions of yen

Items that will not be reclassified to profit or loss

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(167,963)(1)(167,964)(2,746)(170,711)

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

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(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.

21,039Year ended December 31, 2020

SUSTAINABILITY

Millions of yen
Financial Costs—(4,957)

Total

Financial assets measured at amortized cost
Deposits and bonds(2,209)Remeasurements of defined benefit plans

BUSINESS

Investments derecognized during the year

Net gain (loss) on revaluation of financial assets measured
at fair value through other comprehensive income

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

156

Japan Tobacco Inc. Integrated Report 2020

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

CORPORATE PROFILE

32. Share-based Payments

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

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.
Share options are granted by the resolutions of the Board of Directors

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

Thousands of shares

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.

2020

1,774,128

857

792

1,777,639

1,774,921

A. Share Option Contract Conditions of the Company

waive such rights, they cannot exercise them.

Positions of persons granted:D irectors and Executive

Settlement: Issuance of shares

Officers
BUSINESS

2019

1,776,782

Increased number of ordinary shares under subscription rights to shares
Weighted-average number of diluted ordinary shares during the period(i)	The subscription rights to shares become exercisable when a(ii)	In the case where any holders of subscription rights to shares

B. Weighted-average Number of Diluted Ordinary Shares Outstanding During the Period

Weighted-average number of ordinary shares during the period

based on the approvals at the Annual Shareholders’ Meeting.

Conditions related to the exercise of share options are as follows:
VALUE CREATION(2) Basis of Calculating Diluted Earnings per Share

Effective period of granted share option : 3
 0 years after the date of
grant
Vesting conditions: None31. Reconciliation of Liabilities Arising from Financing Activities
B. Changes in the Number of Share Options of the Company

Reconciliation of liabilities arising from financing activities for each year is as follows:

SharesYear ended December 31, 2019
Directors

Balance as of January 1

195,400

634,000

Granted126,000

187,200

313,200

—

—

—

—

(168,000)(168,000)—(203,000)(203,000)Millions of yen
As ofJanuary 1,
2019

Short-term borrowings and commercial paper
Long-term borrowings (Note)
Bonds(Note)

Lease liabilities
Total

Non-cash changes
Cash flows

Foreign exchange
movement

Other

As of
December 31,
2019

238,023(44,976)(1,563)

1,097

192,581

129,313(11,568)(2,475)27

115,297

610,444

59,435(3,579)324

666,623

48,840(14,294)(394)

19,55253,705

1,026,621(11,403)(8,011)

21,0001,028,206

Millions of yen
Non-cash changes
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

Other

As of
December 31,
2020

Directors

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(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

As ofJanuary 1,
2020

ExercisedTotal

829,400

Executive
Officers

GOVERNANCE

Year ended December 31, 2020

2020

Executive
Officers

SUSTAINABILITY

2019(Note) Current portion is included.

158

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020

159

number of allotted shares and the amount of cash to be paid are calcu-(i) Valuation Model

lated 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.

Black-Scholes Model(ii) Main Assumptions and Estimation

The fair value in the plan is estimated based on the market price ofnumerical targets such as performance during the performance
2019

2020

­evaluation period in the range of 0% - 200%.

¥2,401—Volatility of share price (Note 1)

31.2%

—

(4) Share-based Payment Expenses

15 years—

The costs included in “Selling, general and administrative expenses” in the consolidated statement of income are as follows.

Estimated dividends (Note 3)¥150/share—

Risk free interest rate (Note 4)

0.07%

—

Estimated remaining period (Note 2)(Note 1) Calculated based on daily share prices quoted for the past 15 years.
(Note 2) Because of the difficulty of a reasonable estimation due to insufficient data, the remaining period is estimated based on the assumption that share option
rights would 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.

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

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
The 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

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(1) Capital Management

the mid- to long-term, and is consequently in the best interest of all

deemed reasonable by the Company’s Board of Directors, from a

The Group’s management principle is pursuit of the “4S” model: bal-stakeholders, including our shareholders.

position as Member of the Board or any other positions separately

ancing the interests of consumers, shareholders, employees and wider

and Executive Officers, who continue to serve for a stipulated period,

specified by the Company’s Board of Directors even during the transfer

society, and fulfilling our responsibilities towards them, aiming tofinancial base that secures stability in the case of changes in business

pay all of the monetary compensation claims provided by the

restriction period, the transfer restrictions shall be removed on all

exceed their expectations.

environment such as economic crises, and flexibility enabling expeditious

Company by the method of contribution in kind. The transfer

Allotted Shares held by him/her.

The Group believes that sustainable profit growth in the mid- to

For that reason, as its financial policy, the Group maintains a strong

SUSTAINABILITY

Company’s ordinary shares shall be delivered if the Eligible Directors

BUSINESS(2) Restricted Stock Remuneration

VALUE CREATION

Share pricement with the Eligible Directors and Executive Officers and the

CORPORATE PROFILE

C. Method of Measuring Fair Value of Share Options Granted During the Period of the Company

responses to business investment opportunities.

long-term based on this principle will increase the Group’s value in
Details of Restricted Stock Remuneration
Grant date

2020

—

May 26, 2020—

Directors: 94,200
Executive Officers: 145,000—¥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

Number of allotted shares
Fair value at the grant dateCalculation methodology of fair value(3) Performance Share Unit Remuneration
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

attributable to the owners of the parent company). The amounts as of December 31 are as follows:
Millions of yen
2019Interest-bearing debt

(Note)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(Note) Lease liabilities are excluded.

There are specific rules for shares of the Company under theJapan Tobacco Inc. Act, as follows:
The Japanese government shall hold more than one-third of all ofbonds with subscription rights to shares) when exchanging withshares, 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/OTHERS

160

The Eligible Directors and Executive Officers shall be paid monetary

The Group manages net interest-bearing debt, where cash and cash equivalents are deducted from interest-bearing debt, and capital (the part

GOVERNANCE

2019

The 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

In principle, the Group sets credit lines or transaction conditions
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

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 andIn 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

Due after
two years
throughthree years

Due after
three years
throughfour years

Due after
four years
throughfive years

Carrying
amountContractual
cash flow

Due within
one year

Due after
five years

Trade and other payables

408,597

408,597

408,597

—

—

—

—

—
—

Short-term borrowings

192,581

192,581

192,581

—

—

—

—

Current portion of long-term borrowings

11,554

11,554

11,554

—

—

—

—

—

Long-term borrowings

103,743

103,847—

11,20941,211

11,17520,064

20,187

Current portion of bonds

80,00080,00080,000

—

—

—

—

—

Bonds

586,623590,133—

82,17030,000117,519—

360,444

Lease liabilities

There is no excessive concentration of the credit risks to certain
counterparties.

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
Foreign exchange forward contract
Subtotal
Total

BUSINESS

with them; those securities are exposed to the issuer’s credit risk.

Millions of yen
Due after
one yearthrough
two years

Subtotalpresident and the Board of Directors of the Company.

equity securities of customers and suppliers to strengthen relationships

As of December 31, 2019Non-derivative financial liabilities

Directors of the Company.

of mitigating risks from transactions based on actual demand.

The financial liability balance (including derivative financial instruments) by maturity as of December 31 is as follows:

VALUE CREATIONThe Group is exposed to financial risks (credit risk, liquidity risk, foreign

CORPORATE PROFILE(2) Financial Risk Management

As of December 31, 2020

­institutions which are counterparties to these transactions.

Millions of yen

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.

Measured at an amount equal
to the full lifetime expectedcredit losses

1,650

—

269

Addition

1,163

—

18

1

1,182

Decrease (intended use)

(218)

—

—

(0)

(219)

Decrease (reversal)

(20)

—

(57)

(78)

(155)

As of January 1, 2019

Other
As of December 31, 2019
Addition

Noncreditimpaired
financialassetsCreditimpaired
financialassets

Total

5,839

7,758

(100)

—

—

(56)

(156)

2,475

—

230

5,705

8,409

785

—

10

2

797

(1,003)

—

(0)

(55)

(1,059)Decrease (reversal)

(52)

—

(31)

(23)

(107)

Other

(281)

—

(117)

155

(244)

1,923

—

92

5,783

7,798

Decrease (intended use)

As of December 31, 2020

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

Group establishes a finance plan based on the annual business plan

162

Japan Tobacco Inc. Integrated Report 2020

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

—

—

—

—

—

Derivative financial liabilities
Foreign exchange forward contract
Subtotal
Total

10,334

10,334

10,334

—

—

—

—

—

1,472,286

1,481,091

607,389

84,807135,233

27,19698,000528,467

The total of commitment lines and withdrawal as of December 31 are as follows:
Millions of yen

Total committed line of credit
Withdrawing
Unused balance(4) Liquidity Risk

In accordance with the Group Financial Operation Basic Policy, theTrade and other payables

Non-derivative financial liabilities

financial institutions.

(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 fluctuation

2019

2020

470,411478,200——

470,411478,200

FINANCIAL INFORMATION/OTHERS(Note) There is no significant change in the carrying amounts of financial assets which affects the change in the allowance for doubtful accounts.

Due within
one year

GOVERNANCE

Trade
receivables

Measured at
an amountequal to the
12-month
expected
credit losses

Contractual
cash flow

SUSTAINABILITY

Millions of yen
Other financial assets

Carrying
amountincluding 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 2020163

exchange fluctuation when profit or loss denominated in eachon the assumption that currencies other than the currencies used forProfit before income taxes

2019

2020

(1,594)(3,960)­currency-denominated interest-bearing debts for example, when futuresome 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 foreign
the Company regularly reports the performances to the president andthe Board of Directors of the Company.
Foreign Exchange Sensitivity Analysis
In cases where each currency other than the functional currency that
denominates the financial instruments held by the Group as of eachyear end increases by 10% in value against the functional currency, theincome is as follows:
The impact from the translation of functional currency-denominatedafter deducting cash equivalents. Borrowings and bonds with floating
rates are exposed to interest rate fluctuation risk.

USD 218 mil.

USD—

¥105.31

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

Group establishes and implements an interest rate hedging policy, taking

As of January 1, 2019

into consideration the impact on the Group’s performance and the ­current

Other comprehensive income443

condition of the interest rates in a comprehensive manner. The Treasury

Amount arising (Note 1)(882)

Division of the Company reports the performances to the president andReclassification adjustments (Note 2)320

the Board of Directors of the Company.

Tax effects

171

Other

(185)

Interest Rate Sensitivity Analysis

As of December 31, 2019(132)

In cases where the interest rate of financial instruments held by the

Other comprehensive income

Group 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

Profit before income taxes

2019

2020

(566)

1,743

Amount arising (Note 1)

170

Reclassification adjustments (Note 2)

152

Tax effects

(98)

Other

30

As of December 31, 2020

122

(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)

A. Cash Flow Hedges

As of December 31, 2019
Carrying amount (Note)(Millions of yen)Contract amountOver one year

AssetsLiabilities

Average rate,etc.

Foreign exchange risk
Foreign exchange forward contract
USD

—

41

227

¥106.67Over one year

AssetsLiabilities

Average rate,etc.

Bonds in USD

USD 1,250 mil.

USD 1,250 mil.

—

136,675¥109.41

Bonds in EUR

EUR 567 mil.

EUR 567 mil.

—

69,132$1.11

Bonds in GBP

GBP 400 mil.

GBP 400 mil.

—

56,089$1.32

Foreign exchange forward contract
EUR / RUB

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/OTHERS

USD 187 mil.

Contract amount

GOVERNANCE

The details of hedging instruments designated as cash flow hedges are as follows:

Japan Tobacco Inc. Integrated Report 2020

176

(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.”

and under the supervision of the Treasury Committee of the Company, the

The Group’s policy for hedging transactions is stated in “3. Significant Accounting Policies.”

164

324

Foreign exchange forward contract

and bonds, in accordance with the Group Financial Operation Basic Policy,(7) Hedging Transactions

JPY/USD

Average rate,etc.

In order to reduce the interest rate fluctuation risk related to borrowings

financial instruments, and assets, liabilities, income and expenses offoreign operations into Japanese yen is not included. Also, it is based

Liabilities

SUSTAINABILITY

impact on profit before income taxes in the consolidated statement ofInterest rate risk within the Group arises from interest-bearing debts

AssetsForeign exchange risk
JPY/USD(6) Interest Rate Risk

Over one year

BUSINESS

exchange market in a comprehensive manner. The Treasury Division ofContract amount

VALUE CREATION

cash flow is projected or when receivables and payables are fixed, andCarrying amount (Note)(Millions of yen)

Millions of yen

and consolidated.
The Group hedges against risk (i) using derivatives or foreign

As of December 31, 2020

the calculation do not fluctuate.

functional currency of the Group is translated into Japanese yen

CORPORATE PROFILE(iii) The risk that the profit or loss of the Group is influenced by foreign165

As of December 31, 2020
Millions of yen

Carrying amount(Millions of yen)
(Note)

Contract amountOver one year

AssetsLiabilities

Average rate,
etc.

Fair value
Carrying
amountUSD 1,250 mil.

USD 500 mil.

—

129,198¥109.41

Level 1

Level 2

Level 3

Total

Bonds in EUR

EUR 1,321 mil.

EUR 1,321 mil.

—

166,119$1.16

Long-term borrowings (Note)

204,955—

206,953—

206,953

Bonds in GBP

GBP 400 mil.

GBP 400 mil.

—

54,704$1.32

Bonds (Note)702,292

750,417——750,417

Foreign exchange forward contract(Note) Current portion is included.

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

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 the(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 carrying amount.

­principal and interest by the interest rate assumed in a case where the

The schedule of net gains (losses) on hedging instrument designated as hedge of net investment in foreign operations is as follows:

B. Financial Instruments Measured at Fair Value

Millions of yen
2019

2020

17,842

10,338same loan is newly made.

The fair value hierarchy of financial instruments measured at fair value as of December 31 is as follows:
As of December 31, 2019

BUSINESSAs of January 1

Millions of yen

Other comprehensive income(7,271)(Note 1)

Tax effects
As of December 31 (Note 2)

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.

(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:

Level 1

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(8) Market Price Fluctuation Risk

As of December 31, 2020
Millions of yen

reviews the portfolio held by taking into account the relationship withcounterparty entities as necessary.

VALUE CREATION

Bonds in USD

Amount arising

CORPORATE PROFILE

As of December 31, 2020

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

Other
Total
Derivative liabilities
Total

GOVERNANCE

market data
(Note) The schedule of financial instruments that are classified in Level 3 is as follows:
A. Financial Instruments Measured at Amortized Cost

Millions of yen

The carrying amount and fair value hierarchy of financial instruments measured at amortized cost as of December 31 are as follows:
As of January 1
As of December 31, 2019

2019

2020

10,351

11,927

Total gain (loss)
Millions of yen
Fair value
Level 1

Level 2

Level 3Total

Long-term borrowings (Note)

115,297—

116,804—

116,804

Bonds (Note)

666,623

683,650——

683,650

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

Carrying
amountProfit 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.”

166

Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020167

(2) Procurement of Domestic Leaf Tobacco(1) Smoking/Vaping and Health Related Litigation

With regard to the procurement of domestic leaf tobacco by the

The Company and some of its subsidiaries are defendants in ­lawsuits

Based on the Japan Tobacco Inc. Act, the Japanese government shall(1) Related-party Transactions

Company, based on the Tobacco Business Act, the Company enters

filed by plaintiffs seeking damages for harm allegedly caused byhold more than one-third of all of the shares issued by the Company

Related-party transactions are conducted under the same conditions

into purchase contracts with domestic leaf tobacco growers every

smoking or vaping, the marketing of tobacco products, or exposure to(excluding the type of shares, for which it is stipulated that voting rights

as regular business transactions.

year, 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-

may not be exercised on any matters that can be resolved by Annual

The Group’s revenue from CJSC TK Megapolis, the local Russian
distribution affiliate, was ¥202,780 million and ¥177,170 million for thecontracts, the Company is obligated to purchase all domestic leaf

bers of the Group were named as a defendant or for which the­government held 33.35% of all outstanding shares of the Company.

years ended December 31, 2019 and 2020, respectively. The Group held

tobacco produced pursuant to such contracts, except for any domestic

Company may have certain indemnity obligations pursuant to thetrade receivables of ¥38,640 million and ¥27,668 million from CJSC TK

leaf tobacco not suited for the manufacture of tobacco products.

agreement such as for the Company’s acquisition of RJR Nabisco

Megapolis as of December 31, 2019 and 2020, respectively.

37. Hyperinflationary Accounting Adjustments(2) Remuneration for Directors and Audit and Supervisory Board Members

Inc.’s overseas (­non-U.S.) tobacco operations.
The major ongoing smoking and health related cases are
as follows:

Remuneration for directors and audit and supervisory board members for each year is as follows:

As required by IAS 29, the Group’s consolidated financial statements

Remuneration and bonuses

Millions of yen
2019

2020

tionary economy, restated in terms of the measuring unit current at

from its creditors under the Companies’ Creditors Arrangement Act

673

1,139

the end of the reporting period.

(CCAA). The Ontario Superior Court has granted the CCAA application

115

Total

On March 8, 2019, JTI-Macdonald Corp. (hereinafter referred to as

include the financial statements of the subsidiaries in the hyperinfla-

251

788

1,390

For the restatement of financial statements of the subsidiaries in“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

35. Subsidiaries, Associates and Othersof Iran are presented below.

(The composition of the Group)

End of reporting period

ConsumerPrice Index

Conversion
coefficient

31 December 2015

93

300

31 December 2016

102

276

2019

2020

and extended protection in favor of JTI-Mac (hereinafter referred to as

Iran, the Group applies the conversion coefficient derived from theConsumer Price Index and corresponding conversion coefficients

The composition of the Group by reportable segment as of December 31 is as follows:“JTI-Mac”), the Company’s Canadian subsidiary, filed for protection

carries on business in the ordinary course.
A. Individual Claim
There is one individual case brought against the Company’s indemnitee in South Africa.

South Africa Individual Claim (Joselowitz):

251

Number ofsubsidiaries

Number of entities
accounted for using
the equity method (Note)

112

Reportable Segments

Number of entities
accounted for using
the equity method (Note)

31 December 2017

Number ofsubsidiaries

31 December 2018

152

185

South Africa in October 2000. Plaintiff seeks compensatory and puni-

Domestic Tobacco

13

1

13

1

31 December 2019

194

145

tive damages, alleging that the Company’s indemnitee marketed prod-

International Tobacco

171

7

173

8

31 December 2020

281

100

ucts which it knew to be dangerous to health, manipulated nicotine

Pharmaceuticals

2

—

2

—

Processed Food

28

3

28

2

Other

17

2

19

2

Total

231

13

235

13

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

Regarding the restrictions on the ability to use the assets of theGroup, please refer to “7. Cash and Cash Equivalents.”

expressed in terms of the measuring unit current at the end of thereporting period.
For the purpose of consolidation, the financial statements of theGroup's subsidiaries in the hyperinflationary economy are translated

36. Commitments

using the spot exchange rates at the end of the reporting period.

(1) Commitments for the Acquisition of Assets

tion 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 theCompany’s subsidiary and/or indemnitees.

Contingent Liabilities

This class action was brought in September 1998 against three

2020

The Company and some of its subsidiaries are defendants in legal

Acquisition of property, plant and equipment

35,74733,768proceedings. Provisions are not accounted for in matters where it

Acquisition of intangible assets

1,602

3,130

is not practicable to reasonably estimate the final outcomes.

37,34836,897The 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/OTHERS

2019

Total

ing requirements and participated in a clandestine worldwide opera-

38. Contingencies

Commitments for the acquisition of assets as of December 31 are as follows:
Millions of yen

content to foster addiction, failed to comply with South African label-

GOVERNANCE

the year ended December 31, 2020.

restated their non-monetary items held at historical cost, such as

The individual claim was brought against the Company’s indemnitee in

SUSTAINABILITY(Note) No associates or joint ventures are considered to be material to the Group.

The Group's subsidiaries in the hyperinflationary economy have

BUSINESS

Share-based payments

There is no significant change in the composition of the Group for

VALUE CREATION

Shareholders’ Meeting). As of December 31, 2020, the Japanese

CORPORATE PROFILE

34. Related Parties

seeking 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.

168

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169

favor of the plaintiffs in June 2015. In June 2015, JTI-Mac and otherpreliminary motions are pending. The case was dormant and is

Canada British Columbia Health-Care Cost Recovery Litigation:

Canada Alberta Health-Care Cost Recovery Litigation:­currently 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 of Alberta

British Columbia in January 2001 against tobacco industry members

in June 2012 against tobacco industry members including JTI-Mac andtobacco manufacturers appealed the judgment to the Quebec Court of

Canada Manitoba Class Action (Kunta):

including JTI-Mac and the Company’s indemnitees based on its provin-

the Company’s indemnitees based on legislation similar to that introduced

November 2016.

This class action was brought against tobacco industry members

cial legislation, the “Tobacco Damages and Health-Care Costs Recovery

in the Province of British Columbia. The statement of claim contains

including JTI-Mac and the Company’s indemnitees in June 2009.

Act.” The claim amount is unspecified. In 2001, several defendants

allegations of joint and several liabilities among all the defendants but does

defendants by substantively upholding the first instance judgment andPlaintiffs are seeking unspecified compensatory and punitive damages

challenged the legislation’s constitutionality, which was ultimately

not specify any individual amount or percentages within the total claimed

ordering a punitive damage award against the appellants of approxi-

on behalf of class members who allege to be or have been addicted torejected 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 bymately ¥13.0 billion (approximately CAD 161 million), in which the sharenicotine contained in cigarettes manufactured by the defendants. The

action remains pending in the first instance. The case is stayed by thethe CCAA Proceedings.

of the total damage award against JTI-Mac is approximately ¥1.2 billion

statement of claim was served on the Company’s indemnitees but not

CCAA Proceedings.

(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.

In March 2019, the Quebec Court of Appeal dismissed the appeal ofduring the CCAA Proceedings. Enforcement of the judgement is stayed

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

This class action was brought against tobacco industry members

including JTI-Mac and the Company’s indemnitees based on legislation

similar to that introduced in the Province of British Columbia. The claim

Canada Quebec Class Action (Conseil Québécois sur le tabac et la santé):

including JTI-Mac and the Company’s indemnitees in June 2009.

similar to that introduced in the Province of British Columbia. The claim

amount is unspecified. The case is stayed by the CCAA Proceedings.

This class action was brought in November 1998 against three

Plaintiffs are seeking unspecified compensatory and punitive damages

amount is unspecified. The case is stayed by the CCAA Proceedings.

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

Canada Ontario Health-Care Cost Recovery Litigation:

This health-care cost recovery litigation was filed by the Province of

12.4 billion) in compensatory damages, an amount for which all thestatement of claim was served on the Company’s indemnitees but not

This health-care cost recovery litigation was filed by the Province

Prince Edward Island in September 2012 against tobacco industry

defendants are jointly and severally liable, and a total amount of

on JTI-Mac. The case was dormant and is currently stayed by theof Ontario in September 2009 against tobacco industry members

members including JTI-Mac and the Company’s indemnitees based on

approximately ¥65.5 billion (approximately CAD 0.8 billion) in punitive

CCAA Proceedings.

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 the

Canada British Columbia Class Action (Bourassa):

statement of claim contains allegations of joint and several liabilities

CCAA Proceedings.

This class action was brought against tobacco industry members

among all the defendants but does not specify any individual amountfavor of the plaintiffs in June 2015. In June 2015, JTI-Mac and otherincluding JTI-Mac and the Company’s indemnitees in June 2010.

or percentages within the total claimed amount of ¥26,673.9 billion

Canada Nova Scotia Health-Care Cost Recovery Litigation:

tobacco manufacturers appealed the judgment to the Quebec Court of

Plaintiffs are seeking unspecified compensatory and punitive damages(CAD 330 billion). The case is stayed by the CCAA Proceedings.

This health-care cost recovery litigation was filed by the Province ofAppeal, 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.

respective market shares.
The Quebec Superior Court published the first instance judgment in

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

the defendants by substantively upholding the first instance judgment

Canada British Columbia Class Action (McDermid):

Newfoundland and Labrador in February 2011 against tobacco indus-

amount is unspecified. The claim amount is unspecified. The case is

and ordering a compensatory damage award jointly and severallyThis class action was brought against tobacco industry members

try members including JTI-Mac and the Company’s indemnitees based

stayed by the CCAA Proceedings.

against the defendants of approximately ¥1,093.5 billion (approximately

including JTI-Mac and the Company’s indemnitees in June 2010.

on legislation similar to that introduced in the Province of British

CAD 13.5 billion), in which the share of the total damage award against

Plaintiffs are seeking unspecified compensatory and punitive damages

Columbia. The claim amount is unspecified. The case is stayed by the(2) Other Legal Proceedings

JTI-Mac is approximately ¥142.2 billion (approximately CAD 1.8 billion),for class members. The preliminary motions are pending. The case

CCAA Proceedings.

The Company and some of its subsidiaries are also engaged in otherand a punitive damage award of approximately ¥3 million (approxi-

was dormant and is currently stayed by the CCAA Proceedings.

legal proceedings such as commercial and tax disputes.

Canada Manitoba Health-Care Cost Recovery Litigation:

leave to appeal the decision to the Supreme Court of Canada is sus-

Canada Ontario Class Action (Jacklin):This health-care cost recovery litigation was filed by the Province ofpended during the CCAA Proceedings. Enforcement of the judgement

This class action was brought against tobacco industry members

Manitoba in May 2012 against tobacco industry members including

is stayed by the CCAA Proceedings.

including JTI-Mac and the Company’s indemnitees in June 2012.

JTI-Mac and the Company’s indemnitees based on legislation similar to

Plaintiffs are seeking unspecified compensatory and punitive damages

that introduced in the Province of British Columbia. The claim amountactions against the defendants and ordered them to make an initial

for class members. The preliminary motions are pending. The caseis unspecified. The case is stayed by the CCAA Proceedings.

deposit of approximately ¥93.9 billion (approximately CAD 1.2 billion), in

was dormant and is currently stayed by the CCAA Proceedings.

The Quebec Court of Appeal rendered one judgment for both classwhich the share of JTI-Mac is approximately ¥11.8 billion (approxi-

Canada Quebec Health-Care Cost Recovery Litigation:
C. Health-Care Cost Recovery Litigation

This health-care cost recovery litigation was filed by the Province ofstayed by the CCAA Proceedings.

There are 10 ongoing health-care cost recovery cases in Canada pend-

Quebec in June 2012 against tobacco industry members including

ing against the Company’s subsidiary and indemnitees brought by all

JTI-Mac and the Company’s indemnitees based on legislation similar

Canada Saskatchewan Class Action (Adams):

the Canadian provinces (except three Canadian territories). Theseto that introduced in the Province of British Columbia. The statement

This class action was brought against tobacco industry members

provinces filed lawsuits under their own provincial legislation which wasof claim contains allegations of joint and several liabilities among

including JTI-Mac and the Company’s indemnitees in June 2009.

enacted exclusively for the purpose of authorizing the provincial govern-

all the defendants but does not specify any individual amount or per-Plaintiffs are seeking unspecified compensatory and punitive damages

ment to file a direct action against tobacco manufacturers to recoup the

centages within the total amount of the claim approximately ¥4,902.9

on behalf of class members who allege to be or have been addicted tohealth-care costs the government has allegedly incurred and will incur,

billion (approximately CAD 60.7 billion). The case is stayed by the

nicotine contained in cigarettes manufactured by the defendants. The

resulting from “tobacco related wrongs.”

CCAA Proceedings.

Japan Tobacco Inc. Integrated Report 2020

(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/OTHERS

mately CAD 145 million). The obligation to pay the initial deposit is

GOVERNANCE

mately CAD 0.04 million) per defendants. The time limit for seeking

SUSTAINABILITYIn March 2019, the Quebec Court of Appeal dismissed the appeal of

Canada Prince Edward Island Health-Care Cost Recovery Litigation:

BUSINESS

damages, to be divided among all the defendants based on their

170

Canada Saskatchewan Health-Care Cost Recovery Litigation:
Canada New Brunswick Health-Care Cost Recovery Litigation:

Canada Nova Scotia Class Action (Semple):by the CCAA Proceedings.

VALUE CREATION

Appeal, and the appeal on the merits was heard and concluded in

CORPORATE PROFILEThe Quebec Superior Court published the first instance judgment in

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 2020

171• 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

support the sales activities); as a result, early retirement packages

employees of the group companies, following the closure of thea stronger consumer-centric mindset and prioritize investments in• Reform the sales organization structure to further promote sales

will be offered for about 1,600 field partners

Company's Kyushu and JFT Tagawa factories.

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:

150 senior employees (contractors or part-timers who are reem-

The impact of these initiatives on the consolidated financial state-

two tobacco businesses will enable efficient and effective deployment

Restructure the sales organization from 3-tier structure (Market HQ

ployed after their retirement)

ments for fiscal year ending December 31, 2021 is expected to beof resources within the Group.

Regional sales office - branch) to 2-tier structure (Market HQ -In addition, early retirement package will be offered for certain– Offer voluntary retirement program and seek retirement of about– The above voluntary retirement and field partner organization

about JPY 37 billion as a one-time expense, which is due to the factory

New sales office)restructuring measures are expected to be completed at the end of

measures, intending the enhancement of its competitiveness to maxi-

Migrate from a system of 15 regional sales offices and 145

March 2022

mize the value offered to its customers and strengthening its businessbranches to a new system of 47 new sales offices

VALUE CREATIONIn the Japanese market, the Group also plans to implement various– Remove field partner organizational structure (part-timers who

CORPORATE PROFILE

concluded that a revision of its strategic focus in its tobacco businessclosures and the offering of voluntary retirement programs.

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 by

OthersA. Quarterly Information for the Year ended December 31, 2020
Millions of yen

domestic sales volumes

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

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

Kagawa) and Minami-Kyushu Leaf Tobacco Branch (Miyakonojo

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.

global tobacco business (manufacturing, leaf procurement, quality

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)B. Significant Lawsuits

The significant lawsuits of the Group are as stated in “38. Contingencies” in the notes to consolidated financial statements.

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 external

GOVERNANCE– Consolidate the reporting lines of supply chain functions of the345,558SUSTAINABILITY– Group subsidiary measurestobacco business

225,961(Koshi city, Kumamoto) from April 2022

– Consolidate the headquarter functions of the tobacco business,– Operate the Japanese market as a key market in a new unified

115,102

Integrate the Chu-Shikoku Leaf Tobacco Branch (Takamatsu city,
city, Miyazaki) into the West Japan Leaf Services Headquarters

Actions:

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

business 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– Establish an organizational structure to enhance consumer satisfaction

FINANCIAL INFORMATION/OTHERS

Objective:
Actions:– Offer voluntary retirement program and seek retirement of about
Actions:

1,000 employees– 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

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173

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

175
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174

CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

177
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CORPORATE PROFILEVALUE CREATION

BUSINESSSUSTAINABILITY

GOVERNANCE

FINANCIAL INFORMATION/OTHERS

179
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178

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 +Combustibles: Cigarettes + fine cut tobacco.

Adjusted items (income and costs).*

FCT (fine cut tobacco): FCT represents tobacco products which are packed in a loose, fine-cut form in pouches and are also

* Adjusted items (income and costs) = Impairment losses on goodwill ± restructuring income and costs ± othersexchange 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).

known as rolling tobacco, used for both RYO (roll-your-own) cigarettes made using rolling papers and MYO (make-your-own)
cigarettes made by filling a filter tube with cut tobacco.
Products

Adjusted operating profit at constant FX: The same foreign exchange rates between local currencies vs USD as well as the

CORPORATE PROFILE

Glossary of terms

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.

At constant FX, Core revenue/Adjusted operating profit (International tobacco business): The same foreign exchange• T-Vapor: a product that contains tobacco leaf and creates a tobacco-enriched vapor by heating the tobacco without any combustion.

rates between local currencies vs USD are applied as in the equivalent period in the previous fiscal year for the international• HTS (heated tobacco sticks): High temperature T-Vapor

tobacco business. Results on a constant FX are provided additionally and are not an alternative to financial reporting under• Infused (infused tobacco capsules): Low temperature T-Vapor

International Financial Reporting Standards (IFRS).

ALP: Agricultural Labor Practices.
FCF (Free cash flow): FCF is sum of cash flows from operating activities and investing activities, but excludes thefollowing items:

CDP: Headquartered in London, CDP is the leading international non-profit organization that accelerates action to achieve a• From investing CF: Purchase of investment securities (both short-term and long-term), payments into time deposits,

sustainable economy, assessing disclosure and actions by companies from around the world.
Contraband: Genuine products smuggled from abroad that are diverted from the legitimate supply chain and sold in atime deposits and other investing activities not for business operation purposes

country other than the intended retail market without payment of domestic duty in that country.

• 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

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

IFRS (International Financial Reporting Standards): The JT Group adopted IFRS from the fiscal year ended March 31, 2012.

deceive the consumer. They are also sold without duties being paid.

Profit: Profit attributable to owners of the parent company.

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,

Revenue: Excluding tobacco excise taxes and revenue from agent transactions.

• 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.

Sustainability

but excludes revenue from distribution, contract manufacturing and other peripheral businesses.

environmental and social criteria.

SUSTAINABILITY• Core revenue (International tobacco business): Includes revenue from waterpipe tobacco and RRP (Reduced-Risk Products),

BUSINESS

Financials

proceeds from sale or redemption of investment securities (both short-term and long-term), proceeds from withdrawal of

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 ambi-

Volume, JT cigarette sales (Japanese-domestic tobacco business): Excludes sales volume of domestic Duty-Free,tious emission reduction targets.

the China business and RRP while including little cigars.

GOVERNANCE

SDGs (Sustainable Development Goals): The SDGs were adopted by all United Nations Member States in 2015 as a univer-Volume, total shipment (International tobacco business): The shipment volume of tobacco-based products which includes

sal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.

fine cut tobacco, cigars, pipe, oral (snus, nicotine pouch), kretek and T-Vapor but excludes contract manufactured products,
waterpipe tobacco and E-Vapor.

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.

180Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020

181

Dow Jones Sustainability Indices (DJSI)

Swiss LGBTI LabelWe are a member of the DJSI Asia Pacific Index for the seventh consecutive year. We achieved second place in the tobacco

In 2020, JTI, the headquarters of our international tobacco business, was awarded the “Swiss LGBTI Label,” a certification forindustry for the second consecutive year and have been selected for the “SAM Bronze Class” and “SAM Industry Mover” for thecompanies and organizations with an open and inclusive structure.

CORPORATE PROFILEAwards and recognitions

second consecutive year.
Swiss LGBTI Label September 2020
JT Group press release November 2020
The Sustainability Yearbook 2021

VALUE CREATIONFTSE Blossom Japan

Platinum Kurumin Certification
JT has long been certified as a childcare-supporting company by the Japanese Ministry of Health,

We have been selected as a member of FTSE Blossom Japan Index every year since its launch in 2017.

Labour and Welfare.

FTSE Blossom Index (selected by GPIF as a core ESG benchmark) is designed to measure the performanceof Japanese companies that demonstrate strong sustainability practices.

JT press release (in Japanese) November 2018

FTSE Blossom Japan Index January 2021

Top Employer

CDP

Our international tobacco business was certified as a Global Top Employer for the seventh
BUSINESS

consecutive year.
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.

Top Employer January 2021

Nadeshiko Brand

JT Group press release December 2020

Science Based Targets (SBT)

approved as an SBT by the Science Based Targets initiative.

efforts to empower female employees in the workplace.
SUSTAINABILITY

We have set a long-term GHG emission reduction target in line with the Paris Agreement, which was

JT was recognized as a “Nadeshiko Brand” in 2020 for the second consecutive year, for its

JT press release March 2020

Equal Salary Employer

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 andIn 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 2019Children’s Rights Benchmark” report.

White 500

PRIDE Index

In 2021, JT was recognized as a Certified Health and Productivity Management Outstanding Organization (“White 500”) for its

GOVERNANCE

Final Scorecard November 2019

excellent health-conscious management since the launch of this recognition in 2017.
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.

JT Press Release March 2021
FINANCIAL INFORMATION/OTHERS

work with Pride (in Japanese)
JT press release November 2020

182

Japan Tobacco Inc. Integrated Report 2020

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183

Common stock

As of December 31, 2020

The following are the key disclosures we publish on our website.

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

Mitsubishi UFJ Trust and Banking Corporation

Listing
Tokyo Stock Exchange: First Section

Composition of shareholders (excluding treasury stock)

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.

March

37.6%

Financial institutions

17.3%

Securities companies

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

Website (Investors)

Provides comprehensive information to investors, including various financial
information and reports.

As needed

Barclays Securities Japan Limited

18,432,844

Custody Bank of Japan, Ltd. (Trust Account 5)

17,079,000

Website (Sustainability)

Provides relevant information for sustainability, including details of its initiatives
and data.

As needed

Custody Bank of Japan, Ltd. (Trust Account 6)

15,416,800

JAPAN SECURITIES FINANCE CO., LTD.

14,114,400

BUSINESS

Minister of Finance

Individuals and others 22.7%

7.0%

	Other Japanese companies1.7%
Foreign institutions, etc. 13.7%

SUSTAINABILITY

Contact information

Government offerings of JT shares

Japan Tobacco Inc.

1st offering

1-1, Toranomon 4-chome,

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

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

Note:
Listing date: October 27, 1994
Tokyo Stock Exchange: First Section

1202 Geneva, Switzerland
TEL: +41 (0)22-703-07-77

2nd and 3rd, 4th offering

URL: https://www.jti.com/
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

Japan Tobacco Inc. Integrated Report 2020

FINANCIAL INFORMATION/OTHERS

184

Content

VALUE CREATION

4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo

Offer term

Timing of
publication

Disclosures

638,716

Share registrar

MethodList of key disclosures

CORPORATE PROFILE

Shareholder information

Japan Tobacco Inc. Integrated Report 2020185