CORPORATE PROFILEMESSAGE FROM THE CEOOUR VALUECREATION PROCESSVALUE CREATIONSTRATEGY

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Japan Tobacco Inc.

Integrated Report

2019Year ended December 31, 2019p004
CORPORATE PROFILE
001 Foreword by the CEO
002 At a Glance
004 Message from the CEO

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VALUE CREATIONSTRATEGY012 Our History
014 Our Value Creation Process
016 The Source of Our
Competitiveness018 Investing in People

023 The JT Group’s Material Issues
024 Sustainability Strategy Overview
030 Interview with Our CSO
032 Business Strategy/
Business Review– Tobacco Business• International Tobacco
Business• Japanese Domestic
Tobacco Business– Pharmaceutical Business– Processed Food Business054 Message from the CFO
056 Key Performance Indicators
060 Risk Factors
064 Regulation and Other
Relevant Laws
067 Litigation

Table of Contents

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

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Forward-looking statements
This report contains forward-looking statements. These statements
appear in a number of places in this document and include statements
regarding the intent, belief, or current and future expectations of ourmanagement with respect to our business, financial condition and resultsof 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 othersimilar 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 materially from any future results, performance or
achievements expressed or implied by these forward-looking statements.
In addition, these forward-looking statements are necessarily dependent

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070 Respect for Human Rights
071 Improving Our Socialand Environmental Impact
074 Good Governance andBusiness Standards– Dialogue between the
Chairman of the Boardand an Outside Director

092 Financial Review
100 Consolidated Financial
Statements

upon assumptions, estimates and data that may be incorrect or imprecise
and involve known and unknown risks and uncertainties. Forwardlooking statements regarding operating results are particularly subject toa variety of assumptions, some or all of which may not be realized.
Risks, uncertainties or other factors that could cause actual results todiffer 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, labelingand use of tobacco products, privately imposed restrictions andgovernmental investigations;

160 Glossary of Terms
162 Awards and Recognition
164 Corporate Data

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 makeinvestments outside Japan;
6. ‌competition and changing consumer preferences;
7. ‌our ability to manage impacts derived from business diversificationor business expansion;
8. ‌economic, regulatory and political changes, such as nationalization,
terrorism, wars and civil unrest, in countries in which we operate;‌ uctuations in foreign exchange rates and the costs of raw materials; and9. fl
10. ‌catastrophes, including natural disasters.

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Our Management Principles: “The 4S model”

001 Foreword by the CEO
002 At a Glance
004 Message from the CEO

Foreword by the CEO

Our management principles pursue the 4S model. Under the 4S model, we strive tofulfill our responsibilities to our valued consumers, shareholders, employees and thewider society, carefully considering the respective interests of these four key stakeholder groups and exceeding their expectations wherever we can. We believe that pursuingthis 4S model is the best approach to achieving sustainable profit growth over themid- to long-term.

The JT Group is pleased to present its first Integrated Report toour stakeholders.
Our 4S model represents our commitment to serving our four
stakeholder groups: our valued consumers, shareholders, employees
and the wider society. We strive to fulfill our responsibilities towards
our stakeholder groups by carefully considering their respective interests and exceeding their expectations wherever we can.

Shareholders

We are facing more volatile circumstances in our business environment, such as changes in consumer demands, the expansion of
Reduced-Risk Products, stricter regulation on E-Vapor and tax
increases in our markets. Not only do we need to take thesecircumstances into account, but must take into account how
complex our society itself is becoming. These changes include
more awareness on sustainability, innovation in IoT and connectivity, as well as changes in business models such as big data analysis
and the subscription business model.
While we perceive these changes as clear opportunities, we must
simultaneously be aware that timely adaptation is obligatory;
otherwise, we may be eliminated from competition. In order for us
to continue creating sustainable value, we understand it is crucial
to provide a clearer, more convincing approach encompassing abroader, long-term perspective.
As tools to communicate with our stakeholders, we separately
issued an Annual Report and a Sustainability Report until 2018.
However, with increasing needs to communicate our businessthrough a longer perspective with both financial and non-financial
indicators, in 2019, we have decided to publish an Integrated
Report. The JT Group is committed to transparency in providing our
stakeholders with relevant information through this report. We
trust that this report will help our stakeholders deepen theirknowledge and understanding of our business.

Consumers

Employees

Society

Editorial Policy
Period Covered
In principle, this report covers the period from January 1, 2019 to December 31, 2019, but also
includes some information related to activities before and after this period.
Scope of ReportJapan Tobacco Inc. and consolidated subsidiaries
Published
March 2020

Masamichi Terabatake
Representative Director and President,
Chief Executive Officer

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

Japan Tobacco Inc. Integrated Report 2019 001

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At a Glance
Cigarette market share in the tobacco business
The presence of JT Group
in our key markets

The JT Group is a leading global tobaccocompany operating in over 70 countries/
regions. Our products are sold in over 130
countries/regions and our internationallyrecognized brands include Winston, Camel,
MEVIUS and LD. Our pharmaceutical andprocessed food businesses complement theGroup's profit growth and we are developing
these businesses for sustainable growth. JT
is listed on the Tokyo Stock Exchange.
(JT ticker 2914)

ITALY

RUSSIA

39.0%
U.K.
FRANCE
Processed food business

7.3%

43.6%

Pharmaceuticalbusiness

4.1%

Cigarette and Tobacco-Related Factories

35

International

6

Japanese domestic

41

Total

Japanese domestic
tobacco business28.1%

Total Revenue

Number of Employees(2019)(As of December 31, 2019)

Other

7.3%

0.3%

0.3%

24.5%
SPAIN

4.1%

2,175.6

Japanese domestic
tobacco business

Source: JT estimate, IRI, Nielsen and Logista

28.1%

60.3%

Other

1.5%

8.3%
2.4%

2,175.6

17.0%(JPY BN)International tobacco
business

60.3%
Processed food business

61,975
employees

International tobacco
business

1.5%

Pharmaceuticalbusiness

2.4%

Japanese domestic
tobacco business

17.0%* Reduced-Risk Products (RRP): Products with the potential to reduce the risks
associated with smoking.

61,975002 Japan Tobacco Inc. Integrated Report 2019

employees

Our Businesses
International Tobacco BusinessJapanese Domestic Tobacco BusinessIn the international tobacco business, we manufacture andoffer conventional tobacco products, including cigarettes,
cigars, pipe tobacco, smokeless tobacco, waterpipe tobaccoand kretek as well as RRP.* Our key markets include France,
Italy, Russia, Spain, Taiwan, Turkey and the U.K. Our international brand portfolio is very competitive and well-balanced,
with strong equity brands across all relevant product categories and price segments. The portfolio includes leading brands
in cigarettes and Fine Cut, such as Winston, Camel, MEVIUS
and LD, as well as in RRP, such as Ploom and Logic.

The Japanese domestic tobacco business is headquarteredin Tokyo, and manufactures and offers products for Japan,
one of the biggest tobacco markets in the world, where JT
has established substantial presence with its leading
position. Its strong product portfolio includes Ploom TECH,
Ploom TECH+ and Ploom S in the RRP category and the key
brands of MEVIUS, Seven Stars, Natural American Spirit,
Winston and Camel in the cigarette category.

Global Flagship Brands

Key Brands

RRP Brands

RRP Brands

Pharmaceutical Business

Processed Food Business

The pharmaceutical business focuses on the R&D, manufacturing and sale of prescription drugs, concentrating on three specifictherapeutic areas: metabolic diseases; autoimmune/inflammatory diseases; and viral infection.

The processed food business primarily engages in key
product categories that include frozen noodles, packed
cooked rice and frozen baked bread, seasonings and bakery.

70.8%

Other

8.3%

60.4%

25.7%

(JPY BN)

Processed food businessJapanese domestic
tobacco business

28.3%

TAIWAN

45.2%

Pharmaceuticalbusiness

Pharmaceuticalbusiness

JAPAN

TURKEY

Other

International tobacco
business

Processed food business

24.5%

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Message from the CEO
Business Plan 2020
Under our three-year Business Plan 2020* starting in 2020, we
remain committed to pursuing sustainable profit growth overthe mid- to long-term. We will continue aiming to achieve mid
to high single digit annual average growth of adjusted operating
profit at constant FX over the mid- to long-term. This indicatorof business performance excludes foreign exchange impacts,
temporary effects and extraordinary factors.
In 2019, while the Japanese domestic tobacco businessencountered a challenging operating environment, theinternational tobacco business maintained its strong momentum. As a result, adjusted operating profit at constant FX
increased year-on-year driven by the growth of the tobacco
business as a whole. In addition, we have strengthened our
foundations to ensure that each business can sustain profit
growth into the foreseeable future.
The key to the successful implementation of Business Plan
2020 is profit growth in the tobacco business, which remains
the core and main driver of the Group’s profit growth. We
will further grow the tobacco business as a whole bythinking proactively, acting with speed and with a consumer-centric mindset.

Masamichi Terabatake
Representative Director and President, Chief Executive Officer

To remain the preferred choice ofconsumers, shareholders, employees andthe wider society, we will continuously
work to exceed their expectations throughsustainable profit growth.

Our Management Principles: The “4S model”
Our management principles pursue the 4S model. Under the
4S model, we strive to fulfill our responsibilities to ourvalued consumers, shareholders, employees and the wider
society, carefully considering the respective interests ofthese four key stakeholder groups and continuously working
to exceed their expectations. We believe that pursuing this
4S model is the best approach to achieving sustainable profit
growth over the mid- to long-term and increasing ourcorporate value. Doing this conveys benefits to the four
stakeholder groups.
Over the years, the JT Group has continued growing byproactively dealing with operational challenges and by
004 Japan Tobacco Inc. Integrated Report 2019transforming with a long-term perspective, notwithstanding
significant changes in its business environment, such as thepeaking-out of the Japanese domestic tobacco market andthe tightening of regulations. To mention a just few successes, we have achieved business expansion abroad through thelarge-scale acquisitions of RJR Nabisco Inc.’s non-U.S.
business and the entire Gallaher Group Plc (U.K.), rebranded
MILD SEVEN as MEVIUS and pursued geographic expansion
into emerging markets.
It goes without saying that the business environment
surrounding the JT Group is not becoming any more predictable, not to mention the growth of the RRP category. We areat an inflection point, ready to transform again. I will strive toensure the Group’s sustainable profit growth with theambition of being the first to offer new value to our consumers
in RRP.
The 4S model, which forms our management principles,remains the cornerstone for all our decision-making processes
and activities.
In order to remain the preferred choice of consumers,
shareholders, employees and the wider society, we will
strive to fulfill our responsibilities, exceeding expectations
wherever we can, through our sustainable profit growth.

It is necessary that we have strong commitment from the top
management and faster decision making by reducing decision-making layers. That is why starting this year, I am serving
as the head of the tobacco business, where I will take theoverall lead.
In the Japanese domestic tobacco business, it goes without
saying that generating profits in a stable and sustainable
manner is key to growing the tobacco business in the future.
While we expect the situation to remain difficult in the shortterm, we continue to aim for profit generation by strengthening
the top-line in both the RRP and cigarette categories.
With respect to the international tobacco business, we
intend to continue delivering strong profit growth. In existing
markets, our efforts will focus on enhancing brand equity togain further market share and seizing pricing opportunities.
Regarding geographic expansion, investments will driveorganic growth while we leverage M&A opportunities whenappropriate. Overall, we will continue to strengthen our
profitable business base. In the RRP market, we intend to
expand our presence. Meanwhile, although both thepharmaceutical and processed food businesses will continue
to face a challenging business environment, we aim tocomplement the Group’s profit growth by continuing to
implement our strategies.
* Every year we publish a three-year rolling business plan, reflecting thechallenges identified in our operating environment, which presents
continuously changing uncertainties, in order to strengthen ourcompetitiveness with agility.

Our Resource Allocation Policy andShareholder Return Policy
Our resource allocation policy is based on the 4S model andprioritizes business investment leading to sustainable profit
growth. Furthermore, we continue to prioritize investments
towards the growth of the tobacco business.
We aim to enhance shareholder returns, considering profit
growth over the mid- to long-term while we continue tosecure a solid financial base. We also continue to prioritize
stable and sustainable dividend per share growth whileconsidering adjusted operating profit at constant FX—ourprimary indicator—along with profit reflecting currency
impacts to determine the dividend per share.
Under these policies, the proposed dividend in 2020 is 154
yen, set at the same amount as it was in 2019. We will
focus on continuing to ensure the stability of the dividend
going forward.

Sustainability Strategy
For our Group to grow sustainably, it is vital for us tocontribute to the sustainable development of our society
through our business activities. As sustainability is at theheart of our management, we have set out a Group-wide
sustainability strategy. We have also formulated a sustainability strategy for each of our businesses, bearing in mind
the unique challenges they face.
Three absolute requirements of our Group-wide sustainability strategy are “respect for human rights,” “an improvedsocial and environmental impact,” and “good governanceand business standards.” These are the foundations for asustainable business. For our tobacco business, our corebusiness, we have set four focus areas: “products andservices,” “people,” “supply chain,” and “regulatoryenvironment and illegal trade.” For these four focus areas,
we have also established 11 specific targets and initiatives.
By working towards the targets and promoting the initiatives, we will be supporting the United Nations’ Sustainable
Development Goals (SDGs).
In 2019, for the first time, we reported to our stakeholders
on our progress toward the 11 specific targets for our
tobacco business. Our pharmaceutical and processed foodbusinesses both finished setting out their respective focus
areas and targets, so we now have a sustainability strategy
for all of our business segments. Going forward, we willcontinue to engage with our stakeholders and make concerted efforts to ensure that we can all grow together to securea sustainable future.
Please refer to business targets for more details.

Japan Tobacco Inc. Integrated Report 2019 005

CORPORATE PROFILEThis Integrated Report provides an opportunity to discuss and share with shareholders, consumers,
business partners and other stakeholders the key areas of focus in my capacity as CEO of the JT
Group, the initiatives currently underway, our strategic direction as well as my management
approach and the experiences that guide this approach.

Sowing Seeds for the Future
In the last Annual Report, I shared my first impressions upon
returning to Japan as the new JT Group CEO after serving as
deputy CEO of JTI. My main takeaway was simple: I did not
see an operation that showed overall optimization. Instead, I
saw an organization that was too rigid and fragmented, witheach division tending toward narrower perspectives andinternal optimization.
As this situation was clearly sub-optimal, I announced
several measures in 2019, my second year in office, toloosen up the rigidity of the organization and enable swift
decision making by streamlining the decision-making
processes, relocating the headquarters in Japan andrethinking the working environment. Even our international
tobacco business had several inefficiencies so we aretransforming it as well. Further, I am taking a stronger leadership role in the tobacco business myself. While the impact
from these measures will need some time to be recognizedacross the organization and become visible from the outside,
rest assured that the JT Group is changing.
My personal belief has always been that a successfulorganization must adopt a mid- to long-term perspective.
Any decision we take should start from an objective
assessment of the current environment against the end
goal we have defined. From there on, it is all about executing the plans.
This conviction was strengthened during my years working
as Deputy CEO of JTI. When I joined our international
tobacco business in 2013, it already represented the largest
profit contributor of the JT Group. The acquisitions of RJRI in
1999 and the Gallaher Group in 2007 had transformed the JT
Group into a global tobacco manufacturer with steady profit
growth and strong cigarette brands regularly outperforming
competition in many markets. From the outside, it seemedas though the strategic and operating models were working
perfectly. However, at that point, I thought that the international tobacco business became short-term result oriented.
This was concerning from a mid- to long-term perspective,
as we were not prepared to deal with any earnings slowdown from key markets.

006 Japan Tobacco Inc. Integrated Report 2019

It is not to say that the international tobacco business did nothave a mid- to long-term perspective. Back in RJR days, theoperations were more focused on maximizing the profits by
reducing necessary investments; however, after we acquired
the business and decided to increase marketing investments
to enhance brand equity, the entire organization was able tomove to a more mid- to long-term growth mindset. Furthermore, JT’s management principles described in the 4S
model had gradually permeated the organization of theinternational tobacco business, also leading to more mid- tolong-term growth mindset.
Although the international tobacco business had a long-term
perspective, usually when business is growing steadily,people tend to minimize the importance of thinking with alonger-term perspective. I realized we continued to leverage
the same winning strategies but that our actions did notnecessarily fully embed the mid- to long-term outlook.
With the management team, we decided it was critical forthe international tobacco business to increase the focus on
the mid- to long-term in order to realize sustainable growth
for the future. As Deputy CEO, I made sure to re-ingrain thismindset into the organization and change the overall
direction of management. I ensured that our businessplanning and operations kept up with that mid- to long-term
perspective. Further, I encouraged and supported employees
to put this into practice, wherever and whenever I could. For
example, when the international tobacco business needed tofocus on strengthening its foundation in order to ensure
future sustainable performance, I liaised with the management team in Japan to revisit the aggressive profit growthtargets for that year. In a way, I thought of this as aninvestment towards the mid- to long-term and worked togain the understanding of the parent company, JT, while
ensuring the efforts undertaken were generating the
expected returns.
My role was to seed for the future and encourage a meaningful business transformation. The effects of measures put
in place back then can still be felt today. For example, an
important turning point was the establishment of the global
RRP organization in 2014. Another was the deployment of
new focused investments in emerging regions, notably in the
Middle East and South East Asia, which we defined as“markets that matter” where, in line with projected economic

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progression, we expected strong returns over the mid- tolong-term. This new investment approach has become acornerstone of the international tobacco business’s strategy.

Revitalizing the Consumer-Centric Mindset
In 2019, we announced the implementation of a transformation of our international tobacco business. Transformation was something that came up when I was still Deputy
CEO of the international tobacco business, as the management team was thinking about the business requirements
to further enhance our competitiveness. Further acknowledged was that the consumer-centric approach was
required in the mid- to long-term. The geographical expansion of the business had progressed rapidly, through two
major M&A transactions. However, this rapid growth did
not allow for an effective review of the allocation of roles
between corporate functions, regions, markets andfactories. As a result, the organization gradually became
bloated. It became clear a transformation was mandatory to
remove bureaucracy and increase the speed of decision-making. The aim of the international tobacco business’s
ongoing transformation is to streamline the organization
and related operations, in order to create a stronger andmore dynamic business model that can operate consistently with a consumer-centric approach.
Tobacco products, historically our key focus, have a limited
room for innovation, so we have been optimizing by making
adjustments for each market, individually. However, as the
RRP category expands further, there will be instanceswhere the established operating models for tobacco may
not be relied upon. RRP is still in its early stages and theplatforms themselves are evolving quickly; that is notconducive to market-specific optimization. Also from aneffective use of Group-wide resources, product development for RRP should be consolidated globally. For these
efforts to succeed, it will be important to continue competing with an entrepreneurial mindset without being anchored
to previous successes. For example, an increasing numberof venture companies have been disrupting various industries with unique methods that major corporations were notable to catch up in a timely manner. RRP gives me theimpression of being a very similar situation. We must
increase our speed and explore new business opportunities
with a greater sense of urgency. So, does our company
have enough risk-taking capabilities and the appropriate
expertise? Unfortunately, it is probably correct to say that
we do not have enough capabilities yet and therefore wehave not been able to fully exploit the opportunities provided by the operating environmental changes.

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this situation, we are currently engaged in a paradigm shift,
moving from a headquarter-led business to one driven by
the frontline. Growth in the RRP category has slowed inJapan, and competitors have been trying to secure a
captive consumer base. We need to capture a share bytapping the competitors’ consumer base. For that tohappen, we have been striving to upgrade the existingproducts as well as develop next generation products. In
this process, we remind ourselves that we aim to be thefirst to deliver new value to our consumers. For example,
regarding the development of Ploom S, the first HeatedTobacco device launched in Japan by JT, in line with our
ethos as a Japanese manufacturer, we prioritized safety
over cost and undertook development after deliberately
lowering the power output of the battery. Unfortunately,such value was not entirely understood and appreciated byconsumers. This was most likely attributable to the factthat we did not fully focus on the consumer’s expectations.
I feel that this remains an area of improvement for us.
My aim as the head of the tobacco business is to streamline the decision-making process. I think we need toempower our employees more, with an intention to
encourage endeavors in unknown fields and new initiatives
that employees will find necessary from earnest engagement with consumers. And, to ensure we ourselveschange swiftly, we especially need quick decision-making
and commitment by the top management. I am moredetermined than ever that I should promote this transformation myself.

In the Japanese domestic tobacco business, the prevailing
top-down approach has hindered our ability to continue
outperforming the competition in a business environment
like RRP, where rapid changes are unavoidable. To address
Japan Tobacco Inc. Integrated Report 2019 007

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those experiences were tough, they enabled me to rapidly
understand the importance of effectively fueling the
motivation of the frontlines.
During my term at Manchester Tobacco, there were times
when I had to disregard interesting proposals put forward
by colleagues on the frontline because of the specificdirections provided by the headquarters in Tokyo. Partly
due to lack of experience, this kind of response did not
help motivate my colleagues. I truly felt that when an
individual or a team is really empowered to do something,
their commitment, awareness and business impact
increase exponentially.

Embracing New Ways of Working andEmpowering the Frontline
In the last two years, I have visited many of our Japanese andinternational sites. As I heard from the people on the frontlines, I gained a clear understanding of the challenges facedby the entire JT Group.
For example, I found that our colleagues on the frontlines,
regardless of their departments or locations, had someinteresting ideas, but these ideas did not translate into action.
In such cases, sometimes it was because the headquarters
did not support the ideas due to a conservative approach to
avoid failures. Other times, the proposals from the frontlines
simply did not reach appropriate decision-makers who could
have supported them. There are numerous instances ofcommunication breakdowns, which I think is one of ourproblems. I have found this problem as especially true for thecurrent headquarters building in Tokyo, even before I becameGroup CEO. It seemed like each floor was divided into small
segments, both fostering and reinforcing an internallyfragmented departmental mindset. This created a bottleneckfor information sharing and work process as well as
cross-functional communications.
Keenly aware of the risk that rigidity and fragmentation could
create, I mulled over a solution that could harness the powerof the frontlines and turn this situation around. This led to thedecision to relocate the headquarters in 2020. By physicallychanging the environment, we are changing the way people
communicate at the workplace, and ultimately changing theway people collaborate. We planned the layout of the newheadquarters to create an environment where people canfreely consult and discuss with various departments by
expanding the floor space and making the seating arrange008 Japan Tobacco Inc. Integrated Report 2019

ment effective for collaboration and communication. By
facilitating collaboration and communication between
departments, we can foster decision-making to maximize thepower of the frontlines and support front line initiatives.
In the Japanese domestic tobacco business, we regrettably
made two downward revisions to our RRP sales volume
assumptions in 2019. While increasing profit in the short-term
is difficult, 2020 is the first year in which we can fully compete with a portfolio of low-temperature and high-temperature
heating products. We need to build an organization that can
win the competition in the RRP market, and I want to focus
our efforts on finding that path to success. It is not the righttime to spend our efforts on remedies like fundamental
restructuring, which may be effective but could have strong
side effects. I believe that we should focus on revitalizing theorganization first, in order for the frontlines to challengethemselves, after thinking through the consumer expectations, and then maximize the impact of those initiatives. For
example, we are currently working to reform the sales force
mindset, given its close proximity to consumers, so that theinsights gathered on the field can be translated into actions ina timely manner. In 2020, we introduced a new evaluation
system to encourage such new mindset throughout the sales
force. The new system evaluates taking up new challenges,
which had no direct ties to evaluations previously. As a result,the system now evaluates and rewards employees whodevelop new ways to engage with consumers.

Entrusting and Encouraging Our
Frontline Strength
My belief in the power of the frontlines is rooted in experiences from my initial international assignment after the acquisition of Manchester Tobacco in 1992 and RJRI in 1999. While

During the integration of RJRI, I built on this experience.
The acquisition of RJRI was an investment of unprecedented scale for JT at the time and was a project with theCompany’s destiny on the line. The headquarters in Japan
carefully monitored progress to the point that it seemed
likely to fall into micromanagement, with people asking
things like, “How is this part getting along?,” “Shouldn’t
we use a Japanese company as the supplier?,” and“Wouldn’t it be better to use this kind of Japanese method?” This style made me think that if we forced Japanesemethods and headquarters directives on the acquiredcompany, who had their own locally cultivated experienceand expertise, we would end up destroying the value of thecompany. Based on my experience with Manchester
Tobacco, I had strong reservations about the micromanagement approach and worked desperately to persuade the JT
headquarters to change their stance. Thankfully, the top
management at the time took my concerns seriously. They
fully understood the danger and offered support, tellingthose at the JT headquarters to trust the locals and leave it
up to them. When directives that seemed unlikely tocontribute to business growth came from the departments
at headquarters, I didn’t outright refuse them, but I took mytime to lay out the case in a way my counterparts could
agree with and then put that into action proactively. As aresult, we were able to adopt the methods that the people
on the frontline thought were best, and thus maximize theirpower; I think this helped make the integration process govery smoothly.
One of our greatest strengths is the diverse workforce we
can rely on. During the integration with RJRI, we could nothave succeeded in a smooth integration without this diverse
workforce. The diversity has increased further to date, and,in terms of nationalities, we have people from more than
100 countries. The concept of diversity and inclusion reallyresonates with me; the company’s sustainable growth isconnected to respecting not just people’s nationality, genderand age, but also their experience, expertise and other
differences in backgrounds and values. However, if wecompare the JT Group to tobacco competitors simply interms of scale, we are around half the size of the top two

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companies individually. We must think about how to use ourlimited resources most effectively and dynamically. Morerecently, with the aim of building an organization that cancompete globally and optimally allocate resources across theGroup, we are consolidating the R&D, Corporate Strategy
and Business Development functions of JT and JTI. To
ensure that our diverse workforce can leverage thesestrengths without any friction, we will continue to focus on
improving the working environment and training personnel.

The Value We Offer to Consumers
Originally, we defined the JT Group Mission as to create,develop and nurture our brands to meet consumers’ needs
while understanding and respecting the diversity present insociety. Our value creation process reconfirms that providing
consumers with value unique to the JT Group is critical toseize growth opportunities over the mid- to long-term and tocreate a positive impact on the Company and society.
Social environment has been changing substantially, and it isinevitable that we will reach unexpected inflection points invarious aspects of business, not just in the RRP category. To
ensure we continue to create value without being disrupted
by such a change, we should return to our fundamentals,
which work for all our business activities; engaging with
consumers. We can then re-define the “value unique to the
JT Group” we are trying to deliver to consumers. At thesame time, we ask ourselves, “What is the unique valuethat the JT Group can provide for all the stakeholders in the
4S model?” and, “How can we evolve and enhance suchvalue?” We will continue to pursue the answers, and I
believe that this pursuit will lead us to our long-term vision.
Our consumer-centric approach, a sincere engagement withthe consumers above all, has permeated the Group in theform of our action principles, most notably the 4S model.
This should be the starting point for all our actions. Take thetobacco business, for example. In our increasingly stressful
modern society, we need to think deeply about what we, asa manufacturer, can produce that provides consumers with amoment to unwind and a moment of pleasure. Similarly, inthe pharmaceutical business, we are striving to create
original and innovative drugs for patients around the world inthe shortest time possible. In the processed food business,
we seek to provide safe and delicious food for consumers,
with the hope that they choose our products for their loved
ones. In any business, we should put consumers first andfocus on that. By doing so, I believe that the value we create
will become more sustainable.
In this Integrated Report, we lay out our value creation
process. By positioning this process at our foundation whileconsistently evolving it, we will continue to refine andenhance the value unique to the JT Group that we can offer
to all our stakeholders.
Japan Tobacco Inc. Integrated Report 2019 009

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATIONVALUE CREATION
012 Our History
014 Our Value Creation Process
016 The Source of Our Competitiveness018 Investing in People

010 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019011

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

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

1970 s and earlier

1980 s1990 s2000 s

2010s

Origins of the modern
Japanese tobacco industry

Privatizing and creating thebusiness foundation

Growing to become the third largest
global tobacco company through M&A

Strengthening our position asa global tobacco company by accelerating
our global expansion

Providing new value by addressing
the dynamic and diversifying needsof our consumers

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

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

By acquiring RJR Nabisco Inc.’s non-U.S. tobacco
business, JT secures the third position in termsof sales volume.

By acquiring Gallaher Group Plc, JT secures a newmarket platform and diverse brands, further expanding

JT strengthens the international tobacco businessthrough geographical expansion driven by M&A
and starts providing a wide range of product choices,
including RRP.

Consolidated net income(Billions of yen）

the international tobacco business.

The Three Strengths
Underpinned by Our History
and Accomplishments

A solid financial base
• Sustainable profit growthbacked by a combination oforganic growth and M&A• Ability to generate stable
cash flows underpinned byprofit growth

500.01949 Japan Tobacco and Salt

1985 Japan Tobacco Inc. is

Public Corporation is1992 JT acquires Manchester Tobacco Company

established.

2005 JT acquires CRES Neva Ltd. (Russia).

in Japan.

2006 JT acquires AD Duvanska Industrija Senta

founded.
400.0

2013 MILD SEVEN is renamed MEVIUS

Ltd. (U.K.).

1985 The Business Development
1957 HOPE (10) is launched

Division is established to

as Japan's firstpromote new businesses.

domestically produced

The division is later

filter cigarette.

reorganized into the food

1993 The Central Pharmaceutical Research Institute2014 JT acquires e-cigarette company,(Serbia).

is established.

Superior brand equity

Zandera Ltd. (U.K.).

2007 JT acquires Gallaher Group Plc (U.K.), taking
1998 JT acquires a majority stake in Torii

Hedges and more.

Pharmaceutical Co., Ltd.

• High brand equity throughcontinuous investment in
MEVIUS, our leading brand inJapan, as well as in Winston,Camel, LD and other global
brands acquired through M&A• Strong R&D and innovative
product development
capabilities

2015 JT acquires e-cigarette company,over the global brands of LD, Benson &Logic (U.S.).

and pharmaceutical

1969 Seven Stars is launched
300.0

businesses.

as Japan’s first
domestically produced

1988 JT is introduced as the

charcoal filter cigarette.

Company’s public

1999 JT acquires RJR Nabisco Inc.’s non-U.S.

2008 JT acquires a majority stake in Katokichi Co.,

tobacco business, taking over the global

Ltd. (currently TableMark Co., Ltd.) and Fuji

non-U.S. tobacco business frombrands of Winston and Camel.

Foods Corporation.

Reynolds American Inc. (U.S.).

1999 JT acquires Asahi Kasei Corporation’s foodcommunication name.

1977 MILD SEVEN is launched.

2016 JT acquires Natural American Spirit’s

2016 T-Vapor product Ploom TECH

business, including Asahi Foods and sevenis launched.

other subsidiaries.

2016 JT conducts tobacco business
2018

200.0

acquisitions, notably in the Philippines,
Indonesia, Russia and Bangladesh.

A diverse workforce

2019 T-Vapor products, Ploom TECH+ and• A corporate culture that respects
diversity and leverages it into thevalue creation process• A Group that maximizes thesynergies generated from

Ploom S, are launched.

100.0

10

1949

0

Japan Tobaccoand Salt Public
Corporation

1985

85

Japan Tobacco Inc.

012 Japan Tobacco Inc. Integrated Report 2019

90

95

00

10

11

diversity

15
Japan Tobacco Inc. Integrated Report 2019 013

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Our Value Creation Process
Our management principles pursue the 4S model. These principles guide our efforts to achieve our vision by enhancing
corporate value and creating social value. We provide a wide range of products and services while leveraging our threestrengths: a solid financial base, superior brand equity and a diverse workforce.

Our Core Capital

Our Business Activities and Growth Strategies

Our Products and Services

The Value We Create

Business Strategy

Tobacco BusinessCorporate Value

Achieve quality top-line growth
Strengthen cost competitiveness
Enhance business foundation

Expanding our product portfolio

Financial Capital
Sustainable profit growth and stable cash flows arebacked by a combination of organic growth and M&A.
•A
 djusted operating profit at constant FX ����������������¥600.8 billion(+0.9% year-on-year change)• Total equity..................................................................¥2,743.6 billion• FCF...................................................................................¥404.2 billion

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

to satisfy increasingly diverse
consumer needs and preferences

Strategies by Segment
International Tobacco p42 Japanese Domestic Tobacco
Pharmaceuticals p50 Processed Food p52

p46• Cigarettes• RRP– T-Vapor• Tobacco-Infused Vapor products• Heated Tobacco product– E-Vapor, etc.

• R&D expenditures..........................................................¥64.1 billion(Tobacco Science Research Center,
Central Pharmaceutical Research Institute, etc.)

Our corporate culture respects diverse values andgenerates synergy from a diverse workforce.
• Number of employees..............................................................61,975• Employee nationalities.........................................................Over 100• Certified as a Top Employer in..................................... 63 locations

We have global business operations and a wide
collaborative network spanning the value chain.
• Countries/regions where our products are sold................Over 130•C ountries where we operate...............................................Over 70• Directly contracted tobacco leaf growers andtobacco leaf merchants.................................................Over 86,500

Superior
brand equity

A diverse
workforce

Consumers

Employees

Society

to save people around the worldfrom disease• Three Key Therapeutic Areas– Metabolic diseases– Autoimmune/
inflammatory diseases– Viral infection

Manufacturing Capital

M ark etin g

Our optimal manufacturing system and facilities
ensure superior quality and productivity supported by
active capital investment.

Developing new, original drugs

nufSocial and Relationship Capital• Capital expenditures....................................................... ¥131.4 billion• Tobacco manufacturing bases ����������������������������������� 41 factories(29 countries)(all factories have achieved FSSC 22000 certification)

Natural Capital
The natural environment is vital to our sustainable growth.
• Stable climate conditions..........Investment in renewable energy:
Approx. US$21 million (2016–2019)•A
 bundant and quality water resources����� 10,448,035 m3 water (2019)intake volume; 95% of our factories have undergone
water risk assessment• Healthy ecosystems for floraand fauna..............................................Switch to renewable wood;
Planted 7 million trees

Processed FoodBusiness

Our Sustainability Strategy• Processed food manufacturing bases �������������������������31 factories

The JT Group’s Three Absolute Requirements
Respect for human rights
An improved social and environmental impact
Good governance and business standards
Strategic Focus Areas for Sustainability
Tobaccop26

Pharmaceuticals

p28

Processed Food

Mid to high single-digit annual
average growth of adjusted
operating profit at constant FX overthe mid- to long-term

Enhancing shareholder
returns in line with mid- tolong-term profit growth

PharmaceuticalBusiness
acturin g

A solidfinancial bases

Shareholders

Three Strengths Driving
Our Global Growth

Human Capital

S ale

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

D
R&

Ma

The 4S model

Pro
cu
re
m

t
en

Our Management
Principles• We own three of the top 10 highest selling cigarette brands
in the world.

Achieving consolidated
profit targets

p28

Social ValueContributing to the sustainable
development of society
through our business activities
We contribute most significantly tothe following nine SDGs byachieving specific targets in eachbusiness’s focus areas, such asproviding products and services thatexceed consumer expectations,investing in our people and building
a sustainable supply chain.

VISION
Continue toachieve global
growth byproviding diverse
value unique
to JT

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

• Frozen and ambient foods• Seasonings• Bakery products

Our measures to reduce our environmental impact and
the JT Group Environment Plan 2030 p72

Corporate governance and compliance support all of these processes
The external environment surrounding the JT Group
014 Japan Tobacco Inc. Integrated Report 2019

p74

p60
Japan Tobacco Inc. Integrated Report 2019 015

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATIONThe Source of Our CompetitivenessWe will continue to sustainably create value by
ensuring our business will leverage the three

Our Strengths

strengths that make global growth possible.

Overview of Our Core Strengths

A solidfinancial base

Our vision is to achieve global growth by providing value
unique to JT through pursuing the 4S model, which
embodies its management principles.
To realize this vision, we conduct business while leveraging
the strengths we have cultivated throughout our history andthrough our accomplishments: a solid financial base,superior brand equity and a diverse workforce. These arealso the source of our competitiveness. In addition, we
create social value that contributes to the sustainable
development of society and enhances our corporate value byoffering various products and services to meet the needs ofconsumers and society.

Foundation of Our Strengths
The JT Group was established in 1985 upon the privatizationof Japan Tobacco and Salt Public Corporation. Shortly
thereafter, the Japanese market was opened to foreign
tobacco manufacturers. Their aggressive actions, in addition
to a tobacco tax hike, dramatically changed the operating
environment. To top it off, the total demand for tobacco inJapan started to decline. The peak of demand was in thelatter half of the 1990s, with a subsequent decline due to afall in the adult population and an increase in health concerns
associated with smoking. This created an increasingly
severe business environment.

Kiyohide Hirowatari
Executive Vice President

016 Japan Tobacco Inc. Integrated Report 2019

Superior
brand equity

A diverse
workforce

Our Strengths at Present
The JT Group currently sells products in over 130 countries/
regions and continues to steadily grow as a global tobaccocompany.
Backed by our solid financial base, we proactively makebusiness investments and focus on geographic expansion in
emerging markets, while promoting RRP, which is our
future-focused growth driver. In addition, our GFBs (Winston,Camel, MEVIUS and LD) and other superior brands makegreat contributions to our sustainable growth, while wecontinuously enhance their brand equity.

Furthermore, we are striving to maximize Group-wide
management synergies by instilling a common philosophy offully leveraging our diverse workforce, which represents
over 100 different nationalities and promoting collaboration
within this diverse workforce. We are keenly aware that all
the Company’s actions and achievements are born from ourworkforce. We are working to promote greater diversity,
including in work styles and are strengthening our support
for the development of each and every employee. For details,
please refer to the next page.

Our Future Strengths
We are aware that due to global economic trends, foreignexchange rate risks and international geopolitical risks, there
has been a steady increase in uncertainty surrounding ourbusiness environment.
To maintain our growth amid such a challenging environment, we must adapt to the various market trends andaddress our consumers’ diversifying needs. We also need toreform our ways of thinking to effect change without being
confined to our past successes. By fostering this mindset ineach employee and supporting their ambitions, we willcontinue to accelerate our transformation into a company
that initiates change and drives evolution. We regard this
rapidly changing business environment as an opportunity forfurther growth. We will continue our sustainable value creation
by managing our global business appropriately and withintegrity, while better leveraging the three strengths we’ve
cultivated to date.

Perceiving these market changes as opportunities for
growth, we strengthened our marketing capabilities and costcompetitiveness in the Japanese domestic tobacco
business; expanded our business portfolio by entering thepharmaceutical and processed food businesses; and worked
to further expand globally. Through these efforts, we strove
to reinforce our business foundation to ensure sustainablegrowth. Specifically, with the acquisition of RJR Nabisco
Inc.’s non-U.S. tobacco business in 1999 and Gallaher GroupPlc in 2007, we formed the foundation of our current
overseas expansion and gained new market platforms; awide variety of brands; and a diverse workforce that enabled
the growth of these businesses. As a result, the international tobacco business became a profit growth driver alongside
our Japanese domestic tobacco business, which had long
been the core of profit generation. This enabled us toestablish a financial foundation capable of generating stable
cash flows.

Japan Tobacco Inc. Integrated Report 2019 017

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Investing in People
Our sustainability journey isdependent on the skills and spiritof our employees and people inthe communities impacted by ourbusiness. We will create positive
impacts through our business.

The JT Group Human Resources Management Philosophy
We believe that highly skilled and talented people form thefoundation of a company’s success and contribute to realsustainable growth. In light of this, the JT Group proactively
takes steps to secure long-term engagement andemployee satisfaction.

We welcomed a new Vice President of Diversity andInclusion in February 2019 in our international tobacco
business; and established a new strategy consisting of threepillars: Gender Equality, New Ways of Working and LGBT+
Inclusion. A Diversity and Inclusion Advisory Council at
Board level in our international tobacco businessdemonstrates senior management’s support for thisinclusive and forward-looking approach. Senior leadershiphave taken a special training on identifying the obstacles
preventing talented women from advancing their careers.
Another project to address this was a reciprocal mentoring
program that matched JTI top management with more junioremployees (including women, men and LGBT+ employees).
The aim was to enhance the top management’s
understanding of some of the challenges facing female

For example, in 2018 and 2019, our international tobacco
business ran a customized leadership development program
called “LIGHT UP” in partnership with INSEAD businessschool. A total of 32 employees from around the globe wereselected to participate in this program.
Reflecting our commitment to talent development, we often
recruit existing employees to fill open positions. In 2019,93.7% of employees were internally promoted.

AND RESPECTFULLYENSURE
TRANSPARENCY OFPROVIDE ALL JT
GROUP EMPLOYEESRULES AND
STANDARDS

WITH GROWTHOPPORTUNITIESAnother priority for us is ensuring that we are chosen by thebest talent – particularly from Generation Z,* as this grouprepresents a growing proportion of our new hires and theirunique skills will help drive innovation in the JT Group.
Consequently, our international tobacco business launched
the first global internship competition “Make It Bright” in2019. The program reached nine million students globallyand more than 5,000 registered. Finalists from 17 countries
pitched their ideas for our business and the winning teamfrom Ukraine will receive a six-month paid global internshipin 2020.

To evaluate the effectiveness of our programs, determine
the level of employee engagement and identify areas for
improvement, we carry out an Employee Engagement
Survey every three years* across the Group.
Moreover, other surveys are conducted at a local or
departmental level, so that we can always be mindful of

018 Japan Tobacco Inc. Integrated Report 2019

Employer of
Choice• Workshops on LGBT+ Inclusion in Asia-Pacific andEurope with the Vice President of Diversity and Inclusionand various experts.
• Our international tobacco business introduced a new policy,
allowing employees to work remotely four days a month.
• JT has been certified as a childcare-supporting company(in Japanese) by the Japanese Ministry of Health, Labor andWelfare and achieved the highest-ranking Gold status in the
PRIDE index for the fourth consecutive year.

employees’ concerns and quickly implement relevantmeasures. For instance, in 2019, we introduced a newscheme in Japan, allowing departments to carry out
surveys at any time. A variety of options are available under
the new scheme, including a three-minute survey forgathering rapid feedback.
* Before 2019, our Japanese operations conducted the survey every year.

Aspirational Goal

TargetProgress

We will be the employer ofchoice by investing in people.

We will be a certified
employer of choice every
year in at least 60 locations
by focusing on talentmanagement, rewards,
and empowerment.

We were certified as a Top
Employer in 63 locations, anincrease of 5 locations from theprior year. We were also
awarded with local certificationsin 8 locations.

The JT Group Community Investment
We believe that we can contribute to the sustainable growth of societies by helping to make communities more inclusive
and resilient.
Aspirational Goal

* Representatives of Generation Z aged 18+, born between the mid-1990s and 2001.

Community
Investment

Diversity and Inclusion
Establishing a diverse and inclusive workplace is a toppriority for us, as we would like all of our employees to enjoy
their work and the opportunities this brings to perform to thebest of their abilities.

Other key initiatives and achievements in 2019:

Employee Engagement
TREAT ALLEMPLOYEES FAIRLY

Attracting and Developing Talent
Today’s business environment is challenging and requires allof our employees to work together and acquire advanced
skills. Various programs take place globally and locally andwe constantly invest in our employees to ensure theyflourish in their careers.

employees, while providing the junior employees with avaluable career mentoring opportunity.

We will be the employer ofchoice by investing in people.

TargetProgress

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

Between 2015 and 2019, weinvested US$300 million in ourcommunities and employees
volunteered 119,349 hours oncompany time.

Learn more about our community investment activities on page 71.

We also believe that diversity and inclusion create a rich mix
of viewpoints and perspectives, which can inspire newideas, offer solutions to complex issues and drive ourbusiness forward.

Tobacco Business Sustainability
Four Strategic Focus Areas• Investing in People• Exceeding Expectations with Products and Services - RRP• Building Sustainable Supply Chains• Regulatory Environment and Illegal Trade

Note: “Investing in People” is also a strategic focus area for our pharmaceutical and processed food businesses.
Japan Tobacco Inc. Integrated Report 2019 019

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY

Our Health and Safety Performance as a GroupThe JT Group Health and Safety

2015

2016

2017

2018

2019

Employees

1

2

0

1

1

Contractors

1(only JTI)

1

2

0

0

Lost Time Injury Rate(per 200,000 working hours)

Employees

0.34

0.39

0.37

0.24

0.24

Occupational Illness Rate*1(per million working hours)

Employees

0

0

0.08

0.02

0.01

% of Cigarette and Tobacco-Related
Factories Certified to OHSAS 18001

78.9%

77.8%

74.4%

76.9%

79.5%

Number of Vehicle Accidents*2

1,122

1,151

66

85

71

Vehicle Accident Frequency Rate*2(excludes property damage,accidents per million kilometers)

4.84

3.87

0.23

0.21

0.16

Our Approach
Our employees have the right to be protected from workrelated injuries and illnesses, and it is our responsibility toprovide a safe and healthy work environment. We align ourhealth and safety standards with OHSAS 18001 and always
meet or exceed legal requirements.

When our standards are stricter than local laws, we require
our local offices to comply with our standards. The scope of
our standards extends beyond our employees, covering
contractors and visitors to our operations.

Three Pillars of Safety
Our safety programs are based on three fundamental pillars:safe workplaces, safety competence and a Group-wide
culture where the safety of our people always comes first.
The highest risks across the JT Group are driving vehicles,
riding motorcycles and working with machinery, as well as
slips, trips and falls.
To mitigate these risks and prevent injuries, we conduct risk
assessments throughout the whole supply chain. This helps
us to identify hazards, implement appropriate measures andprotect our employees. We also focus on raising awarenessamong employees and thoroughly embedding our safety
culture in our day-to-day operations.
In some countries where infrastructure is poor and traffic
weakly regulated, our people are more at risk of being
involved in road traffic accidents. Given the number ofmergers and acquisitions in our international tobacco
business, addressing this challenge is critical to protecting
our employees, contractors and local communities andensuring our business continuity.
We have been implementing a motorcycle safety program incountries with a high vehicle accident rate (Zambia, Malawi
and Tanzania) since 2016, and we have since achieved a
50% reduction in work-related injuries. Furthermore, in 2019
we rolled out a new driver safety policy and implementation
guidelines across our international tobacco business,requiring all local offices to conduct a risk assessment to
identify high-risk drivers and to send periodic progress
reports and action plans to our headquarters in Geneva.
Given the growing number of female employees, the policy
now also includes maternity protection. In the next three
years, 30,000 employees will take a driver training course.

Towards a Better Workplace
We care deeply about employee well-being because wewant our employees to feel motivated every day. We run
a variety of well-being programs across the Group, suchas ergonomic assessments and ensuring general
occupational hygiene.
To design these programs, we gather well-being data fromour local offices. In 2018, we expanded our data scope byintroducing new rules requiring all local offices to report theiroccupational health cases to our headquarters. This willallow us to understand our global risks and develop a
consistent approach to them while strengthening existing
protection measures.
Local managers are responsible for investigating reported
issues and identifying the causes. If the issues are attributed
to the work or workplace, we take appropriate measures

FINANCIAL INFORMATION

immediately to protect employees’ well-being andprevent recurrences.
In Japan, we focus on mental health and preventing
lifestyle-related diseases such as diabetes and we
encourage employees to attend stress management
sessions and individual consultations with doctors. These
programs have had a positive impact on employee
productivity and the absenteeism rate in Japan, which has
recently been below 1%.
We are pleased to announce that JT was named as a
“White 500” company for the fourth year running. Thisaward is presented by Japan’s Ministry of Economy, Tradeand Industry. It recognizes large enterprises that are
making outstanding progress towards better well-being
among their employees.

No. of Fatalities

Other Important KPIs

Notes: This year, we recalculated all the historical data. Concretely, we removed some data from newly acquired business considering the fact that newly acquired business needs 18 months
to integrate the JT Group Health and Safety Standards.
We revised our KPIs this year and we no longer report the number of lost time incidents, and the lost time incidents rate.
We regret that one employee and two people in our communities died as a result of work accidents in 2019. We try to learn from every accident and remain committed to achieving
zero fatalities.
1* Data scope: 2015: only JT, 2016 and 2017: JT and Japanese domestic Group companies, from 2018: The entire JT Group. Learn more about our data scopes at JT.com.
2* The numbers of vehicle accidents and the vehicle accident frequency rates in 2015 and 2016 contain property damages because the data is not available in our international tobacco
business. The data in 2015 covers only our international tobacco business and from 2016, we cover JT and JTI.

Health and Safety Performance in Our Tobacco Business

Zero Injuries

Aspirational Goal

TargetProgress

We will be the employer ofchoice 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 31.2% from 0.72 in2015 to 0.49 in 2019.

* Recordable injury rate = Recordable injuries/200,000 hours worked. Some data from newly acquired business have been excluded, as newly acquired business needs 18 months to integrate
the JT Group Health and Safety Standards.

Recordable Injury Rate(per 200,000 working hours)

Employees

2015

2016

2017

2018

2019

0.72

0.64

0.67

0.50

0.49

Learn more about our health and safety performance at JT.com.

Tobacco Business Sustainability
Four Strategic Focus Areas• Investing in People• Exceeding Expectations with Products and Services - RRP• Building Sustainable Supply Chains• Regulatory Environment and Illegal Trade

Note: “Investing in People” is also a strategic focus area for our pharmaceutical and processed food businesses.
020 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 021

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATIONThe JT Group’s Material Issues

STRATEGY
023 The JT Group’s Material Issues
024 Sustainability Strategy Overview
030 Interview with Our CSO
032 Business Strategy/Business Review– Tobacco Business

To help the JT Group to grow and to build a sustainable future
as a member of the society in which we operate, we haveidentified a list of high-priority material issues. Our materiality
is based on the JT Group’s management principle, the 4S
model. In 2015, we performed a materiality assessment
covering the entire Group for the first time, selecting material
issues with a medium or high level of importance for the JT
Group and for our external stakeholders.
To identify our material issues, we began with a media andpeer review, which generated a list of sustainability topics• International Tobacco Businessrelevant to the Group. In addition to interviews with employees, our CEO and other members of top management, we
also held interviews with 17 external stakeholders, including
suppliers, investors, labor unions, NGOs and industry associations. Our top management then approved the results of themateriality assessment during a special workshop.
This process resulted in a final list of 22 material issues. We
then divided these into two categories according to theirlevel of importance to the JT Group and our external
stakeholders: medium or high.

The JT Group’s Materiality• Japanese Domestic Tobacco Business– Pharmaceutical Business– Processed Food BusinessHigh

054 Message from the CFO

060 Risk Factors
064 Regulation and Other Relevant Laws

Laws andregulations

Product safety
and productresponsibility

Supply chain
management

Product
innovation andintellectual
property

Environment

Respecting
human rights

Environmental
impacts ofproducts

Information
security

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

Medium

067 Litigation

Importance to external stakeholders

056 Key Performance Indicators

Corporate
governanceandtransparency

MediumHigh

Importance to the JT Group

Value chain boundaries

Our supply chain

Our Company

Since our first materiality assessment, we have noted
increasing public concern about the environment. We share
this concern and have therefore repositioned “Environment”
from Medium-Medium to High-High in the above matrix.
We will continue to build on our effort to reduce ourenvironmental impact on the planet.

022 Japan Tobacco Inc. Integrated Report 2019

Our customers and consumers

Please refer to pages 72-73 for more details.

Looking ahead, we plan to carry out periodic materiality
assessments to ensure that our priorities are up-to-dateand consistent with the current needs.

Japan Tobacco Inc. Integrated Report 2019 023

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Sustainability Strategy Overview
Pharmaceutical Business Sustainability Strategy
The JT Group's sustainability strategy is formulated based on the 4S model, our management
principles, and encompasses our materiality
analyses. It encourages us to look beyond ourusual planning cycle period and think about thelongevity of our business, the future of our planet
and the society we live in. The foundations of oursustainability strategy, which apply across theGroup, are our “three absolute requirements forsustainability.”

Throughout 2019, our pharmaceutical business held
numerous discussions on sustainability and set out threefocus areas. The mission of our pharmaceutical business is
to create innovative, original drugs to support patients in the
shortest time possible. In view of this mission, we haveselected “products and services” and “product safety

and responsibility” as our focus areas. As talentdevelopment of our employees is essential to first-in-classdrug discovery, we have also selected “people” as our
focus area. In total, we have set five specific targets forthese pharmaceutical business focus areas.

Focus Areas

Aspirational Goals

Products and Services

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

Respect for human rights

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

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

Product Safety and Responsibility

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

The JT Group’s Three Absolute Requirements for Sustainability

p70

An improved social and environmental impact
We are committed to protecting the environment and making a positive difference wherever
we operate.
p71-73

Good governance and business standards
We are committed to promoting transparent, fair and timely decision making that carefully
considers the respective interests of consumers, shareholders, employees and the wider society.
p74-89Processed Food Business Sustainability Strategy
Our mission in the processed food business is to deliversafe, high-quality products to consumers. One of the focus
areas that we have selected is “products and services.”
We aim to continuously deliver products with commitment
to quality and technology, in line with consumer needs. In
the processed food business also, we will place emphasis
on “people.” We will strive to ensure workplace safety and
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 in people who can contribute to enhancing
corporate value.

Supply Chain

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

Tobacco Business Sustainability Strategy
We have identified priority areas for each business segment. The tobacco business, our core business, has selected thefollowing four focus areas with its aspirational goals. In addition, we have set 11 specific targets.
Focus Areas

Aspirational Goals

Products and Services

We will be a total tobacco company offering consumers an evengreater choice of products by focusing on quality, innovation, andreduced-risk potential.

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

Supply Chain

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

Regulatory Environment and Illegal Trade

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

024 Japan Tobacco Inc. Integrated Report 2019

invest in our people. Our third focus area is the ”supply
chain.” We will continue to deliver safe products to ourconsumers by working on reducing social and environmental
impacts, to ensure that our supply chain is sustainable overthe mid- to long-term. In total, there are eight targets set
for the focus areas in the processed food business.

Contribution to the SDGs
The JT Group supports the Sustainable Development Goals(SDGs) adopted by the United Nations. Through our business activities, the JT Group will contribute to the SDGs
related to our business and its environment. We havemapped related SDGs against our initiatives for sustainablebusiness and identified the nine SDGs to which our businesscan best contribute.
Please refer to pages 26-29 for more details.

Japan Tobacco Inc. Integrated Report 2019 025

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Sustainability Strategy of Tobacco Business
4 Strategic Focus Areas

Aspirational Goals

Targets*1

Progress*2

Products and Services

We will be a total tobaccocompany offering consumers
an even greater choice of
products by focusing on
quality, innovation, andreduced-risk potential.

Reduced-Risk Products
Reduced-Risk Products (RRP) offer real benefits to consumers and society. Our
responsibility as a manufacturer is to continuously develop and launch RRP thatmeet consumer expectations and to provide information on them. We will lead inproviding the widest range of consumer choice in the RRP category.

At the end of 2019, our Reduced-Risk Product portfolio was present in 28
countries, with a choice of three tobacco vapor offerings (T-Vapor) and five typesof e-cigarettes (E-Vapor).

We will be the employerof choice by investingin people.

Zero Injuries
In line with our vision of zero workplace injuries, we will reduce injury rates by
25% by 2023 and 50% by 2030. (Baseline year: 2015).

Recordable injury rate*3 declined 31.2% from 0.72 in 2015 to 0.49 in 2019.

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

Since 2015, we have invested US$300 million in our communities andemployees volunteered 119,349 hours on company time.

Employer of Choice
We will be a certified employer of choice every year in at least 60 locations byfocusing on talent management, rewards, and empowerment.

We were certified as a Top Employer in 63 locations, an increase of 5 locations
from the prior year. We were also awarded with local certifications in 8 locations.

Greenhouse Gas Emissions
We will reduce greenhouse gas emissions from our own operations by 35% andfrom our direct leaf supply chain by 40%, between 2015 and 2030.

Since 2015, we have reduced greenhouse gas emissions from our own
operations by 17.4%. Greenhouse gas emissions from our direct leaf supply
chain increased by 17.9%.*4

Water and Waste
We will reduce water withdrawal by 15% and waste by 20%, in relation to ourown operations, between 2015 and 2030.

Since 2015, we have reduced water withdrawal by 9.7% and waste by 6.3%,
in relations to our own operations.

Forestry
We will replace all wood from natural forests used in the tobacco curing processof our directly contracted growers with renewable fuel sources by 2030.

Based on our 2019 sustainable tree planting activities in Tanzania, Zambia andBrazil, we estimate that we are on a path to achieve 59% renewable wood
sourcing by 2026.

Agricultural Labor Practices
We will implement our Agricultural Labor Practices (ALP) program in all sourcing
countries by 2025.

[58%*5 of our directly contracted growers and 98% of our leaf merchants were covered by ALP; leaf
merchants data come from reporting entities only and excluding India and China.]

PeopleSupply Chain

We will reduce environmental and social risks, andenable transparent andresponsible practices acrossour supply chain.

SDGs

p36

p18

p38

In 2019, 81% of our supplying entities reported against ALP.

74% of our volumes were covered by ALP.

Regulatory Environment
and Illegal Trade

We will ensure the Company isincluded in policymaking
leading to fair and balanced
regulation, and enhance ourcooperation with governments
to combat illegal trade.

Supplier Screening
We will screen all key suppliers against environmental, social, and governancecriteria by 2023.

At the end of 2019, 67% of our key suppliers were screened against ESG criteria.*6

Engagement
We will always protect our ability to participate in public policy debate with theaim to achieve balanced regulation that meets societal concern and supportsbusiness growth.

During 2019, we engaged openly and transparently in public policy debate andmade our views known to regulators, NGOs and other relevant stakeholders in
the countries where we operate.

p41

Illegal Trade
We will engage in dialogue with law enforcement agencies, with the goal toexchange intelligence regarding illegal tobacco products, in order to support the
reduction of illegal tobacco products.

In 2019, our Anti-Illicit Trade team provided 1,129 intelligence reports to law
enforcement agencies, and advised 2,687 law enforcement officers on
counterfeit recognition.

p40*1 The above are targets for our tobacco business, except for Community Investment which is a Group-wide target.
*2 Progress shown above are 2019 results.
*3 Recordable injury rate = Recordable injuries/200,000 hours worked. Some data from newly acquired business have been excluded, as newly acquired businessneeds 18 months to integrate the JT Group Health and Safety Standards.

026 Japan Tobacco Inc. Integrated Report 2019*4 The main reason for the increase in GHG emissions from our direct leaf supply chain is the increased volume sourced from Zambia and Tanzania, both of which use woodfor curing that currently is predominantly non-renewable. We expect that the impact of initiatives to reduce leaf-related emissions will be seen from 2022 onwards, withcuring barn upgrades and the increase in proportion of renewable wood used for curing in Zambia and Tanzania.
*5 The decrease from 96% in 2018 to 58% in 2019 is due to new acquisitions.
*6 Results for our international tobacco business.

Japan Tobacco Inc. Integrated Report 2019 027

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Sustainability Strategy of Pharmaceutical Business
Strategic Focus Areas

Aspirational Goals

Targets

Products and Services

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

Engaging in R&D Activities
We will continue our efforts and investments into research and development activities of innovative drugs in specific therapeutic areas.

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

Fostering Ethical AwarenessIn order to develop talent and foster employees’ ethical awareness and sense of responsibility towards saving patients, we will continue to learn more about
patients’ needs by engaging in dialogue with medical experts through our internal educational activity “For the Patients Project.”

SDGs

Community Investment*1
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.

Product Safety andResponsibility

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

Responsible Promotion of Drugs
We will conduct, among others, regular training programs for our medical representatives in order to provide medical professionals with appropriate information
on pharmaceutical products.
Greenhouse Gas Emissions
We will reduce greenhouse gas emissions from our own operations by 31%, between 2015 and 2030.

Sustainability Strategy of Processed Food Business
Strategic Focus Areas

Aspirational Goals

Targets

Products and Services

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

Improvement of Quality of LifeWe will develop and provide high-value-added products with a focus on “health,” “convenience,” and “diversity,” in response to diverse consumer needs.

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

Enhance Job Satisfaction
We will further improve job satisfaction by promoting talent development in a secure and motivating workplace.

SDGs

Zero Injuries
In line with our vision of zero workplace injuries, we will reduce injury rates by 25% by 2025 and 50% by 2030. (Baseline year: 2018)

Community Investment*1
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.

Supply Chain

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

Foster a Safe and Reliable Corporate Brand
We will promote food safety management in compliance with global food safety standards to develop food safety. We will also enhance the way wecommunicate with customers so that they retain trust in our food quality.
Promote Use of Environmentally Friendly Packaging Materials
We will promote the use of renewable plant-based resources and reduce our use of non-renewable resources, to reduce the environmental impact of our products.

Waste
We will reduce the amount of waste associated with our Japanese domestic offices by an average of 1% per year. (Intensity target*2).

Greenhouse Gas Emissions
We will reduce greenhouse gas emissions from our own operations by 28%, between 2015 and 2030.

*1 Target for Community Investment is a Group-wide target.
*2 Amount of waste generation / Amount of production.
028 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 029

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ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATIONInterview with Our CSO
Q. How do you pursue sustainability management inyour organization?
In 2015, we identified 22 material issues relevant to the JT
Group and our stakeholders to achieve sustainable growth.
In 2016, our Corporate Governance Policy stipulated that“the Board of Directors, based on the understanding thatmeasures towards domestic and foreign issues onsustainability are an essential part of risk management, shallreceive reports as necessary through Members of the Boardin charge of sustainability and proactively work on such
issues, such as by holding discussions.” As the policy
demonstrates, pursuing sustainability is at the heart ofwhat we do and it is one of the key management issues for
the Group.

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

Q. Tell us about your role as the Chief Sustainability
Officer (CSO).
Contributing to the sustainable development of society isessential for the JT Group to achieve sustainable growth andto meet the needs of our four key stakeholder groups underour 4S model. As a director of the company and CSO, it is
my role to look to the future and pursue sustainability
management across our Group. With a mid- to long-term
perspective, we aim to achieve sustainable growth for thesociety in which we operate and for the JT Group, so that
we can respond to the expectations of our stakeholders.
030 Japan Tobacco Inc. Integrated Report 2019its stable and sustainable procurement is crucial to supply
chain management. We will continue to implement
Agricultural Labor Practices (ALP), our core program for
managing the leaf tobacco supply chain and responding tosocietal issues.

Corporate governance is one of the most important management issues. Governance is a mechanism for ensuring thattransparent, fair, prompt and resolute decision making is carriedout in line with the 4S model, our management principles. Goingforward, we will keep our governance under review forcontinuous improvement to ensure it is fit for the purpose.

The tobacco industry is highly regulated. The restrictions
imposed through regulation are increasing every year and it
is an area of concern to our stakeholders. We will protect ourability to participate in public policy debates and continue toengage in dialogue. Illegal trade not only undermines ourbusiness, but it can cause serious harm to our consumers
and society. We will continue to engage with law
enforcement agencies, exchanging intelligence about illegal
tobacco products to help reduce illegal trade.

Q. Can you tell us about the sustainability strategy
for each of your businesses?

Q. How are you raising awareness of sustainability
within the Group?

Each business has set out its own “focus areas,” with specifictargets. Back in 2018, our tobacco business had four focus
areas and a total of 11 targets. By pursuing such targets, we
believe we can support and contribute to achieving theUnited Nations’ Sustainable Development Goals. I’m pleased
to say this is the first time we are reporting on progress
toward achieving the 11 targets of our tobacco business.

We are working to raise each and every employee’s
awareness of sustainability through a variety of initiatives.
These include communications from top management toemployees, seminars on ESG (environmental, social andgovernance) issues, workshops to enhance employees’
understanding of the United Nations’ Sustainable
Development Goals and briefings at our operational sites.

Q. Tell us about your sustainability issues
and challenges.

During 2019, our pharmaceutical and processed foodbusinesses set out their own sustainability strategies, focus
areas and targets. Our sustainability strategy for the entire
Group is now in place.

The three absolute requirements for the Group are“respect for human rights,” “an improved social andenvironmental impact” and “good governance andbusiness standards.”

In our international tobacco business, our SustainabilityAwards celebrate outstanding sustainability projects
undertaken by our own employees. Through these
initiatives, we encourage our employees to think about andact on sustainability.

Q. Can you give us some insights into thesustainability strategy for your tobacco business?

In 2019, to build on our past sustainability initiatives andcontinue evolving, we re-organized our organizational
structure and established a sustainability management
division at JT headquarters and appointed a Senior Vice
President for sustainability. We also set out a sustainability
strategy encompassing the whole Group. We are now
supporting Group businesses to implement their respective
sustainability strategies. By doing so, we are engaged inenvironmental management, risk management, supply chain
management, initiatives for respecting human rights andcommunity investment on a day-to-day basis.

Kazuhito Yamashita

To improve our social impact, we prioritize three areas:“reducing inequalities,” “improving community resiliencein disaster-prone areas” and “protecting the environment.”
What we would like to see is inclusiveness both in society
as a whole and indeed in all the communities we operate
in. We also provide employees with opportunities forvolunteering so that they can proactively contribute to
local communities.

The JT Group operates in more than 130 countries/regions.
In some of these markets, human rights are at
risk – and respect for human rights is a crucial aspect of theGroup’s sustainability. We set out the JT Group Human
Rights Policy in 2016. Since then, have been training our
employees on human rights through regular e-learning
courses. We perform human rights due diligence for ouroperations globally. We work to ensure that human rights arerespected not only within our own Group, but also throughout our value chain.
As we all are increasingly concerned about the effects ofclimate change, corporations are working on improving
environmental impact. We have set out the JT Group
Environment Plan 2030 to address these issues within ourGroup and throughout our value chain. We are working on
reducing GHG emissions, shifting to renewable energy,
managing water risks, conserving forest resources andfurther reducing the environmental impact of waste.

E-cigarettes and tobacco vapor products are gaining
popularity as alternatives to traditional combustible products.
With the surge of a new category of Reduced-Risk Products(RRP), the tobacco industry is undergoing major change. We
have selected Products and Services as one of our focus
areas. Understanding what consumers are looking for isessential. We would like to offer our customers an evengreater choice of products by focusing on quality, innovation
and reduced risk potential.

Q. Tell us about your aspirations for the future.
As we work day in, day out to grow our business, my dreamis for everyone in our Group to think about sustainability andto feel that they are contributing to improving the society weare all part of. I believe this is the direction we should beheading in – I hope I can be proactive in leading the way.

For the Group to achieve sustainable growth, the skills andcommitment of our employees are vital. The communities
we operate in, and the people who live in them, are important stakeholders. For this reason, we focus on investing in
People and our tobacco, pharmaceutical and processedfood businesses have each chosen this topic as one of theirfocus areas.
Supply chain management is a top priority for our business.
Leaf tobacco is the most important raw material for us, soJapan Tobacco Inc. Integrated Report 2019 031

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ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATIONBusiness Strategy/Business Review
Tobacco Business

The tobacco business remains our core and is expected to continue driving our sustainable profit growth.

Business Strategy/Business Review– Tobacco Business• International Tobacco Business

The Tobacco Business Strategy• Japanese Domestic Tobacco BusinessTobacco business: Our core business and the Group’s
profit growth driver– Mid to high single digit profit growth for the mid- to long-term• Japanese Domestic Tobacco– Strengthen top-line in both RRP and cigarettes• International Tobacco– Sustainable profit growth in existing markets– Geographic expansion through M&A and organic initiatives– Steady progression in RRP– Pharmaceutical Business– Processed Food Business

The tobacco business has been focusing on sustainable profit
growth, consistently playing a pivotal role in JT Group’s profit
growth. Its role continues to be of paramount importance forthe achievement of mid to high single-digit adjusted operating
profit growth at constant currency, which is our main target.
In light of the evolving operating environment, we have beenenhancing our focus on the sustainability of the profit growth
generated by the tobacco business. Additionally, in order tostrengthen and speed up the decision-making process, wehave streamlined the management structure, as demonstrated by our Group CEO, Masamichi Terabatake, directly heading
the tobacco business.
We believe that the consumer-centric mindset is key toachieving our business targets and, therefore, we continue tofoster this mindset across the organization. By constantly
reviewing and adapting our mindset and investment initiatives, we will continue to strengthen our business operations
in both cigarettes and RRP. In particular, RRP is relatively a
new business, where we cannot rely solely on the strategies
deployed successfully in cigarettes. In order to overcome theintense competition in this important category, we are
optimizing resource allocations across the Group; enhancing
collaboration between domestic and international divisions
and maximizing synergies and growth opportunities on a
global basis. Following the consolidation of the R&D functionsin 2019, we have significantly streamlined corporate strategy,
business development and RRP reporting lines in 2020. We
are also working towards integrating the quality assurancefunctions, whose role will be to ensure product safety and reliability. In the three-year time set for the Business Plan 2020,
cigarettes will continue to play a major role in delivering mid tohigh single digit profit growth in the overall tobacco business.

RRP comprised of Ploom TECH and Ploom TECH+ representing the low-temperature heating category and Ploom S
representing the high-temperature category. Generating
stable and sustainable profit growth through fully utilizingthese strong equity brands in both cigarettes and RRP is the
key to the tobacco business growth. While increasing profit
in Japan in the short-term is challenging, we aim to return toprofit growth by strengthening our top-line initiatives in bothcigarettes and RRP. Please refer to the "Japanese domestic
tobacco business" for further details.
In the international tobacco business, we seek to continue
strong bottom-line growth through a clear strategic agenda
centered on sustainable profit growth in existing markets;geographic expansion through M&A and organic initiatives;and steady progression in RRP. In existing markets, we will
focus on maximizing the equity of our Global Flagship Brands(Winston, Camel, MEVIUS and LD) in order to fuel our market
share momentum and seize pricing opportunities. Concerning
geographic expansion, we will focus our organic investments
on further strengthening our talent base, brand portfolio andbusiness infrastructure. At the same time, we will remain alert
to valuable M&A opportunities in markets that matter. In RRP,
Logic is strengthening its presence in the E-Vapor segment,
fueled by the ongoing progression of Compact in many
geographies. As part of our continuous development process,we will also commercialize a Heated Tobacco product inselected international markets this year. The device will beendorsed by Ploom, while related consumables will bebranded according to market and consumer preferences.
Please refer to the “international tobacco business” forfurther details.

In the Japanese domestic tobacco business, we have astrong and wide product portfolio in cigarettes, primarily
comprised of the key brands of MEVIUS, Seven Stars,
Winston, Natural American Spirit and Camel, as well as in
032 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 033

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATIONThis 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.

Tobacco Industry
The Tobacco Industry is evolving and there are many types oftobacco products available in this marketplace today. Cigarettes remain the most popular choice for consumers, while
Fine Cut, cigars, pipe tobacco, smokeless tobacco, waterpipe
tobacco and kretek continue to draw consumers’ interest.
In addition, the RRP category has become increasingly popular.
In particular, the “E-Vapor” market size has been expanding at afast rate, notably in the U.S. and across Europe. The products
vaporize liquid solutions, often containing nicotine, and thegenerated vapor is then inhaled by the user.
As E-Vapor products do not use tobacco leaf, they have notusually been regulated or taxed as tobacco containing
products. However, regulation and taxation of the products
have changed in some countries in accordance with the
expansion of this category.
Another type of RRP, referred to as “T-Vapor” or “Tobacco
Vapor,” has been growing steadily, particularly in Japan.
These products are taxed and regulated as tobacco products
in principle because they use tobacco leaves. We expect
further innovation and product offerings will drive growth in
T-Vapor, especially as market players take keen interest in
this new category.
In addition to these two types, the growth of smokelesstobacco has accelerated in markets with a long history ofthese products, particularly in Europe and the U.S. With
smokeless tobacco, users can enjoy the characteristic
tobacco taste and flavor directly through their nose or mouth.
Approximately 5.3 trillion cigarettes*1 are consumed annuallyaround the world, reaching global sales of approximately
US$700 billion.*1 China is by far the largest market, accounting for over 40% of global consumption, but is almost
exclusively operated by a state monopoly. Indonesia, the U.S.,
Russia and Japan are the following four largest markets.*1
In general, the market dynamics of cigarettes are distinctively
different between mature and emerging markets.
In mature markets, industry volume tends to decline andthese movements can reflect various factors, such as limited
economic growth, tax increases, tightening regulations anddemographic changes among others. In addition, down-trading is prevalent in these markets, as limited growth ofdisposable income inclines consumers to seek more value incomparatively affordable tobacco products.

Overall, the global industry volume*1 of cigarettes has been
decreasing in recent years, although at a sustainable pace.
However, more importantly, we expect industry value tocontinue growing in the 2020-2022 period, with price increases more than compensating for the volume contraction.
These trends – decline in volume and increase in value – areexpected to continue in the upcoming three years. On theother hand, the RRP industry will grow further as we anticipate its global*2 net sales value to reach approximately US$40
billion in 2022.
Excluding the Chinese monopoly, there are four major global
tobacco players: Philip Morris International Inc., British
American Tobacco Plc., Japan Tobacco Inc. and Imperial
Brands Plc. In terms of RRP, besides these four companies,
JUUL Labs, Inc. (E-Vapor) and Swedish Match AB (smokelesstobacco) also have a meaningful presence.
*1 According to 2018 data
*2 Excludes China

Regulations

Taxation

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

Tobacco products are subject to excise or similar taxes inmost countries as governments seek to secure theirrevenue or promote public health. During 2019, excise taxes(including for RRP) were raised in various markets, includingFrance, Romania, Russia and Turkey.

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

In general, tax increases are passed onto the retail prices.
Therefore, repeated tax increases in a short period of time or
substantial tax increases, could lead to a decline in industry
volume and trigger an increase in illicit trade, which could inturn affect our business.

Regarding RRP, a few countries such as the U.S. and partsof Europe have recently established new standards andframeworks used in terms of scientifically evaluating theclaims of reduced risks that come with using theseproducts. In order to gain official approval from thesegovernments, major global tobacco manufacturers haveintensified their activities in developing these reduced-riskclaims. With regards to the regulatory progress in this RRP
category, specified regulations are implemented in somemarkets, namely the prohibition of sales in the U.S. offlavored E-Vapor products, which was implemented in
February 2020, or in other countries the implementation of
the same level of regulations as conventional tobacco
products. However, global implementation of RRP productregulations has not yet been observed, and the attitude
towards regulations still differs from one market to another.
Please refer to “Regulation and Other Relevant Laws” formore details.

In emerging markets, on the other hand, total consumption
tends to be more resilient, driven by population growth andeconomic development, particularly across the Middle East
and Africa. As personal disposable income generally increases
year-on-year, consumers look for quality and trade up to
products in a higher price range.

034 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 035

Tobacco Business Sustainability
Four Strategic Focus Areas• Investing in People• Exceeding Expectations with Products and Services - RRP• Building Sustainable Supply Chains• Regulatory Environment and Illegal Trade

CORPORATE PROFILEVALUE CREATIONABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYSTRATEGYFINANCIAL INFORMATIONThis 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.

Tobacco Business Sustainability Strategy - Four Focus Areas
Exceeding Expectations with Products and Services - RRP

As alternatives to traditional combustible products,
e-cigarettes (E-Vapor) and tobacco vapor products(T-Vapor) are gaining popularity with consumers
around the world. Our industry is changing but ourcommitment to consumer choice remains.
We are always listening and reacting to thechanging tastes of adult smokers and vapers
around the world. We develop, test and bringto market new and innovative forms of RRP andoffer real benefits to consumers, society andour business.
Between 2018 and 2020, we are investing 100 billion
yen in RRP, to further develop our supply chain andexpand our research and development capabilities.

HEATED TOBACCORRP Supply Chain

Our mission is to inform, educate and collaborate with all
those interested in learning about the science behind RRP from consumers to scientists and the regulatory community.
We strive for an open, balanced and fair environment where
factual scientific data and assessments are shared in atransparent way.

We have established a dedicated supply chain for our RRP,
building strong supplier partnerships that support businessexpansion and meet the demands of our increasingly
sophisticated portfolio.
In 2018, we opened an e-liquid (E-Vapor) production facilityon the premises of our manufacturing site in Gostkow,
Poland. We then further boosted our in-house production in
2019, bringing into service a new Ploom product plant in thesame location. These new facilities will enable us to keep up
with the demand for e-liquids containing nicotine, tobacco
capsules and tobacco sticks in expanding markets acrossthe world.

Learn more about our research at JT Science.

Responsible Recycling and Disposal Schemes
We take our responsibility for the environment very seriously and provide consumers with advice and support to help themconveniently and safely recycle or dispose our products at the end of their useful life.

Ploom Return Scheme in Japan

Logic Return Scheme in Switzerland

In some parts of Japan, we have introduced recycling boxes
at shops selling Ploom so that consumers can return theirused devices, capsules and cartridges conveniently.

Online customers can order a Logic recycling box, made from
FSC-certified paper,* to collect their used pods. They can thensend these boxes to us free of charge for recycling.

This program was a significant extension of a 2017-2018
pilot scheme, in which we sent out recycling boxes to morethan 250,000 people. In 2019, we started collecting used
Ploom devices in addition to used capsules and cartridges.

We also set up “pod points” in shops selling Logic products
across Switzerland, giving consumers the option to return theirused products in person.

Key achievements in 2019
Recycling boxes introduced in around 300 shops

Key achievements: March-December 2019
3,600+ individual recycling boxes ordered440+ recycling boxes returned

TOBACCO-INFUSED

T-VAPOROur Product Portfolio

JT Science: An online resource for all

Logic Compact

Logic Power/Curv

Logic Original

E-VAPOR

CLOSED TANK

Logic Pro

Aspirational Goal

OPEN TANK

Logic LQD
RRP

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

TargetProgress

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

At the end of 2019, our RRP
portfolio was present in 28
countries, with a choice of
three tobacco vapor offerings(T-Vapor) and five types of
e-cigarettes (E-Vapor).

* Paper products that meet the Forest Stewardship Council standards
036 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 037

Tobacco Business Sustainability
Four Strategic Focus Areas• Investing in People• Exceeding Expectations with Products and Services - RRP• Building Sustainable Supply Chains• Regulatory Environment and Illegal Trade

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Supplier Screening

Building Sustainable Supply Chains

Maintaining a well-managedsupply chain is essential for thesustainability of our business.
To ensure the highest levels ofsustainability and integrity
across the supply chain, we
work in close cooperation withall our suppliers.

Our supplier screening process, applied in our international
tobacco business, allows us to understand potential risks
related to compliance, human rights, the environment andhealth and safety. In 2019, we continued to strengthen andautomate the process by integrating a continuous key

Supplier
Screeningsupplier monitoring service. In the Japanese market,
suppliers of non-tobacco materials and other products andservices are subject to screening against the JT Group
Supplier Standards, with key suppliers being monitored
regularly though surveys.

Aspirational Goal

TargetProgress

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

We will screen all key suppliers
against environmental, social,and governance criteria by 2023.

At the end of 2019, 67%of our key suppliers werescreened against ESG
criteria in our international
tobacco business.

ARISE

Agricultural Labor Practices
Our Agricultural Labor Practices (ALP) are based on theInternational Labour Organization’s conventions andrecommendations. The program consists of three pillars:
tackling child labor, respecting worker rights and ensuring
workplace health and safety.
As part of our continuous improvement approach, the ALP
program allows us and our suppliers to identify potentiallabor challenges on tobacco farms and help improvegrowers’ labor practices. Being an integral part of the Supply
Chain Due Diligence process, it also contributes to the social
aspect of grower communities and supports sustainableagriculture overall. Whether we source tobacco directly fromgrowers or through tobacco leaf merchants, our contracted
suppliers are committed to implementing ALP.

Aspirational Goal

Progress

TargetIn 2019, 81% of our
supplying entities reported
against ALP.

Agricultural Labor
Practices

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

We will
implement our
ALP program inall sourcing
countries
by 2025.

100% of our
supplying entities toreport on ALP

In 2019, we focused on mapping out new communities toscale up ARISE, building on community capacities to ensure
the sustainability of the program and digitizing our Child
Labor Monitoring System using blockchain technology.

We will continue to work collaboratively
with growers, communities, businessleaders and governments to create
solutions that address the root causesof child labor, while always keeping thechild’s right to quality education at theheart of what we do.

excluding India and China.*]

Elaine McKay
Social Programs Director, JT International S.A.

100% of tobacco
leaf volumes to becovered by ALP

Learn more about our historical data at JT.com.

[58% of our directly contracted
growers and 98% of our leaf
merchants were covered by ALP;
leaf merchants data come from
reporting entities only andOur flagship program ARISE – Achieving Reduction of Child
Labor in Support of Education – has been committed totackling child labor in our tobacco growing communities
since 2011. In 2019, ARISE placed 6,186 children into formal
education, building on the impact of previous years. The
program is forging real sustainable change by implementing
robust solutions to prevent child labor.

74% of our volumes werecovered by ALP.

Reducing Our Environmental Impact in the Tobacco Value Chain
Regarding our targets on “Greenhouse gas emissions,” “Water and waste” and “Forestry,” visit Environment and ouroperations. Learn more about our programs and initiatives in our international tobacco business at “We’re serious aboutprotecting the environment.”* The decrease from 96% in 2018 to 58% in 2019 is due to new acquisitions.

038 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 039

Tobacco Business Sustainability
Four Strategic Focus Areas• Investing in People• Exceeding Expectations with Products and Services - RRP• Building Sustainable Supply Chains• Regulatory Environment and Illegal Trade

Regulatory Environment and Illegal Trade

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In tackling illegal trade, the JT Group complies with all laws
and regulations while fulfilling its obligations under theEuropean Union Cooperation Agreement, signed in 2007.

Experts estimate that over 10% of
all cigarettes sold globally(excluding China) are illicit, withapproximately US$45 billion in
global tax revenue lost each year.
This illegal trade fuels humantrafficking, organized crime andterror groups. It causes harm toconsumers, as uncontrolled
products circumvent regulations
and quality controls, andundermines legitimate tobacco
businesses. Tackling illegal trade
is a top priority for us, and our
Anti-Illicit Trade team isrecognized as the industry leader
in combating this problem.

This means supplying tobacco products only in volumes that
correspond with the legitimate demand of the intended
market of retail sale. Our Anti-Illicit Trade Research team hasdeveloped a global methodology to assist market authorities
in taking a consistent and accurate approach to annual
legitimate market demand (LMD) calculations. Our markets
perform these in conjunction with their annual plan, creatinga proactive supply chain control mechanism to make surethat planned sales volumes are in line with LMD, andensuring our compliance.

FINANCIAL INFORMATION

Compliance also means the implementation and operation of
our Track and Trace program, which helps us to track the
movements of products along the supply chain, supporting
our supply chain analysis. The program has been an importantelement of our compliance policy for more than a decade
firstly as a self-regulation measure and later to meet legal
requirements in a growing number of jurisdictions.
In addition to the United Arab Emirates, Saudi Arabia andRussia, the first regional system applicable in all member
states of the EU went live on May 20, 2019. Despite thechallenging timelines involved in implementing this complex
system, we complied with the regulations as of entry into force,with minimal disruption in the countries in which we operate.
Learn more about our approach to tackling illegal trade at JT.com.

Illegal Trade

Aspirational Goal

TargetProgress

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

We will engage in dialogue withlaw enforcement agencies,
with the goal to exchange
intelligence regarding illegal
tobacco products, in order tosupport the reduction of illegal
tobacco products.

In 2019, our Anti-Illicit Tradeteam provided 1,129
intelligence reports to law
enforcement agencies, andadvised 2,687 law
enforcement officers on
counterfeit recognition.

Tackling Illegal Trade
Our global Anti-Illicit Trade team investigates the illegal
tobacco trade and protects consumers and society, as wellas our business and reputation, from criminal elements.
The team works with our markets to secure our supply chain
and assists law enforcement in removing illegal tobacco
from the marketplace. It maintains a robust dialogue withgovernments and law enforcement agencies on the threat ofillegal tobacco through public-private partnerships andprovides counterfeit awareness programs for law
enforcement, globally.

50%, thanks to our markets’ efforts in securing our supply
chain, with the support of the Anti-Illicit Trade team. Both the
EU and the U.K.’s HM Revenue and Customs recognized us
as an industry leader in the fight against illicit trade.

Optimizing the Regulatory Environment
During 2019, we engaged openly and transparently in public policy debate and made our views known to regulators, NGOs andother relevant stakeholders in the countries where we operate.
We responded to public consultations on regulatory issues of concern to society and business, such as plain packaging, RRP
and retail display bans, among many others.
We also participated in public discussions around good governance, anti-illegal trade, better regulation, transparency
and sustainability.

The team protects the JT Group’s business and reputation,
supporting our long-term, sustainable future.
In 2019, our Anti-Illicit Trade team provided 1,129 intelligence reports to law enforcement agencies, leading to seize
more than 3.2 billion illegal cigarettes. Based on our information, law enforcement raided more than 70 counterfeit
tobacco factories and storage locations.
As a direct result of our work to tackle illegal trade, andbased on seizure statistics, notified seizures of counterfeit
products in the EU have remained consistently high over the
past four years (approximately 90% of products seized arecounterfeit). During the same period, notified seizures of ourown genuine products in the EU have decreased by nearly040 Japan Tobacco Inc. Integrated Report 2019Engagement

Aspirational Goal

TargetProgress

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

We will always protect ourability to participate in public
policy debate with the aim toachieve balanced regulation thatmeets societal concern andsupports business growth.

During 2019, we engaged
openly and transparently inpublic policy debate andmade our views known toregulators, NGOs and otherrelevant stakeholders in the
countries where we operate.

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

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International Tobacco Business

Key Highlights

Results for the fiscal year ended December 31, 2019

Total volume increased 4.3%, driven by acquisitions in Bangladesh and Russia. Excluding
acquisitions, total volume performance was resilient due to the accelerated growth of our Global
Flagship Brands (+4.0%). Currency-neutral core revenue grew 9.3%, led by robust price/mix gains
and positive volume contribution. Adjusted operating profit was up 10.7%, at constant currency,
driven by the strong top-line performance. On a reported basis, core revenue increased 1.5%
while adjusted operating profit was down 10.5%, reflecting currency headwinds.

Adjusted Operating Profit Growth at
Constant FX*

Total Shipment
Volume

445.8
+4.3%

Year-on-Year Change

2019 Performance
Overview
2019 was an excellent year for JTI across all key performance indicators.

GFB Shipment
Volume
(BnU)

277.0
+4.0%

Core Revenue(BnU)

Year-on-Year Change

11,496+1.5%

Adjusted
Operating Profit(USD MM)Year-on-Year Change

3,126-10.5%

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

+14%

+13%

+11%

+10%

2014

2015

2016

2017

2018

2019

* Excluding 2017 one-time loss

Winston’s shipment volume growth exceeded 3%, breaking
volume or share records in more than 25 markets, including
Brazil, Germany, the Philippines, Romania and Turkey.
Camel grew more than 5%, achieving double-digit volume
increase in 23 markets and setting share records in 11, suchas France, Indonesia, Poland, Spain and Thailand.

The successful integration of the acquired businesses in
Bangladesh and Russia enabled us to grow strongly versus
prior year, achieving a total volume increase above 4%.
Excluding acquisitions, our volume declined less than 1%,
as market share gains continued, driven by all Global
Flagship Brands.

I anticipate another strong year for
JTI in 2020. We continue to believein the robustness and resilience of theconventional products model, while
stepping up our efforts in RRP tosatisfy changing consumer needs.

+11%(USD MM)Year-on-Year Change

Our top- and bottom-line performance remained strong
when excluding acquisitions and inventory movements,
highlighting the strength of our talented people and thecompetitiveness of our brands.

+13%

LD, with a 6% volume increase, grew for the third consecutive year and was our fastest growing tobacco brand in 2019.
LD broke volume records in 15 markets, including Canada,
Taiwan and the U.S.

Our investments in strategic acquisitions and organic
expansion have enabled JTI to accelerate share of market
and share of value growth, recording an outstanding increase
across its top-30 markets.

In addition, throughout the year we continued to pursue
selected opportunities in RRP, notably with the expansion of
Logic Compact in E-Vapor and the introduction of Nordic
Spirit in nicotine pouches.

MEVIUS returned to growth, increasing approximately 1%
versus 2018, primarily driven by the positive performance inCambodia, Mongolia and Myanmar.

Price/mix contribution continued to be strong and above JTI’s
5-year average, demonstrating once again the robustness
and sustainability of our growth model. The robust price/mix
contribution, combined with an expanded volume base,resulted in currency-neutral core revenue and adjusted
operating profit growth of 9.3% and 10.7%, respectively.

Global Flagship Brands

The strong equity of our brands in both cigarettes and Fine
Cut, nurtured by focused investment, continued to play apivotal role in enhancing JTI’s pricing power.

Importantly, 2019 marked the ninth consecutive year inwhich JTI achieved double-digit earnings growth at constant currency (excluding one-time factor in 2017), while
also increasing investment levels.

Price/Mix
Global Flagship Brands grew volume for the fifth consecutive year, reaching 277 billion units. This represents a 4%
increase versus 2018 and a compounded annual growth rateof 3% since 2015.
This achievement is remarkable if we consider that, over thesame period, tobacco industry volume has declined around
4% per year in our top-30 markets.

+3% CAGR

2019 Performance*

GFB
volumeJTI
volumeCorerevenue

AOP+10.7％

Including continued price and portfolio investments tostrengthen our competitiveness and business agility, werecorded a total price/mix variance of US$875 million in 2019.

GFB Volume Evolution 2015-2019 (BnU)

1

JTI
SoM*2

Strong pricing was, once again, the key driver of our financial
performance in 2019.

250

257

260

266

277

Importantly, price/mix was above our five-year average,
demonstrating the continued resilience of the tobacco
pricing model.
JTI Price/Mix Variance (USD MM)

+9.3％

+875

+4.0％
+1.5pp*1 2019 variance vs. prior year. Core revenue and adjusted operating profit(AOP) at constant currency*2 Based on JTI’s top-30 markets (cigarettes + Fine Cut)

042 Japan Tobacco Inc. Integrated Report 2019

+746

+4.3％
2015

2016

2017

2018

2019

All four Global Flagship Brands increased volume in 2019,supported by a consistent investment strategy aimed atstrengthening their equity, portfolio and geographic reach.

5-year2019

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As a result of the investment efforts to expand anddiversify our geographic footprint, pricing gains generated
across our key markets, notably France, Russia, Turkey andthe U.K., were complemented by an increasingly robust
contribution from other markets, such as Germany, Iran and
the Philippines.
Furthermore, emerging markets in Africa, Asia and the
Middle East have gradually increased their price/mix
relevance, reinforcing our confidence in the sustainability
and flexibility of our growth model.
Share of Market
The solid performance of our Global Flagship Brands alsoenabled JTI to achieve significant share of market and shareof value gains across its top-30 markets.

Key Market of the U.K.
2019 was an excellent year for JTI in the U.K. market. We
grew share across all product categories, breaking records
through commercial initiatives aimed at injecting innovation,
strengthening retail presence as well as ensuring pricecompetitiveness.

Reduced-Risk Products

2020 Outlook

Our seeding process in RRP continued at a sustained pace.
Logic Compact, our most successful E-Vapor offering todate, was launched in additional 24 markets, which represents a significant increase versus the initial plan.

The 2020 outlook for the International Tobacco Business isbuilt on robust assumptions. We will continue growing ourshare of market, significantly outperforming the tobacco
industry volume trend in our top-30 markets.
Global Flagship Brands will play a key role in fueling share ofmarket growth, as related volumes are anticipated toincrease for the sixth consecutive year.

We also expanded our presence in RRP, with Logic consolidating its leading position, supported by the growth ofCompact in closed tanks.

The pricing environment in conventional products remains
robust. Price/mix variance is expected to be positive and todrive another year of strong core revenue and adjusted
operating profit growth, at constant currency.

Key Market of Russia
Our 2019 performance in Russia was robust. Share ofmarket remained at 39%, underpinned by Global Flagship
Brands and the improving momentum of the local heritage
brands acquired with Donskoy Tabak.

JTI Share in Top-30 Markets
SoM

The continued share growth was primarily driven by ourconsumer-centric approach, strategically positioning ourbrands across key product categories and price segments.

SoV

2020 Guidance*1
Industry
volume*2

JTI
volume

GFB
volumeCorerevenue

AOP
+10%

28.4%
26.9%
24.5%

25.4%

Global Flagship Brands continued to gain share, exceeding
the 25% threshold.

+5%

The resilient performance of Winston, still by far the first
choice of Russian consumers, was complemented by thestrong growth of LD.

+1%
2018

2018

2019

2018

2019

Of a particular note was the progression recorded inEurope, where we enhanced our presence in both cigarettes and Fine Cut.

All these achievements were realized while continuing toseize pricing opportunities, which remained strong despite
the downtrading and volume contraction impacting theoverall industry.

2019
-3%

-5%
*1 2020 variance vs. prior year. Core revenue and AOP at constant currency*2 Based on JTI’s top-30 markets (cigarettes + Fine Cut)

We expect to achieve double-digit adjusted operating profit
growth while continuing to invest in our people, brands andinfrastructures.
Leveraging consumer insights, commercial learnings andnew capabilities acquired in recent years, we also started
exploring opportunities in new categories.
In nicotine pouches, we launched Nordic Spirit in seven
European markets with encouraging results.
Importantly, in the first half of 2020, we will introduce a
Heated Tobacco product in Russia.
The device will be branded Ploom while related consumables will be endorsed by Winston, the number one
tobacco brand in the market.

044 Japan Tobacco Inc. Integrated Report 2019

We will ensure an adequate prioritization of resources
throughout the business, supporting the growth of ourconventional portfolio in markets that matter and stepping
up our efforts in RRP.
The Transformation initiatives kicked-off in 2019 are graduallyadvancing, with the purpose of removing impediments togrowth and building on our strengths, including new
capabilities within the organization such as Global Business
Service centers, Digital and Agile Teams.
These initiatives will significantly strengthen our business foundations, paving the way for more years of sustainable growth.

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Japanese Domestic Tobacco BusinessResults for the fiscal year ended December 31, 2019

Core revenue declined 2.3%, as cigarette pricing gains were more than offset by the decline incigarette sales volume and decrease in RRP related revenue. Adjusted operating profit decreased
10.4%, mainly due to an impairment loss and the top-line decline.

Key Highlights
JT Cigarette
Sales Volume

75.5
-7.9%

(BnU)

Year-on-Year Change

2019 Performance
In the Japanese domestic tobacco business, after the launchof Ploom TECH, we have launched 2 new RRP devices
nationwide: Ploom TECH+ in June 2019, in the lowtemperature heating category, and Ploom S in August 2019,
in the high-temperature heating category. With these threedevices set in place, 2019 was a year of realization, where
we were able to find areas of improvement in RRP throughcontinuous communication with our consumers. For
cigarettes, we have taken measures to strengthen our
product portfolio, including the introduction of little cigar
products, in order to meet the consumers’ changing needs.
Total Tobacco Industry Volume
The total tobacco industry volume* decreased about 4%
year-on-year mainly due to a natural decline trend and theimpact of price revision in October 2018.

In the Japanese domestic tobacco
business, we continue to aim for profit
generation by strengthening the topline for both cigarettes and RRP. In
cigarettes, we aim to recover shareby leveraging our brand loyalty andexpanding our product portfolio. For
RRP, we will strive to build competitive
advantage by further investing in
R&D and marketing.
Junichi Fukuchi
Chief Executive Officer of Japanese Tobacco Business,
Tobacco Business Planning, Tobacco Business

046 Japan Tobacco Inc. Integrated Report 2019

Cigarette industry volume* decreased 6.3% year-on-year
due to the decline in industry volume and expansion in the
RRP category. Out of the entire tobacco industry volume,
overall RRP market size* in Japan is estimated at approximately 23% (shipment basis).
* Source: JT estimate. Cigarette industry volume and cigarette share ofmarket include little cigars which are classified as cigars as per the Tobacco
Business Act in Japan as well as conventional cigarettes.

Volume and Financial
Core revenue decreased 2.3% to 568.9 billion yen, ascigarette pricing gains in the January-September period weremore than offset by declines in cigarette sales volume and
RRP-related revenue.
Adjusted operating profit decreased 10.4% to 187.2 billion
yen, mainly due to an impairment of capsule manufacturingmachines for low-temperature heating products and the
top-line decline.
• JT cigarette sales volume decreased 7.9% year-on-year to75.5 billion units due to the cigarette industry volume
decline as well as our market share loss.
• JT RRP sales volume increased by 0.5 billion to 3.3 billion
cigarette equivalent units.

JT Cigarette
Sales Volume (BnU)
Core Revenue

568.9
-2.3%

Year-on-Year Change

Adjusted
Operating Profit(JPY BN)

187.2-10.4%

Year-on-Year ChangeCore Revenue (JPY BN)
-2.3%

-7.9%
82.0

75.5

2018

2019

Adjusted
Operating Profit (JPY BN)-10.4%

582.4

568.9

209.0

2018

2019

2018

187.2

(JPY BN)

Share Performance
For RMC, our share declined due to the intensified competition in the value segment.
• JT cigarette category share: 60.4% (1.0 percentage point
decline from 2018)
For RRP, our share increased throughout the year, following
the expansion of our RRP portfolio.
• JT RRP category share: approximately 9% (in convenience
stores, roughly a 2 percentage point increase from 2018)

Industry Overview
We predict that the total tobacco industry volume will
steadily decline at a low single-digit rate despite the planned
full enforcement of the new indoor smoking regulation in
April 2020. We expect the RRP industry volume to growmoderately compared to the rapid expansion in the previous
year, bringing our share to over 25% of the total tobacco
industry. As competition for share in this market intensifies,
we expect that our competitors will continue to increase
investments in this category in Japan. For cigarettes, thecompetition in the value segment, including little cigars, hasbeen intensifying following the down-trading trend since theprice revision in October 2018. Considering the tax hikes inline to take place in 2020 and 2021, we expect thisdown-trading trend to continue and the value segment toexpand. In the midst of delisting our former third-classproducts and competitors continuously producing value
segment cigarettes, we launched little cigar products in2019 as a measure to prevent consumers from transferringout to our competitors.
This section is intended only to explain the business operations of the JT
Group, not to promote sales of tobacco or vaping products or encouragesmoking or vaping among consumers.

2019

Strategy
In the RRP category, we aim to establish and maintain acompetitive advantage in both high- and low-temperature
heating categories by capturing shares from competitors in
the high-temperature heating category, while continuing todevelop the low-temperature heating category. As the areasof improvement made clear in 2019, we continuously workon the development of the devices, expansion of refill
line-up and production of digital infrastructure for future
diverse marketing. We will also strengthen our investment
towards R&D, marketing and sales for our future growth,
while continuously reducing costs in 2020.
We consider the cigarette category will remain an important
profit generator going forward. While we expect cigarettedemand to decline due to the planned tobacco tax hikes in2020 and 2021, we will utilize appropriate pricing to maintainour profitability. We aim to recover our share by taking
initiative throughout our product portfolio, mainly by maintaining our share of the premium+ and prestige segment
products in addition to the launch of value segment products, which are to tackle down-trading.

2020 Outlook
The key to the growth of the tobacco business in the future
is to generate profits in a sustainable manner in the Japanese domestic tobacco business. While we expect the
short-term turnaround of the business to be challenging, we
will continue to aim for profit generation by strengthening
the top-line for both RRP and cigarettes.
Core revenue is expected to decrease by 5.1%, as thedecrease in cigarette sales volume and the decline in RRP
related revenue will more than offset the cigarette pricing
gains and increase in RRP sales volume. Adjusted operating
profit will decrease 9.2% due to the decrease in core revenue
while we continue to increase the necessary investments.
Despite the difficulty in terms of profitability, we recognize
2020 as a year for rebuilding the business foundation towards
sustainable profit growth in the mid- to long-term.

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Our Brand Portfolio

Our T-Vapor Products
Our Ploom brand offers our customers the choice to select the best product that meets their diverse
preferences and lifestyles. Ploom S, our Heated Tobacco product, offers a superior taste of tobacco
leaves; Ploom TECH, one of our Tobacco-Infused Vapor product, offers a variety of flavors; and Ploom
TECH+, the other Tobacco-Infused Vapor product, offers a rich and powerful tobacco vapor.

Our Core Brands
In our Japanese market, we offer more than 15 brands in various product categories, including cigarettes, T-Vapor and little cigars. Some of these brands include MEVIUS, a market leader for more than 40
years; Seven Stars, which has been generating the highest revenue for 12 consecutive years;* Natural
American Spirit; Winston; and Camel, which is growing into one of our major brands.

Tobacco Business Value Chain

R&D

Manufacturing

Create Value through Innovation and Quality Improvement

Support Top-line Growth through Delivering Quality Products• We are closely collaborating with all functions across thevalue chain to focus on fundamental research and producttechnology developments, using a global research platform.
In particular, our R&D activities focus on these areas:– Strengthen product development and analytical capabilities
in line with market needs while anticipating regulatory trends–M aintain existing products that comply with regulatory changes– Develop new technologies and improve production processes to maintain competitiveness and increase efficiency– Drive product innovation to enhance brand equity,
including tobacco leaves, blends, filters, printing techniques and packaging– Develop RRP• We put great emphasis on improving product quality tomeet consumer expectations towards innovative offerings.
In addition, we consistently pursue an optimal
manufacturing footprint, which ensures efficient andtimely product deliveries to our markets.
– Overcome manufacturing complexities that come withan increase in number of products, while ensuring highquality products and enhancing flexibility in the manufacturing process– Strengthen our ability for business continuity in timesof emergencies– Pursue efficiency by managing cost increases andoptimizing our manufacturing footprints

Procurement

Marketing

Ensure Stable Supply of Quality Tobacco Leaves

Enhance Equity of Flagship Brands• We aim to strengthen our capability in ensuring a sustainablesupply of tobacco leaves, which is one of the most important
raw materials for our products.
– Increase the proportion of leaves procured from ourvertical integration bases in Africa, Brazil and the U.S.
– Enhance the sustainability of tobacco farming by helping
farmers to improve productivity as well as taking
initiatives to support their communities– Maintain good relationships with external suppliers toensure sufficient supply at competitive prices• With regard to non-tobacco materials, we aim to mitigate
the raising costs, mainly through investments in design
enhancements and creating innovative products byeffectively managing procurement lot-size.

• We focus our strategy on our core brands and we strive toenhance their equity through effective communications
with consumers.
– Support brand equity enhancement for our GFBs byappropriately allocating resources– Conduct effective marketing programs that comply withall applicable laws and regulations wherever we operate,
as well as our Global Tobacco Marketing Principles

Sales & Distribution
Expand Product Availability by Leveraging Our Excellencein Sales Activities• There are many channels for tobacco products such as
supermarkets, convenience stores, street and train
station kiosks, small independent retailers and vending
machines. The importance of channels are different
depending on each country. We increase availability ofour products through various key channels by developing
good relationship with retailers.
– Strengthen relationships with key accounts, leveraging
our trained sales forces– Apply most effective marketing initiatives suited for eachmarket, taking market context into account such as
channel development, consumers and competitors*JT estimate as of 2019048 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 049

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Strategy and Business Review
Pharmaceutical Business

Key Highlights

Results for the fiscal year ended December 31, 2019

Revenue declined by 22.3%, mainly due to the termination of license agreements for six anti-HIV drugs inJapan as well as lower overseas royalty income. Adjusted operating profit decreased 43.9% due to therevenue decline.

Revenue

88.5
-25.5

Adjusted
Operating Profit(JPY BN)Year-on-Year Change

In order to control medical care expenses, the Japanese
government has been promoting the use of generic drugs,
leading the generic drugs market to expand in the Japanesepharmaceutical market. Additionally, a drastic reform of the
drug pricing system will lead to a gradual price reduction
each year from 2021, creating challenges for the industry.
The drug price reduction rate in October 2019 was 2.4% on
average, due to a consumption tax increase.

JT is committed to creating innovative,
original drugs to support patients in the
shortest time possible. We are proud to havereceived manufacturing and marketing
approval for CORECTIM® Ointment
0.5%, for an indication of atopic
dermatitis in Japan in January 2020. In
addition, we filed a New Drug Application
for JTZ-951 (generic name: enarodustat)
for anemia associated with chronic kidneydisease. We have been making steadyprogress in our R&D and will aim tocontribute to sustainable profit growth.
Muneaki Fujimoto
President, Pharmaceutical BusinessIndustry Overview
The global pharmaceutical market continued to grow in 2018,
reaching sales of approximately US$1,198.2 billion, an increaseof 5.2% year-on-year,* due to increasing health awareness,population growth and development of public healthcare
systems. While these factors result in a higher demand formore advanced drugs, governments are strengthening theircontrol on drug prices by holding back medical costs, due tothe rapidly aging society and fiscal deficits.
050 Japan Tobacco Inc. Integrated Report 2019

Revenue (JPY BN)

15.9
-12.5

Adjusted Operating Profit (JPY BN)-22.3%

88.5

Year-on-Year Change

2018

2019

license agreement with BioCryst Pharmaceuticals, Inc. forexclusive marketing rights in Japan to the plasma kallikreininhibitor BCX7353 in November. In the following month, we
also signed an exclusive license agreement with Shenzhen
Salubris Pharmaceuticals Co., Ltd. for the development andcommercialization in Mainland China, Hong Kong, Macau andTaiwan of JTZ-951 (enarodustat).

Worldwide Pharmaceutical Market* (USD BN)

Our Sustainability Strategy

1,109.4

1,139.5

1,198.2

2014

2015

2016

2017

2018

*Copyright©2020 IQVIA.
Created based on IQVIA World Review ExecutiveTM 2014-2018
Reprinted with permission

Our Performance and Outlook• In-house development (2019 progress)– Entered the clinical trial stage:
JTE-761 (ROR antagonist) – Phase 1 (Overseas)– New Drug Application filed (Japan):JTE-052/delgocitinib (JAK inhibitor),
JTZ-951/enarodustat (HIF-PH inhibitor)
For further details, please visit JT.com.

We steadily made progress in our R&D in 2019, as we had a newcompound entering the clinical stage and two New Drug Applications filed in Japan, in spite of having a challenging year. Challenges included a decrease in revenue and adjusted operating profit
due to the termination of exclusive license agreements for six
anti-HIV drugs in Japan as well as lower overseas royalty income.
It was also a fruitful year for license activities as our groupcompany, Torii Pharmaceutical Co., Ltd. (Torii), entered into a-37.3%
15.9
10.0

While we expect 2020 to remain challenging, we will continue
aiming towards contributing to sustainable profit growth. We
started the year with receiving manufacturing and marketing
approval for CORECTIM® Ointment 0.5% (generic name:delgocitinib), a Janus kinase (JAK) inhibitor, for an indication of
atopic dermatitis in Japan. In addition, Torii has restructured its
business and, in line with plans, started operating under the
new structure in late 2019.

1,066.6

28.4
76.0(JPY BN)Our pharmaceutical business competes with not only
numerous Japanese domestic companies, but also withforeign companies, including global mega pharma andstart-up companies. We will continue to promote R&D andseek optimum timing to license out our compounds in orderto accelerate our R&D and swiftly provide new drugs topatients around the world.

1,055.9-43.9%-14.2%

114.0

Our pharmaceutical business aims to create innovative,
original drugs to support patients in the shortest time possible. As this business has a direct impact on human health andlife, we not only strictly comply with all laws, regulations andindustry standards, but we guide ourselves with a strong
sense of ethics and responsibility. This is particularly the casein areas such as clinical trials and drug marketing, as well asanimal experiments and managing chemical substances.
We set five specific targets for three focus areas in 2019,
which we consider are essential for the sustainability of ourbusiness and for our stakeholders. For more details, pleaserefer to page 28. The focus areas and the specific targets areavailable at JT.com as well.

R&D that Ensures Ethical Integrity
We carry out our research activities in an ethical manner andcomply with all applicable laws, regulations and industry
standards. We continue to strengthen our R&D capability
which enables us to create innovative drugs by focusing ourresources on specific therapeutic areas. In 2019, the JT
Group invested 33.2 billion yen in our R&D activities.
We have established internal policy on animal experiments
based on government legislation. Our Institutional Animal
Care and Use Committee ensures that we follow the 3R
concept: Replacing laboratory animals with other research

2020
Forecast

2018

2019

2020
Forecast

materials where possible; Reducing the number of animals
used; and Refining experiments to prevent animals from
suffering unnecessary pain and distress.
We carry out periodic internal audits and assessments to ensurethat we comply with this policy. Our practices are accreditedby the Japan Health Sciences Foundation, an external
authority that lists all accredited facilities on its website.

Quality Assurance of Pharmaceutical
Products Production
The JT Group establishes a sustainable supply chain thatdelivers high quality products to patients. Our products
marketed in Japan are mainly produced and distributed by
Torii, while simultaneously outsourcing to contract manufacturers in order to build an efficient manufacturing structure.
We have also developed our own guidelines on how to
conduct annual audits to ensure that our production methods
fully comply with government recommendations. We began
implementing these inspections in selected factories in 2017
and no issues were identified. We have been steadily
expanding the scope of our guidelines since 2018, and they
now cover 100% of our own factories* and contracted
factories. We will continue to operate under these guidelines.
* In 2020, the JT Group will stop manufacturing operations of its
pharmaceutical products in its own facilities and outsource all of them tocontracted factories.

Responsible Promotion of Drugs
We formulate our own standards on the ethical promotion ofprescription drugs, based on the guidelines on the sales
information provision activities, issued by the Ministry of Health,
Labor and Welfare. Torii’s Medical Representatives (MRs)provide and collect information on pharmaceutical drugs to/frommedical professionals appropriately and regularly participate intraining programs to ensure adherence to these guidelines.

Transparency of Partnerships
In order to develop drugs that are more effective, we build
partnerships with research institutes, universities and medical
institutions. When we make financial contributions to ourpartners, we strive to ensure transparency by disclosing thesepayments on our website.
Japan Tobacco Inc. Integrated Report 2019 051

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Strategy and Business Review
Processed Food Business

Key Highlights

Results for the fiscal year ended December 31, 2019

Revenue decreased 1.7% as solid performance in the main staple food* category was offset by the decline
in sales of products with lower profitability. Adjusted operating profit increased by 1.3 billion yen mainly
driven by the positive contribution from pricing, product portfolio optimization as well as cost reduction
initiatives, despite lower revenue and increases in raw material and distribution costs.
*Staple food: Frozen noodles, frozen rice, packed cooked rice and frozen baked bread

Revenue

158.6
-2.8

Year-on-Year Change

imports, grew 1.6% year-on-year to 1,074.6 billion yen,exceeding one trillion yen for the second consecutive year.*
The Japanese Frozen Food Market on a
Consumption Basis* (JPY BN)
988.3

2014

We have a mission of delivering safe, highquality food to our customers throughour three businesses: frozen and ambient
food, seasonings and bakery. In frozen
and ambient food, our core business, we
strive to achieve revenue growth and aim
to increase our contribution to the Group’s
mid- to long-term sustainable profit
growth, while optimizing manufacturing
capabilities and enhancing the profitableproduct portfolio.
Hiromasa Furukawa
Food Business

1,015.6

2015

989.4

2016

1,057.7

2017

1,074.6

2018*Source: Japan Frozen Food Association

Our subsidiary, TableMark Co., Ltd., is competing against
major players like Maruha Nichiro, Nichirei Foods, Ajinomoto
Frozen Foods and Nippon Suisan Kaisha as well as amultitude of mid- or small-scale producers, although we arestarting to see gradual segregation of competition within theindustry according to the product categories these competitors respectively own.
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 brandproducts by various distribution companies; and the reorganization of wholesale entities. We also need to be aware of
the continuing risk of price fluctuations in raw materials due
to global food shortages.

Our Performance and Outlook
Strategy

Industry Overview
We expect the Japanese processed food industry tocontinue to grow as lifestyles change. Frozen foods canhelp meet the diverse needs of consumers with its
abundant variety and convenience in recreating freshly
served taste.
In 2018, annual consumption of frozen food in Japan increased 1.4% to 2,893,299 tons year-on-year, a record high.
Domestic market size on a consumption basis, including
052 Japan Tobacco Inc. Integrated Report 2019

• Strengthen our product branding, particularly for staple
food products, through combining product development
and consumer needs• Strive to develop high value-added products to respond tochanging consumer needs• Mitigate the impact of rising raw material costs
Our business primarily engages in frozen and ambient foods,
notably staple food products; seasonings including yeast
extracts and oyster sauce; and products for bakery chain
outlets mainly in the Tokyo metropolitan area.

Revenue (JPY BN)
Adjusted
Operating Profit(JPY BN)5.4+1.3

Adjusted Operating Profit (JPY BN)
+0.9%

-1.7%
161.4

158.6

-8.0%

+31.8%

160.0

5.4

5.0

2019

2020
Forecast

4.1(JPY BN)Year-on-Year Change

2018

2019

We continue to take measures to improve profitability. In 2019,
revenue decreased as the solid performance of the main
staple food category was offset by the decline in sales of
products with lower profitability. On the other hand, adjusted
operating profit increased by 1.3 billion yen mainly driven by
the positive contribution from pricing, product portfolio
optimization as well as cost reduction initiatives, despite lower
revenue and increases in raw material and distribution costs.
In 2020, we expect raw material and distribution costs willcontinue to increase. We will aim to achieve top line growth
while enhancing optimal manufacturing capabilities andstrengthening the profitable product portfolio in our corefrozen and ambient food.

2020
Forecast2018• All factories that are contracted to manufacture frozen
food products on our behalf have also achieved the ISO
22000 or FSSC 22000 certification.
Food Defense Practices• We protect 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;
these guidelines are referred to during our annual audits.
• We strengthen our defense mechanisms against
deliberate contamination by optimizing factory cameras
and enhancing the way we manage chemical substances.
Enhancing Food Quality

Our Sustainability Strategy
Our mission is to deliver safe, high quality food products toour consumers.
In 2019, we set eight specific targets for three focus areas
which we consider to be essential for the sustainability ofour business and for our stakeholders. For more details,
please refer to page 28. The focus areas and the specifictargets are available at JT.com as well.

Delivering Safe, High Quality Products
Our processed food business has 32 factories, including theone scheduled to operate from 2020, which produce a variety
of food products, from frozen foods to seasonings and bakery
products. We are dedicated to delivering safe and high quality
food products to our consumers by thoroughly managing foodsafety based on the four priorities of food safety, fooddefense, food quality and food communication.
Food Safety Standards• 31 of these factories inside and outside Japan haveachieved FSSC 22000 certification, which is recognized by
the Global Food Safety Initiative, the food industry’s global
body that promotes food safety management. Our newest
factory, scheduled to operate from 2020, is also
progressing towards this certification.

• We ensure that all of our employees have deeper
understandings of quality improvement through various
initiatives conducted by each factory and customized
e-learning materials.
• We listen to our consumers’ suggestions for improving
product quality, and swiftly share these with our factories
and operations.
• We respond to our consumers’ recommendations throughour internal Quality Improvement Committee. This
Committee is comprised of representatives from different
divisions, including Product Development, Manufacturing,
Distribution, Sales, Quality Control and our Consumer
Call Center.
• Our consumer care service management system iscompliant with ISO 10002, the international standard forcustomer satisfaction and complaints handling.
Food Communication• We respond to consumers’ requests to obtain information anddisclose the precise factory where food products were made,or the country of origin the main ingredients came from.
• In order to ensure food safety, we utilize a system thatrecords information about our products at every stage ofthe process, from the raw materials and production toprocessing, distribution and sales. This allows us to trace
our product to any point, if necessary.
• We provide toll-free numbers on our product labels, which
consumers can call to obtain information.
Japan Tobacco Inc. Integrated Report 2019 053

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Message from the CFO
Free Cash Flow (FCF) reached 404.2 billion yen, driven by
the stable cash generation ability of our business operations
and supported by a one-time gain in 2019. Year-on-year, thisrepresents an increase of 298.6 billion yen as the cash
outlay, related to acquisitions in Bangladesh and Russia in
2018, has not recurred.

While maintaining a strong
financial base, we aim forsustainable profit growth overthe mid- to long-term andimproved shareholder returns.

2020 Financial Forecast
Revenue, on a reported basis, is forecast to increase by
0.2%, as overall tobacco business growth will offset lower
overseas royalty income in the pharmaceutical business.
Adjusted operating profit will decrease by 2.5% to 503.0
billion yen, as the overall growth of the tobacco business will
be more than offset, mainly by the decline in the pharmaceutical business, costs related to headquarters transfer in 2020and IT system investment. Adjusted operating profit atconstant FX is expected to be stable year-on-year.
Operating profit is expected to decline by 6.2% to 471.0
billion yen. Positive impacts include the absence of restructuring costs in 2019 in the international tobacco businessand the anticipated proceeds from sale of the headquarters
building. These, however, will be more than offset by the
decline in the consolidated adjusted operating profit and thenon-recurrence in 2019 of a one-time compensation gain in
the pharmaceutical business.

Naohiro Minami

Profit is forecast to decrease 12.4% to 305.0 billion yen due
to decline in operating profit and a higher effective tax rate
relative to 2019, which was reduced by a one-time factor.

Representative Directorand Executive Vice President,
Chief Financial Officer

Regarding FCF, we expect continuous stable cash generation
ability of our business operations, although FCF is expected
to decrease by 34.2 billion yen to 370.0 billion yen mainly
due to the non-recurrence of the one-time gain in 2019.

2019 Financial Results
Revenue on a reported basis decreased 1.8% year-on-year,
mainly due to the decline of cigarette sales volume in theJapanese domestic tobacco business, currency headwinds
in the international tobacco business, impact from thetermination of the license agreements for six anti-HIV drugs
in Japan and lower overseas royalty income in the pharmaceutical business.
Adjusted operating profit decreased 13.4% mainly due tothe decline in revenue. Excluding the impact of foreignexchange, adjusted operating profit at constant FX increased
by 0.9%. This is the main indicator we use to evaluate our
performance. The change was driven by the growth of thetotal tobacco business, which combines the Japanese
054 Japan Tobacco Inc. Integrated Report 2019

Shareholder Return Policy
domestic tobacco and international tobacco businesses,
offsetting the decline in the pharmaceutical business.
Operating profit declined by 11.1% to 502.4 billion yen,mainly due to the decline in the consolidated adjusted
operating profit, an increase in amortization related toacquisitions, restructuring costs in the international tobacco
business and a decline in proceeds from sales of real estate
assets, despite the one-time compensation gain related tothe termination of license agreements for six anti-HIV drugs
in the pharmaceutical business.
Profit also decreased by 9.7% to 348.2 billion yen, mainly due
to the decline in operating profit and higher financing costs.

We give the highest priority to business investments, which
contribute to sustainable profit growth in the mid- tolong-term and seek a balance between profit growth throughbusiness investment and shareholder returns under our
resource allocation policy. Our policy remains unchanged,
aiming to deliver stable, consistent growth in dividend pershare based on the mid- to long-term profit growth outlook
while maintaining a strong financial base. In addition, we
continue to consider share buybacks in light of the outlook
for our business environment and financial condition.
In determining the dividend, we are taking into account the
profit level since 2019, following FX volatility in the past
several years. However, the mid- to long-term growth rate
outlook for adjusted operating profit at constant FX remains

our primary indicator. Our mid- to long-term target remains
the same; we aim for mid to high single digit growth overthe mid- to long-term for adjusted operating profit atconstant FX.
On the other hand, adjusted operating profit at constant FX
in 2019 was below our target, as is the forecast for 2020.
Furthermore, profit, from which dividends stem, has been
trending downward due to currency headwinds over
several years.
In addition, although we plan to meet our mid- to long-termtarget for the adjusted operating profit at constant FX in our
Business Plan 2020, the uncertainty over profit remains highdue to FX volatility and potentially some one-time factors.
Given these circumstances, our annual dividend per sharefor 2019 has been set at 154 yen, as announced at the
beginning of 2019. For 2020, we plan to offer an annual
dividend per share of 154 yen, unchanged from the previous
year, to ensure stability of future dividends.

Investor Relations Activities
We are pursuing timely and appropriate disclosure of bothfinancial information such as operating results, and non-financial information, including management strategies, ESG
information and the status of each business, through directcommunication with shareholders and institutional investors.
Our dedicated IR teams based in Tokyo and Geneva engages
in daily dialogue with sell-side analysts and institutional
investors on not only earnings announcements, but also
ESG. We had approximately 500 meetings in 2019.
Our executive management team, including the president,
executive vice president or senior vice president also visits
domestic and overseas institutional investors for meetings.
This includes visits to major cities in North America, Europe
and Asia.
Moreover, we attend conferences held by brokers, both inJapan and overseas, to meet with sell-side analysts andinstitutional investors. We hold several briefing sessions for
non-institutional investors every year.
In 2019, we held an RRP-manufacturing factory tour torespond to a request from sell-side analysts and institutional investors.
Going forward, we will continue to carry out IR activities thatwill meet the needs of shareholders and institutional investors.

Japan Tobacco Inc. Integrated Report 2019 055

CORPORATE PROFILEVALUE CREATIONABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYSTRATEGYFINANCIAL INFORMATIONKey Performance Indicators
Financial Performance Review
Revenue

Adjusted Operating Profit

Profit(JPY BN)(JPY BN)(JPY BN)
392.4

2,216.0

2,139.7

585.3

2,175.6

600.8

+5.3

595.5

-84.8

385.7

348.2

515.9

JPY

2,175.6BN

1.8%

decrease year-on-year

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

2017

2018

2017

2018

Operations

2019 atconstant FX

FX

2019

13.4 % decrease to515.9 BN (reported basis)
0.9% increase at constant currency
JPY

2017

JPY

2018

348.2 BN2019

9.7% decrease year-on-year
Profit attributable to owners of the parent company.

Adjusted operating profit=Operating profit+amortization costof acquired intangibles arising from business acquisitions+adjusted items (income and costs)*

2019*Adjusted items (income and costs) are impairment losses on goodwill,
restructuring income and costs and others

Core Revenue

Free Cash Flow

International Tobacco Business (USD MM)

Japanese Domestic Tobacco Business (JPY BN)
590.6+1,04910,49812,379582.4

Dividend Per Share(JPY BN)

(JPY)
404.2

568.9

140

-884

2018

154

2018

2019

11,496

11,330

72.6

2017

150

Operations

2019 atconstant FX

FX

2019

2017

2018

9.3 % growth to

2.3 % decrease to

USD

JPY

U.S. dollar-based core revenue for the international tobacco
business. Includes waterpipe tobacco and RRP, but excludes
revenue from distribution, contract manufacturing and otherperipheral businesses.

Core revenue for the Japanese domestic tobacco business.
Includes revenue from domestic duty free, the China
business, little cigars and RRP, but excludes revenue from
distribution of imported tobacco in the Japanese domestic
tobacco business, among others.

12,379 MM (at constant currency)

056 Japan Tobacco Inc. Integrated Report 2019

2017

2019

568.9 BN

JPY

105.6

2018

2017

2019

404.2 BN298.6 BN increase year-on-year
Free Cash Flow is sum of cash flows from operating
activities and investing activities, but excludes the following
items:

4 yen increase to

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

• From operating cash flow: depreciation from lease transactions, interest
received, dividends received, interest paid and income taxes related tothese items excluding lease transactions• From investing cash flow: purchase of investment securities (both shortterm and long-term), payments into time deposits, proceeds from sale orredemption of investment securities (both short-term and long-term),
proceeds from withdrawal of time deposits and other investing activities
not for business operation purposes

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Non-Financial Performance Review
Dow Jones Sustainability Indices

Environment

We are very proud to be listed in the Asia-Pacific Dow Jones Sustainability Index for thesixth consecutive year, moving up to second place in the tobacco industry.
Highlights include:• Improved scores and ranking across all economic, environmental and social dimensions• Industry leader in the social dimension, with full scores in Corporate Citizenship andPhilanthropy and Social Reporting• Perfect scores of 100 also in Environmental Reporting and Climate Strategy• In the economic dimension, we scored 100 in Materiality• Recognized with SAM Bronze Class 2020 ranking and as a SAM Industry Mover
2020 for the first time
See The Sustainability Yearbook 2020 for more details.

We strive to further reduce environmental impacts, focusing on the most significant environmental risks and opportunities forour business and stakeholders. Learn more about our Environment data at JT.com.

RRP(CO2e thousand tons)

Combined Scope 1 and 2
GHG Emissions(CO2e thousand tons)

Anti-Illicit Trade28

We provided information to law enforcement that led to:countries, with a choice of three tobacco vapor offerings

70+ counterfeit tobacco factories and storage(T-Vapor) and five types of e-cigarettes (E-Vapor).

locations raided

3.2 billion+ illegal cigarettes seized

Scope 3At the end of 2019, our RRP portfolio was present in

ARISE*

Human Rights
We completed

GHG Emissions in Our Value Chain in 2019

9 Human Rights Impact Assessments in

6,186 children off farms and into schools through theWater Withdrawal (Thousand m3)

Waste Generated (Thousand tons)

ARISE programhigh-risk countries.

*Achieving Reduction of Child Labor in Support of Education

Agricultural Labor Practices

Community Investment

Of all the entities that provided us with tobacco leaf, either

50 (USD MM) invested in our communities
10,256 employees volunteered 33,055 hours

directly or through leaf merchants,

81% reported against Agricultural Labor Practices.

on company time

3,640 employees spent 22,841 hours of their own timetaking part in volunteering activities

Human Resources

Compliance

Our international tobacco business was certified as a Global Top

99.7% of our employees in our Japanese operations

Employer for the sixth consecutive year. We were certified as a
Top Employer by the Top Employers Institute in

63 countries

around the world. In Japan, JT was selected as a “White 500”
company and achieved Gold status in the Pride Index Report ofcompleted online training on the Code of Conduct.

30,000employees attended training on our Code of

Conduct in our international tobacco business.

Note: T he data have been restated in line with our recalculation policy. Learn more about our calculation methodology at JT.com.

This year, we regained our spot on CDP’s prestigious “A List” for climatechange, putting us in the top 2% of companies achieving A list status. We arealso very proud to have achieved A list status for water security and to berecognized as a leader in supply chain engagement, both for the first time.

Japanese employers for the fourth consecutive year.

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.
058 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 059

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Risk Factors
The JT Group is a leading global tobacco company,
selling products in more than 130 countries/regions.
The Group is also present in pharmaceutical andprocessed food businesses. Due to our businesscharacteristics and changing business environments, we are exposed to various risks.

Under our risk management framework, each division carefully monitors the development of events
that may adversely affect our business. This enables us to identify the risks that may inflict a loss andtake countermeasures against them. When risks are materialized, we promptly respond to minimize
the impact.
We utilize internal guidelines for risk assessments, estimating the possibility of risk materializing andmagnitude of potential impact that the risks have throughout each of our businesses. Based on these1 Substantial or Repeated Tax Increases

2 Increase in Illicit Trade

Tobacco products are subject to excise or similar taxes in
addition to consumption tax and value-added tax. Excise
taxes are increased in many countries, including Japan, as aresult of their governments’ discussion regarding securing
financial income as well as promoting public health. In
general, value-added tax tends to increase as well. We revise
our prices taking into account the expected volume decline
after the price revision, in addition to fully passing on any tax
increase to tobacco products. A tax increase within a reasonable range is manageable through such a price increase as
well as our efforts to support the top-line and pursue cost
efficiency. Most governments take a rational approach on tax
increases, as they are aware that substantial or repeated tax
increases can reduce their tax revenue. However, we haveexperienced tax increases in some markets that had significant impact on our business in the past.

Illicit trade is a major concern not only for the tobacco
industry, but also for the wider society. For the tobacco
industry, it undermines legitimate tobacco business. For
society, illicit trade reduces excise revenue for the government; often fuels organized crime, and may increase healthconcerns due to poor manufacturing quality and improper
product handling. The tobacco industry, including JT, hasbeen fighting against illicit trade, which takes the forms ofcontraband, counterfeit and illicit whites.
Illicit trade tends to increase in a market after substantial or
repeated tax increases. Regulatory actions against ingredients and packages could also trigger the acceleration ofillicit trade because it could make counterfeit manufacturing
easier and detection of illicit products more difficult.
Risk Description and Potential Impact

Risk Description and Potential Impact
A substantial or repeated tax increases on tobacco products
could result in lower consumption and increased illicit trade.
In addition, this could accelerate down-trading to products inthe lower-priced category, resulting in a decline of ourshipment volume, revenue and profit.
Key Measures to Address the Risk
• Promote the understanding of relevant authorities that
substantial or repeated tax increases do not necessarily
serve their purpose.
• Optimize our product portfolio to meet volatile consumer
preferences.
• Enhance our geographical portfolio to mitigate the negative
impact of such tax increases in applicable markets.
• Further improve cost efficiency to secure our profitability.
• Adequately set each product price according to eachmarket in order to minimize the impact of tax increases.

An increase in illicit trade could reduce legitimate industry
volume, leading to a decline in our shipment volume,
revenue and profit. In addition, any costs associated with
combatting illicit trade will cause more pressure on ourearnings. Furthermore, it is possible that low quality counterfeits and improperly handled, smuggled products can cause
damage to the credibility of genuine brands as well as the
reputation of their owners.
Key Measures to Address the Risk
• Engage with governments, regulatory bodies and law
enforcement agencies to eradicate illicit trade.
• Ensure we conduct business transactions with reputablebusiness partners in accordance with our rigorouscompliance policy.
• Raise awareness among our consumers of the negative
consequences of purchasing illegally traded products.

assessments, we report any material risks, which might have a significant impact on our business
operations and financial results, to the CEO and decision is taken for implementation of countermeasures.
The following is not an exhaustive list or explanation of all risks which we may face. All the risk
factors potentially have a material impact on our business operations and financial results.
Please read this chapter together with the forward-looking statements of this report.

Working together with authorities:
JT International Holding B.V. and JT International S.A.,
two JT Group subsidiaries, have entered a cooperationagreement with the European Union (EU), and EU
Member States as part of efforts to combat illicit trade.
Under this agreement signed in 2007, we contributed
an annual US$50 million in the first five years from its
execution and have been contributing an annual
US$15 million in the subsequent ten years. Thisfinancial contribution is to support anti-smuggling andanti-counterfeiting initiatives led by the EU and its
Member States.
JTI-Macdonald Corp., our Canadian subsidiary, also
signed a similar agreement with the Government andProvinces of Canada in 2010.
We have been implementing and operating our Trackand Trace system as part of our compliance policy formore than a decade; initially, as a self-regulation
measure and later, to meet legal requirements in somecountries/regions. We are complying with the regulations as of entry into force.

Risk Description and Potential Impact
Further tightening of tobacco regulations on promotional
activities could undermine our strategy for top-line growth as
we lose opportunities to enhance brand equity. Moreover,certain regulations may impose additional costs on us. Thesemay negatively impact our volume, revenue and profit.
Key Measures to Address the Risk
• Identify ongoing regulatory initiatives as early as possible
by promptly collecting accurate information.
• Endeavor to hold constructive dialogues with governments
and regulators for reasonable and balanced regulations
that meet their objectives.
Regulation and Other Relevant Laws

4 Competition
The JT Group competes fiercely in both Japanese domestic
and overseas tobacco markets with our competitors.

Tobacco Business: Regulatory Environment and Illegal Trade

3 Tightening Tobacco Regulations
The tobacco industry is highly regulated in various aspects,
including advertising and promotion, and these regulations
could influence our business performance and financial results.
For example, we may incur additional costs in order to comply
with ingredients and packaging requirements. Furthermore,these regulatory attempts could lead to an increase in illicit
trade and negatively influence our legitimate business. Moreprohibitive regulations on communication with consumers
may also adversely affect our top-line performance.
As a responsible company, we comply with all of the laws
and regulations where we operate. We believe that laws andregulations should differ in each country, reflecting their own

060 Japan Tobacco Inc. Integrated Report 2019legal, social and cultural background. Therefore, we endeavor to hold constructive dialogues with governments andregulators for a reasonable and balanced approach towards
tobacco regulation.

In the Japanese domestic tobacco market, the liberalization ofimported tobacco products took place in 1985, followed by
the suspension of its custom duties in 1987. Since then,competition has intensified each year due to aggressive sales
activities by competitors, diversified consumer preferences
and rapid expansion of the RRP market.
In the overseas tobacco markets, we expanded our own
business organically as well as through M&A, by acquiring thenon-U.S. tobacco business of RJR Nabisco Inc. and thereafter
acquiring Gallaher Group Plc. As a result, we are in competition with global players and local competitors with theirunique strengths within each of their markets.
Market Share can fluctuate due to a number of factors,
including changes in regulations, consumer preferences
and the economic conditions of each market, as well ascompetitors’ pricing strategies or brand equity. Moreover,Japan Tobacco Inc. Integrated Report 2019 061

CORPORATE PROFILE

any temporary factors, such as new product launches and theassociated promotional activities, can influence market sharein the short-term.
Risk Description and Potential Impact
Fluctuation of our market share may affect our businessperformance. In addition, price competition (price reductionsor brand repositioning among others) aimed at increasing
market share, may negatively affect our profit margins.
Key Measures to Address the Risk
• Optimize our product portfolio by:– developing and providing products that can capturechanges in consumer preferences and needs– placing brands with strong brand equity in each pricecategory• Enhance trade marketing capability and effective
promotional initiatives.
• Further improve cost efficiency to secure our profitability.
• Avoid overdependence on a small number of markets assources of profits by expanding the pool of highly
profitable markets.

5 Country Risks
The JT Group, especially the tobacco business, has consistently expanded our earnings base to secure long-term
growth by making acquisitions, entering new markets aswell as organic growth in each market. However, thesegeographical expansions may increase our exposure tocountry risks. In any market where we operate, we may facepolitical, economic or social turmoil, which may negatively
affect our operations and financial results.

dollar and Swiss franc. Therefore, exchange rate fluctuations offoreign currencies against the Japanese yen influence ourreported financial results. As for the financial reporting of theinternational tobacco business, JT International Holding B.V.
consolidates the financial results of the international tobacco
subsidiaries and reports its consolidated financial statements in
U.S. dollars. We often communicate the financial performanceof our international tobacco business in U.S. dollars, which isaffected by exchange rate fluctuations against the U.S. dollar. In
principle, we do not hedge the risks that arise from thetranslation of financial statements. However, we hedge against
risks that arise when equity denominated in each functional
currency is translated into Japanese yen to be consolidated byusing foreign currency-denominated, interest-bearing debts andpart of these are designated as net investment hedges.
In addition, many Group subsidiaries make transactions incurrencies other than their reporting currencies for day-to-day
operations. Such transactions also involve the risk of exchange
rate fluctuations. We mitigate these transaction risks throughhedging activities; however, it is not possible to completely
eliminate them.
Furthermore, when we liquidate or sell a Group subsidiary
which we acquired in a currency other than the Japanese yenor impair a substantial value of such a subsidiary, the gain orloss from the transaction includes the currency fluctuation
impact. Specifically, the impact comes from the difference inthe exchange rates of the relevant currency against theJapanese yen at the time of the acquisition and at the time ofsuch transaction.
Risk Description and Potential Impact

Political instability, economic downturn, social unrest or otherunfavorable developments in a certain market could disrupt
our business, leading to lower volume, revenue and profit in
the market.

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

Key Measures to Address the Risk

Key Measures to Address the Risk

• Avoid overdependence on a small number of markets assources of profits by expanding the pool of highly
profitable markets.

• Mitigate the risk through hedges such as derivative
contracts, possession of interest-bearing debts in foreign
currencies and others.

Risk Description and Potential Impact

6 Currency Fluctuations

7 Instability in the Procurement of Key Materials

As the JT Group operates globally, it is exposed to risks
associated with currency fluctuations.

Across its businesses, the JT Group procures raw andprocessed materials for product manufacturing. In particular,
we strive to procure key materials in the required quantityand at reasonable costs. Our key materials include agricultural products: most notably, tobacco leaf for the tobacco
business; and grains for the processed food business.
Availability of agricultural products is often affected by

The reporting currency of our consolidated financial statements
is in Japanese yen, while the financial statements of ourinternational subsidiaries are reported in other currencies suchas the Russian ruble, euro, British pound, Taiwanese dollar, U.S.
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natural phenomena, such as weather conditions; as well as
market forces. In addition, there is a growing concern that
agricultural production costs may rise, as a result of increased
demand in energy resources due to global population increases and economic growth in emerging countries.
Risk Description and Potential Impact
Insufficient supply of key materials could lead to inability to
manufacture our products, subsequently resulting in the lossof revenue and profit. Furthermore, the increase in procurement costs driven by higher production costs for agricultural
products would directly pressure our earnings.

FINANCIAL INFORMATION

9 Natural Disasters
The operations of the JT Group may be disturbed by natural
disasters such as earthquakes, typhoons, floods, volcanic
eruptions and others. Japan is one of the most important
markets for our businesses, yet is subject in particular tovarious natural disasters. The Great East Japan Earthquake in2011 was devastating. The impacts on JT Group included
casualties among our employees, physical damage to ourfactories and supply shortages of certain tobacco productmaterials. This forced our tobacco business to temporarilysuspend product shipment and limit shipment volume for an
extended period.

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

8 Unfavorable Developments in Litigation
JT and some of its subsidiaries are defendants in lawsuits
filed by plaintiffs seeking damages for harm allegedly causedby smoking, the marketing of tobacco products or exposure totobacco smoke. As of December 31, 2019, 20 smoking andhealth-related cases were pending, in which one or moremembers of the JT Group were named as the defendant; orfor which JT may have certain indemnity obligations pursuant
to the agreement for matters such as JT’s acquisition of RJRNabisco Inc.’s non-U.S. tobacco business. JT and its subsidiaries, who are defendants in such lawsuits, believe that wehave valid grounds to defend the claims in such lawsuits;
however, we cannot predict the outcome of any pending or
future litigation.
In addition to these smoking and health-related cases, JT and
its subsidiaries may be a party to other lawsuits in the future,such as product liability claims in the event of a productquality problem.
Risk Description and Potential Impact
A decision unfavorable to the JT Group and its consequences,including the payment of monetary compensation, could
materially affect our financial performance. Moreover, critical
media coverage of any lawsuit may reduce social tolerance
about our products. Such media coverage may also prompt
the filing of a number of similar lawsuits against JT or its
subsidiaries, resulting in increased litigation costs.
Key Measures to Address the Risk
• Continue to build well-organized teams coordinating with external
legal counsel to defend ourselves against these lawsuits.
• Continue legitimate and appropriate business operations.

We have developed a Business Continuity Plan, including the
optimization of the global supply chain, in order to minimize
the impact of such disasters.
Risk Description and Potential Impact
Natural disasters could cause damage to our business aswell as our value chain, leading to disruption of our businessand negatively impacting financial results.
Key Measures to Address the Risk
• Continuously review the Business Continuity Plan andrevise it as necessary.
• Carry out emergency drills to increase employees’
preparedness against disasters.
• Insure key assets such as buildings, machinery, equipment
and inventory to recover financial losses as appropriate.

10 Climate Change
Climate change caused by global warming can trigger
abnormal weather conditions that could cause various
damages. These include flooding, landslides, severe heat,
heavy snowfall and drought due to unseasonable weatherchanges, water resources depletion and loss of biodiversity.
Risk Description and Potential Impact
Climate change could adversely affect our results of operations
by damaging the JT Group and our value chain.
Key Measures to Address the Risk
• Work to reduce environmental impact by reducing
greenhouse gas emissions, using water resources
efficiently and reducing waste.
• Establish a system to better understand the impacts ofclimate change on businesses and respond appropriately,such as formulating a scientifically based plan to reducegreenhouse gas emissions (SBT) in the JT Group
Environment Plan 2030 and investigating scenario analyses.
Improving Our Environmental Impact

Litigation
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Regulation and other Relevant Laws
Tobacco Business
Regulation in International Markets
The regulatory environment for tobacco is getting stricter
year by year, in the wake of the Framework Convention on
Tobacco Control (FCTC), which came into force in February
2005. The Japanese government ratified the framework in
June 2004.
The purpose of the FCTC is to control continuously andsubstantively the proliferation of smoking. Its provisions
include price and tax measures; non-price measures toreduce demand (including protection from passive smoking, testing and measuring the contents and emissions of
tobacco products and their information disclosure, productpackaging and labeling, regulations on tobacco advertising,promotion and sponsorship), and measures related to the
reduction of tobacco supply (including prevention of illicit
trade and prohibition of sale of tobacco products to minors).
All Parties to the FCTC are obligated to develop, implement, periodically update and review strategies, plans andprograms for tobacco control. However, each party, has aright to determine the content, scope and specific implementation method of their own tobacco control.
After coming into force, the Parties of FCTC continue their
discussions through regularly holding the Conferences of
the Parties (COP) in order to develop the protocols (forwhich additional ratification, acceptance, accession andother are required to the FCTC Parties) and guidelines inview of implementation of each FCTC provision.
Specific regulations are also undertaken in each country.
For example, Russia, a key market of the JT Group,
enacted the comprehensive tobacco control law in February 2013 and has gradually been implementing it sinceJune 2013. The law includes a retail display ban; restrictions on sales of tobacco products in certain retail stores; aban on advertising, sponsorship and promotions; theintroduction of minimal pricing; a ban on smoking in public
places; and anti-illicit trade measures.
In addition, the EU revised the EU Tobacco Product Directive(EU TPD) announced in July 2001 and it entered into force
in May 2014. The revised Directive includes the tightening of
packaging and labeling regulations; restrictions on the use ofadditives including menthol for cigarettes and Fine Cut;
regulations related to electronic cigarettes; and anti-illicit
trade measures. Each member state has legislated theirnational laws based on the revised Directive.
Furthermore, the Australian government introduced plain
packaging in December 2012, which prohibits displaying
logos and brand images on tobacco packages. The regulation only allows product names to be displayed in theprescribed color, font, font size and font color. Various
countries including France, U.K. and others have also
introduced and legislated similar regulations, while othercountries has been discussing its implementation.
064 Japan Tobacco Inc. Integrated Report 2019

With regards to the regulation in those new category
products including RRP, new standards or frameworks for
reduced risk claims have been established in a few countries
such as the U.S. and European countries. In order to gain
official approval from governments, activities in developing
reduced risk claims have been intensified among major
global tobacco manufacturers. At the same time, somecountries have adopted different regulatory initiatives tothese products. For instance, the U.S. newly implemented
the prohibition of the sale of certain flavored E-Vapor
products in February 2020. Moreover, some governments
have applied the same level of regulations to these products
as those to conventional tobacco products. However, weunderstand that no substantive global trend on regulations
has been observed yet in this new product category.
Regulation in the Japanese Domestic Market
The Tobacco Business Act and its related acts, statutes, andvoluntary rules regulate the sale and promotion activities oftobacco products in Japan. These regulations include theplacement of caution statements on tobacco productadvertisements and packages that urge caution over the
relationship between the product consumption and health(hereinafter referred to as the Caution).
The amendment of Ordinance for Enforcement of the
Tobacco Business Act (hereinafter referred to as theamendment of the Tobacco Ordinance) in November 2003
included the wording of the Caution on tobacco productpackages. All tobacco products sold in Japan have compliedwith the amended act since July 2005. In addition, theJapanese Minister of Finance has indicated a Guideline forAdvertising of Tobacco Products (hereinafter referred to as
the Advertising Guideline) based on the Tobacco Business
Act, Article 39 (caution statements) and Article 40 (advertising regulations). The Advertising Guideline was amended in
March 2004 in accordance with the amendment of the
Tobacco Ordinance.
Tobacco Institute of Japan (TIOJ) has voluntary rules regarding
the packaging, advertising and sales promotion activities for
tobacco products (hereinafter referred to as the Tobacco
Rules) as per the Tobacco Ordinance. All member companies,
including the JT Group, comply with the Tobacco Rules.
Under the meeting for the Financial System Council
tobacco business subcommittee, a new labeling subcommittee was established in February 2016, which conducted
an evaluation on the Advertising Guideline. The labelingsubcommittee reported the results to the tobacco businesssubcommittee in June 2016, proceeding further discussions within the tobacco business subcommittee. As aresult, the Regulation Review of the Caution and Advertising was published on December 28, 2018.
Based on the aforementioned review and a promulgation ofa partial amendment of the Ordinance for Enforcement of
the Tobacco Business Act; the Advertising Guideline; andRelated Notices of the Tobacco Business Act on June 14,
2019, TIOJ revised the Tobacco Rules on the same day.

business performance if there will be further enhancementof these regulations or if we are unable to adapt into them.

There are four criteria in this revision: the revision ofstandards for tobacco products; establishment of new rules
for T-vapor products; establishment of new rules for T-vapor
devices; and establishment of new rules for business activity and television advertising to advocate the improvementof smoking manners.

Tobacco Business Act
The importers and wholesalers of manufactured tobacco
products must register with the Minister of Finance. On theother hand, retailers of manufactured tobacco products
must obtain the license from the Minister of Finance. The
retailers must sell the products manufactured by JT andimported tobacco products at the fixed retail price that is
approved by the Minister of Finance. The Minister ofFinance must approve the filed retail sales prices unlessthe prices are considered unfairly prejudicial to consumers.

With regard to the Caution, the revision now requires (a)caution statement changes on tobacco product packages
by July 1, 2020 and (b) more restrictive advertisement
measures for tobacco products. The changes in (a) include
wording revision, which reflects the latest scientificknowledge, and increasing the area of the statements atleast 50% on the surface. With regard to (b), the measures
include more effective ways to prevent minors’ access tointernet advertisements and new restrictions on the sizeand presentation methods for point-of-sale advertising.
The enactment of the Partial Amendment of the Health
Promotion Act (Act No. 78 of July 25, 2018) (hereinafterreferred to as the Act) in July 2018 strengthened measures
to prevent unwanted passive smoking at facilities used bynumerous people. The Act classifies the facilities into
three types in terms of measures to take: Facility Type 1
includes schools, hospitals and administrative agencies;
Facility Type 2 includes restaurants, offices, factories andany other facilities that do not fall under Facility Type 1 or
facilities whose main purpose is not for smoking; andother facilities that do not fall in Facility Type 1 or 2 whose
main purpose is to provide a place for smoking (includes
public smoking areas, bars that are mainly for smoking
and tobacco retailers). Facility Type 1 prohibits smoking
within its site but allows designated outdoor smoking
areas if they meet all of the requirements. Facility Type 2
prohibits indoor smoking but allows designated smoking
rooms after meeting certain criteria. Additionally, arestaurant can allow indoor smoking once it meets certain
requirements. Facilities whose main purpose is to provide
a place for smoking allow smoking within their sites. We
expect less smoking places to be available after the Act
comes into full enforcement on April 1, 2020. We forecasta certain level of impact on our Group’s business performance while it is difficult to predict the anticipated changes
in smoking environment.
Impact on the Group’s Business Performance
The JT Group expects regulations, such as the aforementioned and new ones (including those of local governments), to expand across Japan and other countries where
we operate, although it is difficult to forecast the exact
contents of possible laws, regulations and industry guidelines relating to sales activities, marketing, packaging andlabeling, tobacco products and smoking.
We support any appropriate and rational tobacco regulations.
Nevertheless, we also expect unfavorable impact on our

The Tobacco Business Act requires the JT Group to enter
into purchase contracts with Japanese tobacco growers
annually, regarding the aggregate cultivation area for
specific varieties of leaf tobacco and the prices for the leaf
tobacco by variety and grade. The Group must purchase allleaf-tobacco-produced pursuant to such contracts, except
those that are not suitable for the manufacture of tobacco
products. Before entering into the contract, the JT Groupshall submit a proposal to the Leaf Tobacco Deliberative
Council (hatabako shingi kai, hereinafter referred to as theCouncil). The Group, with the approval of the Minister ofFinance, appoints members for the Council among those
who represent the domestic leaf tobacco growers andacademic scholars. The proposal covers the area ofdomestic tobacco cultivation as well as the purchasing
price of leaf tobacco and the Group shall honor the Council’s opinions. Similar to many other agricultural products inJapan, production costs for domestic-grown leaf tobacco
are higher than those that are foreign-grown. This results inthe purchase price for the domestic-grown leaf tobacco(before re-drying) to be approximately three times higher
than that of the foreign-grown leaf tobacco (after re-drying).
The Japan Tobacco Inc. Act
Pursuant to the Japan Tobacco Inc. Act (hereinafter referred
to as the JT Act), JT was established to manage thebusiness related to manufacturing, sale and import oftobacco products. Based on the JT Act, the Japanese
government must hold over one-third of all of the Company’s issued shares except for the class shares, which haveno voting rights against all matters that can be resolved at
our shareholders’ meeting. The JT Act also states that it
requires the approval of the Minister of Finance for any
issuance of new shares and stock acquisition rights as well
as for any issuance of new shares, stock acquisition rights
and bonds with stock acquisition rights in case of ashare-for-share exchange.
The JT Act also indicates that under the approval of the
Minister of Finance, the JT Group may engage in businesses other than manufacturing, sales and imports of tobacco
products or tobacco-related business that are essential toserve the purpose of the Group. Certain matters, including
the appointment or dismissal of Directors, Executive
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Litigation
Officers and Audit & Supervisory Board Members; amendments to our Articles of Incorporation; distributions ofsurplus (excluding loss compensation); mergers; corporate
splits or dissolution also require the approval from the
Minister of Finance. The JT Group must submit its statement of financial position, statement of income andbusiness report to the Minister of Finance within threemonths after the end of each fiscal year.
The supplementary provisions of the Reconstruction
Financing Act* came into effect on December 2, 2011. This
Act states that the government shall consider the possibility of full disposal of government-owned JT shares byreassessing owned JT shares through taking into accounttheir involvement in the tobacco-related industries basedon the Tobacco Business Act by the fiscal year ending
March 31, 2023.
* Reconstruction Financing Act: Act on Special Measures for Securing
Financial Resources Necessary for Reconstruction from the Great East
Japan Earthquake.

Voluntary Marketing Regulations
The JT Group’s Global Marketing Principles
The JT Group complies with all regulations of the respective
countries where we operate. At the same time, we pursue
our business based on the JT Group’s Global Marketing
Principles (hereinafter referred to as the Principles), which
value responsible marketing. The JT Group markets only
towards existing adult consumers with the aim of maintaining brand loyalty and encouraging adult consumers to switch
to our brands. Moreover, we recognize that youth smoking
prevention is an issue that must be addressed by society as
a whole. Based on the Principles, we will continue tooperate our business appropriately, while working withgovernments and other relevant organizations to take steps
towards preventing youth smoking.
Please refer to JT.com for more details.

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

066 Japan Tobacco Inc. Integrated Report 2019

In Japan, the marketing of pharmaceutical products is
subject to the supervision of the Ministry of Health,
Labor and Welfare (MHLW) and relevant prefectures,primarily under the Act on Securing Quality, Efficacy and
Safety of Products Including Pharmaceuticals and Medical
Devices. This Act requires pharmaceutical companies toobtain an approval to conduct their manufacturing anddistribution activities from every prefecture where they
operate once every five years. In addition, the companies
must obtain marketing approval for each of their products
from the MHLW.
The Japanese universal health insurance system sets a listof pharmaceutical drugs and their official prices which
medical insurance can cover. Moreover, drastic reform of
the drug pricing system will create challenging circumstances due to annual drug price revision, constraints on
the scope of price maintenance premium drugs, pricereduction of long-listed drugs according to replacement rateand similar factors.

Processed Food BusinessAs a manufacturer and a distributor of food products, theJT Group’s processed food business is subject to regulations mainly under the Food Safety Basic Act, the Food
Sanitation Act and the Food Labeling Act.
The Food Safety Basic Act requires food-related companies
to take necessary measures to ensure food safety in eachprocess of the supply chain as well as to provide information about foods and food-related goods appropriately.
The Food Sanitation Act aims to prevent the sanitation
hazards resulting from consumption of food and beverages.
This Act requires food-related companies to take necessary
measures under their own responsibility to ensure the safety of food, additives, tools and packages. The measures
discussed in the Act include the acquisition of knowledge
and skills, assurance of raw material safety and inspection.
The Food Labeling Act sets the standards for the labelingof food intended for sale and defines the labeling requirements such as allergens, expiration date, materials or
origin. Food-related companies and entities must comply
with the standards to prepare their product labels.
While complying with the abovementioned laws andregulations, the JT Group is also striving to address ina high level of food safety control through four perspectives: Food Safety, Food Defense, Food Quality andFood Communication.

JT and/or some of its subsidiaries are defendants inlawsuits filed by plaintiffs seeking damages for harmallegedly caused by smoking, the marketing of tobacco
products or exposure to tobacco smoke. As of the fiscal
year-end date, there were a total of 20 smoking andhealth-related cases pending in which one or more members of the JT Group were named as a defendant or forwhich JT may have certain indemnity obligations pursuant
to the agreement for JT’s acquisition of RJR Nabisco Inc.’s
non-U.S. tobacco business. In addition, JT and some of its
subsidiaries are also defendants in lawsuits other than thesmoking and health-related cases.
As of the fiscal year-end date, there are 10 ongoing healthcare cost recovery cases in Canada pending against
JTI-Macdonald Corp. (hereinafter referred to as JTI Mac), ourCanadian subsidiary and JT’s indemnitees (RJR Nabisco
Inc.’s affiliates), brought by Canadian provinces. In addition,
there are eight pending class actions in Canada whereplaintiffs are seeking damages for harm allegedly caused bysmoking of cigarettes. Damages claimed in some of thesecases reach sums in the multi-billion-dollar range. The JT
Group will continue to take all appropriate actions to defend
such claims vigorously and believes there are a number ofvalid defenses.
On March 8, 2019, JTI-Mac filed for protection from its
creditors under the Companies’ Creditors Arrangement Act(CCAA). The Ontario Superior Court has granted the CCAA
application and extended protection in favor of JTI-Mac. All
the Canadian matters against JTI-Mac have been stayed by
the court order. JTI-Mac carries on business in the ordinary
course under the CCAA.

e-cigarette manufacturers in the U.S. However, as of the
fiscal year-end date, neither JT nor any of its subsidiaries
are a party to these cases.
Please refer to the “Consolidated Financial Statements,“Note” 38 Contingencies – Contingent Liabilities” for major
lawsuits to which JT and some of its subsidiaries are
named as defendants.
To date, The JT Group has never lost a case or paid any
settlement award in connection with smoking and health-related litigation. However, the Group is unable to predict theoutcome of currently pending or future lawsuits. A decision
unfavorable to the JT Group and payment of substantial
amount of monetary compensation could materially affect its
financial performance. Moreover, regardless of the results ofthese lawsuits, critical media coverage may reduce social
tolerance of smoking, strengthen public regulations concerning smoking and prompt the filing of a number of similar
lawsuits against the JT Group, forcing it to bear litigation
costs and materially affecting our business performance.
Apart from smoking and health-related ones, the JT Groupalso may become the defendant in further litigation. Whenany problems arise on the Group’s product quality, this willlead to a claim seeking profit liability. Such litigation cases
may negatively affect its business performance or manufacture, sale and import and export of our products, should theiroutcomes prove unfavorable.

In recent decades, numerous, large-scale, smoking andhealth-related cases have been brought against tobacco
product manufacturers in the U.S. and some of the cases
initially resulted in verdicts with massive damage awards.
JT and its subsidiaries are not defendants in any of theselawsuits, nor are they subject to any indemnity claims withrespect to them. The JT Group’s U.S. tobacco businessdoes not include the business that it acquired from RJR
Nabisco Inc. in 1999, as well as the Natural American
Spirits’ non-U.S. business that it acquired from the Reynolds American Inc. group in January 2016. Even now, thescale of the JT Group’s U.S. tobacco business remains
small. Hence, the Group considers potential exposure tosmoking and health-related litigation in the U.S. to be low;
we believe that litigation in the U.S. will not materiallyaffect its businesses in the near future.
Following the 2015 acquisition of Logic Technology
Development LLC, the JT Group operates an e-cigarettebusiness in the U.S. The Group is aware of related ongoing
litigation alleging health effects associated with e-cigarette
use and harm caused to consumers by misleading representations and advertising for which plaintiffs are seeking
damages and/or demanding health warnings against
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FOR SUSTAINABILITY
070 Respect for Human Rights
071 Improving Our Socialand Environmental Impact
074 Good Governance andBusiness Standards– Dialogue between the Chairman of
the Board and an Outside Director

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Respect for Human Rights

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY

Improving Our Social Impact
We respect human rights across our value chain
and recognize the Universal Declaration of Human
Rights, the International Bill of Human Rights andthe International Labour Organization’s
Declaration on Fundamental Principles and Rights
at Work. The JT Group Human Rights Policy
follows the framework provided by the UN
Guiding Principles on Business and Human Rights(UNGPs).

Our community investment policy determines acommon goal across the JT Group: “To contributeto the development of sustainable societies, byhelping to make communities more inclusive.” We
believe that everyone should have the opportunity
to participate in society, and that inclusive societies
are also better for business.
Our community investment programs are
implemented according to our community
investment policy. All of our programs have apositive impact on our communities while
respecting the environment and the diversity ofsocieties and individuals.

Our Approach and Progress
InformWe are working hard to embed human rights thinking in our
Corporate culture and to improve employees’ understandingof the human rights implications of business decisions. To dothis, we provide regular training and continuously share
information about human rights and the JT Group Human
Rights Policy.
Assess
We conduct Human Rights Impact Assessments (HRIAs) to
identify and assess actual and potential human rights risks. Inline with the UNGPs, our HRIAs focus on the greatest risk topeople, both within our own Company and through business
relationships with our suppliers from farm to store. As a resultof the HRIAs, we aim to address the identified risks of therights-holders, meet our stakeholder expectations on
respecting human rights and mitigate against the overall risks
to people and the business.
Conducting human rights due diligence – through HRIAs – ispart of our Corporate responsibility to prevent adverse
impacts on people and ensure that the highest standards of
behavior are upheld within our business and value chain. To
achieve this, we are committed to assessing 100% of ourhigh-risk countries by 2025, in our tobacco business.
As part of this commitment, we have completed nine HRIAs
across our entire value chain in the last two years – in the
Dominican Republic, Egypt, Ethiopia, Kazakhstan, Kyrgyzstan,
Malaysia, Mexico, Myanmar and Tanzania. In our Japanese
operations specifically, we started conducting due diligence inour processed food business in China and Thailand.
Over the last year, we have also conducted HRIAs in our
tobacco leaf supply chain in various markets, including
Ethiopia and India. These assessments provide a morecomprehensive understanding of the human rights impacts
Learn more about our findings from HRIAs at JT.com.
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within one specific part of our value chain — our tobacco
supply chain and farming business — and the root causes ofchallenges that tobacco growers face in their communities.

Our Focus Areas

Measurement and Evaluation

Through long-term partnerships with local and internationalorganizations, we are implementing about 400 community
investment programs that contribute to the development of
inclusive and sustainable societies across 68 countries.
The programs are based on global and local needs and help
communities become more inclusive and resilient. We arefocusing on three specific issues:
1. Reducing inequalities, e.g., helping underprivileged people
gain access to food and education.
2. Improving community resilience in disaster-prone areas,e.g., providing access to clean water.
3. Protecting the environment, e.g., replanting trees with thehelp of our employees.

Our work is highly rated by external agencies, including the
Dow Jones Sustainability Indices (DJSI), which recognizes
us as the industry leader in “corporate citizenship andphilanthropy,” with a perfect score of 100.

Improve
We develop action plans to address issues identified throughHRIAs and self-assessment questionnaires. Since 2018, we
have developed nine action plans in our tobacco businessand seven action plans in our processed food business, eachwith an agreed timeline. A Network of Human Rights
Champions is responsible for ensuring that these action plans
are managed and implemented by each country and respectfor human rights is firmly established in the business.

The United Nations Guiding Principles
on Business and Human Rights makethe pathway clear: companies have a
responsibility to respect the rights of
those they impact through their business
operations and supply chains.
As a company, we have embraced ourobligation to respect human rights andare committed to tackling the challenges
this will bring. We have made solid
progress and will continue this work on
our journey of continuous improvement.
Charlie Watson
Director, Human Rights, JT International S.A.

To measure the social impact of
our work, we use the LBG*
Framework provided by
Corporate Citizenship.
* Global standard for measuring and reporting on corporate community investment

Our Contribution to Communities in 2019
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 refer to page 27 for more details on our progress towards our targets.

50

Total
(USD MM)
US$44,044,379 in cash
US$ 4,213,951 in management costs
US$ 1,109,297 in employee
volunteer hours
US$ 303,483 in kind

33,055 398+ 689 2,270,421

Hours volunteered

Community

Organizations(only including
volunteering during

investment programs

supported

Beneficiaries

working hours)

Note: We applied the average exchange rate for 2019 (US$1= 109.03 yen).
Learn more about our community investment activities at JT.com.

Japan Tobacco Inc. Integrated Report 2019 071

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Improving Our Environmental Impact
JT Group Environment Management
Environmental issues, such as climate change, are of increasing societal concern.
Our operations impact the environment through resource usage, emissions andwaste generation, as do most industries. The environment also has a direct influenceon our business. We all need to address environmental issues and, as a globalorganization, we recognize that we have a key role to play in reducing our impacts,
not only from our own operations but across our value chain.

In our more complex operations, we align our approach toenvironmental management with internationally recognized
standards – ISO 14001 and ISO 50001.*3 In our smaller andless complex operations in Japan, we have implemented ourown “JT Green System,” which promotes a simple andconsistent approach.

By implementing sustainable business practices, we are able to conserve resources,
reduce waste, manage costs and meet growing consumer demand for moresustainable products – bringing benefits to both the environment and our business.
This approach is explained in the JT Group Environment Policy.

To objectively review our approach to environmental
management and our overall performance, we use external
disclosures and ratings agencies, such as CDP and the

Dow Jones Sustainability Indices (DJSI). In 2019, we
improved our rating in DJSI’s environmental dimension andachieved the maximum score in Environmental Reporting
and Climate Strategy.

Learn more about our approach to environment on JT.com.

CDP A List and Supplier Engagement Leader
Since 2010 we have reported on our environmental impact to
CDP, a leading external ratings agency and climate research
provider. This year we regained our spot on CDP’s prestigious“A List” for climate change (press release in January 2020),
having done so previously in 2016. We are also very proud toreport that we are included in the CDP A List as a global leader
on water security for the first time (press release in February2020) and recognized as a global leader in engaging our supply
chain in addressing climate change.

The JT Group Environment Plan 2030*1
In 2019, we launched the JT Group Environment Plan 2030,
which sets objectives and targets that address our key
environmental risks and opportunities in relation to three focus
areas: Energy and Emissions, Natural Resources and Waste.
Our GHG emission reduction target was approved as ascience based target (SBT) by the Science Based Targets
initiative (SBTi).
Objective

EnergyEmissions

Water

Forestry

Waste

Transition our operations
to net zero carbon energy
supply.

TargetProgress in 2019

We will double the proportion of renewable electricity that we use to
25% by 2030 and 100% by 2050.

13.9%

Reduce our greenhouse gas
emissions to support the Paris
Agreement on global climatechange with the aim ofachieving net zero carbon
emissions from our operations.

We will reduce greenhouse gas emissions from our own operations by 32%.

-14.3%

We will reduce emissions associated with our purchased goods andservices by 23%.

+ 9.0%*2

This will be achieved through a 40% reduction from our direct leaf supply
chain and reductions in our non-tobacco materials, such as packaging.

p27

Support global water
stewardship by reducing ourwater withdrawal and byencouraging water risk
management in our supply chain.

We will reduce water withdrawal associated with our tobacco business by 15%.

Ensure a sustainable wood
supply for our product supply
chains and further contributeto forest conservation andrehabilitation.

Further reduce theenvironmental impacts ofwaste associated with ourprocesses and products.

To better understand water risk and use in our supply chain, by 2022,
we will implement a water risk management process in our
manufacturing supply chain.
To further focus our efforts on sustainable forest management, by 2020,
we will have assessed the drivers for deforestation and forest
degradation in communities where we source tobacco and developed
action plans for improved wood resource use, forest conservation, andforest rehabilitation.

p27

p27

We will replace all wood from natural forests used in the tobacco curing
process of our directly contracted growers with renewable fuel sources.
We will reduce waste associated with our tobacco business by 20%.
By 2020, we will have targets and action plans relating to theappropriate use and responsible disposal of materials, including
plastics, used in our products and packaging.

p27*1 Baseline year for all targets is 2015. Target year is 2030 unless stated otherwise. The overall plan is to be reviewed every five years.
*2 The main reason for the increase in GHG emissions associated with our purchased goods and services is leaf related emissions rise due to increased leaf volume sourced from Zambia andTanzania, both of which use wood for curing that currently is predominantly non-renewable. We expect that the impact of initiatives to reduce leaf-related emissions will be seen from 2022
onwards, with curing barn upgrades and the increase in proportion of renewable wood used for curing in Zambia and Tanzania.

072 Japan Tobacco Inc. Integrated Report 2019Live barns in Malawi.*4*3 ISO 14001 and ISO 50001, are the internationally recognized standards for environmental management systems and energy management systems, respectively. These standards do notprescribe absolute performance requirements. Rather, they provide us with a framework to help build effective management systems that deliver continual improvement in environmental
and energy performance.
*4 Learn more about Live barns at JTI.com.

Japan Tobacco Inc. Integrated Report 2019 073

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATIONGood Governance and Business Standards
Dialogue between the Chairman of
the Board and an Outside Director

the agenda and the quality of the discussions at board
meetings. Using the feedback from the survey, we conduct
PDCA cycles to further enhance the effectiveness of theBoard of Directors. On this point, what is your take on JT’s
Board of Directors, Ms. Nagashima?

Yukiko Nagashima

Yasutake Tango

Outside Director

Chairman of the Board

The JT Group appoints Outside Directors who cancontribute to the Group’s sustainable profit growthand enhance corporate value in the mid- to longterm, from the perspective of strengthening thesupervisory functions and transparency of business.
The following is a dialogue between Yasutake
Tango, the Chairman of the Board, and Yukiko
Nagashima, an Outside Director since 2019.

Tango: Our management principles pursue the 4S model.
We have been taking various initiatives to enhance ourcorporate governance, which is one of the key challenges for
management, as part of pursuing the model.
Nagashima: It has been almost a year since I was appointed
as an Outside Director of JT. By attending board meetingsand participating in the decision-making process, I haverealized that the 4S model is not just a slogan; it forms thecore standard of making decisions in the Group. What really
impressed me was when one of the Executive Officers was
asked about the status of an acquired overseas tobaccocompany at a board meeting. His report included thefeedback from the employees at the local factory of theacquired company that they were glad to be acquired, sayingthat their uniforms have now become much more hygienic. I
was surprised to receive such an employee-centered reportin addition to quantitative prior- and post-acquisition performance analyses, which are usually mandatory. The former
report also made me realize that there are systems thatenable the observation and reporting of what is happening
on the frontlines from the 4S model perspective, reflecting
the fact that the model has
become the Group’s mindset.
The 4S model pursued by the JT
Group is a cornerstone formaking decisions that takes into
consideration the sustainability ofbusiness operations without
being biased toward any
074 Japan Tobacco Inc. Integrated Report 2019

particular stakeholder. Any decision making is conducted bycomprehensively accounting for the relationships between andimpacts on various stakeholders, ensuring that corporate
activities are not just profit oriented. The JT Group introduced
the 4S model in 1996, which is in harmony with the concept ofsustainability, the global trend now embodied by ESG and the
SDGs. I also think it is important for the Group to communicatethat the 4S model is not just about seeking higher stakeholder
satisfaction; it also enhances the growth of the Group.
Tango: Thank you. Throughout my business trips to ouroffices around the world or when addressing sustainability
challenges, I notice the frontline employees are carrying out
their duties while taking each stakeholder into consideration.
I believe that, in line with your opinions, we must continuously pursue the 4S model.
Needless to say, good corporate governance is the foundationof pursuing the 4S model. The Board of Directors plays a rolein making decisions on Group-wide management strategies
and important matters. At the same time, the Board serves as
the body supervising all business activities. To ensure board
meetings run effectively, it is crucial that all attendees,
including Outside Directors, engage in free, active andconstructive debate and exchanges of opinion. To this end,
proposals to the Board are explained in advance to attendees
by the proposing party or the Corporate Strategy Division,
which serves as the Board’s secretariat. We strive to ensurethat each attendee has enough time to fully assess every
proposal. In addition to proposals, information that supports
the forming of judgments during the decision-making process,such as the business environment surrounding the tobacco
industry, is shared regularly. We also encourage Outside
Directors to visit the frontlines of the Group worksites inJapan and overseas as much as possible. Furthermore, wehave just taken measures to increase opportunities for
Outside Directors and the Audit & Supervisory Board to get
together and exchange opinions.
To evaluate the effectiveness of the Board of Directors, we
conduct surveys of all Members of the Board and Audit &Supervisory Board Members on the operational framework,

Nagashima: In its evaluation of effectiveness, the JT Groupgoes beyond just scoring each element. The Group collects
qualitative comments on both accomplishments and areas ofconcern. The frank opinions of each Member of the Board andthe Audit & Supervisory Board Member are provided as
feedback to the board meetings. I feel that one way the Boardof Directors helps enhance its effectiveness is its assessmentof new initiatives, asking what their aims are and how they
are actually fairing in terms of achieving those aims. One such
example was when the Advisory Panel on Nomination andCompensation was launched, we quickly added new effectiveness evaluation items related to the new panel.
Tango: The Advisory Panel on Nomination and Compensation,
which you just mentioned, was established in 2019 throughthe integration of the formerly independent Compensation
Advisory Panel and the Meeting for Talent Development,
which discussed matters related to supporting the growth ofcandidates for top management positions. The purpose wasto enhance the quality of debate by uniting the two panelsand having the same members hold deliberations.
In terms of selecting our leaders for the next generation, I
would like the CEO, CFO and other top management positions to be filled by people who can seriously tackle thechallenges of the JT Group as well as take the initiative. In
particular, I would like the young people who will lead the JT
Group in the future to always carry out their work with a visionof what they want the JT Group to be in 10, 20 or even 30
years from now. I want them to figure out what they need to
do now to realize their vision of the future and then proactively take on challenges. Some say that our young employees
are relatively quiet compared to those in the past, who used
to put pressure on the top management. I would like theyoung people to discuss what we need to do and take action
with a mindset of leading the JT Group’s future.
Nagashima: As you said, to ensure that the personnel
responsible for the future of the Group are actively engaging
in a wider environment, I think they need to lead theirbusinesses not only by leveraging the global businessfoundations established by their forerunners but also by
focusing on how tobacco is fundamentally defined and, froma longer-term perspective, on defining the ideal relationshipbetween a tobacco product and society. I believe this would
likely lead to more younger people putting pressure on top
management, which you touched on earlier. Additionally, I
think it is very important for the current top management tohave discussions with those next leaders to speedily create
future business opportunities.
In addition, to recruit and train the personnel responsible forthe present and future growth of the JT Group and fully

harness their abilities, it is extremely important that an
appropriate executive remuneration system is in place. As an
Outside Director, I am carrying out my responsibility toestablish a competitive executive remuneration system
befitting those work responsibilities while also assessing its
fairness from a market perspective.
Tango: Last but not least, I
would like to hear your thoughts
on your role as an Outside
Director with regard to issues
related to the corporate
governance and business of the
JT Group.
Nagashima: This is not limited
to corporate governance, but I feel it would be even better
to more strongly communicate the goals and aspirations forbusinesses both internally and externally. The 4S model isultimately a check sheet for operating a business. I think thestarting point for conducting business is embracing thevision of what the JT Group wants to do and what it strives
to be. The support of each stakeholder can only be gained
through the results of these business efforts.
In addition, given the rapidly changing business environment, transformation is an indispensable tool. As weundertake transformation, I would like everyone to take up
challenges in all areas with the belief that they will definitely
succeed and while being unafraid of failure. Rather than craft
a strategy to avoid failures, take up challenges with thebelief that you will definitely succeed and enhance yourquality of output as a result. Even if you fail, you will learnmuch more from the mistakes. I believe that this mindset isalso in harmony with one of the strengths of the JT Group,
which has continued to grow through transformationaccomplished by taking up many challenges amid a challenging business environment.
The company where I worked has repeatedly disrupted its
success models and launched new businesses. I often
encountered occasions where we changed our personnel,
organizations and strategies. In terms of corporate governance, we also changed our management structure, goingfrom a privately owned business to a listed company.
In addition, I once served as CEO of one of the company’s
subsidiaries. What I learned from that experience was that a
CEO’s jobs are to make decisions and take responsibility.
Management can choose from several options but to provethat they have chosen the right one, they must succeed. It isa series of tough decisions, and even if we fail, management
must take responsibility as reflected in remuneration or
position. The current tobacco industry requires its players to
swiftly undertake various projects and I think this is a similar
environment to the one I experienced.
As an Outside Director, I will continue to fulfill my duties throughsubstantive debate while maintaining a healthy distance.
Japan Tobacco Inc. Integrated Report 2019 075

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY

Corporate Governance

The Advisory Panel on Nomination and Compensation

Basic Policy

The Advisory Panel on Nomination and Compensation is avoluntary advisory body to the Board of Directors, which wasestablished on March 20, 2019 by merging the functions of
the existing Meeting for Talent Development and theCompensation Advisory Panel. The Advisory Panel on
Nomination and Compensation was established to aim tofurther enhance objectiveness and transparency by playing arole in supporting senior executive candidates, deliberating
the selection of candidates for Board of Directors and Audit& Supervisory Board, deliberating the dismissal of Executive
Directors and Members of the Board who execute thebusiness, and making reports after deliberating mattersrelated to remuneration of the Members of the Board andthe Executive Officers, thereby enhancing the supervisory
function of the Board of Directors. The Advisory Panel on
Nomination and Compensation consists of the Chairman of
the Board, who chairs the panel, and three Independent
Outside Directors, meeting at least once a year.

The JT Group believes that corporate governance is themeans for conducting transparent, fair, timely and decisivedecision-making for pursuing our management principles, the4S model. Specifically, the 4S model aims to fulfill our
responsibilities to our valued consumers, shareholders,
employees and the wider society, carefully considering therespective interests of these four key stakeholder groups, andexceeding their expectations wherever we can. We haveinstituted the JT Corporate Governance Policy in a belief thatby doing so, it will enable us to achieve mid- to long-termsustainable profit growth and increase company value, which
will contribute to our stakeholders and eventually the economy and society development. We will continue to strive to
make enhancing corporate governance one of the key
challenges for our management.
Please refer to JT.com for more details on the JT Corporate Governance Policy.

Reasons for Choosing the Current Structure
The JT Group has a fair and independent Audit & Supervisory
Board, which strengthens the supervisory function on
management in securing objectivity and neutrality by monitoring the performance of the Members of the Board andExecutive Officers. Under the supervision of the Audit &Supervisory Board, the Group is ensuring efficient operations
with optimal size of the Board of Directors and throughdelegation of authority under the Executive Officer System.
As part of the Company’s efforts to establish an effective
corporate governance system, it has established the JT Group
Compliance Committee with the majority of the members
consisting of external members and the Advisory Panel on

Nomination and Compensation with the majority of themembers consisting of Independent Outside Directors.
Starting 2019, with an objective to further enhance objectivity and transparency of the management and to improve
corporate governance, the JT Group has assigned an
additional member to both the Outside Directors and Audit &Supervisory Board.
We have adopted our current Corporate Governancestructure as these processes have been effective for
operational execution and supervision.

Our Initiatives to Enhance Corporate Governance
Strengthen advisory function

Streamline decision-making system andenhance supervisory function

Pursue efficient business execution

Set up the Compliance Committee (FY2000)

Reduced number of Directors (FY2000)

Introduced Executive Officer System (FY2001)

Set up the Advisory Committee*1 (FY2001)

Promoted the delegation of business execution to the Executive Officers (FY2000, FY2008 and FY2011)

Set up the Compensation Advisory Panel* (FY2006) Invited Outside Directors (FY2012)2

Set up the Advisory Panel on Nomination and Compensation (2019)*1 The Advisory Committee was abolished on June 30, 2014.
*2 The Compensation Advisory Panel was integrated into the Advisory Panel on Nomination and Compensation on March 20, 2019.

General Meeting of Shareholders
Accounting audit/Operating audit

Audit Report
Board of Directors
ReportIndependent
Auditors

Lawyers

nine members(including three
Outside Directors)

Introduce compliance-related matters

Supervise
performance

Accounting
audit
AdviceSelect or dismiss members

Select or dismiss members

Select or dismiss members

Operational Review
and Business
Assurance Division

Report/ProposalInternal
audit
Group
audit

076 Japan Tobacco Inc. Integrated Report 2019

President andChief Executive
Officer

Executive Officers

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
four members(including three
Outside Directors)

Compliance Office

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

Auditor’s Office

In 2019, it convened six times to confirm and discuss
agenda, including a review of the existing executive remuneration plan, a proposal to revise the remuneration plan, thelevel of remuneration, processes for developing the pool of
executive candidates. In addition, we had two Compensation
Advisory Panel meetings before establishment of theAdvisory Panel on Nomination and Compensation.
Members
Chair

Chairman of the Board

Yasutake Tango

Members

Independent Outside Director Main Kohda
Independent Outside Director Koichiro Watanabe
Independent Outside Director Yukiko Nagashima

Nomination of Member of the Board Candidates and Dismissal of
Executive Directors and Members of the Board Who Execute the BusinessIn the JT Corporate Governance Policy, nomination ofMember of the Board candidates and dismissal of Executive
Directors who are the directors with special titles andMembers of the Board who execute the business andrelated matters shall be conducted according to the following.
Member of the Board candidates shall be nominated byresolution of the Board of Directors after receiving reports ofthe deliberations from the Advisory Panel on Nomination andCompensation. The President submits the initial proposal of
the candidates to the Advisory Panel on Nomination andCompensation. Then the Advisory Panel on Nomination andCompensation deliberates while securing appropriate input
from Independent Outside Directors.
If Executive Directors and Members of the Board who
execute the business do not meet the required standards or

Our Corporate Governance System (As of March 19, 2020)

FINANCIAL INFORMATION

have become unable to perform their duties, they shall bedismissed by the resolution of the Board of Directors. The
Members of the Board who are not subject to dismissal shallrequest the Advisory Panel on Nomination and Compensation to examine and report back the content and results of
their deliberations to the Board of Directors on the proposal
for dismissal. This Advisory Panel on Nomination andCompensation secures appropriate input from Independent
Outside Directors.
Further, when bringing up agenda items on the appointmentof Member of the Board candidates to Ordinary General
Meetings of Shareholders, and the dismissal of a Member ofthe Board who is Executive Officer by the Board of Directors,
the JT Group shall disclose the reasons for the appointment
of individual candidates and for their dismissal, respectively.

Selection and Dismissal Process

Selection Process for
Member of the Board

Dismissal Process for
Executive Directors andMembers of the Board who
execute the business

The Advisory Panel on Nomination and Compensation
Deliberate on the candidate proposed by the President andreport its deliberations to the Board of Directors

The Board of Directors
Resolution on a candidate proposal

The Advisory Panel on Nomination and Compensation
Deliberate on a proposal for dismissal and report the content
and results of its deliberations to the Board of Directors

The Board of Directors
Resolution on a proposal for dismissal

Accounting audit/Operating audit

Departments
Subsidiaries

Japan Tobacco Inc. Integrated Report 2019 077

CORPORATE PROFILEVALUE CREATION

Succession Planning

STRATEGY

Original

Ratio

Stock Option Grants

Executive Bonus

Payment Format

We aspire to enhance the development of the executive
candidate pool, in which candidates are nominated by the
executive officers led by the CEO; enhance the succession
plans and support the growth of such candidates, in consultation with Advisory Panel on Nomination and Compensation
comprised mainly of Outside Directors.

Cash

Stock Option Grants

Base Salaryc.55%

Executive Bonus
c.27%

Stock Option Plan
c.18%
ChangeNew

Ratio*1

Executive Bonusc.31-35%

Base Salaryc.33-42%

Payment Format

Cash

Restricted StockRemuneration*2

Performance
Share Unit*2

c.25-33%
SharesShares & Cash*3*1 The composition ratios vary depending on the duties of the Members of the Board. The ranges are indicated in the illustration.
*2 The ratio of the restricted stock remuneration and performance share units is approximately three to one.
*3 Under the Performance Share Unit Plan, 50% is paid as cash towards tax payment.
Note: The above illustration is based on certain assumptions of the Company’s performance and the share price. The ratios may fluctuate depending on the
Company’s performance and the share price.

Executive Remuneration
Executive Remuneration Policy
In order to achieve sustainable profit growth and increase
company value over the mid- to long-term through pursuing
the management principles of the 4S model, the Advisory
Panel on Nomination and Compensation reviews and provides
advice on the policy, framework and calculation method for
remuneration of the Company’s Members of the Board andExecutive Officers in response to inquiries. The panel also
monitors whether our executive remuneration level isreasonable. Based on the recommendation from the Advisory
Panel on Nomination and Compensation, the key policies for

the Company’s executive remuneration are as follows:• Set the remuneration at an adequate level to retain
personnel with superior capabilities.
• Link the remuneration to company performance so as tomotivate executives to achieve their performance targets.
• Link the remuneration to company value in the mid- tolong-term.
• Ensure transparency by implementing an objective andquantitative framework.

Remuneration for the Members of the Board who do not serve as Executive Officers (excluding Outside Directors)
January 1, 2020, the remuneration is comprised of theRemuneration for the Members of the Board (excluding“base salary” in order to place a greater emphasis on
Outside Directors) who do not serve as Executive Officers
objectivity and neutrality and further focus on the superviis comprised of their “base salary” and “stock option”
sory functions, including monitoring the implementation ofsince they are required to make decisions on compamid- to long-term growth strategies.
ny-wide management strategies and fulfill supervisory
functions to enhance company value. Effective from
Remuneration for the Outside Directors and the Audit & Supervisory Board Members
Remuneration for both the Outside Directors and the Audit & Supervisory Board Members consists of the “base salary” alone
to ensure, respectively, their independence and their responsibility to conduct audits.

Executive Remuneration Details

Process of Executive Remuneration
The amount of remuneration for Directors is determined byresolution of the Board of Directors within the approved upper
limits at the Ordinary General Meetings of Shareholders inlight of deliberations by the Compensation Advisory Panel.
These amounts are determined by benchmarking based on
third-party research conducted on remuneration of corporate
executives at major Japanese manufacturers that operate

globally and possess comparable levels of size and profits
with the JT Group. The remuneration of Audit & Supervisory
Board Members is also benchmarked in the same way and isdetermined by deliberation among the Audit & Supervisory
Board Members within the maximum remuneration approvedat the Annual General Meeting.

Executive Remuneration Structure
Base salary

Original
Executive bonus

Plan

Base salaryNew
Executive bonus

Plan

Executive Officer

Applicable

Applicable

Applicable

Applicable

Applicable

ApplicableNot an Executive Officer

ApplicableNot applicable

Applicable

ApplicableNot applicableNot applicable

Outside Directors

ApplicableNot applicableNot applicable

ApplicableNot applicableNot applicable

Audit & Supervisory Board Members

ApplicableNot applicableNot applicable

ApplicableNot applicableNot applicable

Remuneration for the Members of the Board also serving as Executive Officers
Additionally, in order to strengthen the efforts to enhance theRemuneration for the Members of the Board also serving as
mid- to long-term company value and to further promote shared
Executive Officers (hereinafter referred to as Eligible Directors)
value with the shareholders, the JT Group has proposed tois comprised of their ”base salary,” “executive bonus,” andabolish the existing stock option plan and to introduce the“stock option plan” as they are responsible for achieving
Restricted Stock Remuneration Plan and the Performanceassigned annual targets through their day-to-day management.
Share Unit Plan.
From 2020, Eligible Directors will be individually evaluated for
On a 100% grant basis, the composition of executive bonus
achievement of their performance targets through execution
and performance share unit remuneration will be as per theof their duties that will lead to the Company’s sustainablefollowing illustration.
profit growth.
078 Japan Tobacco Inc. Integrated Report 2019

FINANCIAL INFORMATION

Base Salary

The JT Group shall work on creating a succession pool ofcandidates with qualities to ensure sustainable profit growthand increase corporate value in the mid- to long-term by
pursuing the 4S model.

Members of theBoard (excluding
Outside Directors)

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY

Base Salary
Until 2019, Executives were remunerated with a monthly“Fixed base salary” as per their responsibilities. From January
1, 2020, the Eligible Directors will be individually evaluated forachievement of their performance targets through executionof their duties that will lead to the JT Group’s sustainableprofit growth. Performance targets are set through interviews

with the Group’s President and the CEO at the beginning ofyear and evaluated at the end of year. The base salary for thefollowing year will be set within a certain range reflecting theindividual performance evaluations. However, an individual
performance evaluation will not be applicable for the Group’s
President and the CEO.

Executive Bonus
Executive bonuses for Eligible Directors will be paid asmonetary remuneration, reflecting annual performance.
Adjusted operating profit at constant FX and profit results
will be the performance indicators (KPI), which form thefoundation of sustainable profit growth and shared value

with the shareholders. Executive bonuses will be determined by adjusted operating profit at constant FX and profit
in the ratio of 75% and 25%, respectively. Performancelinked payouts will be based on the KPI achievement in therange of 0% - 200%.

Stock Option Grants
The Company’s stock options are designed based on astock option grants plan, in which the exercise price is 1
yen (the amount paid by the person is 1 yen per share).
The Board of Directors decides the number of units to beallocated for each term based on the fair value of theCompany’s shares, calculated by a third party.
The assigned stock options can be exercised only after one’s
positions as Directors, Audit & Supervisory Board Members
Restricted Stock Remuneration Plan (Effective from 2020)
Restricted Stock Remuneration Plan is designed to further
enhance the shared value in the mid- to long-term between
Eligible Directors and shareholders. Eligible Directors receiveand Executive Officers end. We do not intend to change thisexercise condition in the future.
From 2020, we will abolish the existing stock option planand introduce the restricted stock remuneration plan and the
Performance Share Unit Plan for the Members of the Board
also serving as Executive Officers. The stock options thatwere already granted will remain in force.

monetary compensation claims every year towards restricted
shares and Eligible Directors will receive the allocation of JT’s
common shares by paying all of the monetary compensation
Japan Tobacco Inc. Integrated Report 2019 079

CORPORATE PROFILE

claims in kind in accordance with the resolution of the Boardof Directors (the allotment will be made from the treasury
stock). The transfer restrictions on the allotted shares will be

lifted upon resignation of such Eligible Director from theCompany’s Board of Directors or any other position specified
by the Company’s Board of Directors.

Performance Share Unit Plan (Effective from 2020)
The Performance Share Unit Plan is a performance-linked
stock compensation system that aims to strengthen theshared value with shareholders in order to enhance thecompany value over the mid- to long-term and to commit toachieving business results over the mid-term. The Eligible
Directors receive monetary compensation claims and cash
after the Performance Evaluation Period, which is alignedwith the duration of the JT Group’s three-year business plan,in accordance with the performance achievement rate andother multi-year performance targets during the Performance
Evaluation Period. The Advisory Panel on Nomination andCompensation deliberates and decides on the achievement

rate of such targets for performance and other items during
the Performance Evaluation Period. The remuneration for the
performance share units will be disbursed at the end of theyear as monetary remuneration claims and cash towards theacquisition of common stock. Each of the Eligible Directors
will receive an allocation of the Company’s common sharesby paying all of the monetary compensation claims in kind inaccordance with a resolution of the Board of Directors (theallotment will be made from treasury stock). Profit will be
set as a KPI for the Performance Stock Unit Plan starting in2020 and the performance-linked payout will be based on
the KPI achievement in the range of 0% - 200%.

Overview of the Resolutions on Total Executive Remuneration at the Ordinary General
Meeting of Shareholders
The ceiling for annual aggregate remuneration towards all Members of the Board was approved at our 34th Ordinary General Meetingof Shareholders (March 20, 2019) and our 35th Ordinary General Meeting of Shareholders (March 19, 2020) as listed below.
New

Original
Remuneration
amountBase salary

Base salary

Short-term
incentive

Executivebonus

Mid- tolong-term
incentive

Stock option Stock option grant up
grantsto 960 units

Up to 1.2 billion yen(incl. 80 million yen for
Outside Directors)

Members of the Board(excl. Outside Directors)

Remuneration
amountOutsideNot an Directors
Executive Executive
Officer
Officer
Applicable

Applicable

ApplicableBase salary

ApplicableNot
applicableNot
applicable

Executive
bonus

ApplicableNot
applicable

Up to 240 million yen

Applicable(192,000 shares equivalent)

Total
remuneration 1.44 billion yen
amountMembers of the Board(excl. Outside Directors)

OutsideNot an Directors
Executive Executive
Officer
Officer
Applicable

Applicable

Applicable

ApplicableNot
applicableNot
applicable

Restricted
stock

Up to 210 million yen
Applicable(Up to 115,200 shares)

Not
applicableNot
applicable

Performance
share units

Up to 130 million yen(Up to 76,800 shares)

Not
applicableNot
applicable

Total
remuneration
amount1.44 billion yen

Up to 1.1 billion yen(incl. 80 million yen
for Outside Directors)

Applicable

Further, the maximum amount of annual aggregate remuneration towards all Audit & Supervisory Board Members was approved atour 34th Ordinary General Meeting of Shareholders (March 20, 2019) and will not exceed 240 million yen.

Total Amount of Remuneration in 2019

Category

Total amount of
remuneration andother payments(Millions of yen)

Total amount of remuneration and other payments
by its type (Millions of yen)
Basic salary

Executive bonus

Stock option
grantsNumber to be
paid (Person)

Members of the Board (excluding Outside Directors)

659

467

77

115

6

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

94

94

-

-

3

Outside Directors and Outside Audit& Supervisory Board Members

119

119

-

-

7

Total

872

680

77

115

16

Note: For “executive bonus,” the amounts planned to be paid are shown.

080 Japan Tobacco Inc. Integrated Report 2019

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Evaluation of Effectiveness of the Board of Directors
In the JT Group, all Members of the Board as well as Audit &Supervisory Board Members conduct questionnaire-based
self-evaluations on the effectiveness of the Board of Directors
in terms of its operation systems and supervisory functions aswell as interactions with shareholders and investors. The Boardof Directors Secretariat also conducts individual interviews withthe aim of supplementing the results of the evaluations.

enhancing the quality of decision-making at the Board of
Directors. Consequently, we took various measures in 2019,
which include increasing the number of meetings to
exchange opinions between the Outside Directors and the
Audit & Supervisory Board Members as well as improving
the processes of advance explanation and information
sharing in relation to items on the Board of Directors agenda.

The Board of Directors then assesses and analyzes theresults for further improvements in its effectiveness.

From 2020, the JT Group will prioritize planning information
sharing opportunities that will further enhance the supervisory
functions of the Board of Directors; and determining the levelof detail and depth of information to be shared. We decided totake these measures by taking account of the challenges
identified in the evaluation conducted in 2019.

The JT Group confirmed the improvement of the Board of
Directors’ effectiveness in 2018. On the other hand, we
found that there is room for improvement which includes
strengthening cooperation between the Outside Directors
and the Audit & Supervisory Board Members; and an
information sharing process that could contribute to further

The JT Group will continue to take necessary measures to further
enhance effectiveness, including the aforementioned ones.

The Board of Directors
The Board of Directors is responsible in making decisions forany critical matters including the JT Group strategy as well as
in supervising all the activities of the Group. The structure of
the Board of Directors is defined as follows.
• The number of Members of the Board in the Board of
Directors shall be 15 or less, within necessary andappropriate scope, composed of diverse people with ahigh-integrity sense of ethics, knowledge, experienceand skills as professionals.
• The JT Group shall appoint two or more Independent Outside
Directors with qualities that will contribute to the Group’s
sustainable profit growth and increase of company value in themid- to long-term from the viewpoint of strengthening
supervisory functions and increasing transparency of business.

The Board of Directors meeting, in principle, is held every
month and more if necessary. The Board of Directors makes
decisions on the matters required to be resolved by themunder the Companies Act, such as any essential businessplans, disposal or acquisition of important assets, significant
amount of borrowings and conclusion of important agreements. For the purpose of supervising the Company’s
activities, the Board of Directors requires Member of theBoard to report on the progress of operations at least on aquarterly basis. The JT Group had 14 board meetings attended by all members of the Board in 2019 to discuss important
issues including the management plan.

The Audit & Supervisory Board
The Audit & Supervisory Board, entrusted by shareholders
and ensured of its autonomy, conducts operating and accounting audits. We currently have five Audit & Supervisory Board
Members including three Outside Audit & Supervisory Board
Members. Collectively, the members have experience inmanagement, legal, finance and accounting among otherareas. The Audit & Supervisory Board Members possess
various statutory rights in order to accomplish their roles andresponsibilities. These include making requests to theMembers of the Board, Executive Officers and employees toreport to the Audit & Supervisory Board issuing injunctions toprevent illegal activities by Member of the Board representing
the Company in the case of litigation between any Member ofthe Board and the Company; and dismissing the auditing firm.
The Audit & Supervisory Board submits its report, containing
the results of both the accounting and operating audits, to theOrdinary General Meeting of Shareholders. Members of theboard or Executive Officers must report to the Audit &Supervisory Board any identified facts that may causesignificant damage to the Company as well as other importantmatters concerning the management of the Company. The
Audit & Supervisory Board Members can attend meetings ofthe Board of Directors and other important meetings.
Members of the Board respond promptly and appropriately
when they are requested by Audit & Supervisory Board
Members to inspect important documents, conduct on-site
inspections and submit reports. In addition, the audit department and the compliance departments collaborate with the
Audit & Supervisory Board Members. Ms. Nagata and Mr.
Obayashi attended all 14 meetings of the Audit & Supervisory
Board held in 2019. Mr. Yamamoto, Mr. Mimura, and Mr.
Yoshikuni attended all 10 meetings of the Audit & Supervisory
Board held in 2019 following their appointment.
Japan Tobacco Inc. Integrated Report 2019 081

CORPORATE PROFILEVALUE CREATIONSTRATEGY

Directors and the Audit & Supervisory Board

April
July
June

Nine Directors (including three Outside Directors)

July
January

As of March 19, 2020

Kiyohide Hirowatari*

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

Representative Director andExecutive Vice President

Yasutake Tango
Chairman of the Board
Date of birth: March 21, 1951
Term of office:2 years from March 2020
Number of shares held: 13,800

April
1974	Entered Ministry of Finance Japan
October 2006	Director-General of the Financial Bureau, Ministry of Finance Japan
July
2007	Deputy Vice Minister, Ministry of Finance Japan
July
2008	Director-General of the Budget Bureau, Ministry of Finance Japan
2009	Administrative Vice Minister, Ministry of Finance Japan
July
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)
Significant Concurrent Positions Outside the Company:
Outside Director, The Ogaki Kyoritsu Bank, Ltd.

Mr. Tango possesses abundant knowledge and experienceon topics that include corporate governance, gained
through diverse networking not limited to the public or
private sectors as well as his important positions as
Administrative Vice Minister of the Ministry of Finance in
his longstanding experience in ministries and bureaus.
Therefore, we propose his reelection as he currently
serves as Chairman of the Board; chairman of theAdvisory Panel on Nomination and Compensation; andchairman of the Compliance Committee of the Company.
We believe his broad outlook and high standing in his field
will be essential to the improvement of the governance of
the Group going forward.

June

Mutsuo Iwai
Deputy Chairman of
the Board
Date of birth: October 29, 1960
Term of office:2 years from March 2020
Number of shares held: 27,000

June
June
June
June
January
MarchJanuary
March
April
July
July
June
June
June

Masamichi Terabatake*
Representative Director
and President,
Chief Executive Officer
Date of birth:
November 26, 1965
Term of office:2 years from March 2020
Number of shares held: 21,400

Naohiro Minami*
Representative Director andExecutive Vice President,
Chief Financial Officer

January
March1983	Joined the Company (Japan Tobacco and Salt Public Corporation)
2003	Vice President, Corporate Planning Division
2004	Vice President, Corporate Strategy Division
2005	Senior Vice President and Vice President, Food Business Division,
Food Business2006	Member of the Board and Executive Vice President, President,
Food Business2008	Executive Vice President, Chief Strategy Officer
2010	Member of the Board and Senior Vice President, Chief Strategy
Officer and President, Food Business2011	Member of the Board, Japan Tobacco Inc. Executive Vice President,
JT International S.A.
2013	Senior Executive Vice President, Chief Strategy Officer
2016	Senior Executive Vice President, President, Tobacco Business2016	Representative Director and Executive Vice President
2020	Member of the Board
2020	Deputy Chairman of the Board (Current Position)

Mr. Iwai was appointed to the position of Representative
Director and Executive Vice President of the JT Group in
March 2016. Despite unclear and uncertain businessenvironments, his forceful execution of business, backed byaccurate decision-making, has been a driver of the tobacco
businesses. The broad and deep knowledge and insights hehas cultivated through wide-ranging experience both inJapan and overseas, in areas such as the tobacco
businesses, the food business, and Corporate Strategy, willbe essential to the improvement of the governance and thestrengthening of relationships with stakeholders.

1989	Joined the Company
2005	Vice President, Secretary’s Office2008	Vice President, Corporate Strategy Division2011	Senior Vice President, Chief Strategy Officer and in charge ofFood 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)

Mr. Terabatake has been the President and Chief
Executive Officer of the JT Group since January 2018 and
was also named Representative Director in March of thesame year. He has utilized his extensive experience andknowledge, as well as strong leadership in relation to
global business management, into a range of duties suchas the planning and execution of management strategy
both in Japan and overseas and the execution of thebusiness 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 forthe management of the Group going forward.

Significant Concurrent Positions Outside the Company:
Managing Director, JT International Group Holding B.V.

April
1986	Joined the Company
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, Chief Financial Officer
January 2018	Executive Vice President
March2018	Representative Director and Executive Vice President(Current Position)

April
May
July
June

Kazuhito Yamashita*

Significant Concurrent Positions Outside the Company:
Supervisory Board Member, JT International Holding B.V.

Date of birth:January 21, 1964
Term of office:2 years from March 2020
Number of shares held: 14,800

Mr. Hirowatari was appointed Executive Vice President of theCompany in January 2018 and then Representative Directorand Executive Vice President in March of the same year. He
utilizes his leadership and wide-ranging knowledge in suchareas of corporate law, business management and HR, which
he developed during his term in diverse and important roles,(including Senior Vice President, Chief Legal Officer; Head ofTobacco Business Planning Division, Tobacco Business andSenior Vice President, Human Resources); to maintain afoundation for the JT Group’s sustainable growth and toformulate strategy. We believe that his keen insight anddecision-making, cultivated from knowledge and experiencein a broad range of fields, will be indispensable in the Group’s
management going forward.

1986	Joined the Company
2007	Vice President, Corporate, Scientific & Regulatory Affairs Division,
Tobacco Business2009	Vice President, Corporate Affairs Division, Tobacco Business2010	Senior Vice President, Chief Corporate, Scientific & Regulatory
Affairs Officer, Tobacco Business2015	Senior Vice President, Head of China Division, Tobacco Business2019	Senior Vice President, Compliance, Sustainability Management andGeneral Affairs
2019	Member of the Board and Senior Vice President (Current Position)

Mr. Yamashita has been Member of the Board and SeniorVice President of the JT Group since March 2019. He hasserved in such roles as Senior Vice President, Chief
Corporate, Scientific & Regulatory Affairs Officer; and Headof China Division, focusing on promoting social andenvironmental issues and on the expansion of the overseas
business. He has leveraged his wide-ranging experienceand knowledge to contribute to establishing an environment
conducive to the Group’s business. His leadership andbroad knowledge will be indispensable to the sustainability
management that will form the foundation of the Group’s
sustainable growth going forward.

January
January
March

Outside Director(Independent Outside Director)

September 1995	Started independently as Novelist (Current Position)
January 2003	Member of Financial System Council, Ministry of Finance Japan
April
2004	Visiting Professor, Faculty of Economics, Shiga University
March2005	Member of the Council for Transport Policy, Ministry of Land,
Infrastructure, Transport and Tourism
November 2006	Member of the Tax Commission, Cabinet Office, Government of Japan
2010	Member of the Board of Governors, Japan Broadcasting Corporation
June
June
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)

Date of birth: April 25, 1951
Term of office:2 years from March 2020
Number of shares held: 0

Significant Concurrent Positions Outside the Company:
Novelist
Outside Director, Japan Exchange Group, Inc.
Outside Director, Mitsubishi Motors Corporation

April
July
April
July
July
April

Koichiro Watanabe
Outside Director(Independent Outside Director)
Date of birth: April 16, 1953
Term of office:2 years from March 2020
Number of shares held: 0

April
October
April

March
May

1976	Joined The Dai-ichi Mutual Life Insurance Company
2001	Director, The Dai-ichi Mutual Life Insurance Company
2004	Managing Director, The Dai-ichi Mutual Life Insurance Company
2004	Managing Executive Officer, The Dai-ichi Mutual Life Insurance Company
2007	Director and Managing Executive Officer, The Dai-ichi Mutual Life
Insurance Company
2008	Director and Senior Managing Executive Officer, The Dai-ichi Mutual Life
Insurance Company
2010	Representative Director and President, The Dai-ichi Life Insurance
Company, Limited
2016	Representative Director and President, Dai-ichi Life Holdings, Inc.
2017	
Representative Director and Chairman of the Board, Dai-ichi Life Holdings, Inc.
(Current Position)
Representative Director and Chairman of the Board, The Dai-ichi Life
Insurance Company, Limited (Current Position)2018	Outside Director of the Company (Current Position)
2019	Vice Chair, Director, Keidanren (Japan Business Federation) (Current Position)

Significant Concurrent Positions Outside the Company:
Representative Director and Chairman of the Board, Dai-ichi Life Holdings, Inc.
Representative Director and Chairman of the Board, The Dai-ichi Life Insurance Company, Limited
Vice Chair, Director, Keidanren (Japan Business Federation)
April
April
January
October
June
April

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: 0082 Japan Tobacco Inc. Integrated Report 20191989	Joined the Company
2010	Vice President, Legal Division2012	Senior Vice President, Chief Legal Officer and Vice President,
Legal Division2014	Senior Vice President, 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)

Date of birth: February 4, 1963
Term of office:2 years from March 2020
Number of shares held: 7,200

Main Kohda

Mr. Minami was appointed Executive Vice President of the
JT Group in January 2018, and then Representative
Director and Executive Vice President in March of thesame year. He has fully leveraged the wide-ranging anddeep knowledge in the field of accounting and finance that
he cultivated during his service as Controller, and SeniorVice President, Chief Financial Officer, to play a key role inthe management of the Group and contribute to its
growth. We consider that his accurate decision-making
and strategic thinking based on his diverse experience
make a contribution to maintaining and broadening themanagement foundation that supports the expansion of
the Group’s business and will be indispensable in driving
the Group’s management further forward.

FINANCIAL INFORMATION

Date of birth: November 11, 1965
Term of office:2 years from March 2020
Number of shares held: 9,200

Director
April
June
July
June

January
January
March

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY

March

1985	Joined Recruit Co., Ltd. (Current Recruit Holdings Co., Ltd.)
2006	Corporate Executive Officer, Recruit Co., Ltd.
2008	President and Representative Director, Recruit Staffing Co., Ltd.
2012	Corporate Executive Officer, Recruit Holdings Co., Ltd.
2016	Standing Audit and Supervisory Board Member, Recruit Holdings
Co., Ltd. (Current Position)2018	Standing Audit and Supervisory Board Member, Recruit Co., Ltd.
(Current Position)
2019	Outside Director of the Company (Current Position)

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.

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 from afair and independent standpoint. She has also contributed
enormously to improving corporate governance in the Groupthrough actively providing proposals and advice to the Boardof Directors and the Advisory Panel on Nomination andCompensation of the Group. We believe her wide-ranging
experience and broad knowledge are Indispensable for ourmanagement going forward.

Mr. Watanabe was appointed as our Outside Director in
March 2018. We have benefited from his outstanding
experience in corporate management which, over thecourse of many years, he has used to drive business
operations that successfully combined both healthyfinancials and high profitability, being reflected in the
management of the JT Group. He has worked tirelessly tosupervise business execution from a fair and independent
standpoint. He has also contributed enormously to
improving corporate governance in the Group throughactively providing proposals and advice to the Board of
Directors and the Advisory Panel on Nomination andCompensation of the Group. He has abundant experiencein working to strengthen the governance structure. He
also has objective, wide-ranging insight from an investor
perspective; and is well versed with capital markets. We
believe these attributes to remain indispensable for theGroup going forward.

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 tosupervise business execution from a fair and independent
standpoint. She has also contributed enormously to improving
corporate governance in the Group through actively providing
proposals and advice to the Board of Directors and theAdvisory Panel on Nomination and Compensation of theGroup. We believe that her experience and knowledge fromthe perspectives of both management and audit will be
indispensable in the Group’s management going forward.

Japan Tobacco Inc. Integrated Report 2019 083

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Five Audit & Supervisory Board Members (including three Outside Audit & Supervisory Board Members)
As of March 19, 2020

April
April
June

Ryoko Nagata
Standing Audit &Supervisory Board Member

July
July
June
January
March

1987	Joined the Company
2001	Vice President, Products Division, Food Business Division, Food Business2008	Senior Vice President, Head of Beverage Business Division andVice President, Product Division, Food Business Division, Food Business2008	Senior Vice President, Head of Beverage Business, Food Business2010	Senior Vice President, 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)

Ms. Nagata was appointed as an Audit & Supervisory Board
Member of the JT Group in March 2018. She has
contributed in the Group’s auditing through leveraging herabundant experience and her wide-ranging insights withregard to the Group’s business operations acrossoperational businesses and internal departments. We
believe her experience and knowledge will be indispensable
to the improvement of the corporate governance of theGroup going forward.

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

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)

Hiroshi Yamamoto
Standing Audit &Supervisory Board Member
Date of birth: November 29, 1963
Term of office:4 years from March 2019
Number of shares held: 2,600

Standing Audit &Supervisory Board Member(Outside Audit &Supervisory Board Member)
Date of birth: December 26, 1955
Term of office:4 years from March 2019
Number of shares held: 0

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

June
June
March

April
June

June
1979	Entered Ministry of Finance2010	Deputy Director-General of the Planning and Coordination Bureau, andSecretary-General of the Executive Bureau, Certified Public Accountantsand Auditing Oversight Board, Financial Services Agency
2011	Director General, Kinki Local Finance Bureau, Ministry of Finance
July
January 2012	Deputy Director-General, Minister’s Secretariat, Ministry of Defense
September 2012	Director General, Bureau of Personnel and Education, Ministry of Defense
July
2013	Director General, National Institute for Defense Studies,
Ministry of Defense
July
2014	Director General, Bureau of Finance and Equipment, Ministry of Defense
October 2015	Vice-Minister of Defense for International Affairs, Ministry of Defense
September 2016	Chairman, Sompo Japan Nipponkoa Research Institute Inc.
October 2017	Director, Eltes Co.,Ltd.
2018	Registered as Attorney at Law
March
March
2019	Standing Outside Audit & Supervisory Board Member of the Company(Current Position)

Mr. Mimura has deep knowledge of such fields asfinance, global risk management, geopolitics andcorporate law through his extensive experience overmany years of serving in a wide range of important
positions in ministries and bureaus, in addition to his role
as research institute chairman. We believe that his broadand deep knowledge can make a significant contribution
to the effective auditing of the JT Group in this highly
uncertain business environment. In addition, we believe
his roles as Standing Audit & Supervisory Board Member
and Outside Audit & Supervisory Board Member
facilitated improvements to auditing from a third-party
perspective and led to a strengthening of the Group’s
corporate governance, for which reason we propose hiselection as Outside Audit & Supervisory Board Member.

Significant Concurrent Positions Outside the Company:
Attorney at Law, Shiba International Law Offices

Mr. Mimura meets all requirements for becoming an
Independent Director prescribed by the Tokyo Stock
Exchange, Inc. However, the JT Group does not intend to
appoint him as our Independent Director, taking into
account the Group’s prescribed criteria of independence
and his professional experience at the Ministry of Finance.
It has been more than eight years since Mr. Mimura
resigned from his post at the Ministry of Finance.

084 Japan Tobacco Inc. Integrated Report 20191970	Judicial Apprentice
1972	Appointed as Public Prosecutor
2001	Director-General of the Rehabilitation Bureau, Ministry of Justice
2002	Deputy Vice-Minister of Justice, Ministry of Justice
2004	Director-General of the Criminal Affairs Bureau, Ministry of Justice
2006	Vice-Minister of Justice, Ministry of Justice2007	Superintending Prosecutor, Sapporo High Public Prosecutors’ Office2008	Superintending Prosecutor, Tokyo High Public Prosecutors’ Office2010	Prosecutor-General2011	Registered as Attorney at Law
2011	Outside Audit & Supervisory Board Member, Daiwa Securities Co., Ltd.
(Current Position)2013	Outside Director, Mitsubishi Electric Corporation (Current Position)2014	Outside Audit & Supervisory Board Member, Nippon Steel & Sumitomo
Metal Corporation(Current Nippon Steel Corporation) (Current Position)2015	Outside Audit & Supervisory Board Member of the Company(Current Position)

Mr. Obayashi has been our Audit & Supervisory Board
Member since March 2015. In addition to his extensive
experience in the legal circles, Mr. Obayashi has
significant experience as an Outside Director and Outside
Audit & Supervisory Board Member across a wide range
of industries. We consider his deep knowledge andexperience to be indispensable to improving the Group’s
corporate governance going forward. We also believe that
he can fulfill his duties as Outside Audit & Supervisory
Board Member for the aforementioned reasons and thefact that he has sufficiently carried out his responsibilities
as an Audit & Supervisory Board Member of the JT Group,
despite having no experience of being involved incompany management other than being an Outside Audit& Supervisory Board Member.

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 Audit & Supervisory Board Members, Nippon Steel Corporation

June

April
July

Toru Mimura

Mr. Yamamoto has served in such roles as the Vice
President of 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 byenhancing the Group’s corporate governance in its business
operations. We believe he will fulfill his duties as an Audit &Supervisory Board Member in relation to the effective
auditing of the Group through his detailed, deep andwide-ranging knowledge as well as experience across all
business operations and in direct departments.

Hiroshi Obayashi
Audit & Supervisory
Board Member(Independent Outside Audit &Supervisory Board Member)

April
April
May
January
June
June
July
July
June
March
April

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: 0

February
April
April
March
April

1975	Joined Japan Broadcasting Corporation
2003	Director Responsible for Finance of News Department,
Japan Broadcasting Corporation2005	Executive Director, Yokohama Broadcasting Station,
Japan Broadcasting Corporation2007	Chief of Secretariat for Board of Governors,
Japan Broadcasting Corporation2010	Senior Director, Japan Broadcasting Corporation2012	Executive Director, Japan Broadcasting Corporation2017	Vice President and Professor, the Graduate School of Project Design
Auditor, Hosei University (Current Position)
2019	Audit & Supervisory Board Member of the Company (Current Position)
2019	President, the Graduate School of Information & Communication(Current Position)

Mr. Yoshikuni has served in such roles at Japan
Broadcasting Corporation as the Director Responsible forFinance of News Department, Chief of Secretariat for Boardof Governors, and Executive Director. He has knowledge ofpolitics and economics cultivated over long years in his
journalist career as well as management experience thatmake him well-versed with all business operations andinternal departments. We believe him to utilize hisknowledge to play a significant role, as an Audit &Supervisory Board Member, in improving the Group’s corporate governance.

Japan Tobacco Inc. Integrated Report 2019 085

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY

Internal Control System & Risk Management System

Credible Financial Reporting

Overview

The JT Group has introduced an internal control system inaccordance with the Financial Instruments and Exchange Act
and other standards, in order to ensure the credibility of theGroup’s financial reporting. In addition, the Group has
created a dedicated division to review the internal control

The JT Group strives to optimize its system to conduct
appropriate business operation by reinforcing internal control
including compliance, internal audit and risk management.
We regularly report any information related to these internal
controls to the Board of Directors. In addition, we have the
Auditor’s Office, a department reporting to the Audit &Supervisory Board, to help our Audit & Supervisory Board
Members effectively perform their duties. The JT Group works
with its Group companies to enhance the framework forcompliance (including the concern reporting system), credible
financial reporting, risk management and internal audit.

The Board of Directors

Crisis management/
Disaster response

Financial risks/Credit exposure

External Auditors
Monitoring

Compliance Policy andthe Compliance
Implementation Plan

Internal audit plan/Internal audit report

Internal control
reportInternal control
audit

Compliance
The JT Group created a Code of Conduct based on ourinternal guidelines approved by the Board of Directors.
Under the Code of Conduct, we expect all directors andemployees to fully comply with applicable laws, our Articles
of Incorporation, social norms and other compliance standards. In addition, the Board of Directors has established aframework as described below to ensure fair and effective
compliance practices.
• Set up the JT Group Compliance Committee, which
reviews and discusses compliance-related matters as well
as reports directly to the Board of Directors• Appoint an Executive Officer responsible for theCompliance Office• Deliberate the Annual Compliance Plan and its action plansapproved by the Board of Directors.
• Report the status of implemented compliance initiatives tothe Board of Directors

system and report the result of the assessment. The
credibility of our financial reporting is confirmed by theexternal accounting auditor who makes an assessment of
our internal control system based on the Internal Control
Report we prepare.

Risk Management

Internal Control Framework

Reporting

FINANCIAL INFORMATIONThe JT Group has both internal and external hotlines, which
employees can use to consult or report any violations or
possible violations of the JT Group Code of Conduct. The
Compliance Office is responsible for investigating reported
cases and implementing corrective measures after discussing with the relevant divisions. The JT Group Compliance
Committee reviews any significant cases, and further reports
to the Board of Directors if necessary.
The JT Group Compliance Committee is led by the Chairmanof the Board, with the majority of the members consisting of
external members. The JT Group Compliance Committee met
three times in 2019, and discussed initiatives to promotecompliance throughout the Group among other matters.

Financial Risk Management
The JT Group has set up the internal guidelines for financial
risk management. Our Group CFO presents the relevant
reports to the Group CEO and the Board of Directors on aquarterly basis.
Crisis Management and Disaster Control
In order to deal with possible crises or disasters, the JT
Group has produced a manual for crisis management anddisaster control so that we can make a proper initial response. In the event of a crisis or a disaster, a project teamled by the President is immediately assembled. In the
project team, the Corporate Strategy Division assumes the
key role to support the CEO. Under the leadership of the
President, we respond promptly and properly, ensuring close
cooperation with concerned departments. Crisis or disaster
incidents shall be reported to the Board of Directors.

Other Risk Managements
In accordance with the Rules Defining the Extent of Responsibility and Authority, we delegate the management of otherrisks to relevant divisions, where they are to identify andmonitor the risks in their areas of responsibility. These
divisions will report significant risks to the CEO, together witha request for approval to implement countermeasures against
them, whenever necessary.
 lease refer to "Risk Factors" for more information on the JT
PGroup's risks.

Internal Audit System
The JT Group has an Operational Review and Business
Assurance Division, which is thoroughly independent from theother Group divisions and organizations. Under such a capacity,
it conducts internal audits and directly reports to the CEO. The
Operational Review and Business Assurance Division has
unlimited access to all Group-wide activities, records andemployees to accomplish its roles and responsibilities. The

head of the division is required to report the results of internal
audits along with their analysis and assessment to the CEO,and the Board of Directors every year. The head of the division
has the right to contact the management of JT and the Group
companies regularly and as frequently as needed.

The Compliance Office is in charge of enhancing as well as
identifying any issues in the compliance framework. The
Compliance Office also promotes compliance by conducting
various training programs for Board Members and employees.

086 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 087

CORPORATE PROFILE

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

Executive Officers

Chairman of the Board

President

Yasutake Tango

As of March 19, 2020

Masamichi Terabatake
Naohiro Minami
Kiyohide Hirowatari

Kiyohide Hirowatari

Corporate, Scientific & Regulatory Affairs,
Tobacco Business

Legal, Corporate Strategy, Digitalization,
Human Resources, Operation Review &Business Assurance, PharmaceuticalBusiness and Food Business

Ryoko Nagata
Hiroshi Yamamoto
Toru Mimura*2
Audit & Supervisory
Board Members
Hiroshi Obayashi*2
Koji Yoshikuni*2*2 Outside Audit & Supervisory Board Members
under the Companies Act of Japan

Chigusa Ogawa

Chief Operating Officer

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

Senior Vice President, Reduced-Risk Products

Senior Vice Presidents

Takehiko Tsutsui

Kazuhito Yamashita

Shuichi Hirosue

Senior Vice President, Business Development
and Corporate Strategy

Chief Executive Officer of Japanese Tobacco
Business, Tobacco Business Planning,
Tobacco Business

Yves Barbier
Antoine Ernst

Head of RRP Japan Office, Tobacco Business

Junichi Fukuchi

Regional President, Middle East, Near East,
Africa, Turkey and Worldwide Duty-Free

Senior Vice President, Marketing and Sales

Yasuhiro Nakajima

Marketing, Tobacco Business

Bilgehan Anlas

Senior Vice President, People & Culture,
and Chief Compliance Officer

Daniel Torras

Compliance, Sustainability Management andGeneral Affairs

Senior Vice President, Legaland Regulatory Affairs

Howard Parks

Leaf Procurement, Tobacco BusinessDirectors

Standing Audit & Supervisory
Board Members

Senior Vice President, R&D, Chief Quality Officer

Roland Kostantos

Kenji Ogura

The Audit &Supervisory Board

Wade WrightChief Executive Officer

Representative Directors*1 Outside Directors under the Companies Act
of Japan

Regional President, Americas

Chief Financial Officer of Japanese Tobacco
Business, Tobacco Business

Chief Financial Officer and Communications

Kazuhito Yamashita
Main Kohda*1
Koichiro Watanabe*1
Yukiko Nagashima*1

Marchant Kuys

Senior Vice President, Corporate Affairs
and Communications

Yuki Maeda

Sales, Tobacco Business

As of January 1, 2020

Suzanne Wise

Masamichi Terabatake

Naohiro Minami

FINANCIAL INFORMATION

President and Chief Executive Officer

Executive Vice President and Deputy CEO

Eiichi Kiyokawa

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY

Eddy Pirard
Koji Shimayoshi

Executive Vice Presidents

STRATEGY

Members of the JTI Executive Committee

Senior Vice Presidents

Deputy Chairman of the Board
Mutsuo Iwai

VALUE CREATION

Hiroyuki Miki
Jorge da Motta
Regional President, Asia PacificAndrew Newton
Senior Vice President, Global Supply Chain

Kevin Tomlinson
Regional President, Eastern Europe

Senior Vice President,
Chief Transformation Officer

Stefan Fitz
Regional President, Western Europe

Hiroyuki Miki
R&D, Tobacco BusinessAkihiro Koyanagi
Manufacturing, Tobacco Business

Toru Oguchi
Head of China Division, Tobacco Business

Toru Hijikata
Quality Assurance, Tobacco Business

Muneaki Fujimoto
President, Pharmaceutical Business

Shigenori Ohkawa
Head of Central Pharmaceutical ResearchInstitute, Pharmaceutical Business

Hiromasa Furukawa
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

088 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 089

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATIONFINANCIALINFORMATION
092 Financial Review
100 Consolidated Financial Statements

160 Glossary of Terms
162 Awards and Recognition
164 Corporate Data

090 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 091

CORPORATE PROFILEVALUE CREATIONABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYSTRATEGYFINANCIAL INFORMATION

Financial Review
Analysis of the Results

Results for the fiscal year ended December 31, 2019

Revenue*1

Billions of yen
2,216.0

2018

Profit*3

Billions of yen

International Tobacco–1.5

Operating profit

Japanese Domestic Tobacco–9.9Financial income/financial cost

Pharmaceutical–25.5

Income tax

Processed Food

–2.8

Profit attributable tonon-controlling interests

Others–0.7

2019

Profit decreased 37.5 billion yen or 9.7% year-on-year to348.2 billion yen, due to the decline in operating profit andincrease in financing costs. This was partially offset by favorable contributions from one-time factors leading to a lower­effective tax rate.

385.7

2018

–62.6
–3.6
+40.4

• Financial costs increased (negative impact in the graph)mainly due to an increase in interest expense associatedwith demand for working capital in the international
tobacco business.
• Income tax expenses decreased (positive impact in thegraph) due to a lower effective tax rate and decline in profit
before income tax.

–11.7
348.2

2,175.6

2019

Revenue decreased 40.3 billion yen or 1.8% year-on-year to2,175.6 billion yen mainly due to lower revenue in theJapanese domestic tobacco business, pharmaceuticalbusiness and processed food business. In the international
tobacco business, the solid performance driven by price/mix
contribution was offset by currency headwinds.

Revenue by Business Segment

Revenue

Adjusted Operating Profit*2/Operating Profit

Billions of yen

International Tobacco
Core revenue*4
Japanese Domestic Tobacco

595.5

2018 Adjusted operating profit

Core revenue*5

International Tobacco: Business momentum(at constant FX)+41.1

International Tobacco: Local currency vs.
USD FX effect–81.3

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

Pharmaceutical
Processed Food
Others20182019

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

2,175.6
1,310.9
1,253.0
611.5
568.9
88.5
158.6
6.1

–3.6

International Tobacco: USD vs. Yen FX effect–21.8

Japanese Domestic Tobacco–12.5

Pharmaceutical

Billions of yen

Consolidated: Operating profit
International Tobacco
Japanese Domestic Tobacco
Pharmaceutical
Processed Food
Others/Elimination
Adjustments, Total*6
International Tobacco
Japanese Domestic Tobacco
Pharmaceutical

Average Exchange Rate
2018

2019

USD/JPY110.44109.03

Processed Food
Others/Elimination
Consolidated: Adjusted operating profit

Processed Food

+1.3

USD/RUB

62.68

64.74

Others–2.8

USD/GBP

0.75

0.78

Japanese Domestic Tobacco

USD/EUR

0.85

0.89

Pharmaceutical

515.9

2019 Adjusted operating profit

2019 Operating profit

502.4

Adjusted operating profit decreased 79.5 billion yen or 13.4%
year-on-year to 515.9 billion yen, mainly due to unfavorable
currency movements in the international tobacco business.
• In the international tobacco business, adjusted operating
profit declined. Unfavorable currency movements andfurther investments in recently acquired businesses and in
RRP offset price/mix and positive volume contribution.
• In the Japanese domestic tobacco business, adjusted
operating profit declined due to an impairment of capsulemanufacturing machines for low-temperature heatingproducts and the top-line decline, which more than offset
the positive cigarette price/mix variance.
• In the pharmaceutical business, adjusted operating profit
declined due to the revenue decline.

092 Japan Tobacco Inc. Integrated Report 2019

Processed Food
–13.6

Adjustment total

International Tobacco

Adjusted operating profit at constant foreign currency
increased 0.9% year-on-year.
Operating profit decreased 11.1% year-on-year to 502.4 billion yen due to a decrease in adjusted operating profit, adecline in proceeds from sales of real estate assets, a higher
trademark amortization and recognition of restructuring costs
related to the transformation in the international tobacco business. This was in spite of one-time compensation gains related to the termination of the six anti-HIV drugs license
agreements in the pharmaceutical business.

Others/Elimination

2018

2019

565.0
339.5
192.5
26.3
2.9
3.8
(30.5)(45.0)(16.5)
(2.1)
(1.2)
34.4
595.5
384.5
209.0
28.4
4.1
(30.6)

502.4
274.0
171.0
72.7
5.5
(20.8)(13.6)(66.7)(16.2)
56.8
0.1
12.5
515.9
340.8
187.2
15.9
5.4
(33.4)• For the analysis of revenue, core revenue and adjusted
operating profit of each business segment, please refer to“Review of Operations.”*1 Excludes tobacco excise and other similar taxes, as well as agency transactions, in 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*4 Includes waterpipe tobacco and RRP, 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 Japanese
domestic 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 2019 093

CORPORATE PROFILE

Consolidated Statement of Financial Position (Assets)
December 31, 2018

Billions of yen

+75.1
+1.9

Trade and other receivables
Inventory+28.3

Property, plant and equipment

+44.4
–5.8

Goodwill–60.6

Trademark+8.4

Other assets

Total assets increased 91.7 billion yen to 5,553.1 billion yen,mainly led by the increase in cash and cash equivalents asa result of improvement in business activities.
Consolidated Statement of Financial Position (Debt and Equity)
December 31, 2018

Billions of yen

5,461.4+28.1

Trade and other payables

+56.2

Bonds
Borrowings+12.6

Income tax payables–2.9

Commercial paper–72.0

Other liabilities

+26.6
+90.1

Retained earnings
Treasury shares–49.6

Other equity total+2.7

December 31, 2019

Total liabilities increased 48.5 billion yen to 2,809.5 billion yen
mainly due to an increase in lease obligations associated withthe adoption of IFRS 16.

094 Japan Tobacco Inc. Integrated Report 2019

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY

1. Significant Accounting Policies

The JT Group has applied IFRS 16 since 2019. Please refer topage 106 for more details on the significant accounting policies.

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

5,553.1

December 31, 2019

STRATEGY

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

5,461.4

Cash and cash equivalents

VALUE CREATION

5,553.1

For our international tobacco business, its consolidated financial statements reported in U.S. dollars are internallyreviewed, 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, to corresponding
financial numbers prepared in accordance with IFRS.
Core Revenue
For the tobacco business, core revenue is additionally disclosed
as a breakdown of revenue. Specifically, the core revenue for
the Japanese domestic tobacco business includes revenue
from domestic duty free, the China business, little cigars and
RRP, but excludes revenue from distribution of imported tobacco in the Japanese domestic tobacco business among others.
Core revenue for the international tobacco business excludes
the revenue from distribution, contract manufacturing andother peripheral businesses, but includes revenue fromwaterpipe tobacco and RRP.

FINANCIAL INFORMATION

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

3. Analysis of Consolidated Financial
Results for 2019
• “Revenue,” “Adjusted Operating Profit/Operating Profit”
and “Profit” pages 92 to 93• “Assets,” “Debt” and “Equity” page 94• Please refer to “Review of Operations” for an analysis offinancial results by business segment.
Results and Plans of 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
our factories and other facilities; strengthening our competitiveness; and operating in various business fields. In 2019,
total capital expenditures amounted to 131.4 billion yen.
Capital ExpenditureBillions of yen

Total
International Tobacco
Japanese Domestic Tobacco
Pharmaceutical
Processed Food
Others/Elimination

2018

2019

159.8
75.7
55.4
11.3
12.7
4.6

131.4
78.3
34.8
7.0
6.1
5.2

Total equity increased 43.2 billion yen to 2,743.6 billion yen.

Japan Tobacco Inc. Integrated Report 2019 095

CORPORATE PROFILE

In the international tobacco business, capital expenditures
amounted to 78.3 billion yen, which was spent on manufacturing facilities overseas. In the Japanese domestic tobacco
business, capital expenditures amounted to 34.8 billion yen
which was mainly spent on the RRP-related manufacturing
facilities. In the pharmaceutical business, capital expenditures
amounted to 7.0 billion yen which was primarily spent on theconstruction and equipping of a joint facility of Toxicology
Research Laboratories and Pharmaceutical Frontier ResearchLaboratories. In the processed food business, capital expenditures amounted to 6.1 billion yen, which was spent on constructing new buildings and facilities to enhance and maintainproduction capacity and the optimal production system.
These capital expenditures were internally funded throughcash generated by operations and borrowings.
Plans for New Installations and Disposal of Facilities
Based on the JT Group’s management principles, we will prioritize our mid- to long-term resource allocations on business
investments for mid- to long-term sustainable profit growth.
We position the international and Japanese domestic tobacco
businesses as our core business and profit growth drivers andplace top priority on business investments that will lead totheir sustainable profit growth. Meanwhile, regarding thepharmaceutical 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 thispolicy, we estimate our capital expenditure plan to total 144.0
billion yen for 2020. In addition, we are planning to sell our
fixed asset related to JT headquarters building within 2020.
The amount of sale is to be confirmed.
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 in “Risk Factors.”

4. Dividends

The year-end dividends related to the current year are recognized in the following year for accounting purposes. The yearend dividend related to 2018 (record date of December 31,2018) and the interim dividends for 2019 (record date of June30, 2019) are recorded in the financial statements for 2019.
Please refer to page 138 for more details.

5. Capital Management
The JT Group’s management principles pursue 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 wecan. The JT Group believes that sustainable profit growth in
the mid- to long-term based on this principle will increase the
JT Group’s value in the mid- to long-term and is consequently
in the best interest of all stakeholders, including our shareholders.
The JT Group’s financial policy maintains a solid financial base.
This provides us with the capacity to withstand any adversity
arising out of a volatile environment, such as economic crisis.
It also allows for sufficient flexibility to capture attractive
investment opportunities. The JT Group monitors financial
indicators in order to maintain a well-balanced capital structurethat ensures an appropriate return on equity and a financialbase for future investment. We monitor credit ratings for asolid financial base and ROE (Return On Equity) for profitability
as well as internal and external environment fluctuation. The
JT Group manages net interest-bearing debt, where cash andcash equivalents are deducted from interest-bearing debt, andcapital (the part attributable to owners of the parent company),
which are detailed below as of each year-end:
Capital Management
Billions of yen
As ofDec. 31,
2018

As of
Dec. 31,2019

Net interest-bearing debt

987.6
(282.1)
705.5

974.5
(357.2)
617.3

Capital (equity attributable to ownersof the parent company)

2,630.6

2,662.7

Interest-bearing debt
Cash and cash equivalents

The year-end dividends for 2019 were 77 yen per share.
Including interim dividends per share of 77 yen, total annual­dividends per share rose to 154 yen per share, a 4 yen
increase year-on-year.

Capital Expenditure Plan
2020 (Billions of yen)

Main purpose of investing

Funding80.0
29.0

RRP-related investment andimprovement in productspecifications

Internally funded

RRP- and IT-related investment

Same as above

10.0

Maintenance andreinforcement of R&D

Same as above

14.0

Increase in production capacity,
increase of productivity,
maintenance andreplacement of facilities

Same as above

International Tobacco

Japanese Domestic Tobacco
Pharmaceutical
Processed Food

096 Japan Tobacco Inc. Integrated Report 2019

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Share Buy-backExternal Investments

The JT Group held 226,196,566 shares of common stock as
treasury stock as of December 31, 2019, amounting to11.31% of the total number of shares issued.

The JT Group always makes its financial investments by taking into account safety, liquidity and optimal yield. We do notallow any speculative dealings in pursuit of profit margin. We
also report the investment results to the Group CEO and theBoard of Directors on a regular basis.

A repurchase of our shares requires cash outlays. In order torepurchase our shares in a flexible manner, we amended the
Articles of Incorporation at the 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 our management with an additional option for increasing flexibility and speed in capital management in order toadapt to a rapidly changing business environment.

6. Financial Activities
The JT Group’s Treasury Division provides Group-wide support to enable secure and efficient financing activities. We areexposed to various financial risks: credit risks, liquidity risks,
foreign exchange risks, interest rate risks and market pricefluctuation risks. We conduct our treasury activities pursuant
to a set of Group-wide financial risk management policies andthe results are reported to the Group CEO and the Board of
Directors on a regular basis. Please refer to page 146 formore details.
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 our Group,
where legally permissible and economically viable.
External Funding

7. 2019 and 2018 Cash Flow Results
Cash and cash equivalents at the end of 2019 increased by
75.1 billion yen from the end of 2018 to 357.2 billion yen.
Cash and cash equivalents at the end of 2018 were 282.1­billion yen.
Cash Flows in Operating Activities
Net cash flows from operating activities during 2019 were
540.4 billion yen. This was mainly due to payments ofJapanese domestic and international tobacco excise andincome taxes and the generation of a stable cash inflow fromthe total tobacco business. Net cash flows from operating
activities in 2018 were 461.4 billion yen.
Cash Flows in Investing Activities
Net cash flows used in investing activities during 2019 were
123.6 billion yen. This was mainly due to an increase in property, plant and equipment. Net cash flows used in investing
activities in 2018 were 383.3 billion yen.
Cash Flows in Financing Activities
Net cash flows used in financing activities during 2019 were
333.8 billion yen. Bonds issued in 2019 partially offset theincrease of dividends per share, buybacks and repayments ofborrowings. Net cash flows used in financing activities in2018 were 62.4 billion yen.

We basically found our short-term working capital needs
through short-term borrowings from financial institutions,commercial paper or a combination of both. We fund our midto long-term capital needs through long-term borrowings fromfinancial institutions, bonds, equity or a combination of thosepreviously stated.
We continue to diversify our financing method and correspondent financial institutions to secure stable and efficient funding sources through activities such as the establishment ofcommitted facilities. We report the status of Group-wide
external debt to the Group CEO and the Board of Directors ona regular basis.

Japan Tobacco Inc. Integrated Report 2019 097

CORPORATE PROFILE

8. Liquidity
We have historically had, and expect to continue to have, significant cash flows from operating activities. We expect thatcash generated from operating activities will continue to bestable and cover funds needed for daily business activities.
The JT Group had 470.4 billion yen in committed facilities forboth domestic and international major financial institutions on
December 31, 2019, of which 100% was unused. In addition,
we have a commercial paper program, uncommitted facilities,
a domestic bond shelf registration and EMTN program.
Long-term Debt
Our bonds issued (including the current portion) as ofDecember 31, 2018 and December 31, 2019 accounted for610.4 billion yen and 666.6 billion yen, respectively. Our longterm borrowings as loans from financial institutions (including
the current portion) accounted for 129.3 billion yen in 2018
and 115.3 billion yen in 2019. Maturities of interest bearing
debts are shown in the table below.

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATIONAs of December 31, 2019, our long-term debt was rated A1
by Moody’s Japan K.K. (Moody’s), AA- by Standard & Poor’s
Ratings Japan K.K. (S&P) and AA by Rating and Investment
Information Inc. (R&I), with a “stable” outlook from Moody’s,
a “negative” outlook from S&P and a “stable” o­ utlook from R&I.
These ratings are affected by a number of factors such as
developments in our major markets, our business strategies
and general economic trends that are beyond our 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
Our short-term borrowings totaled 166.0 billion yen as ofDecember 31, 2018 and 192.6 billion yen as of December 31,
2019. Commercial paper totaled 72.0 billion yen as ofDecember 31, 2018 and 0 yen as of December 31, 2019.

Liquidity
Billions of yen

Book Value

Due within
1 yearDue after
1 yearthrough
2 years

Short-term borrowings as loans

192.6

192.6

—

—

—

—

—

Long-term borrowings asloans (current portion)

11.6

11.6

—

—

—

—

—

Bonds (current portion)

80.0

80.0

—

—

—

—

—

Long-term borrowings as loans

103.7

—

11.2

41.2

11.2

20.1

20.2

Bonds

586.6

—

82.2

30.0

117.5

—

360.4

Total

974.5

284.1

93.4

71.2

128.7

20.1

380.6

Year ended December 31, 2019098 Japan Tobacco Inc. Integrated Report 2019

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

Japan Tobacco Inc. Integrated Report 2019 099

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Consolidated Financial Statements
Consolidated Statement of Financial Position

Japan Tobacco Inc. and Consolidated Subsidiaries
As of December 31, 2018 and 2019
Millions of yen

Assets20182019  282,063
456,591649,238
35,633385,872
1,809,396
10
1,809,406  357,158
458,513677,586
21,943
410,443
1,925,643
30
1,925,673

Current 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

Millions of yen

Liabilities and equity

2018

2019

  380,516
250,466
72,4494,486
6,078
716,190
1,430,185  408,597
284,135
69,543
21,862
16,570701,050
1,501,757

Total non-current liabilities

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

690,367
41,062
320,614
19,463
155,768
80,4301,307,702

Total liabilities

2,760,955

2,809,459

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

100,000
736,400(492,469)(431,741)
2,750,506
2,662,696
80,916
2,743,611

5,461,400

5,553,071

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

Non-current assets
Property, plant and equipment (Note 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

Other financial liabilities (Note 19)758,841
2,008,416
503,076
17,55857,14066,807
115,046
125,109
3,651,993

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

5,461,400

5,553,071

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

EquityShare capital (Note 23)

Total assets

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

100 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 101

CORPORATE PROFILE

Consolidated Statement of Income

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Consolidated Statement of Comprehensive Income

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2018 and 2019Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2018 and 2019
Millions of yen

Millions of yen

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

2018

2019

2,215,962(933,034)
1,282,928

2,175,626(942,299)
1,233,326

Profit for the period

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

95,7255,011(831,707)
502,355

Items that will not be reclassified to profit or loss

5,754
(39,252)
531,486

8,402(45,526)465,232(144,055)  387,431(103,609)  361,622

Owners of the parent company
Non-controlling interests
Profit for the period  385,677
1,755  387,431  348,190
13,432  361,622

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

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

215.31215.20387,431361,622(8,215)(3,195)(11,410)(2,484)(2,811)(5,295)(247,731)
1,012(246,719)

9,879
(391)
9,489

(258,129)
129,302

4,194
365,816

128,340962
129,302352,953
12,863365,816

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

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

Earnings per share

2019

Other comprehensive income

Comprehensive income (loss) for the period

Attributable to2018   195.97
195.87

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

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

102 Japan Tobacco Inc. Integrated Report 2019

2018

2019

564,984
61,772(40,447)
9,154
595,463502,355
69,623(84,467)
28,415515,927

Japan Tobacco Inc. Integrated Report 2019 103

CORPORATE PROFILE

Consolidated Statement of Changes in Equity

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2018 and 2019

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY

Consolidated Statement of Cash Flows

FINANCIAL INFORMATION

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2018 and 2019
Millions of yen

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

As of January 1, 2018
Profit for the period
Other comprehensive income (loss)

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

Total transactions with the owners
As of December 31, 2018
Profit for the period
Other comprehensive income (loss)

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

Total transactions with the owners
As of December 31, 2019

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

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

Share capital

Capital surplus

Treasury shares

Subscription
rights to shares

Exchangedifferences ontranslation offoreign operations

100,000
—
—
—
—
—
—
—
—

736,400
—
—
—
—
—
—
—
—

(443,636)
—
—
—
(0)
807
—
—
—

1,964
—
—
—
—
(691)
274
—
—

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

  (88)
—
1,012
1,012
—
—
—
—
—

38,670—(8,239)(8,239)
—
—
—
—
—

—
—
—
—
100,000
—
—
—
—
—
—
—
—

—
—
—
—
736,400
—
—
—
—
—
—
—
—

—
—
—
807
(442,829)———(50,001)
361
—
—
—

—
—
—
(417)
1,547
—
—
—
—
(281)
290
—
—

—
—
—
—
(454,918)—
10,553
10,553
—
—
—
—
—

—
—
(480)
(480)
443
—
(391)
(391)
—
—
—
—
—

—
(860)
—
(860)
29,570—(2,486)(2,486)
—
—
—
—
—

—
—
—
—
100,000————
736,400———(49,640)(492,469)

—
—
—
10
1,556

—
—
—
—
(444,366)

—
—
(185)
(185)
(132)

—
(15,883)—(15,883)
11,201Millions of yen

Equity attributable to owners of the parent company

As of January 1, 2018
Profit for the period
Other comprehensive income (loss)

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

Total transactions with the owners
As of December 31, 2018
Profit for the period
Other comprehensive income (loss)

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

Total transactions with the owners
As of December 31, 2019

104 Japan Tobacco Inc. Integrated Report 2019

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

Retainedearnings

Total

Non-controllinginterests

Total equity    ——(3,075)(3,075)—————(167,338)—(257,337)(257,337)
—
(691)
274
—
—

2,536,262
385,677—
385,677—(116)
2(259,724)—

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

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

2,842,027
387,431(258,129)
129,302(0)0311(261,638)
139

—
3,075
—
3,075
—
—
(2,913)(2,913)
—
—
—
—
—

—
2,215
(480)
1,318
(423,357)
—
4,763
4,763
—
(281)
290
—
—

495
(2,215)—(261,558)
2,660,381
348,190—
348,190—(80)(19)(270,936)
—

495
—
(480)
(259,433)
2,630,594
348,190
4,763
352,953(50,001)0271(270,936)—(9,713)——(11,452)
69,851
13,432(569)
12,863——47(2,051)—(9,218)—(480)(270,885)
2,700,445
361,622
4,194
365,816(50,001)0319(272,987)
—

—
2,913
—
2,913
    —

—
(12,971)(185)(13,146)(431,741)(1)
12,971—(258,065)
2,750,506

(1)
—
(185)
(320,851)
2,662,696

206——(1,798)80,916205—(185)(322,650)
2,743,611

531,486
158,671
8,454(5,751)
16,343(3,931)

465,232
183,852
16,124(7,944)27,557(5,011)(34,905)(30,818)(53,058)(4,618)(8,864)(36,662)
53,408(11,026)
8,969
587,697
11,743(13,685)(124,366)
461,389(8,299)10,673(32,817)
28,294(9,526)(21,864)
3,891
29,592
16,766
696,521
15,340(24,346)(147,105)
540,410(36,705)
10,159(138,605)
46,868(20,205)(878)
812(247,632)(4,589)7,467(383,307)(45,401)
77,200(111,366)
15,863(22,004)
(218)
409
—
(40,127)
2,073(123,571)(259,671)(1,747)
109(133,849)
59,135(2,710)341,516(54,086)(1,637)(0)(9,421)
0(62,360)
15,721
285,486(19,145)
282,063(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

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
Payments into time deposits

Total

2019

Cash flows from operating activities

Purchase of intangible assets

Other components of equity
Remeasurementsof defined
benefit plans

2018

Proceeds from withdrawal of time deposits
Payments for business combinations
Subsequent payments for past fiscal years’ business combinations
Other
Net cash flows from investing activities
Cash flows from financing activities
Dividends paid to owners of the parent company (Note 24)
Dividends paid to non-controlling interests
Capital contribution from non-controlling interests
Increase (decrease) in short-term borrowings and commercial paper (Note 32)
Proceeds from long-term borrowings (Note 32)
Repayments of long-term borrowings (Note 32)
Proceeds from issuance of bonds (Note 32)
Redemption of bonds (Note 32)
Repayments of lease liabilities (Note 32)
Acquisition of treasury shares
Payments for acquisition of interests in subsidiaries from non-controlling interests
Other
Net cash flows from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at the end of the period (Note 7)

Japan Tobacco Inc. Integrated Report 2019 105

CORPORATE PROFILE

Notes to Consolidated Financial Statements
1. Reporting Entity

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Japan Tobacco Inc. and Consolidated Subsidiaries
Years Ended December 31, 2018 and 2019

3. Significant Accounting Policies

the Company in exchange for control over an acquiree. Any excess

Financial assets are classified as financial assets measuredof the consideration of acquisition over the fair value of identifiable

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

Japan Tobacco Inc. (hereinafter referred to as the “Company”) is(1) Basis of Consolidation

assets and liabilities is recognized as goodwill in the consolidated

Otherwise, they are classified as financial assets measured ata joint stock corporation under the Companies Act of Japan, pursuant

The consolidated financial statements include financial statements ofstatement of financial position. If the consideration of acquisition isfair value.

to the Japan Tobacco Inc. Act, with its principal places of business

the Company and its subsidiaries, and interests in investments inlower than the fair value of the identifiable assets and liabilities, the• The asset is held within a business model whose objective is tolocated in Japan since its incorporation. The addresses of theassociates and joint arrangements.

difference is immediately recognized as profit in the consolidated

Company’s registered head office and principal business offices arestatement of income. If the amount of initial accounting for a busi-

hold assets in order to collect contractual cash flows• The contractual terms of the financial asset give rise on specified

A. Subsidiaries

ness combination is not determined by the end of the reporting

dates to cash flows that are solely payments of principal and inter-

A subsidiary is an entity that is controlled by the Group and theperiod in which the combination occurs, the provisional amounts

est on the principal amount outstanding

the Company and its subsidiaries (hereinafter referred to as theGroup has control over the entity if it is exposed, or has rights, tofor the items for which the accounting is incomplete are reported

For financial assets measured at fair value, each equity instru-“Group”) are stated in “6. Operating Segments.”

available on the Company’s website (https://www.jt.com/).
The details of businesses and principal business activities ofvariable returns from its involvement with the investee and has theand are adjusted during the measurement period, which is one

ment is designated as measured at fair value through profit or loss or

The Group’s consolidated financial statements for the year

ability to affect those returns through its power over the investee.

year from the acquisition date. Acquisition-related costs incurredas measured at fair value through other comprehensive income,ended December 31, 2019 were approved on March 19, 2020

The acquisition date of a subsidiary is the date on which the Groupare recognized as expenses. The additional acquisition of non-­except for equity instruments held for trading purposes that mustby Masamichi Terabatake, President and Chief Executive Officer.

obtains control of the subsidiary, and the subsidiary is included in thecontrolling interests after obtaining control is accounted for as abe measured at fair value through profit or loss. Such designations

consolidation from the date of acquisition until the date on which thecapital transaction. Any difference between the amount by which theare applied consistently.

Group loses control.

non-controlling interests are adjusted and the fair value of the consid-

2. Basis of Preparation

In cases where the accounting policies applied by a subsidiary are(1) Compliance with IFRS

different from those applied by the Group, adjustments are made to

The Group’s consolidated financial statements are prepared in accor-

the subsidiary’s financial statements, if necessary.

dance with International Financial Reporting Standards (hereinafterreferred to as “IFRS”).

All intergroup balances, transactions, income and expenses
are eliminated on consolidation.
Comprehensive income for s­ ubsidiaries is attributed to owners of

All financial assets are measured at fair value plus transaction

eration paid or received is recognized directly in retained earnings

costs that are attributable to the financial assets, except for the caseand no goodwill is recognized with respect to such transaction.

of being classified in the category of financial assets measured at fairvalue through profit or loss.

(3) Foreign Currency Translation(ii) Subsequent Measurement

Consolidated financial statements of the Group are presented in

After initial recognition, financial assets are measured based on theJapanese yen, which is the functional currency of the Company.

following classifications:(2) Basis of Measurement

the parent company and non-controlling interests even if this results

Each company in the Group specifies its own functional currency and(a) Financial Assets Measured at Amortized Cost

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

in the non-controlling interests having a deficit balance.

measures transactions based on it.

Financial assets measured at amortized cost are measured at

Accounting Policies,” the Group’s consolidated financial statements
are prepared on the historical cost basis.

Foreign currency transactions are translated into the functional­amortized cost using the effective interest method.

B. Associates

currency at the rates of exchange prevailing at the dates of transac-(b) Other Financial Assets

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

tions or an approximation of the rate. Monetary assets and liabilities

Financial assets other than those measured at amortized cost are(3) Functional Currency and Presentation Currency

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

measured at fair value.

The Group’s consolidated financial statements are presented in

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

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

the investee but it does not have control or joint control over thearising from the translation and settlement are recognized as profit or

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

investee. Investments in associates are accounted for using theloss. However, exchange differences arising from the translation of

yen are rounded to the nearest million yen.

equity method from the date on which the Group has the significant

financial instruments designated as hedging instruments for net­designated as measured at fair value through other comprehensive

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

investment in foreign operations (foreign subsidiaries), financial

income are recognized as other comprehensive income and theinfluence.

assets measured at fair value through other comprehensive income,amount in other comprehensive income is transferred to retained

and cash flow hedges are recognized as other comprehensive income.

earnings when equity instruments are derecognized or the decline in

The assets and liabilities of foreign operations are translated into

its fair value compared to its acquisition cost is significant. Dividends(4) Changes in Method of Presentation(Consolidated Statement of Cash Flows)

Changes in the fair value of financial assets measured at fair value
are recognized as profit or loss.
However, changes in the fair value of equity instruments“Subsequent payments for past fiscal years’ business combina-

C. Joint Arrangements

tions,” which were included in “Other” of “Cash flows from invest-

A joint arrangement is a contractual arrangement in which two

Japanese yen at the rates of exchange prevailing at year end, whileon the financial assets are recognized in profit or loss for the year.

ing activities” on the consolidated statement of cash flows for theor more parties have joint control. Depending upon the rights andincome and expenses of foreign operations are translated into(iii) Derecognition

year ended December 31, 2018 have been presented separately toobligations of the parties to the arrangement, the Group classifies

Japanese yen at the rates of exchange prevailing at the dates ofFinancial assets are derecognized when the rights to receive b­ enefitsreflect the increase of materiality for the year ended December 31,

a joint arrangement into a joint operation whereby the Group has

transactions or an approximation of the rate. The resulting translationfrom them expire or are transferred, or when substantially all the2019. In order to reflect the change in method of presentation, therights to the assets and obligations for the liabilities relating to thedifferences are recognized as other comprehensive income. In cases

risks and rewards of the ownership are transferred.

consolidated statement of cash flows for the year ended December

arrangement, and a joint venture whereby the Group has rights

where foreign operations are disposed of, the cumulative amount of

31, 2018 has been reclassified.

to the net assets of the arrangement only. The Group recognizes

translation differences related to the foreign operations is recognized

B. Impairment of Financial Assets

the assets, liabilities, revenues and expenses relating to its interestas profit or loss in the period of disposition.

With respect to financial assets measured at amortized cost, theAccordingly, ¥4,589 million included in “Other” of “Cash flows
from investing activities” on the consolidated statement of cash

in a joint operation while a joint venture is accounted for using

flows for the year ended December 31, 2018 has been reclassified as

the equity method.

“Subsequent payments for past fiscal years’ business combinations.”

106 Japan Tobacco Inc. Integrated Report 2019

Group recognizes an allowance for doubtful accounts for expected(4) Financial Instruments

credit losses. The expected credit losses are calculated based on

A. Financial Assets

historical loss experience or future recoverable amounts.

(2) Business Combination(i) Initial Recognition and Measurement

Business combinations are accounted for using the acquisition

Financial assets are classified into financial assets measured at fairrecognized in an amount equal to the full lifetime expected credit

method. Consideration transferred in a business combination isvalue through profit or loss, fair value through other comprehensive

losses. In principle, with respect to financial assets except for trademeasured as the sum of the acquisition-date fair value of the assets

income, and amortized cost. The Group determines the classification

receivables, an allowance for doubtful accounts is measured at antransferred, the liabilities assumed and equity instruments issued byat initial recognition.

amount equal to the 12-month expected credit losses. However, theAn allowance for doubtful accounts for trade receivables is always

Japan Tobacco Inc. Integrated Report 2019 107

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

allowance for doubtful accounts is measured at an amount equal to

D. Offsetting of Financial Instruments

designated as at fair value through other comprehensive income.

(6) Inventories

the full lifetime expected credit losses if a credit risk on the financial

Financial assets and financial liabilities are offset and presented

Regarding the hedging gain or loss on the hedged item, the carrying

The cost of inventories includes all costs of purchase, costs of con-asset has increased significantly since initial recognition.

as a net amount in the consolidated statement of financial position

amount of the hedged item is adjusted and the change is recognizedversion and other costs incurred in bringing the inventories to their

only when there is a legally enforceable right to set off the recog-

as profit or loss in the consolidated statement of income. However,present location and condition.

increased significantly based on a change of the default risk consid-

nized amounts and the Group intends either to settle on a net basischanges in the fair value of an equity instrument which the Group

Inventories are measured at the lower of cost or net realizable

ering past due information, financial difficulties of obligors or down-

or to realize the asset and settle the liability simultaneously.

elected to present in other comprehensive income are recognized asvalue, and the costs are determined by using the weighted-average

The Group assesses whether a credit risk on a financial asset hasother comprehensive income.

method. Net realizable value is determined as the estimated selling

E. Derivatives and Hedge Accounting(ii) Cash Flow Hedge

price in the ordinary course of business less the estimated costs ofis deemed extremely difficult to be collected as a default and recog-

The Group utilizes derivatives, including forward foreign exchange

The effective portion of gains or losses on hedging instruments iscompletion and estimated costs necessary to make the sale.

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

contracts and interest rate swap contracts, to hedge foreign

recognized as other comprehensive income in the consolidated

Leaf tobacco which is stored for more than 12 months before

determines that a whole or part of the financial asset is uncollectible,

exchange and interest rate risks. These derivatives are initiallystatement of comprehensive income, while the ineffective portion

being used for production is included in current assets since it is held

the carrying amounts of financial assets are written-off directly.

­measured at fair value when the contract is entered into, and areis recognized immediately as profit or loss in the consolidated

within the normal operating cycle.

The expected credit losses on trade receivables which are notsubsequently remeasured at fair value. Changes in the fair value­statement of income.

assessed as credit-impaired financial assets are measured collec-of derivatives are recognized as profit or loss in the consolidated

The amounts of hedging instruments recognized in othertively by an asset group consisting of a number of homogeneousstatement of income. However, the gains or losses on the hedging­comprehensive income are reclassified to profit or loss when theProperty, plant and equipment is measured by using the cost model

counterparties.

instrument relating to the effective portion of cash flow hedges

transactions of the hedged items affect profit or loss. In cases where

and is stated at cost less accumulated depreciation and accumulated

and hedges of net investment in foreign operations are recognized

hedged items result in the recognition of non-financial assets or

impairment losses.

nized in profit or loss. If an event which causes a reduction in theas other comprehensive income in the consolidated statement ofliabilities, the amounts recognized as other comprehensive income

The acquisition cost includes any costs directly attributable to theallowance for doubtful accounts occurs, a reversal of an allowancecomprehensive income.

are accounted for as adjustments to the original carrying amount ofacquisition of the asset and dismantlement, removal and restoration

non-financial assets or liabilities.

costs, as well as borrowing costs eligible for capitalization.

grades of the internal credit rating.
The Group assesses a whole or part of the financial asset which

An allowance for doubtful accounts for financial assets is recog-

for doubtful accounts is recognized in profit or loss.

At the inception of the hedge, the Group formally designatesand documents the hedging relationship to which hedge accounting

If the hedged future cash flows are no longer expected to occur,(7) Property, Plant and Equipment

Except for assets that are not subject to depreciation such as

C. Financial Liabilities

is applied and the objectives and strategies of risk management for

any related cumulative gain or loss that has been recognized inland, assets are depreciated using the straight-line method over their(i) Initial Recognition and Measurement

undertaking the hedge. The documentation includes identification

equity as other comprehensive income is reclassified to profit or

estimated useful lives. The estimated useful lives of major asset

Financial liabilities are classified into financial liabilities measuredof the hedging instruments, the hedged items, the nature of theloss. If the hedged future cash flows are still expected to occur,

items are as follows:at fair value through profit or loss and financial liabilities measured atrisks being hedged and how the hedging relationship’s effectivenessamounts that have been recognized in other comprehensive income• Buildings and structures: 38 to 50 years

amortized cost. The Group determines the classification at initial

is assessed. These hedges are assessed on an ongoing basis toare continued to be recognized in other comprehensive income until• Machinery and vehicles: 10 to 15 years

recognition.

determine whether the hedging relationship is effective prospec-

the future cash flows occur.

tively, even though it is expected that there is an economic relation-(iii) Hedge of Net Investment in Foreign Operations

at each year end and if there are any changes made to the estimatednition. However, financial liabilities measured at amortized cost

ship between the hedged item and the hedging instrument, that theTranslation differences resulting from the hedge of net investment in

useful lives and depreciation method, such changes are applied

are measured at cost after deducting transaction costs that are

effect of credit risk does not dominate the value changes that result

foreign operations are accounted for similarly to a cash flow hedge.

prospectively as changes in estimate.

directly attributable to the financial liabilities.

from that economic relationship, and that the hedge ratio of the

The effective portion of gains or losses on hedging instruments is(ii) Subsequent Measurement

hedging relationship is the same as that resulting from the quantity

recognized as other comprehensive income in the c­ onsolidated(8) Goodwill and Intangible Assets

After initial recognition, financial liabilities are measured based on theof the hedged item that the Group actually hedges and the quantity

statement of comprehensive income, while the ineffective portion is

A. Goodwill

following classifications:of the hedging instrument that the Group actually uses to hedge thatrecognized as profit or loss in the consolidated statement of income.

Goodwill is stated at acquisition cost less accumulated impairment(a) Financial Liabilities Measured at Fair Value through Profit or Lossquantity of the hedged item.

At the time of the disposal of the foreign operations, any related

losses.

All financial liabilities are measured at fair value at initial recog­

Financial liabilities measured at fair value through profit or loss include

If a hedging relationship ceases to meet the hedge effectivenesscumulative gain or loss that has been recognized in equity as othercomprehensive income is reclassified to profit or loss.

The estimated useful lives and depreciation method are reviewed

Goodwill is not amortized. It is allocated to cash-generating units thatare 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 eco-measured at fair value through profit or loss at initial recognition.

nomic relationship between the hedged item and the hedging instru-(b) Financial Liabilities Measured at Amortized Cost

ment but the risk management objective remains the same, theF. Fair Value of Financial Instruments

ment. Impairment losses on goodwill are recognized in the consolidated

After initial recognition, financial liabilities measured at amortizedGroup would adjust the hedge ratio so that it meets the qualifying

Fair value of financial instruments that are traded in active financial

statement of income and no subsequent reversal is made.

cost are measured at amortized cost using the effective interest

criteria again. The Group discontinues hedge accounting for the por-markets at year end refers to quoted prices or dealer quotations.

method. Amortization under the effective interest method and gains

tion that does not meet the requirement when the hedging relation-or losses on derecognition are recognized as profit or loss in theship ceases to meet the qualifying criteria even after adjusting

consolidated statement of income.

the hedge ratio.

After initial recognition, financial guarantee contracts are

Hedges that meet the stringent requirements for hedge account-

for impairment annually or whenever there is any indication of impair-If there is no active market, fair value of financial instruments isdetermined using appropriate valuation models.

B. Intangible Assets
Intangible assets are measured by using the cost model and arestated at cost less accumulated amortization and accumulated(5) Cash and Cash Equivalents

impairment losses.

­measured at the higher of:ing are classified in the following categories and accounted for in

Cash and cash equivalents consist of cash on hand, demand deposits,• The amount of an allowance for doubtful accounts calculated inaccordance with IFRS 9 “Financial Instruments.”

and short-term investments that are readily convertible to known

the initial recognition, and the costs of intangible assets acquired(i) Fair Value Hedge

amounts of cash and subject to insignificant risk of change in value

through business combinations are recognized at fair value at the

The gain or loss on the hedging instrument is recognized as profit

and due within three months from the date of acquisition.

acquisition date. Expenditures on internally generated intangible

accordance with “B Impairment of Financial Assets” above, and• The amount initially measured less cumulative revenue recognized in

Intangible assets acquired separately are measured at cost at

or loss in the consolidated statement of income. However, changes

assets are recognized as expense in the period when incurred,(iii) Derecognitionin the fair value of the hedging instrument are recognized as otherexcept for development expenses that satisfy the capitalization

Financial liabilities are derecognized when the obligation iscomprehensive income in the consolidated statement of comprehen-

criteria.

­discharged, canceled or expired.

sive income if the hedging instrument hedges an equity instrument

accordance with IFRS 15 “Revenue from Contracts with Customers.”

108 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 109

CORPORATE PROFILE

Intangible assets with finite useful lives are amortized using(11) Impairment of Non-financial Assets

the straight-line method over their estimated useful lives and are

The Group assesses for each year whether there is any indication

tested for impairment whenever there is any indication of impair-

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY

For each plan, the Group calculates the present value of defined

FINANCIAL INFORMATION(16) Revenue

benefit obligations, related current service cost and past service cost

A. Revenue from Contracts with Customers
Revenue is recognized based on the following five-step approach.

that an asset may be impaired. If any such indication exists, or inusing the projected unit credit method. For a discount rate, a dis-ment. The estimated useful lives and amortization method of intan-

cases where the impairment test is required to be performed eachcount period is determined based on the period until the expected

gible assets with finite useful lives are reviewed at each year end,

year, the recoverable amount of the asset is estimated. In cases thatdate of benefit payment in each year, and the d­ iscount rate is deter-

Step 1: Identify the contract with a customer

and the effect of any changes in estimate would be accounted for on

the recoverable amount cannot be estimated for each asset, it ismined by reference to market yields for the period corresponding to

Step 2: Identify the performance obligations in the contracta prospective basis.

estimated by the cash-generating unit to which the asset belongs.

the discount period at the end of the year on high quality corporate

Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations

The estimated useful lives of major intangible assets with finite

The recoverable amount of an asset or a cash-generating unit isbonds or government bonds. Liabilities or assets for defined benefit

useful lives are as follows:

determined at the higher of its fair value less costs of disposal or its

plans are calculated by the present value of the defined benefit• Trademarks: 10 to 20 years

value in use. If the carrying amount of the asset or cash-generating

obligation, deducting the fair value of any plan assets (including• Software:

unit exceeds the recoverable amount, impairment losses are recog-

adjustments for the asset ceiling for defined benefit plans and mini-

5 years

Intangible assets with indefinite useful lives and intangible

in the contract
Step 5: Recognize revenue when the entity satisfies a performanceobligation

nized and the carrying amount is reduced to the recoverable amount.

mum funding requirements, if necessary). Expected interest costs

assets that are not ready to use are not amortized, but they are

In determining the value in use, estimated future cash flows are

and interest income are recognized as financial costs.

tested for impairment individually or by cash-generating unit a­ nnually

discounted to the present value, using pretax discount rates thator whenever there is any indication of impairment.

reflect current market assessments of the time value of money andfull as other comprehensive income in the period when they are

ery of the products because the customer obtains control of the
products upon delivery, by which the Group evaluates that the per-Remeasurements of defined benefit plans are recognized in

The Group mainly engages in the sale of tobacco products, prescription drugs, and processed foods. Revenue is recognized upon deliv-

the risks specific to the asset. In determining the fair value lessincurred and transferred to retained earnings immediately. Past ser-

(9) Leases

costs of disposal, the Group uses an appropriate valuation model

vice costs are recognized as profit or loss in the period whenformance obligation is satisfied. Revenue is measured at the consid-

At inception of a contract, the Group assesses whether the contract

supported by available fair value indicators.

incurred.

eration promised in a contract with a customer, less discounts,

is, or contains, a lease if the contract conveys the right to control the

The Group assesses whether there is any indication that an

The cost for retirement benefits for defined contribution plans isimpairment loss recognized in prior years for an asset other thaneration. The Group elects not to recognize right-of-use assets andgoodwill may no longer exist or may have decreased, such as anylease liabilities for short-term leases within 12 months and leases ofchanges in assumptions used for the determination of the recover-(14) Share-based Payments

deducting the tobacco excise taxes and other transactions is presented

low-value assets.

able amount. If any such indication exists, the recoverable amount of

The Group has a share option plan as an equity-settled share-based

as “Revenue” in the consolidated statement of income.

If a contract is, or contains, a lease, except for short-term leases

recognized as an expense at the time of contribution.

rebates and taxes, including consumption tax.

use of an identified asset for a period of time in exchange for consid-

The tobacco excise taxes and other transactions in which the Groupis involved as an agency are excluded from revenue. The amount after

the asset or cash-generating unit is estimated. In cases that thepayment plan. Share options are estimated at fair value at grant dateand leases of low-value assets, the Group recognizes right-of-use

recoverable amount exceeds the carrying amount of the asset or

and are recognized as an expense over the vesting period in the

B. Interest Income

assets and lease liabilities on the consolidated statement of financial

cash-generating unit, impairment losses are reversed up to the lower

consolidated statement of income after considering the number ofInterest income is recognized using the effective interest rate

position at the commencement date. The Group recognizes theof the estimated recoverable amount or the carrying amount (net ofshare options that are expected to be eventually vested. The cor-method.

lease payments associated with short-term leases and leases ofdepreciation) that would have been determined if no impairment

responding amount is recognized as an increase in equity in the

low-value assets as an expense on a straight-line basis over thelosses had been recognized in prior years.

consolidated statement of financial position.

(12) Non-current Assets Held-for-Sale(15) Provisions

stated at cost less accumulated depreciation and accumulated

An asset or asset group for which the value is expected to be recov-

The Group has present obligations (legal or constructive) resulting

impairment losses.

lease term.
Right-of-use asset is measured by using the cost model and is

C. Dividend Income
Dividend income is recognized when the shareholders’ right toreceive payment is established.

ered through a sales transaction rather than through continuing use

from past events and recognizes provisions when it is probable that(17) Government Grants

An acquisition cost of a right-of-use asset includes the amount ofis classified into a non-current asset or disposal group held-for-salethe obligations are required to be settled and the amount of theGovernment grants are recognized at fair value when there is a

the initial measurement of the lease liability, any lease payments madewhen the following conditions are met: it is highly probable that the

obligations can be estimated reliably.

reasonable assurance that the Group will comply with the conditionsat or before the commencement date, and any initial direct costs. The

asset or asset group will be sold within one year, the asset or asset

Where the effect of the time value of money is material, theright-of-use asset is depreciated using the straight-line method over its

group is available for immediate sale in its present condition, and theamount of provisions is measured at the present value of the expen-

In the case that the government grants are related to expense

estimated useful life or lease term, whichever is shorter. The lease

Group management commits to the sale plan. In such cases, theditures expected to be required to settle the obligations. In calculat-

items, they are recognized in profit or loss on a systematic basis

liability is initially measured at the present value of the lease payment

attached to them and receive the grants.

non-current asset is not depreciated or amortized and is measured at

ing the present value, the Group uses the pretax discount rateover the period in which the related costs for which the grantsthat is not paid at the commencement date. The lease payments are

the lower of its carrying amount or its fair value less costs ofreflecting current market assessments of the time value of money

are intended to compensate are recognized. With regard to govern-

apportioned between the financial cost and the reduction in the leasedisposal.

and the risks specific to the liability.

ment grants for assets, the amount of the grants is deducted fromliability based on the effective interest method. The financial costs arerecognized in the consolidated statement of income.

(10) Investment Property
Investment property is property held to earn rentals or for capital
appreciation or both.
Investment property is measured by using the cost model and is

In accordance with IAS 37 “Provisions, Contingent Liabilities andthe acquisition cost of the assets.

(13) Post-employment Benefits

Contingent Assets,” the Group recognizes a provision for restructur-

The Group sponsors defined benefit plans and defined contribution

ing when it has a detailed formal plan for the restructuring and has(18) Borrowing Costs

plans as employee retirement benefit plans.

raised a valid expectation in those affected that it will carry out theWith respect to assets that necessarily take a substantial period

restructuring by starting to implement that plan or announcing itsof time to get ready for their intended use or sale, the borrowing

assistance association incurred with respect to services in or before

main scheme to those affected by it. Restructuring provisions

costs that are directly attributable to the acquisition, construction
or production of the assets are capitalized as part of the acquisition

The Company is obligated to bear pension expenses for a mutual
June 1956 (prior to the enforcement of the Act on the Mutual Aid

include only the direct expenditures arising from the restructuring,stated at cost less accumulated depreciation and accumulated

Association of Public Corporation Employees). Such obligations

which meet both of the following criteria:

cost of the assets. Other borrowing costs are recognized as an

impairment losses.

are calculated and included in liabilities related to the retirement• necessarily entailed by the restructuring;

expense in the period when they are incurred.

benefits.

• not associated with the ongoing activities of the entity.

110

Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019111

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION(19) Income Taxes(21) Earnings per Share

Income taxes in the consolidated statement of income are presented

Basic earnings per share are calculated by dividing profit or loss

applied to lease liabilities on the consolidated statement of financial

management. The effects of a change in estimates and assumptions

as the total of current income taxes and deferred income taxes.

attributable to ordinary shareholders of the parent company by the

position at the date of initial application is 4.1%.

are recognized in the period of the change or the period of theCurrent income taxes are measured at the amount that isweighted-average number of ordinary shares outstanding during the

The difference between the total amount of future minimum lease

expected to be paid to or refunded from the taxation authorities.

year, adjusted by the number of treasury shares. Diluted earnings per

payments under non-cancellable operating leases (discounted by theAmong the above estimates and assumptions, the following are

For the calculation of the tax amount, the Group uses the tax rates

share are calculated by adjusting the effects of dilutive potential

lessee’s incremental borrowing rate above) which were disclosed

items that may have a material effect on the amounts recognized inand tax laws that have been enacted or substantively enacted by theordinary shares.

upon adopting IAS 17, “Leases” (hereinafter referred to as “IAS 17”),the consolidated financial statements of the Group:

end of the year. The current income taxes are recognized in profit or

The lessee’s weighted average incremental borrowing rate which

The estimates and assumptions are continuously reviewed bychange and future periods.

at the end of the consolidated year immediately before the initialloss, except for taxes arising from items that are recognized in other(22) Dividends

application and the lease liabilities on the consolidated statement ofcomprehensive income or directly in equity and taxes arising from

Dividend distributions to the shareholders of the Company are recog-

financial position at the date of initial application is mainly due to thebusiness combinations.

A. Impairment of Property, Plant and Equipment, Goodwill,
Intangible Assets and Investment Properties

nized as liabilities in the period in which, for year end dividends, theestimation difference of the lease term of lands and buildings for theWith regard to property, plant and equipment, goodwill, intangible

Deferred income taxes are calculated based on the temporary

Annual Shareholders’ Meeting approves the distribution and, forperiod which exceeds the non-cancellable period.

assets and investment properties, if there is any indication that thedifferences between the tax base for assets and liabilities and theinterim dividends, the Board of Directors approves the distribution.

carrying amount at year end. Deferred tax assets are recognized for

The Group has adopted this standard for contracts that werepreviously identified as leases adopting IAS 17 and IFRIC 4,

recoverable amount has declined below the carrying amount, theGroup performs an impairment test.

deductible temporary differences, carryforward of unused tax credits(23) Contingencies“Determining whether an Arrangement Contains a Lease” (hereinaf-

and unused tax losses to the extent that it is probable that future

A. Contingent Liabilities

ter referred to as “IFRIC 4”), without reassessing whether a contract

with adverse effect on the results of past or projected businesstaxable profit will be available against which they can be utilized.

The Group discloses contingent liabilities in the notes to consolidated

is, or contains, a lease at the date of initial application. The Group

performance, significant changes in the use of acquired assets or inDeferred tax liabilities are recognized for t­axable temporary

financial statements if it has possible obligations at year end, whose

has not adopted this standard for contracts that were not previously

overall business strategy, and significant deteriorations in industry or

differences.

existence cannot be confirmed at that date, or if the obligations do not

identified as containing a lease adopting IAS 17 and IFRIC 4.

economic trends. With regard to goodwill, an impairment test is

The deferred tax assets or liabilities are not recognized for themeet the recognition criteria of a provision described in “20. Provisions.”

following temporary differences:

For leases previously classified as operating leases adopting IAS
17, the following practical expedients permitted as transition meth-• the initial recognition of goodwill

B. Contingent Assets

ods are adopted:• the initial recognition of assets or liabilities in transactions that are

The Group discloses contingent assets in the notes to consolidated• A single discount rate is applied to a portfolio of leases with rea-

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 sub-sonably similar characteristics.

Such indications include, but are not limited to significant changes

conducted at least once a year, regardless of whether there are any
indicators of impairment.
An impairment test is performed by comparing the carrying
amount to the recoverable amount of the asset under assessment. If
the recoverable amount is below the carrying amount, impairment• Leases for which the lease term ends within 12 months of thelosses are recognized. The recoverable amount is calculated based

date of initial application are accounted for in the same way as

primarily on a discounted cash flow model. Certain assumptions

short-term leases.

must be made for the useful lives and future cash flows of thesidiaries and associates, and interests in joint ventures to the(24) Adjusted Financial Measuresextent that it is probable that the timing of the reversal of the

The adjusted financial measures are calculated by adding certain

temporary difference in the foreseeable future and it is not prob-

adjustment items to the non-adjusted financial data or by deducting

use assets at the date of initial application.

rates. These assumptions are based on the best estimates and judg-

able that future taxable profits will be available against which they

the items from the non-adjusted financial data.

As a result of the adoption of IFRS 16, “Assets” and “Liabilities”

ments made by management. However, there is a possibility that

increased by ¥39,033 million at the date of initial application. There isthese assumptions will be affected by changes in uncertain future

can be utilized• taxable temporary differences arising from investments in subsid-

The adjustment items are determined by management’s judgment, taking into consideration the nature and frequency of the• Initial direct costs are excluded from the measurement of right-of-

an immaterial impact on operating profit and profit for the period.

economic conditions, which may have a material impact on the con-iaries and associates, and interests in joint ventures to the extent

income and costs such that they provide effective comparative infor-that the timing of the reversal of the temporary difference is con-mation on the Group performance and that they reflect the way ofwith the adoption of IFRS 16, “Repayments of finance lease obliga-

trolled and that it is probable the temporary difference will not

managing our business appropriately. Adjusted financial measures

tions,” which was presented in “Cash flows from financing activi-“13. Property, Plant and Equipment,” “14. Goodwill and Intangible

reverse in the foreseeable future.

are presented in the consolidated statement of income andties” on the consolidated statement of cash flows for the year ended

Assets” and “16. Investment Property.” With regard to goodwill, theDeferred tax assets and liabilities are measured at the tax rates“6. Operating Segments.”

December 31, 2018, has been presented as “Repayments of leasesensitivity analysis is described in “14. Goodwill and Intangible Assets.”that are expected to apply to the year when the asset is realized or
the liability is settled, based on tax rates that have been enacted or

The adjusted financial measures are not defined under IFRS andare not comparable with equivalent indicators for other entities.

substantively enacted by year end.
Assets and liabilities are recognized as estimated amounts if(Changes in Accounting Policies)
The Group has adopted the following new accounting standards,

tax laws and regulations is probable.

amended standards and new interpretations from the year ended

taxation system.

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

112

Japan Tobacco Inc. Integrated Report 2019

The effect of adopting IAS 19 on the consolidated financial state-

4. Significant Accounting Estimatesand Judgments

December 31, 2019.
IFRS

IFRS
16
IAS
19

Employee
Benefits

The method for calculating the recoverable amount is described in

B. Post-employment Benefits
The Group has various types of retirement benefit plans, including
defined benefit plans. In addition, the mutual pension benefits planof the Company is one of the public pension systems under thejurisdiction of the government of Japan and the Company is legallyobligated to bear a part of the pension costs of the plan.

Description of new standards and amendments

Leasessolidated financial statements in future periods.

liabilities” from the year ended December 31, 2019.
ments is immaterial.

uncertain tax position of income taxes arising from interpretation of
The Company and certain subsidiaries apply for the consolidated

In order to reflect the change in accounting method in accordance

assets, the applicable discount rates as well as long-term growth

Amendments to accounting treatment
for lease arrangements
Clarifying treatment on a defined benefit
plan curtailment or settlement

In adopting IFRS 16, the Group used a transition method bywhich the cumulative effect of initially adopting this standard wasrecognized at the date of initial application.

Preparation of consolidated financial statements of the GroupThe present value of defined benefit obligations on each of theserequires management estimates and assumptions in order toplans and the related service costs are calculated based on actuarial­measure income, expenses, assets and liabilities, and disclose

assumptions. These actuarial assumptions make use of estimates­contingencies as of the year end. These estimates and assumptions

and judgments on a number of variables, including discount rates

are based on the best judgment of management in light of historicaland inflation rate.

experience and various factors deemed to be reasonable as of the

The Group obtains advice from external pension actuaries withyear end. Given their nature, actual results may differ from those

respect to the appropriateness of their actuarial assumptions includ-

estimates and assumptions.

ing the aforementioned variables.

Japan Tobacco Inc. Integrated Report 2019113

CORPORATE PROFILE

The actuarial assumptions are determined based on the best

actual tax liabilities and income taxes. These differences may haveestimates and judgments made by management. However, there isa material impact on the consolidated financial statements in future

a possibility that these assumptions will be affected by changes inperiods.

uncertain future economic conditions, or by the publication or amend-

In addition, deferred tax assets are recognized to the extent that

VALUE CREATIONABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYSTRATEGY

6. Operating Segments

FINANCIAL INFORMATION

Japan and markets in China, Hong Kong, and Macau where theCompany’s China Division operates). The “International Tobacco(1) Outline of Reportable Segments

Business” manufactures and sells tobacco products overseas mainly

The reportable segments of the Group are determined based on

through JT International S.A., which controls manufacturing andment of related laws, which may have a material impact on theit is probable that taxable income will be available against which

the operating segments that are components of the Group for whichsales operations. The “Pharmaceutical Business” consists ofconsolidated financial statements in future periods.

deductible temporary differences can be utilized.

separate financial information is available and are evaluated regularly

research and development, and the manufacture and sale of pre-by the Board of Directors in deciding how to allocate resources andscription drugs. The “Processed Food Business” consists of thein assessing performance.

manufacture and sale of frozen and ambient processed foods, bakery

These actuarial assumptions and the related sensitivity analysis

In recognizing the deferred tax assets, when judging the possibil-

are described in “22. Employee Benefits.”

ity of the future taxable income, we reasonably estimate the timing
and amount of future taxable income based on the business plan.

The Group is mainly engaged in the manufacture and sale of

The timing when taxable income arises and the amount of suchtobacco products, prescription drugs and processed foods. With

The Group recognizes various provisions, including provisions forincome may be affected by changes in uncertain future economic

respect to tobacco products, operations are managed separately(2) Revenues and Performances of Reportable Segments

asset retirement obligations and restructuring, in the consolidated

conditions. Therefore, this may have a material impact on the con-for domestic and overseas markets. The reportable segments of

Revenues and performances of reportable segments are as follows.

statement of financial position.

solidated financial statements in future periods.

the Group are composed of four segments: “Domestic Tobacco

The Board of Directors assesses the segment performance andBusiness,” “International Tobacco Business,” “Pharmaceutical

determines resource allocation after reviewing revenues andBusiness,” and “Processed Food Business.” They are determinedadjusted operating profit. Since financial income, financial costs andby types of products, c­ haracteristics, and markets.

income taxes are managed by the Group head office, these income

C. Provisions

These provisions are recognized based on best estimates of the

The content and amount related to income taxes are described in

expenditure required to settle the obligations, taking into account the“17. Income Taxes.”

pertinent risks and uncertainties which exist at the year-end for those
E. Contingencies

obligations.
Expenditures required to settle the obligations are calculated

With regard to contingencies, any items that may have a material

by taking possible results into account comprehensively; however,

impact on business in the future are disclosed in light of all the available

they may be affected by the occurrence of unexpected events orevidence as of the year end and by taking into account the probability ofchanges in conditions which may have a material impact on thethese contingencies and their impact on financial reporting.

The nature and amount of recognized provisions are described

5. New Accounting Standards Not Yet
Adopted by the Group

in “20. Provisions.”
D. Income Taxes

tobacco products in domestic areas (which include duty-free shops inMillions of yen
Reportable Segments

External revenue
Intersegment revenue

By the date of approval of the consolidated financial statements,
new accounting standards, amended standards and new interpre­amounts to be paid to the tax authorities, based on the estimation intations that have been issued, but have not been early adopted by

Segment profit (loss)Adjusted operating profit (Note 1)

accordance with their laws and regulations.

the Group are as follows.

Other items

Calculating current tax liabilities and income taxes requires esti-

The implications from adoption of these standards and interpreta-mates and judgment on various factors, including the interpretation

tions are assessed by the Group; however, we evaluate that none ofof tax regulations by taxable entities and the tax authority in thethem will have a material impact on our operating results and finan-

jurisdiction or the experience of past tax audits.

cial condition.

Therefore, there may be differences between the amountTo be adopted
by the GroupInternational
TobaccoPharmaceuticals

Processed
Food

Total

Other (Note 2)

Elimination

Consolidated

621,426
7,976
629,403

1,312,342
27,637
1,339,979

113,992—
113,992

161,3871
161,388

2,209,147
35,6152,244,762   6,815
5,737
12,553—(41,353)(41,353)

2,215,962—
2,215,962

208,977  384,524

28,438  4,123  626,062(30,440)   (159)  595,463

55,044    89,887  5,071  6,708  156,710   2,193   (233)  158,671

Impairment losses on other thanfinancial assets

—

5,336

2,141

146

7,623

831

—

8,454

Reversal of impairment losses
on other than financial assets

—

692

—

—

692

—

—

692

35
55,444

3,849
75,727—
11,333

11
12,7493,895
155,253

36
4,844

—
(289)

3,931
159,808

Depreciation and amortization

Capital expenditures
Description of new standards and amendments

IFRS 3Business Combinations

January 1, 2020

Year ending
December 2020

Amendments to definition of “business”

IFRS 7

Financial Instruments
Disclosures

January 1, 2020

Year ending
December 2020

Amendments to provide relief from potential effects of theuncertainty caused by interest rate benchmark reform

IFRS 9Financial Instruments

January 1, 2020

Year ending
December 2020

Amendments to provide relief from potential effects of theuncertainty caused by interest rate benchmark reform

IFRS 17

Insurance Contracts

January 1, 2021

Year ending
December 2021

Amendments to accounting treatment for insurance contracts

IAS 1

Presentation of Financial
Statements

January 1, 2020

Year ending
December 2020

Amendments to definition of “material”

January 1, 2022

Year ending
December 2022

Clarifying classification of liabilities as current or non-current

IAS 8

Accounting Policies, Changes in
Accounting Estimates and Errors

January 1, 2020

Year ending
December 2020

Amendments to definition of “material”

IAS 39Financial Instruments Recognition
and Measurement

January 1, 2020

Year ending
December 2020

Amendments to provide relief from potential effects of theuncertainty caused by interest rate benchmark reform

IFRS 10
IAS 28

Sale or Contribution of Assets
between an Investor and its
Associate or Joint Venture

Not yet determined

Not yetdetermined

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

Japan Tobacco Inc. Integrated Report 2019

Total revenue

Share of profit (loss) in investments
accounted for using the equity
methodr­ecognized as tax liabilities and income taxes and the amount ofDomestic
TobaccoRevenuerecognizes current tax liabilities and income taxes as the estimated114

within the segments are based mainly on prevailing market prices.

Year ended December 31, 2018

The Group operates business activities around the world, and it

IFRS

and expenses are excluded from segment performance. Transactions

The “Domestic Tobacco Business” manufactures and sells

The content of contingencies is described in “38. Contingencies.”

consolidated financial statements in future periods.

Mandatory adoption(From the year
beginning)products and seasonings.

Japan Tobacco Inc. Integrated Report 2019115

CORPORATE PROFILE

Year ended December 31, 2019

VALUE CREATIONABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYSTRATEGYFINANCIAL INFORMATION

Year ended December 31, 2019
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

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

611,494
7,270
618,764

1,310,877
27,626
1,338,503

88,528—88,528

158,5861
158,587

2,169,485
34,8972,204,382   6,140
7,333
13,473—(42,229)(42,229)

2,175,626—
2,175,626

Amortization cost of acquired­intangibles arising frombusiness acquisitions

187,180  340,752

15,943  5,432  549,308(33,478)97  515,927

Adjustment items (costs) (Note 6)

Adjustment items (income) (Note 5)
Operating profit (loss)

Other items
Depreciation and amortization(Note 1)

(Note 3)59,276  108,378

5,936  7,586  181,176   2,909   (233)  183,852

7,751

5,765

1,471

220

15,207917—

16,124

Reversal of impairment losses
on other than financial assets

Capital expenditures (Note 4)

International
TobaccoPharmaceuticals

Processed
Food

Total

Other (Note 2)

Elimination

Consolidated

187,180

340,752

15,943

5,432

549,308(33,478)97515,927(16,245)24—
170,960(53,378)
8,776(22,141)
274,008—
61,018(4,264)
72,697

—
461
(365)
5,528

(69,623)
70,278(26,770)
523,193—
14,189(1,646)(20,935)———
97(69,623)
84,467(28,415)502,355
8,402(45,526)465,232

Financial income
Financial costs

Impairment losses on other thanfinancial assets

Share of profit (loss) in investments
accounted for using the equity
methodDomestic
Tobacco

—

91

—

—

91

—

—

91

16
34,793

4,863
78,295

—
6,979

10
6,142

4,889
126,209

122
5,609

—
(383)

5,011
131,434

Profit before income taxes(Note 1)	For adjusted operating profit, amortization cost of acquired intangibles arising from business acquisitions, and adjustment items (income and costs) areexcluded from operating profit (loss).
(Note 2)	“Other” includes business activities relating to rent of real estate and corporate expenses relating to corporate communication and operation of the head
office.
(Note 3)	Depreciation and amortization of right-of-use assets included in “Depreciation and amortization” is as follows:
Millions of yen
2019

3,649
10,314456
741
616
15,778Domestic Tobacco
International Tobacco

Reconciliation from “Adjusted operating profit” to “Profit before income taxes”

Pharmaceuticals

Year ended December 31, 2018
Millions of yen

Adjusted operating profit (Note 1)
Amortization cost of acquired­intangibles arising frombusiness acquisitions
Adjustment items (income) (Note 5)
Adjustment items (costs) (Note 6)
Operating profit (loss)

Domestic
TobaccoInternational
Tobacco208,977

384,524

Processed Food
Other

Reportable Segments
Pharmaceuticals

Processed
Food

Total

Other (Note 2)

Elimination

Consolidated

28,4384,123

626,062(30,440)(159)

595,463

Depreciation and amortization of right-of-use assets(Note 4) The increase in right-of-use assets is excluded from the year ended December 31, 2019.
(Note 5) The breakdown of “Adjustment items (income)” is as follows:

Millions of yen(16,245)9(288)
192,453

Financial income
Financial costs
Profit before income taxes(45,527)
1,711(1,195)339,514——(2,141)
26,297—37(1,240)2,919(61,772)
1,757(4,864)561,183—
38,691(4,290)  3,960

—
—
—
(159)

(61,772)
40,447(9,154)564,984
5,754(39,252)
531,486

Gain on transfer of pharmaceutical licenses
Restructuring incomes
Other
Adjustment items (income)

2018

2019

—
39,284
1,163
40,44760,51815,197
8,752
84,467

		Restructuring incomes for the years ended December 31, 2018 and 2019 mainly relate to gains on sale of real estate. The breakdown of restructuringincomes is described in “26. Other Operating Income.” Other for the year ended December 31, 2019 mainly relates to gains on fair value adjustment
after the measurement period for assets and liabilities acquired in a business combination in the “International Tobacco Business.”(Note 6) The breakdown of “Adjustment items (costs)” is as follows:
Millions of yen

Restructuring costs
Other
Adjustment items (costs)

2018

2019

7,934
1,220
9,154

26,182
2,233
28,415

			Restructuring costs for the year ended December 31, 2018 mainly relate to disposal of real estate, business structure reform in the “PharmaceuticalBusiness” and rationalization of the production and distribution system in some markets in the “International Tobacco Business.” Restructuring costs forthe year ended December 31, 2019 mainly relate to business operation transformation in the “International Tobacco Business” and business structurereform in the “Pharmaceutical Business.” Restructuring costs included in “Cost of sales” were ¥13 million for the year ended December 31, 2018.
Restructuring costs included in “Selling, general and administrative expenses” were ¥7,921 million and ¥26,182 million for the years ended December
31, 2018 and 2019, respectively. The breakdown of restructuring costs included in “Selling, general and administrative expenses” is described in “27.
Selling, General and Administrative Expenses.” Other for the year ended December 31, 2018 mainly relates to settlement of the litigation in September
2018. Other for the year ended December 31, 2019 mainly relates to disposal of real estate.

116

Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019117

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

8. Trade and Other Receivables(3) Geographic Information
The regional breakdown of non-current assets as of December 31 is as follows:

The breakdown of “Trade and other receivables” as of December 31 is as follows:
Non-current Assets

Millions of yen
Millions of yen

JapanOverseas
Consolidated

2018

2019

  835,386
2,452,505
3,287,891  812,083
2,450,772
3,262,855

Note and account receivables
Other
Allowance for doubtful accounts
Total

2018

2019

449,863
8,378(1,650)456,591

432,874
28,113(2,475)458,513(Note) Non-current assets, exclusive of financial instruments, deferred tax assets and retirement benefits assets, are segmented by the location of the assets.

Trade and other receivables are presented net of allowance for
doubtful accounts in the consolidated statement of financial position.

The regional breakdown of external revenue for each year is as follows:

Trade and other receivables are classified as financial assets measured at amortized cost.

9. Inventories

External Revenue
Millions of yen

JapanOverseas
Consolidated

2018

2019

  822,070
1,393,892
2,215,962  789,279
1,386,347
2,175,626

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

Merchandise and finished goods(Note 1)

Leaf tobacco (Note 2)(Note) Revenue is segmented by the sales destination.

Other(4) Major Customers Information

the Megapolis Group were ¥249,797 million (11.3% of consolidated

The “International Tobacco Business” of the Group sells products torevenue) for the year ended December 31, 2018 and ¥235,093 mil-the Megapolis Group that engages in distribution and wholesale

lion (10.8% of consolidated revenue) for the year ended December­business in Russia and other countries. The external revenues from31, 2019.

7. Cash and Cash Equivalents

Millions of yen
2018

Short-term investments
Total

Cash and cash equivalents are classified as financial assets measured at amortized cost.
The Group’s Iranian subsidiaries’ ability to remit funds outside of2019

209,491
364,084
75,662649,238

236,233
365,700
75,652
677,586(Note 1) For imported tobacco products (merchandise) that are sold by TS Network Co., Ltd., a subsidiary of the Company, commissions solely from wholesale areincluded in revenue. The amount of imported tobacco products (merchandise) that the company holds as of December 31 of each year is included ininventories and presented as “Merchandise and finished goods.”(Note 2) Leaf tobacco includes those products that will be used after 12 months from the end of each year, but they are included in inventories since they are held
within the normal operating cycle.

10. Other Financial Assets

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

Cash and deposits

Total

2018

234,263
47,800282,063(1) The breakdown of “Other financial assets” as of December 31 is as follows:
Millions of yen

2019

260,908
96,249357,158

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

Derivative assets
Equity securities
Debt securities
Time deposits
Other
Allowance for doubtful accounts
Total

Iran is restricted mainly due to international sanctions imposed on

the adoption of the “Companies’ Creditors Arrangement Act.” “CashCurrent assets

Iran. “Cash and cash equivalents” include ¥24,772 million as ofand cash equivalents” as of December 31, 2019 includes cash andNon-current assets

December 31, 2018 and ¥48,675 million as of December 31, 2019

cash equivalents of ¥19,085 million held by JTI-Mac.

Total

2018

2019

  8,653
64,684
26,816979
55,656(6,108)150,679
35,633
115,046
150,679  2,564
32,747
18,616761
82,757(5,935)131,511
21,943
109,568
131,511

held 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 atfair value through profit or loss excluding those to which hedge

118

Japan Tobacco Inc. Integrated Report 2019accounting is applied, equity securities are classified as financial
assets measured at fair value through other comprehensive income,and time deposits and debt securities are classified as financial
assets measured at amortized cost.

Japan Tobacco Inc. Integrated Report 2019

119

CORPORATE PROFILE(2) Names of major securities held as financial assets measured at fair value through other comprehensive income and their fair values as ofDecember 31 are as follows:
Millions of yen

Company name

Seven & i Holdings Co., Ltd.
DOUTOR • NICHIRES Holdings Co., Ltd.
Japan Airport Terminal Co.,Ltd.
Central Japan Railway Company
KATO SANGYO CO., LTD.
Mitsubishi Shokuhin Co., Ltd.
OKAMURA CORPORATIONWest Japan Railway Company
YOSHIMURA FOOD HOLDINGS K.K.
Nippon Express Co., Ltd.

2018

2019

4,091
2,681
1,524
2,317
1,709
1,683
1,710
1,032
510
1,059

3,424
2,892
2,436
2,200
2,032
1,860
1,343
1,256
1,250
1,111

Equity securities are held mainly for strengthening relationships

In order to pursue the efficiency of assets held and to use themwith investees. Therefore, they are designated as financial assets

effectively, sales of financial assets measured at fair value through­measured at fair value through other comprehensive income.

other comprehensive income have been carried out (derecognition).

2018

2019

2,241
(860)

30,765(15,883)(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.

Consumption tax receivables
Other
Total

With regard to such assets and assets sold, impairment losses of¥74 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
Carrying Amount

As of January 1, 2018
Individual acquisition
Acquisition through business combinations
Transfer to investment property
Transfer to non-current assets held-for-sale

Sale or disposal
Exchange differences on translation of foreign operations
Other
As of December 31, 2018
Cumulative effect of changes in accounting policies
As of January 1, 2019, after cumulative effect of changes
in accounting policies

Transfer to non-current assets held-for-saleMillions of yen

Prepaid expenses

ended December 31, 2018.

Transfer to investment property

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

Prepaid tobacco excise taxes

expenses” in the consolidated statement of income for the year

Individual acquisition

11. Other Current Assets

2018

2019

308,815
21,262
17,177
38,618385,872

337,166
22,172
15,24335,863
410,443

FINANCIAL INFORMATION

are currently actively marketed for sale.

Reversal of impairment losses
Millions of yen

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITY“Non-current assets held-for-sale” are mainly idle properties which

Impairment losses

year is as follows:

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

STRATEGY

Depreciation

The fair value at the time of sale and cumulative gain or loss that is recognized in equity through other comprehensive income for each

Fair ValueVALUE CREATION

Depreciation
Impairment losses
Reversal of impairment losses
Sale or disposal
Exchange differences on translation of foreign operations
Other
As of December 31, 2019

Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total

363,245
18,972
7,275(3,211)(1,945)(16,647)(1,561)
248(764)(14,716)
11,691
362,586
36,440279,088
56,901
8,498
(0)
(4)
(50,794)(3,442)432(3,221)(22,895)
24,025288,587
4,548

46,373
14,873107(3)—(14,987)
(86)
—
(773)
(2,162)991
44,33385

56,902
48,735
21
—
—
—
(131)
12
(82)
(4,208)(37,913)
63,335—

745,607
139,480
15,902(3,215)(1,949)(82,428)(5,220)692(4,841)(43,981)(1,206)758,841
41,073399,027
29,054(1,095)(14)(28,049)(1,930)
—
(739)
(741)
9,461
404,973

293,135
47,247——(55,775)(9,506)91(5,148)(1,550)30,172
298,665

44,41815,808(21)—(15,196)(304)—(2,084)(81)
1,357
43,897

63,33541,371
—
—
—
(44)
—
(21)
(1,280)(47,657)
55,704

799,914
133,480(1,116)(14)(99,021)(11,784)
91(7,991)(3,652)(6,668)803,239

Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total

664,779
671,434
734,009761,581773,836826,909

156,169
152,793
156,328

56,90263,44355,7091,639,431
1,661,505
1,772,954

Land, buildings
and structures

Machineryand vehicles

Tools, furnitureand fixtures

Constructionin progress

Total

301,534
308,847
329,036

482,493
485,249528,244

109,797
108,460
112,431—107
5893,824902,664
969,715

Millions of yen

12. Non-current Assets Held-for-Sale
Acquisition Cost

As of January 1, 2018

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

As of December 31, 2018

Breakdown of Major Assets

As of December 31, 2019
Millions of yen
2018

2019
Millions of yen

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

120 Japan Tobacco Inc. Integrated Report 2019

4
6
—
10

14
—
17
30

Accumulated Depreciation and Accumulated Impairment Losses

As of January 1, 2018
As of December 31, 2018
As of December 31, 2019Japan Tobacco Inc. Integrated Report 2019 121

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION(2) Impairment Losses

the recoverable amounts for buildings, structures, machinery and(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 isvehicles, due to the decision to demolish individual items, etc.

Goodwill and intangible assets recognized in the consolidated state-

management. After the three-year business plan, the Group sets ament of financial position are mainly composed of goodwill andgrowth rate from 5.7% in the fourth year (2018: 8.1%) to 3.3% intrademarks in the JTIH Group. The carrying amounts of goodwill as

the ninth year (2018: 3.0%), and the same growth rate as the ninthof December 31, 2018 and 2019 were ¥1,717,156 million andyear from the tenth year as a continued growth rate for inflation.

the smallest cash-generating unit that independently generates cash
inflows.

The recoverable amounts of these assets are calculated mainly by
their values in use.

The Group recognized impairment losses of ¥5,220 million in the

Impairment losses recognized in the year ended December 31,

year ended December 31, 2018, and ¥11,784 million in the year

2019 represent losses incurred to reduce the carrying amounts to¥1,711,335 million, respectively. The carrying amounts of trademarks

ended December 31, 2019 in “Selling, general and administrative

the recoverable amounts for buildings, structures, machinery andas of December 31, 2018 and 2019 were ¥305,997 million andsufficiently exceeds the carrying amount of the cash-generating unit.

expenses” in the consolidated statement of income.

vehicles, due to the decision to dispose of individual items, etc.

¥261,969 million, respectively.

Therefore, even in cases where the discount rate and growth rate

Impairment losses recognized in the year ended December 31,
2018 represent losses incurred to reduce the carrying amounts to

The recoverable amounts of these assets are calculated mainly by
their values in use, which are estimated at “zero.”

Schedule of Goodwill and Intangible Assets

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

As of January 1, 2018
Individual acquisition
Acquisition through business combinations
Amortization(Note)

Impairment losses
Reversal of impairment losses
Sale or disposal
Exchange differences on translation of foreign operations
Other
As of December 31, 2018
Individual acquisition
Amortization (Note)
Impairment losses
Sale or disposal
Exchange differences on translation of foreign operations
Other
As of December 31, 2019

Goodwill

Trademarks

Software

Other

Total

1,891,210—
279,606————(162,240)(161)
2,008,416
—
—
—
—
(665)
(5,155)2,002,595

401,286
188
104,833(57,539)——(70)(27,423)—
421,2764(63,380)
(791)
(6)
3,536
3
360,641

23,223
10,831
163(11,242)
(17)
0
(124)
(271)
9,355
31,9198,778(11,500)
(130)
(300)
(129)
2,934
31,572

54,6668,970
6,758(6,888)(2,389)—(1,556)(1,099)(8,579)49,882
13,112(9,418)(2,501)(83)
121(2,891)
48,2212,370,385
19,990391,360(75,669)(2,406)0(1,750)(191,033)
615
2,511,492
21,893(84,298)(3,423)(389)
2,863(5,109)2,443,029(Note) The amortization of intangible assets is included in “Cost of sales” and “Selling, general and administrative expenses” in the consolidated statementof income.

Millions of yen
Acquisition Cost

As of January 1, 2018
As of December 31, 2018
As of December 31, 2019

Goodwill

Trademarks

Software

Other

Total

1,891,210
2,008,416
2,002,595

1,028,189
1,078,596
1,087,865

142,531
157,191
141,954

126,263
94,698103,762

3,188,192
3,338,901
3,336,175
Millions of yen

Accumulated Amortization and Accumulated Impairment Losses

As of January 1, 2018
As of December 31, 2018
As of December 31, 2019

The majority of goodwill and trademark in the JTIH Group wasused in calculating the value in use fluctuate within reasonable

recognized as a result of the acquisitions of RJR Nabisco’s non-U.S.

ranges, the Group assumes that the value in use will not become

tobacco operations in 1999 and Gallaher in 2007.

less than the carrying amount.

Other than the above, goodwill and trademark in Domestic

14. Goodwill and Intangible Assets(1)

The pre-tax discount rate is 11.0% (2018: 9.9%). The value in use

Goodwill———

Trademarks

626,903657,320
727,224

Software

119,308
125,272
110,382

Other

71,59744,81755,540

Total

817,808
827,409893,146

Tobacco business were recognized as a result of the acquisition of

C. Processed Food Cash-generating Unit

Natural American Spirit’s non-U.S. tobacco operations in 2016. The

The recoverable amount is calculated by the value in use based oncarrying amounts of goodwill as of December 31, 2018 and 2019

the three-year business plan that was prepared by reflecting past

were ¥265,891 million and ¥265,891 million, respectively. The carry-experiences and external information and that was approved bying amounts of trademarks as of December 31, 2018 and 2019 weremanagement. After the three-year business plan, the Group sets a¥115,274 million and ¥98,669 million, respectively.

growth rate from 2.5% in the fourth year (2018: 1.2%) to 1.3% in

The trademarks are amortized using the straight-line method andthe ninth year (2018: 1.2%), and the same growth rate as the ninth

the remaining amortization period is mainly from 6 to 7 years.

year from the tenth year as a continued growth rate for inflation.

(3) Impairment Test for Goodwill

sufficiently exceeds the carrying amount of the cash-generating unit.

For the year ended December 31, 2019, the carrying amount of the

Therefore, even in cases where the discount rate and growth rate

majority of goodwill is allocated to the domestic tobacco cash-­used in calculating the value in use fluctuate within reasonablegenerating unit of ¥265,891 million (¥265,891 million for the year

ranges, the Group assumes that the value in use will not become

ended December 31, 2018), the international tobacco cash-generating

less than the carrying amount.

The pre-tax discount rate is 3.8% (2018: 4.0%). The value in use

unit of ¥1,711,335 million (¥1,717,156 million for the year ended
December 31, 2018) and the processed food cash-generating unit of(4) Impairment Losses¥25,368 million (¥25,368 million for the year ended December 31,

Goodwill is allocated to cash-generating units that are identified2018). Details of the result of impairment tests are as follows:

according to locations and types of businesses. The groupingof intangible assets for impairment test is the smallest cash-­

A. Domestic Tobacco Cash-generating Unit
The recoverable amount is calculated by the value in use based on

generating unit that independently generates cash inflow.
The Group recognized impairment losses of ¥2,406 million for thethe three-year business plan that was prepared by reflecting past

year ended December 31, 2018, and ¥3,423 million for the year

experiences and external information and that was approved by

ended December 31, 2019 in “Selling, general and administrative

management. After the three-year business plan, given the current

expenses” in the consolidated statement of income.

domestic tobacco market situation, the Group calculates the value inImpairment losses recognized in the year ended December 31,

use by using cash flows with a growth rate of 0% conservatively. For

2018 represent the losses incurred to reduce the carrying amounts

both the current and prior period, the Group’s estimated growth rate

to the recoverable amounts of software and other intangible assets

of 0% is applied only from the fourth year of cash-flows onwards.

since the recoverable amounts were lower than the carrying amounts.

The pre-tax discount rate is 4.3% (2018: 4.9%). The value in use
sufficiently exceeds the carrying amount of the cash-generating unit.
Therefore, even in cases where the discount rate and growth rate

The recoverable amounts of these assets are calculated mainly by
their values in use.
Impairment losses recognized in the year ended December 31,

used in calculating the value in use fluctuate within reasonable2019 represent the losses incurred to reduce the carrying amounts

ranges, the Group assumes that the value in use will not becometo the recoverable amounts of trademarks, software and other intan-

less than the carrying amount.

gible assets since the recoverable amounts were lower than the
carrying 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

122 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 123

CORPORATE PROFILE

15. Lease Transactions

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

16. Investment Property

The Group leases buildings, factory sites, vehicles and other assets

escalation clauses. There are no restrictions on additional debt and(1) Schedule of Investment Property

as 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

Year ended December 31, 2018

2018

2019

Acquisition cost as of December 31

16,700
338
3,215
139
(1,171)
(35)
(573)
(754)
(303)
(6)
7
17,55845,76829,06838,355

17,558
182
1,116
—
(403)
(370)
(533)
(917)
(34)
(10)
—
16,58838,355
20,79740,262

Accumulated depreciation and accumulated impairment losses
as of December 31

20,797

23,674(1) Future Minimum Lease Payments under Non-cancellable Operating Leases

As of January 1

The total of future minimum lease payments under non-cancellable operating leases as of December 31 is as follows:

Expenditure after acquisition
Millions of yen
2018

11,841
15,87014,69642,407

Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total

Transfer from property, plant and equipment
Acquisition by business combination
Transfer to non-current assets held-for-saleTransfer to property, plant and equipment
Depreciation
Impairment losses
Sale or disposal
Exchange differences on translation of foreign operations(2) Total of Minimum Lease Payments and Contingent Rents
The total of minimum lease payments and contingent rents of operating lease contracts recognized as an expense for each year is as follows:
Millions of yen
2018

13,445
1,188

Total of minimum lease payments
Contingent rents

Other
As of December 31
Acquisition cost as of January 1
Accumulated depreciation and accumulated impairment losses as of January 1(3) Carrying Amount of Leased Assets from Finance Leases
The breakdown of carrying amount of leased assets from finance leases is as follows:(2) Fair Value
Millions of yen

As of December 31, 2018

Land, buildings
and structures

Machinery andvehiclesTools, furnitureand fixtures

Total

6,386

5,846

271

12,503

The fair value of investment property is determined based on avaluation conducted by an external real estate appraiser. The valuation is made in accordance with the appraisal standards of the country where the investment property is located and based on market
evidence of transaction prices for similar assets.

Year ended December 31, 2019

marketLevel 2: Fair value that is calculated using the observable price
Level 3: Fair value that is calculated based on valuation tech-

The breakdown of addition, depreciation and carrying amount of right-of-use assets is as follows:niques which include inputs that are not based onYear ended December 31, 2019

observable market data

Millions of yen

Depreciation

Level 1: Fair value measured at the quoted price in the active

other than categorized in Level 1 directly or indirectly(1) Addition, Depreciation and Carrying Amount of Right-of-use Assets

Addition

The fair value hierarchy of investment property is categorizedfrom Level 1 to Level 3 as follows:

Land, buildings
and structures

Machinery andvehiclesTools, furnitureand fixtures

Total

14,645
10,449

9,404
5,210

72
119

24,121
15,778The fair value of investment property based on the fair value hierarchy as of December 31 is as follows:
Millions of yen
As of December 31, 2018

Investment property

As of December 31, 2019

Level 1

Level 2

Level 3Total     —

34,678

2,485

37,164

Millions of yen

Carrying amountMillions of yen

Land, buildings
and structures

Machinery andvehiclesTools, furnitureand fixtures

Total

43,772

12,813

126

56,711

As of December 31, 2019

Investment property

Level 1

Level 2

Level 3

Total

    —

34,7881,416

36,204(2) Expense Items Related to Lease
The breakdown of expense items related to lease is as follows:
Millions of yen
2019

Financial cost on lease liabilities
Expense relating to short-term lease or leases of low-value assets
Expense relating to variable lease payments
Total cash outflow for leases
124 Japan Tobacco Inc. Integrated Report 2019

1,506
9,440
2,182
16,003
Japan Tobacco Inc. Integrated Report 2019 125

CORPORATE PROFILEVALUE CREATION(3) Impairment Losses

the carrying amount for land and buildings as it was decided to

The grouping of investment properties for impairment test is based

demolish certain idle properties. The recoverable amount is calcu-

on the smallest cash-generating unit that independently generates

lated based on value in use basis, which is “zero” for buildings due

Deferred Tax Liabilities

cash inflows. Impairment tests for idle properties are c­ arried out

to the decision of demolition, and the recoverable amount of other

Fixed assets (Note 2)

individually.

properties is calculated by the fair value less costs of disposal.

Retirement benefits

The Group recognized impairment losses of ¥754 million for the

Impairment losses recognized for the year ended December 31,

year ended December 31, 2018, and ¥917 million for the year ended

2019 represent the difference between the recoverable amount andDecember 31, 2019 in “Selling, general and administrative

the carrying amount for buildings as it was decided to demolish certain

expenses” in the consolidated statement of income.

idle properties. The recoverable amounts of these assets are calcu-

Impairment losses recognized for the year ended December 31,

lated mainly by their values in use, which are estimated at “zero.”

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYSTRATEGYFINANCIAL INFORMATION

Millions of yen

Other
Total

As of
January 1
2019 (Note 3)(99,298)(10,125)(117,697)(227,120)

Recognized in
profit or loss

Recognized in othercomprehensive
incomeOther (Note 1)

As ofDecember 31, 2019

5,824
375
3,938
10,137—(1,708)
6,773
5,065

  (495)(174)(574)(1,243)(93,968)(11,632)(107,561)(213,160)(Note 1) “Other” includes exchange differences on translation of foreign operations and acquisition through business combinations.
(Note 2) “Fixed assets” include property, plant and equipment, goodwill, intangible assets and investment property.
(Note 3) According to cumulative effects of changes in accounting policies, “Fixed assets” of “Deferred Tax Assets” and “Deferred Tax Liabilities” have increased¥7,619 million.

2018 represent the difference between the recoverable amount and
The deferred tax assets are recognized for the amount consideredand ¥31,555 million (including ¥19,252 million, for which the carryfor-

17. Income Taxes

to be recoverable on deductible temporary differences, carryforward

ward expires after five years) as of December 31, 2019. Tax credits,of unused tax losses and tax credits by taking taxable temporary

for which the deferred tax assets are not recognized, were ¥5,417(1) Deferred Tax Assets and Deferred Tax Liabilities

differences and future taxable profits plan into account. The carryfor-

million (including ¥5,183 million, for which the carryforward expires

The breakdown and schedule of “Deferred tax assets” and “Deferred tax liabilities” by major causes of their occurrence for each year are as follows:

ward of unused tax losses, for which the deferred tax assets are notafter five years) as of December 31, 2018, and ¥4,201 million (includ-recognized, was ¥44,610 million (including ¥15,696 million, for whiching ¥3,931 million, for which the carryforward expires after fivethe carryforward expires after five years) as of December 31, 2018,

years) as of December 31, 2019.

Year ended December 31, 2018
Millions of yen

Deferred Tax Assets

Fixed assets (Note 2)
Retirement benefits
Carryforward of unused tax losses
Other
Subtotal
Valuation allowance
Total

As of
January 1, 2018

Recognized in
profit or loss

Recognized in othercomprehensive
income124,70973,621
55,22874,433327,991(65,374)
262,617(10,763)(1,563)(589)
13,522607(1,012)   (406)

   —
1,731
—
(2,043)(312)(1,248)(1,560)

Other (Note 1)

As ofDecember 31, 2018

(1,436)(1,543)(1,513)(1,697)(6,188)
1,648(4,540)112,50972,24853,126
84,215322,098(65,986)
256,112(2) Income Taxes
The breakdown of “Income taxes” for each year is as follows:
Millions of yen

Current income taxes
Deferred income taxes
Total income taxes

Deferred income taxes increased by ¥96 million and decreased by¥4,498 million for the years ended December 31, 2018 and 2019,

Millions of yen

Deferred Tax Liabilities

Fixed assets (Note 2)
Retirement benefits
Other
Total

As of
January 1, 2018

Recognized in
profit or loss

Recognized in othercomprehensive
income(84,705)(9,244)(122,563)(216,511)

5,971(1,530)(5,001)
(559)

—
(254)
4,337
4,083

Other (Note 1)

As ofDecember 31, 2018(12,944)902
5,529(6,513)(91,678)(10,125)(117,697)(219,500)

Millions of yen

Deferred Tax Assets

Fixed assets(Note 2)Retirement benefits
Carryforward of unused tax losses
Other
Subtotal
Valuation allowance
Total

126 Japan Tobacco Inc. Integrated Report 2019

As ofJanuary 1
2019 (Note 3)

Recognized in
profit or loss

Recognized in othercomprehensive
income120,129
72,24853,126
84,215
329,717(65,986)
263,731(2,528)(3,996)(10,070)
2,635(13,959)
15,011
1,053

—
3,854
—
1,103
4,957
(1,438)
3,519

Other

(Note 1)    16
(572)
(648)
(22)
(1,225)
349
(877)

As of
December 31, 2019117,616
71,53442,40987,931
319,490(52,064)
267,4262019

143,090965
144,055

114,799(11,189)
103,609

respectively, due to the effect of changes in tax rates in Japan andother countries.

(3) Reconciliation of the Effective Tax Rate
The breakdown of major items that caused differences between the effective statutory tax rate and the average actual tax rate for each year
is as follows:
The Company is subject mainly to corporate tax, inhabitant tax and enterprise tax, and the effective statutory tax rate is calculated basedon these taxes. The effective statutory tax rates were 30.66% and 30.43% for the years ended December 31, 2018 and 2019, respectively.
Foreign subsidiaries are subject to income taxes at their locations.
%

Effective statutory tax rate

Year ended December 31, 20192018

Different tax rates applied to foreign subsidiaries
Non-deductible expenses
Dividend income
Valuation allowance
Tax credits
Withholding tax in foreign countries
Tax contingencies
Other
Average actual tax rate

2018

2019

30.66
(9.57)
1.13
0.45
0.95
(0.62)
1.50
2.32
0.28
27.10

30.43
(9.08)
1.48
2.04(2.90)(1.66)
1.79
1.21(1.05)
22.27

Japan Tobacco Inc. Integrated Report 2019 127

CORPORATE PROFILE

18. Trade and Other Payables

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION(Note) The summary of the issuing conditions of the bonds is as follows:

The breakdown of “Trade and other payables” as of December 31 is as follows:

Millions of yen

%

As of
December 31, 2018

As ofDecember 31, 2019

Interest
rate

Collateral

Date of maturity

1.300

Yes

December 9,
2020

0.217

Yes

July 15, 2020

0.358

Yes

July 15, 2022

Company

Name of bondDate of issuanceJapan Tobacco Inc.

8th domestic
straight bondDecember 9, 2010

20,000Japan Tobacco Inc.

9th domestic
straight bondJuly 15, 2015

60,000Japan Tobacco Inc.

10th domestic
straight bondJuly 15, 2015

30,00020,000(20,000)
60,000(60,000)
30,000Japan 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.

13th domestic
straight bondSeptember 10,
2018

30,00030,0000.355

Yes

September 8,
2028

(1)

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

Yes

April 13, 2021

Straight bondin USD

April 13, 2016

2.800

Yes

April 13, 2026

JT International
Financial Services B.V.

Straight bondin USD

September 28,
2018

3.500

No

September 28,
2023

JT International
Financial Services B.V.

Straight bondin USD

September 28,
2018

3.875

No

September 28,
2028

JT International
Financial Services B.V.

Straight bondin EUR

September 28,
2018

1.125

No

September 28,
2025

JT International
Financial Services B.V.

Straight bondin EUR

November 26,
2019

1.000

No

November 26,
2029

JT International
Financial Services B.V.

Straight bondin GBP

September 28,
2018

82,095[USD 750 mil.]
54,580[USD 500 mil.]
57,198[USD 525 mil.]
54,172[USD 500 mil.]
66,772[EUR 550 mil.]
60,639[EUR 500 mil.]
56,168[GBP 400 mil.]
666,623(80,000)

2.000

Japan Tobacco Inc.

83,116[USD 750 mil.]
55,268[USD 500 mil.]
57,871[USD 525 mil.]
54,827[USD 500 mil.]
69,134[EUR 550 mil.]
—

2.750

No

September 28,
2033

Millions of yen

Accounts payable
Other payables
Other
Total

2018

2019

197,426
68,246
114,844
380,516

229,91469,439109,245
408,597

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
Commercial paper
Current portion of long-term borrowings
Current portion of bonds (Note)
Long-term borrowings
Bonds (Note)
Lease liabilities
Other
Total
Current liabilities
Non-current liabilities
Total

2018

2019

Due

  3,176
165,985
72,03812,443—116,870
610,4449,807
1,570
992,334
254,953
737,381992,334    7,739
192,581—
11,55480,000103,743586,623
53,705
1,479
1,037,425  305,997
731,428
1,037,425

—
—
—
—
—
2021–2028

—
—
—

Total

55,228[GBP 400 mil.]
610,444(—)(Note 1) The figure in parentheses ( ) represents the amount of the current portion of the bond.
(Note 2) The figure in parentheses [ ] represents the amount of foreign currency-denominated bond.

Derivative liabilities are classified as financial liabilities measured(2) Assets Pledged as Collateral for Liabilities

at fair value through profit or loss excluding those to which hedge

A. Pursuant to the provisions of Article 6 of the Japan Tobacco Inc.

accounting is applied, and bonds and borrowings are classified as

Act, the Company’s properties are pledged as general collateralfinancial liabilities measured at amortized cost.

for bonds issued by the Company. Bondholders are entitled to

There are no financial covenants that have a significant impact on
the bonds and borrowings of the Group.

claim satisfaction in preference to unsecured creditors of theCompany properties (with the exception of national and local
taxes and certain other statutory obligations).
B. Assets pledged as collateral by some subsidiaries are ¥2,138
million and ¥2,060 million as of December 31, 2018 and 2019,respectively. Their corresponding debt is ¥71 million as ofDecember 31, 2018.

128 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 129

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

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, 2018
Millions of yen

Tobacco special excise tax payables

Asset retirement
provisions

Restructuringprovisions

Provisions forsales rebates

Other
provisions

Total

3,463
157
29
(70)
—
—
3,579
—
3,579
3,579

7,074
1,657
—
(7,590)
(686)
(133)
  322
  309
12
  322

3,312
3,668
—
(3,312)
—
—
3,668
3,668
—
3,668

3,185
657
—
(309)
(1,058)
(185)
2,289
2,101
189
2,289

17,0336,138
29(11,280)(1,744)
(318)
9,858
6,078
3,780
9,858

As of January 1, 2018
Provisions
Interest cost associated with passage of time
Provisions used
Provisions reversed
Exchange differences on translation of foreign operations
As of December 31, 2018
Current liabilities
Non-current liabilities
Total

Tobacco excise tax payables
Tobacco local excise tax payables
Consumption tax payables
Bonus to employees
Employees’ unused paid vacations liabilities
Other
Total
Current liabilities
Non-current liabilities
Total

2018

2019

297,728
10,562
163,704
95,781
38,977
19,130269,582
895,464
716,190
179,274
895,464

302,965
10,060163,387
124,693
49,473
19,488
186,752
856,818
701,050
155,768
856,818

22. Employee Benefits
Year ended December 31, 2019
Millions of yen
Asset retirement
provisions

Restructuringprovisions

Provisions forsales rebates

Other
provisions

Total

3,579
2
29
(9)
(4)
—
3,598
—
3,598
3,598

   32225,393—(2,874)(95)
490
23,236
7,565
15,671
23,236

3,668
4,000
—
(3,668)
—
—
4,000
4,000
—
4,000

2,289
4,564
—
(990)
(699)
34
5,199
5,004
194
5,199

9,858
33,96029(7,540)(798)
524
36,033
16,57019,46336,033As of January 1, 2019
Provisions
Interest cost associated with passage of time
Provisions used
Provisions reversed
Exchange differences on translation of foreign operations
As of December 31, 2019
Current liabilities
Non-current liabilities
Total(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

defined contribution plans as employee retirement benefit plans. The

using a discount rate set with reference to a yield on high quality

benefits of defined benefit plans are predetermined based on condi-

corporate bonds or government bonds. If the return on the plantions, such as points employees have gained in compensation for

assets is below this yield, there is a possibility that the plan iseach year of service, the payment rate, years of service, and average

underfunded.

salaries in their final years of service before retirement.
The Company is obligated to bear pension costs for a mutual

A decrease in a yield on high quality corporate bonds or government

June 1956 (prior to enforcement of the Act on the Mutual Aid

bonds will increase the present value of the defined benefit obliga-

Association of Public Corporation Employees). Such obligations aretions. However, this will be partially offset by an increase in the fairrecognized as liabilities at their present value using the actuarial

value of the debt instruments (plan assets).

valuation method and are included in retirement benefit liabilities.
Special termination benefits may be provided to employees

A. Asset Retirement Provisions

Business.” The timing of the payment may be affected by future

In order to settle the obligation of restoring and of removing

business plans.

­hazardous substances from plant facilities and premises that the(ii) Interest rate risk

assistance association incurred with respect to services in or before

on their early retirements under certain circumstances.
The Company and its subsidiary transferred a portion of theirpension plans from a defined benefit plan to a defined contribution(iii) Inflation risk
The level of benefit for certain defined benefit plans of the Groupis linked to inflation. Accordingly, a rise in inflation will increase
the present value of the defined benefit obligations.

Group uses, the probable amount to be paid in the future is recog-

C. Provisions for Sales Rebates

nized based on past performances. These expenses are expected

These provisions are for contracts which reward the customers withto be paid after one year or more; however, they may be affecteddiscounts when the sales volume or sales amount in a given period

or the fund that is legally separated from the Group in accordanceSome defined benefit plans of the Group provide a lifetime annuity,

by future business plans.

exceeds a specified volume or amount and correspond to “Refundwith statutory requirements. The Group, or the board of the pension

and the Group is obligated to provide pension benefits to the plan

liabilities” in IFRS 15 “Revenue from Contracts with Customers.”

fund and the trustee of the plan, are required by law to act in theparticipants for the rest of their lives after their retirements. The

They are expected to be paid within one year.

best interests of the plan participants, and are responsible for man-present value of the defined benefit obligations is calculated by

These provisions are mainly related to business integration andaging the plan assets in accordance with the designated investment

reference to the best estimate of the mortality of plan participantsmeasures for the rationalization of the “International Tobacco

strategy.

during or after employment. An increase in average life expectancy

B. Restructuring Provisions

plan as of April 1, 2018.
The funded defined benefit plans are administrated by the GroupThe Group’s main defined benefit plans expose the Group to(iv) Longevity riskof the plan participants will increase the defined b­ enefit obligations.

actuarial risks, such as investment risk, interest rate risk, inflation
risk, and longevity risk.

130 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 131

CORPORATE PROFILEVALUE CREATIONSTRATEGY

A. Schedule of Defined Benefit Obligations

B. Schedule of Plan Assets

The schedule of the defined benefit obligations is as follows:

The schedule of the plan assets is as follows:

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Millions of yen

As of January 1, 2018

(Notes 1, 2)

Current service cost
Past service cost and settlement
Interest expense
Contributions by plan participants

Japan (Note 3)

Overseas

Total

249,972
10,214(26,868)
1,049—

530,4159,348
450
10,646
1,675

780,386
19,562(26,418)
11,695
1,675

Millions of yen

As of January 1, 2018
Interest income
Decrease due to settlement

(249)
(85)
3,350
(21,159)——
216,223
9,940
—
1,000
—

Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Benefits paid
Exchange differences on translation of foreign operations
Other
As of December 31, 2018 (Notes 1, 2)
Current service cost
Past service cost and settlement
Interest expense
Contributions by plan participants(1,189)(9,860)
1,255(23,942)(34,097)263
484,964
9,099(4,190)10,287
1,727(1,438)(9,946)
4,605(45,101)(34,097)263
701,187
19,039(4,190)11,2881,727

Return on plan assets (excluding amounts included in interest income)(Notes 1, 2)

Contributions by plan participants
Benefits paid
Exchange differences on translation of foreign operations
As of December 31, 2018
Interest income

1,135(1,282)(2,914)(23,507)——
200,595

Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Benefits paid
Exchange differences on translation of foreign operations
Other
As of December 31, 2019 (Notes 1, 2)(4,668)46,336(2,463)(21,110)
(284)
(608)
519,089(3,533)45,053(5,378)(44,617)
(284)
(608)
719,684(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 (2018: 7.1 years for Japanand 15.1 years for overseas).
(Note 2) The Group’s breakdown of the defined benefit obligation by plan participant is as follows:

Return on plan assets (excluding amounts included in interest income)Contributions by the employer (Notes 1, 2)
Contributions by plan participants
Benefits paid
Exchange differences on translation of foreign operations

As of December 31, 2019

Active members
Deferred members
Pensioners
Total

Japan

Overseas

Total

Japan

Overseas

Total

140,274
13,15862,792
216,223

158,329
74,678251,957
484,964

298,60387,836
314,748
701,187

135,200
10,42754,968200,595

172,637
76,190270,263
519,089

307,837
86,617
325,230
719,684
Millions of yen

As of January 1
Interest expense
Remeasurement gains and losses
Benefits paid
As of December 31

132 Japan Tobacco Inc. Integrated Report 2019

2018

2019

42,284127(875)(4,861)
36,67536,675110(1,661)(4,034)31,090411,004
8,460—

501,002
8,782(22,481)

(31)
1,159
—
(6,180)—62,788296(11,420)
10,885
1,675(19,163)(27,738)
373,702
8,207(11,451)
12,044
1,675(25,343)(27,738)
436,489
8,503

1,064
959
—
(7,114)—57,99230,122
6,465
1,727(16,402)
4,634
408,455

31,185
7,424
1,727(23,516)
4,634
466,447

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, 2018
Millions of yen
JapanOverseas

Total

60,453(62,788)(2,334)
155,770

343,304(373,702)(30,398)
141,660

403,757(436,489)(32,732)
297,430Retirement benefit assets

153,435
158,297(4,861)

111,262
163,541(52,279)

264,697
321,838(57,140)

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

153,435

111,262

264,697

Present value of the funded defined benefit obligations
Fair value of the plan assets
SubtotalPresent value of the unfunded defined benefit obligations
Net defined benefit liabilities (assets) recognized in the consolidated statement offinancial position
Retirement benefit liabilities(Note 3) The schedule of mutual pension benefits obligations included in the category of Japan is as follows:

89,998322(22,481)(Note 1) Pursuant to laws and regulations, the Group and the pension fund review the financial condition of the pension plan regularly and recalculate contributions
for allocating future benefit and keeping the balance of the pension financing when the plan is underfunded.
(Note 2) The Group plans to pay contributions of ¥6,462 million in the year ending December 31, 2020.

Millions of yen
As of December 31, 2018

Total

Remeasurement gains and losses:

As of December 31, 2019

Remeasurement gains and losses:

Overseas

Remeasurement gains and losses:
Contributions by the employer

Remeasurement gains and losses:

Japan

Japan Tobacco Inc. Integrated Report 2019 133

CORPORATE PROFILE

As of December 31, 2019

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Total
Millions of yen
JapanOverseas

Total

53,201(57,992)(4,791)
147,394366,845(408,455)(41,610)
152,244420,046(466,447)(46,401)
299,638

Retirement benefit assets

142,603148,915(6,312)

110,635
171,699(61,064)

253,237
320,614(67,377)

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

142,603110,635

253,237

Present value of the funded defined benefit obligations
Fair value of the plan assets
SubtotalPresent value of the unfunded defined benefit obligations
Net defined benefit liabilities (assets) recognized in the consolidated statement offinancial position
Retirement benefit liabilities

Millions of yen
As of December 31, 2019

As of December 31, 2018
Market price inan active market

Cash and cash equivalents
Equity instruments
Debt instruments
Real estate
General account of life insurance companies (Note)
Other
Total

Market price inan active market

QuotedUnquoted

Total

QuotedUnquoted

Total

22,45250,908287,497
11,581—
9,414
381,852

   —
—
5,134
65
40,3099,129
54,63722,45250,908292,631
11,64640,30918,543
436,489

23,416
62,614
303,578
13,060—11,180413,849

    —
0
5,334
66
36,496
10,702
52,59823,416
62,615308,913
13,12636,496
21,882
466,447(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:Japan
Millions of yen
As of December 31, 2019

As of December 31, 2018
Market price inan active market

Cash and cash equivalents
Equity instruments
Japan
Overseas
Debt instruments
Japan
Overseas
General account of life insurance companies (Note)
Other
Total

Market price inan active market

QuotedUnquoted

Total

QuotedUnquoted

Total

7,183
3,052
1,530
1,523
10,388
9,147
1,242
—
1,208
21,832

   —
—
—
—
—
—
—
40,309646
40,956

7,183
3,052
1,530
1,523
10,3889,147
1,242
40,3091,855
62,788

7,794
3,078
1,509
1,569
8,819
7,572
1,247
—
785
20,477

    —
—
—
—
—
—
—
36,496
1,019
37,515

7,794
3,078
1,509
1,569
8,819
7,572
1,247
36,496
1,804
57,992(Overseas)(Japan)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

setting a target rate of return and composition ratio of plan assets byplans is to manage risks arising from its defined benefit obligation,asset category within the risk tolerance that is annually assessed,

and meanwhile to achieve a return on assets in excess of the move-

the Company invests plan assets consistently with the composition

ment in the value of the defined benefit obligation.

ratio. When reviewing the composition ratio, the Company considers

The majority of the plan assets have been allocated to liability

introducing an asset investment which has a high correlation withmatching bonds and the remaining parts of the plan assets are

the liability.

mainly invested in equities targeting long-term return.

When an unexpected situation occurs in the market environment,
it is temporarily allowed to make a weighted adjustment to the risk
assets, complying with company policy.
E. Matters Related to Actuarial Assumptions
The major items of actuarial assumptions as of December 31 are as follows:%
As of December 31, 2018

Overseas
As of December 31, 2018
Market price inan active market

Cash and cash equivalents
Equity instruments
United Kingdom
North America
Other
Debt instruments
United Kingdom
North America
Other
Real estate
Other
Total

134 Japan Tobacco Inc. Integrated Report 2019

Millions of yen

Discount rate

As of December 31, 2019

Inflation rate

Market price inan active market

QuotedUnquoted

Total

QuotedUnquoted

Total

15,26947,856
3,871
17,53926,445277,109
195,193
39,58342,333
11,581
8,206
360,021

   —
—
—
—
—
5,134
—
0
5,134
65
8,482
13,681

15,26947,856
3,871
17,53926,445282,242
195,193
39,58347,466
11,646
16,688373,702

15,62259,536
4,242
23,39731,897294,759
210,452
33,186
51,122
13,060
10,395393,372

    —
0
—
—
0
5,334
—
—
5,334
66
9,683
15,083

15,62259,537
4,242
23,39731,897300,093
210,452
33,18656,456
13,126
20,078408,455

As of December 31, 2019

Japan

Overseas

Japan

Overseas

0.5
—

2.2
2.4

0.6
—

1.5
2.3

As of December 31, 2018
Years
Japan

Overseas

Males

Females

Males

Females23.6 (Note 2)

29.3 (Note 2)

22.0 (Note 3)
23.4 (Note 4)

24.2 (Note 3)
25.5 (Note 4)

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

Japan Tobacco Inc. Integrated Report 2019 135

CORPORATE PROFILE

As of December 31, 2019

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Year ended December 31, 2019
Years
Japan
Males

Females

Males

Females

Average life expectancy at retirement (Note 1)
Current pensioners

23.6 (Note 2)

Future pensioners

29.3 (Note 2)

21.8 (Note 3)
23.1 (Note 4)

24.0 (Note 3)
25.3 (Note 4)(Note 1) The average life expectancies underlie the values of the defined benefit obligations on major plans. Assumptions regarding future mortality rate are basedon 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
in major assumptions as of December 31 are as follows. Each of these sensitivities assumes that other variables remain fixed; however, in fact, they do
not always change independently. Negative figures represent a decrease in pension plan obligations, while positive figures represent an increase.

Millions of yen
As of December 31, 2018
Change inassumptions

Discount rate

Increase by 0.5%
Decrease by 0.5%

Inflation rate

Increase by 0.5%
Decrease by 0.5%

Mortality rate

Extended 1 year
Shortened 1 year

Millions of yen

Overseas

As of December 31, 2019

Japan

Overseas

Japan

Overseas(7,192)
7,711
—
—
4,420
(4,267)(34,758)
38,49623,889(22,326)
16,812(16,915)(6,438)
6,917
—
—
3,834
(3,696)(38,101)
42,46025,757(24,052)
20,155(19,764)

Current service cost
Past service cost and gains and losses on settlement
Interest expense (income)Defined benefit cost through profit or loss
Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Return on plan assets (excluding amounts included in interest income)Defined benefit cost through other comprehensive income
Total of defined benefit cost

Past service cost and gains and losses on settlement
Interest expense (income)Defined benefit cost through profit or loss
Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Return on plan assets (excluding amounts included in interest income)Defined benefit cost through other comprehensive income
Total of defined benefit cost

Overseas

Total

9,348
450
2,186
11,985(1,189)(9,860)1,255
11,4201,626
13,611

19,562(3,937)
2,913
18,538(1,438)(9,946)
4,605
11,451
4,673
23,21019,039(4,190)2,785
17,634(3,533)45,053(5,378)(31,185)
4,957
22,591Millions of yen

Remuneration and salary
Bonus to employees

Termination benefits

Japan

9,099
(4,190)2,080
6,989(4,668)46,336(2,463)(30,122)
9,083
16,072are as follows:

The breakdown of defined benefit cost for each year is as follows:

10,214(4,388)
727
6,553
(249)
(85)
3,350
31
3,047
9,600

9,940
—
704
10,6451,135(1,282)(2,914)(1,064)(4,126)
6,519(2) Other Employee Benefit Expenses

Welfare expenses

Current service cost

Total

The employee benefit expenses other than post-employment benefits that are included in the consolidated statement of income for each year

F. Breakdown of Defined Benefit Cost

Millions of yen

Overseas(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 ¥11,517 million for the year ended December 31, 2018 and ¥9,269 million for the year ended
December 31, 2019 and were not included in the table above.

Legal welfare expenses

Year ended December 31, 2018

Japan

2018

2019

236,971
67,37944,53539,086(304)

239,305
80,97344,607
38,62024,541

23. Equity and Other Equity Items(1) Share Capital and Capital Surplus
A. Authorized Shares
The number of authorized shares as of December 31, 2018 and 2019 is 8,000,000 thousand ordinary shares.
B. Fully Paid Issued Shares
The schedule of the number of issued shares and share capital is as follows:
Thousands of shares

As of January 1, 2018
Increase (decrease)
As of December 31, 2018
Increase (decrease)
As of December 31, 2019

Millions of yen

Number of ordinary
issued shares

Share capital

Capital surplus

2,000,000—
2,000,000—
2,000,000

100,000—
100,000—
100,000

736,400—
736,400—
736,400(Note) The shares issued by the Company are non-par value ordinary shares that have no restriction on any content of rights.

136 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 137

CORPORATE PROFILE(2) Treasury Shares

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Year ended December 31, 2019

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

Millions of yen

Number of shares

Amount208,957(380)
208,577
17,620226,197443,636(807)
442,829
49,640492,469

As of January 1, 2018
Increase (decrease) (Note 2)
As of December 31, 2018
Increase (decrease) (Note 2)
As of December 31, 2019

(Note 1) The Company adopts share option plans and utilizes treasury shares for delivery of shares due to its exercise. Contract conditions and amounts aredescribed in “33. Share-based Payments.”(Note 2) 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 costis ¥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,
2018 and 0 thousand shares for the year ended December 31, 2019. The number of shares delivered upon exercise of share options is 380 thousand
shares for the year ended December 31, 2018 and 168 thousand shares for the year ended December 31, 2019.

(3) Other Components of Equity

D. Net Gain (Loss) on Revaluation of Financial Assets Measured at

A. Subscription Rights to Shares

Fair 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

measured at fair value through other comprehensive income.

and amount are described in “33. Share-based Payments.”

Millions of yen

Yen

Class of shares

Total
dividends

Dividends per
share

Annual Shareholders’ Meeting(March 20, 2019)

Ordinary shares

134,357

Board of Directors(July 31, 2019)

Ordinary shares

136,579

December 31, 2018

March 22, 201977

June 30, 2019

September 2, 2019

Basis date

Effective date

December 31, 2018

March 22, 2019

Basis date

Effective date

December 31, 2019

March 23, 2020

Year ended December 31, 2018
Millions of yen

Yen

Class of shares

Total
dividends

Dividends per
share

Ordinary shares

134,357

75(Resolution)
Annual Shareholders’ Meeting(March 20, 2019)

Remeasurements of defined benefit plans comprise actuarial gains

Exchange differences on translation of foreign operations are com-and losses, the return on plan assets excluding amounts included

posed of foreign currency translation difference that occurs when

in interest income, and any change in the effect of the asset ceiling(Resolution)

consolidating 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

Annual Shareholders’ Meeting(March 19, 2020)

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.

Hedges75

Dividends for which the effective date falls in the following year are as follows:

B. Exchange Differences on Translation of Foreign Operations

The Group uses derivatives for hedging to avoid the risk of

Effective dateYear ended December 31, 2019

E. Remeasurements of Defined Benefit Plans

C. Net Gain (Loss) on Derivatives Designated as Cash Flow

Basis date

(Resolution)

Millions of yen

Yen

Class of shares

Total
dividends

Dividends per
share

Ordinary shares

136,583

77

25. Revenue

Remeasurements are recognized as other comprehensive income
when they occur and are transferred immediately from other compo-(1) Disaggregation of Revenue

nents of equity to retained earnings.

The disaggregation of “Revenue” for each year is as follows. The amounts are presented after eliminations of intercompany transactions.

­fluctuation in future cash flows. This is the effective portion ofchanges in the fair value of hedging instruments designated asYear ended December 31, 2018

cash flow hedges.

Millions of yen
Reportable Segments

24. DividendsCore revenue from tobacco business (Note 1)
Dividends paid for each year are as follows:

Other
Total

Domestic
Tobacco (Note 2)

International
Tobacco (Note 3)

Pharmaceuticals

Processed
Food

Other

Consolidated

582,379
39,047
621,426

1,250,719
61,622
1,312,342

     —
113,992
113,992     —
161,387
161,387

   —
6,815
6,815

1,833,098
382,864
2,215,962

Year ended December 31, 2018

Class of shares

Millions of yen

Yen

Total
dividends

Dividends per
share

Year ended December 31, 2019
Basis dateMillions of yen

Effective date
Reportable Segments(Resolution)
Annual Shareholders’ Meeting(March 27, 2018)

Ordinary shares

125,373

70

December 31, 2017

March 28, 2018

Board of Directors(August 1, 2018)

Ordinary shares

134,35175

June 30, 2018

September 3, 2018

Core revenue from tobacco business (Note 1)
Other
Total

Domestic
Tobacco (Note 2)

International
Tobacco (Note 3)

Pharmaceuticals

Processed
Food

Other

Consolidated

568,880
42,614
611,494

1,253,022
57,855
1,310,877    —
88,52888,528     —
158,586
158,586

   —
6,140
6,140

1,821,902
353,724
2,175,626(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.
(Note 2) Revenues from RRP in core revenue from the “Domestic Tobacco Business” were ¥64,611 million and ¥60,932 million for the year ended December 31,
2018 and 2019, respectively. RRP represents Reduced-Risk Products with potential to reduce the health risks associated with smoking.

138 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 139

CORPORATE PROFILE(Note 3) Core revenue by cluster from the “International Tobacco Business” is as follows:

North and Central Europe
CIS+
Rest-of-the-World
Total

2018

2019

  222,964
233,103311,897482,756
1,250,719  216,653
236,210309,646
490,513
1,253,022

South and West Europe includes France, Italy and Spain. North and Central Europe includes Germany and the United Kingdom. CIS+ includes
Romania and Russia. Rest-of-the-World includes Iran, Taiwan and Turkey.
revenue and sales-based royalties. Upfront income is recognized at

Domestic and international tobacco businesses engage in the sale ofthe time the customer obtains control of the license. Milestone

tobacco products.

revenue is recognized at the time the milestone agreed between theparties such as the progress of development is achieved. Sales-

the products because the customer obtains control of the products

based royalties are measured based on the Group’s licensees’ sales,

upon delivery, by which the Group evaluates that the performanceand recognized by taking into consideration the timing of occurrence.

obligation is satisfied. Revenue is measured at the consideration

Considerations for transactions are received mainly within one

promised in a contract with a customer, less discounts, rebates andyear from satisfying their performance obligations and includes notaxes, including consumption tax. In addition, where the Groupsignificant financial component.

makes payments to the customer, except the case when consideration payable to the customer is a payment for a distinct product or

C. Processed Foods Businessservice from the customer, revenue is measured at the amount

Processed foods business engages in the sale of frozen and ambientwhich is consideration promised with the customer, less consider-processed foods, bakery products and seasonings.

ation payable to the customer.

Revenue from sales of products is recognized upon delivery ofConsiderations for transactions are received mainly within one

the products because the customer obtains control of the products

year from satisfying their performance obligations and includes noupon delivery, by which the Group evaluates that the performance

significant financing components.

obligation is satisfied. Revenue is measured at the consideration

The tobacco excise taxes and other transactions in which the

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATIONThe reconciliation from “Gross turnover” to “Revenue” for each year is as follows:
Millions of yen

Gross turnoverTobacco excise taxes and agency transaction amount
Revenue

The tobacco excise taxes and other transactions in which theGroup is involved as an agency are excluded from revenue. The

A. Domestic and International Tobacco Businesses

Revenue from sales of products is recognized upon delivery of

STRATEGY(3) Gross Turnover
Millions of yen

South and West Europe

VALUE CREATION

promised in a contract with a customer, less discounts, rebates andGroup is involved as an agency are excluded from revenue. The

taxes, including consumption tax. In addition, where the Group

inflow of economic benefits after deducting the tobacco excise taxes

makes payments to the customer, except the case when consider-and other transactions is presented as “Revenue” in the consoli-

ation payable to the customer is a payment for a distinct product or

dated statement of income.

service from the customer, revenue is measured at the amount

2018

2019

7,532,248(5,316,285)
2,215,962

7,581,071(5,405,446)
2,175,626

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

inflow of economic benefits after deducting the tobacco excise taxes
and other transactions is presented as “Revenue” in the­consolidated statement of income.

26. Other Operating Income
The breakdown of “Other operating income” for each year is as follows:
Millions of yen
2018

2019

—

60,51839,402
9,129
48,532

15,605
19,603
95,725Gain on transfer of pharmaceutical licenses
Gain on sale of property, plant and equipment, intangible assets
and investment property (Notes 1, 2)
Other(Note 2)

Total

(Note 1) The amount of gain on sale for the year ended December 31, 2018 mainly relates to the sale of the old plant sites.
(Note 2) The amount of restructuring incomes included in each account is as follows:
Millions of yen

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

2018

2019

38,559725
39,284

14,626571
15,197

which is consideration promised with the customer, less considerB. Pharmaceutical BusinessPharmaceutical business mainly engages in the sale of prescription
drugs and licensing.
Revenue from sales of products is recognized upon delivery of
the products because the customer obtains control of the products

ation payable to the customer.

27. Selling, General and Administrative Expenses

Considerations for transactions are received mainly within one
year from satisfying their performance obligations and includes no

The breakdown of “Selling, general and administrative expenses” for each year is as follows:significant financial component.

Millions of yen

Transactions in which the Group is involved as an agency areupon delivery, by which the Group evaluates that the performance

excluded from revenue. The inflow of economic benefits after

Advertising expenses

obligation is satisfied. Revenue is measured at the consideration

deducting these transactions is presented as “Revenue” in the

Promotion expenses

promised in a contract with a customer, less discounts, rebates andconsolidated statement of income.

Commission
Employee benefit expenses (Note 2)

taxes, including consumption tax. In addition, where the Groupmakes payments to the customer, except the case when consider-(2) Transaction Price Allocated to the Remaining Performance Obligations

ation payable to the customer is a payment for a distinct product or

The Group uses the practical expedient and does not disclose infor-

service from the customer, revenue is measured at the amountmation on the remaining performance obligations because it has nowhich is consideration promised with the customer, less consider-significant transactions with initial expected contractual terms

ation payable to the customer.

exceeding one year. There are no significant amounts of consider-

Revenue from licensing is generated by licensing out the rights todevelop and market of each compound to licensees in the develop-

ations from contracts with customers that are not included in­transaction prices.

Research and development expenses (Note 1)
Depreciation and amortization
Impairment losses on other than financial assets (Note 2)
Losses on sale and disposal of property, plant and equipment, intangible assets,
and investment property (Note 2)
Other (Note 2)
Total

2018

2019

29,111
106,199
52,749268,956
65,37787,9268,454

33,467102,095
55,469309,623
64,079106,094
16,124

8,845
142,790
770,407

9,432
135,324
831,707(Note 1) All research and development expenses are included in “Selling, general and administrative expenses.”ment stage, and the Group receives upfront income, milestone

140 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019141

CORPORATE PROFILE(Note 2) The amount of restructuring costs included in each account is as follows:
Millions of yen

Employee benefit expenses
Impairment losses on other than financial assets
Losses on sale and disposal of property, plant and equipment, intangible assets,
and investment property
Other
Total

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

29. Other Comprehensive Income

2018

2019

    24
3,105

24,378411

Amount arising during the year, reclassification adjustments to profit or loss and tax effects for each component of “Other comprehensive

3,262
1,530
7,921

329
1,064
26,182

Year ended December 31, 2018

income” for each year are as follows:

Millions of yen
Amount arising

Reclassification
adjustments

Before tax
effects

Tax effects

Net oftax effects(11,703)(4,673)(16,375)———(11,703)(4,673)(16,375)

3,488
1,478
4,965

  (8,215)(3,195)(11,410)(244,898)
1,138

(230)
236

(245,128)
1,374(2,603)(363)(247,731)
1,012(243,760)(260,135)

    6
    6

(243,754)(260,129)(2,965)2,000(246,719)(258,129)

Amount arising

Reclassification
adjustments

Before tax
effects

Tax effects

Net oftax effects(2,209)(4,957)(7,166)———(2,209)(4,957)(7,166)

(274)
2,146
1,871

(2,484)(2,811)(5,295)

7,521
(882)

2,591
320

10,112
(561)

(233)
171

9,879
(391)

6,639
  (527)

2,911
2,911

9,550
2,384

  (62)
1,810

9,489
4,194

Items that will not be reclassified to profit or loss

28. Financial Income and Financial Costs

Net gain (loss) on revaluation of financial assets measured
at fair value through other comprehensive income
Remeasurements of defined benefit plans

The breakdown of “Financial income” and “Financial costs” for each year is as follows:
Millions of yen
Financial Income

2018

2019

Items that may be reclassified subsequently to profit or loss

Dividend income

Exchange differences on translation of foreign operations

Financial assets measured at fair value through other comprehensive income
Investments derecognized during the year
Investments held at the end of the year

  185
1,871

1,275
654

3,695
2
5,754

6,014
459
8,402

Interest income

Other
Total

Net gain (loss) on derivatives designated as cash flow hedges
Total of items that may be reclassified subsequently to profit
or loss
Total

Financial assets measured at amortized cost
Deposits and bonds

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

Year ended December 31, 2019
Millions of yen

Millions of yen
Financial Costs

2018

2019

Interest expenses
Financial liabilities measured at amortized cost
Bonds and borrowings (Note 2)
OtherForeign exchange losses (Note 1)
Employee benefit expenses (Note 3)
Other
Total

16,26777
15,9742,913
4,022
39,252(Note 1) Valuation gain (loss) of currency derivatives is included in foreign exchange losses.
(Note 2) Valuation gain (loss) of interest rate derivatives is included in interest expenses.
(Note 3) The employee benefit expenses are the net amount of interest cost and interest income related to employee benefits.

26,0191,538
13,2972,785
1,887
45,526

Items that will not be reclassified to profit or loss
Net gain (loss) on revaluation of financial assets measured
at fair value through other comprehensive income
Remeasurements of defined benefit plans
Total of items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations
Net gain (loss) on derivatives designated as cash flow hedges
Total of items that may be reclassified subsequently to profit
or loss
Total

30. Earnings per Share(1) Basis of Calculating Basic Earnings per Share
A. Profit Attributable to Ordinary Shareholders of the Parent Company
Millions of yen

Profit for the period attributable to owners of the parent company
Profit not attributable to ordinary shareholders of the parent company
Profit for the period used for calculation of basic earnings per share

142 Japan Tobacco Inc. Integrated Report 2019

2018

2019

385,677—
385,677

348,190—
348,190

Japan Tobacco Inc. Integrated Report 2019 143

CORPORATE PROFILE

B. Weighted-average Number of Ordinary Shares Outstanding During the Period

VALUE CREATIONABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYSTRATEGYFINANCIAL INFORMATION

Year ended December 31, 2019
Thousands of shares

Weighted-average number of shares during the period

2018

2019

1,791,296

1,776,782(2) Basis of Calculating Diluted Earnings per Share

Millions of yen
Non-cash changes

Short-term borrowings and commercial paper

A. Profit Attributable to Diluted Ordinary Shareholders

Long-term borrowings
Millions of yen

Profit for the period used for calculation of basic earnings per share
Adjustment
Profit for the period used for calculation of diluted earnings per share

2018

2019

385,677—
385,677

348,190—
348,190(Note 1)

Bonds (Note 1)
Lease liabilities
Total

As of
January 1,
2019 (Note 3)  238,023
129,313
610,444
48,8401,026,621

Cash flows

Acquisition
throughbusiness
combinations

Foreignexchange
movement

Fair valuechanges

Other

As of
December 31,
2019(44,976)(11,568)
59,435(14,294)(11,403)

—
—
—
—
—

(1,563)(2,475)(3,579)(394)(8,011)

—
—
—
—
—

1,097
27
324
19,55221,000  192,581
115,297
666,623
53,705
1,028,206(Note 1) Current portion is included.
(Note 2) Derivatives are held for the purpose of hedging bonds.
(Note 3) According to cumulative effects of changes in accounting policies, lease liabilities have increased ¥39,033 million.

B. Weighted-average Number of Diluted Ordinary Shares Outstanding During the Period
Thousands of shares

Weighted-average number of ordinary shares during the period
Increased number of ordinary shares under subscription rights to shares
Weighted-average number of diluted ordinary shares during the period

2018

2019

1,791,296
863
1,792,159

1,776,782
857
1,777,639

31. Non-cash Transactions

33. Share-based Payments
The Company and Torii Pharmaceutical adopt share option plans.
Share options are granted by the resolutions of the Board ofConditions related to the exercise of share options are as follows:
A. The subscription rights to shares become exercisable when a

Directors based on the approvals at the Annual Shareholders’holder of a subscription right to shares no longer holds a position

Meeting.

as a director, an audit & supervisory board member or an execu-

The outline of the share option plan of the Company is as follows:

tive officer. In the subscription rights to shares allocation contract
with holders of such rights, it is provided for that the rights

Significant Non-cash Transactions

from this year, increase in right-of-use assets has been described in(1) Share Option Contract Conditions of the Company

The amount of assets acquired under finance leases was ¥1,041“15. Lease Transactions” following the application of IFRS16.

Positions of persons granted: Directors and Executive
Officers

million for the year ended December 31, 2018. In addition, starting
Settlement

become exercisable from the date following the date on which
they no longer hold their positions.
B. In the case where any holders of subscription rights to shares: Issuance of shares

waive such rights, they cannot exercise them.

Effective period of granted share option : 30 years after the date of

32. Reconciliation of Liabilities Arising from Financing Activities

grant
Vesting conditions

Reconciliation of liabilities arising from financing activities for each year is as follows:Year ended December 31, 2018

: None(2) Changes in the Number of Share Options of the Company
Millions of yen

SharesNon-cash changes

Short-term borrowings and commercial paper
Long-term borrowings (Note 1)
Bonds (Note 1)
Lease liabilities
Derivatives(Note 2)Total

144 Japan Tobacco Inc. Integrated Report 2019

As ofJanuary 1,
2018341,041
71,854332,242
10,667(2,490)753,314

2019

2018

Cash flows

Acquisition
throughbusiness
combinations

Foreignexchange
movement

Fair valuechanges

Other

As of
December 31,
2018(133,849)
56,425285,136(1,637)2,294
208,370

49,137
1,795———
50,932(19,586)(764)(7,346)(264)—(27,960)

—
—
—
—
196
196

1,280
2
413
1,041
—
2,736

238,023
129,313
610,444
9,807—
987,588

Balance as of January 1
GrantedExercisedTransferred
Balance as of December 31
Exercisable balance as of December 31

Directors

Executive
Officers

Total

328,800
68,800—(202,200)
195,400—

702,400
109,400(380,000)
202,200
634,000
239,600

1,031,200
178,200(380,000)—
829,400
239,600

Directors

Executive
Officers

Total

195,400
126,000—
39,600361,000—

634,000
187,200(168,000)(39,600)
613,600
153,400

829,400
313,200(168,000)—
974,600
153,400(Note 1) The number of share options is presented as the number of underlying shares.
(Note 2) All share options are granted with an exercise price of ¥1 per share.
(Note 3) Share options are granted to 5 directors and 18 executive officers for the year ended December 31, 2018, and 6 directors and 20 executive officers forthe 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 values per share of share options granted during the period were ¥1,500 and ¥940 for the years ended December 31, 2018 and2019, respectively.
(Note 5) The weighted-average share prices of share options at the time of exercise during the period were ¥3,086 and ¥2,544 for the years ended December 31,
2018 and 2019, respectively.
(Note 6) The weighted-average remaining contract years of unexercised share options at the end of each period were 25.4 years and 26.4 years for the years
ended December 31, 2018 and 2019, respectively.

Japan Tobacco Inc. Integrated Report 2019 145

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION(3) Method of Measuring Fair Value of Share Options Granted During the Period of the Company(2) Financial Risk Management

A. Valuation Model

The Group is exposed to financial risks (credit risk, liquidity risk,

with respect to trade receivables for counterparties based on theBlack-Scholes Model

foreign exchange risk, interest rate risk, and market price fluctuation

Credit Management Guidelines in order to control the credit riskrisk) in the process of its management activities and it manages risks

relating to counterparties. In addition, the receivable balances ofbased on a specific policy in order to avoid or reduce said risks. The

counterparties with high credit risk are monitored. The Treasury

results of risk management are regularly reported by the Treasury

Division of the Company regularly monitors the status of the occur-

Division to the president and the Board of Directors of the Company.

rence and collection of bad debts, and reports them to the president

B. Main Assumptions and Estimation
Share priceVolatility of share price (Note 1)
Estimated remaining period (Note 2)
Estimated dividends (Note 3)
Risk free interest rate (Note 4)

2018

2019

¥3,01331.7%
15 years¥140/share
0.26%¥2,401
31.2%
15 years¥150/share
0.07%(Note 1) Calculated based on daily share prices quoted for the past 15 years.
(Note 2) Because of the difficulty of a reasonable estimation due to insufficient data, the remaining period is estimated based on the assumption that share option
rights would be e
­ xercised at a midpoint of the exercise period.
(Note 3) Based on the latest dividends paid.
(Note 4) The yield on government bonds for a period of the expected remaining period.

(4) Share-based Payment Expenses¥275 million and ¥291 million for the years ended December 31,

The costs for share options included in “Selling, general and adminis-

2018 and 2019, respectively.

trative expenses” in the consolidated statement of income were

The Group policy limits derivatives to transactions for the p­ urposeof mitigating risks from transactions based on actual demand.
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(3) Credit Risk

from occurring and based on the Group Financial Operation Basic

Receivables, such as note and account receivables, acquired from

Policy. In addition, the Treasury Division of the Company regularly

the operating activities of the Group are exposed to customer

monitors the performance of these transactions and reports thecredit risk.

results to the president and the Board of Directors of the Company.

The Group holds mainly debt securities for surplus investment

The maximum exposure pertaining to credit risks for financial

and equity securities of customers and suppliers to strengthen rela-assets is the carrying amount after considering impairment intionships with them; those securities are exposed to the issuer’s

the consolidated financial statements.

In addition, through derivative transactions that the Group con-There is no excessive concentration of the credit risks to certain
counterparties.

ducts in order to hedge foreign exchange fluctuation risks and interthe mid- to long-term, and is consequently in the best interest of all

est rate fluctuation risks, we are exposed to the credit risk of the

The Group’s management principle is pursuit of the “4S” model:

stakeholders, including our shareholders.

financial institutions which are counterparties to these transactions.

balancing the interests of consumers, shareholders, employees and

For that reason, as its financial policy, the Group maintains

wider society, and fulfilling our responsibilities towards them, aiming

a strong financial base that secures stability in the case of changes

to exceed their expectations.

in business environment such as economic crises, and flexibility

long-term based on this principle will increase the Group’s value inWith regard to the investment of cash surpluses and derivatives,
the Group invests in debt securities and other financial instruments(1) Capital Management

The Group believes that sustainable profit growth in the mid- toand the Board of Directors of the Company.

Therefore, we do not transact derivatives for speculation purposes or

credit risk.

34. Financial Instruments

In principle, the Group sets credit lines or transaction conditions

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.

enabling expeditious responses to business investment

Millions of yen

opportunities.

Trade
receivables

The Group manages net interest-bearing debt, where cash and cash equivalents are deducted from interest-bearing debt, and capital(the part attributable to the owners of the parent company). The amounts as of December 31 are as follows:
Millions of yen

Interest-bearing debt (Note)
Cash and cash equivalents
Net interest-bearing debt
Capital (equity attributable to owners of the parent company)

2018

2019

  987,588(282,063)
705,526
2,630,594  974,502(357,158)
617,3442,662,696

As of January 1, 2018
Addition
Decrease (intended use)
Decrease (reversal)
Other(Note) Lease liabilities are excluded from the year ended December 31, 2019.

As of December 31, 2018
There are specific rules for shares of the Company under theJapan Tobacco Inc. Act, as follows:
The Japanese government shall hold more than one-third of all of(excluding its own bonds with subscription rights to shares) when

Additionexchanging with shares, the Company shall obtain the approval

Decrease (intended use)of the Minister of Finance (Article 2 (2)).

Decrease (reversal)
Other23,589228(19,537)(591)(2,040)
1,650
1,163
(218)
(20)
(100)
2,475

Other financial assets
Measured at an amount equal to
the full lifetime expectedcredit losses

Measured at an
amount equal
to the12-month
expected
credit losses

Noncredit-impaired
financial assets

Credit-impaired
financial assets

Total

—
—
—
—
—
—
—
—
—
—
—

317
13
(3)
(58)
—
269
18
—
(57)
—
230

6,252
906
(117)
(979)
(223)
5,839
1
(0)
(78)
(56)
5,705

30,158
1,147(19,656)(1,628)(2,263)
7,758
1,182
(219)
(155)
(156)
8,409

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 the

As of December 31, 2019

matters that can be resolved by the Annual Shareholders’ Meeting)relevant annual budget (Article 3).

(Note) There is no significant change in the carrying amounts of financial assets which affects the change in the allowance for doubtful accounts.

(Article 2 (1)).

The Group monitors financial indicators in order to maintain awell-balanced capital structure that ensures an appropriate return on(4) Liquidity Risk

plan and the Treasury Division of the Company regularly monitors

scribe for shares to be issued or subscription rights to shares or

equity and a stable and flexible financial condition for future invest-

The Group raises funds by borrowings, commercial paper and bonds;

and collects information on the balance of liquidity-in‑hand and inter-

where the Company intends to deliver shares (excluding treasury

ment. We monitor credit ratings for financial stability and flexibility,

however, these liabilities are exposed to the liquidity risk that we

est-bearing debt and reports it to the president and the Board of

shares), subscription rights to shares (excluding its own subscription

and ROE (return on equity) for profitability, while focusing on

would not be able to repay liabilities on the due date due to the

Directors of the Company. In addition, the Group keeps necessary

rights to shares) or bonds with subscription rights to shareschanges in the domestic and overseas environment.

deterioration of the financing environment.

credit facilities to manage liquidity risk by having commitment lines

In cases where the Company intends to solicit persons to sub-In accordance with the Group Financial Operation Basic Policy,
146 Japan Tobacco Inc. Integrated Report 2019

the Group establishes a finance plan based on the annual businesswith several financial institutions.
Japan Tobacco Inc. Integrated Report 2019 147

CORPORATE PROFILE

The financial liability balance (including derivative financial instruments) by maturity as of December 31 is as follows:

Millions of yen

Carrying
amountContractual
cash flow

Due within
one year

Due after
two years
throughthree years

Due after
three years
throughfour years

Due after
four years
throughfive years

Due after
five years

Short-term borrowings
Commercial paper
Current portion of long-term borrowings
Long-term borrowings
Bonds
Lease liabilities
Subtotal  380,516
165,985
72,03812,443116,870
610,444
9,807
1,368,104  380,516
165,985
72,15012,443
117,006
613,773
13,401
1,375,273

380,516
165,985
72,15012,443——
1,305
632,399————
11,95680,0001,130
93,086————
11,60883,250992
95,849————41,61030,000700
72,309————
11,576
118,275483
130,334————
40,257302,248
8,790
351,295

Derivative financial liabilities
Foreign exchange forward contract
Subtotal
Total

3,176
3,176
1,371,280

3,176
3,176
1,378,449

3,176
3,176
635,575——
93,086——
95,849——72,309——130,334——
351,295

As of December 31, 2019
Millions of yen
Due after
two years
throughthree years

Due after
three years
throughfour years

Due after
four years
throughfive years

Due after
five years

Carrying
amountContractual
cash flow

Due within
one year

Due after
one yearthrough
two years  408,597
192,581
11,554
103,743
80,000586,623
53,705
1,436,804  408,597
192,581
11,554
103,847
80,000590,133
58,1891,444,901

408,597
192,581
11,554—80,000—15,289708,022     ———
11,209—82,17010,985
104,364   ———
41,211—
30,0006,482
77,694     ———
11,175—
117,519
4,183
132,877   ———
20,064——2,751
22,815     ———
20,187—360,444
18,497399,128

7,739
7,739
1,444,543

7,739
7,739
1,452,640

7,739
7,739
715,761——
104,364——
77,694——
132,877——
22,815——399,128

Non-derivative financial liabilities
Trade and other payables
Short-term borrowings
Current portion of long-term borrowings
Long-term borrowings
Current portion of bonds
Bonds
Lease liabilities
Subtotal

FINANCIAL INFORMATION

The impact from the translation of functional currency-

exchange fluctuation when equity denominated in each functional

denominated financial instruments, and assets, liabilities, income andcurrency of the Group is translated into Japanese yen

expenses of foreign operations into Japanese yen is not included.

and consolidated.

Also, it is based on the assumption that currencies other than the(iii) The risk that the profit or loss of the Group is influenced by

Non-derivative financial liabilities
Trade and other payables

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYSTRATEGY(ii) The risk that the equity of the Group is influenced by foreign

As of December 31, 2018
Due after
one yearthrough
two years

VALUE CREATION

currencies used for the calculation do not fluctuate.

foreign exchange fluctuation when profit or loss denominatedMillions of yen

in each functional currency of the Group is translated into
Profit before income taxes

Japanese yen and consolidated.

2018

2019

(2,725)(1,594)The Group hedges against risk (i) using derivatives or foreign
currency-denominated interest-bearing debts for example, when(6) Interest Rate Risk

future cash flow is projected or when receivables and payables

Interest rate risk within the Group arises from interest-bearing debts

are fixed, and some of them are designated as cash flow hedges.

after deducting cash equivalents. Borrowings and bonds with floating

The Group hedges against risk (ii) using foreign currency-­

rates are exposed to interest rate fluctuation risk.

denominated interest-bearing debts for example, and part of theseIn order to reduce the interest rate fluctuation risk related toare designated as net investment hedges. The Group does notborrowings and bonds, in accordance with the Group Financial

hedge against risk (iii) in principle.

Operation Basic Policy, and under the supervision of the Financial

In order to mitigate risks mentioned above resulting from the

Risk Management Committee of the Company, the Group estab-foreign exchange fluctuation, in accordance with the Group Financial

lishes and implements an interest rate hedging policy, taking into

Operation Basic Policy, and under the supervision of the Financial

consideration the impact on the Group’s performance and the ­current

Risk Management Committee of the Company, the Group estab-condition of the interest rates in a comprehensive manner. The

lishes and implements a foreign currency hedge policy, taking into

Treasury Division of the Company reports the performances to theconsideration the impact on the Group’s performance and the current

president and the Board of Directors of the Company.

conditions of the foreign exchange market in a comprehensive
manner. The Treasury Division of the Company regularly reports theInterest Rate Sensitivity Analysis

performances to the president and the Board of Directors of

In cases where the interest rate of financial instruments held by thethe Company.

Group as of each year end increases by 100bp, the impact on profit
before income taxes in the consolidated statement of income is as

Foreign Exchange Sensitivity Analysis

follows:

In cases where each currency other than the functional currency that

The analysis is subject to financial instruments affected by inter-

denominates the financial instruments held by the Group as of each

est rate fluctuation and based on the assumption that other factors,

year end increases by 10% in value against the functional currency,

including the impacts of foreign exchange fluctuation, are constant.

the impact on profit before income taxes in the consolidated state-

Millions of yen

ment of income is as follows:
Profit before income taxes

2018

2019

(955)

(566)

Derivative financial liabilities
Foreign exchange forward contract
Subtotal
Total(7) Hedging Transactions
The Group’s policy for hedging transactions is stated in “3. Significant Accounting Policies.”
A. Cash Flow Hedges
The details of hedging instruments designated as cash flow hedges are as follows:

The total of commitment lines and withdrawal as of December 31 are as follows:
Millions of yen

Total committed line of credit
Withdrawing
Unused balance

2018

2019

478,531—478,531

470,411—
470,411

As of December 31, 2018
Carrying amount (Note)(Millions of yen)Contract amountOver one year

AssetsLiabilities

Average rate, etc.

USD 638 mil.
CNY 49 mil.

USD        —CNY        —

1,329
—

613
8

¥109.21¥15.92Foreign exchange risk
Foreign exchange forward contract

fluctuation as a result of external transactions and intergroup

JPY/USD

The Group operates businesses globally and, therefore, is exposedtransactions, including the payment and receipt of dividends, in

JPY/CNYto the following risks due to foreign exchange fluctuation:

currencies that are different from each functional currency of(i) The risk where the profit or loss and cash flow in each functional

the Group.

(5) Foreign Exchange Risk

currency of the Group is influenced by foreign exchange

148 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 149

CORPORATE PROFILE

As of December 31, 2019

VALUE CREATIONABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYSTRATEGYFINANCIAL INFORMATIONAs of December 31, 2019
Carrying amount (Note)(Millions of yen)Contract amountOver one year

AssetsLiabilities

Carrying amount (Note)(Millions of yen)
Average rate, etc.

Foreign exchange risk

Bonds in USD
Bonds in EUR

Foreign exchange forward contract

USD 187 mil.

JPY/USD

USD        —

41

227

¥106.67(Note) Carrying amounts of derivatives are presented as “Other financial assets” or “Other financial liabilities” in the consolidated statement of financial position,and the portion with over one year maturity is classified as “Non-current assets” or “Non-current liabilities.”

Millions of yen
Effective portion of changes
in the fair value of cash flow hedges
Foreignexchange risk

Interest
rate risk

Total

(195)

106

  (88)

1,334
194
(410)
(480)
443

(196)
42
47
—
—

1,138
236
(363)
(480)
443

Over one year

AssetsLiabilities

Average rate, etc.

USD 1,250 mil.
EUR 567 mil.
GBP 400 mil.

———

136,675
69,13256,089¥109.41
$1.11
$1.32

—
—
—
15
—

930
749
399
395
358

€0.014¥106.68$0.033£0.77€0.89

Foreign exchange forward contract
EUR / RUB
JPY / USD

The schedule of net gains (losses) on hedging instrument designated as cash flow hedges is as follows:

As of January 1, 2018

Bonds in GBP

Contract amountUSD 1,250 mil.
EUR 567 mil.
GBP 400 mil.

USD / TWD
GBP / USD
EUR / USDRUB 29,502 mil.
USD 400 mil.
TWD 7,518 mil.
USD 245 mil.
USD 183 mil.

RUB
USD
TWD
USD
USD

—
—
—
—
—

(Note) Carrying amounts of bonds are presented as “Bonds and borrowings” in the consolidated statement of financial position, and the portion with over one year maturity
is classified as “Non-current liabilities.” Carrying amounts of derivatives are presented as “Other financial assets” or “Other financial liabilities” in the consolidated
statement of financial position, and the portion with over one year maturity is classified as “Non-current assets” or “Non-current liabilities.”

Other comprehensive income
Amount arising (Note 1)
Reclassification adjustments(Note 2)

Tax effects
Other
As of December 31, 2018
Other comprehensive income
Amount arising

(882)
320
171
(185)
(132)

(Note 1)

Reclassification adjustments (Note 2)
Tax effects
Other
As of December 31, 2019

—
—
—
—
—

(882)
320
171
(185)
(132)

(Note 1) The change in value of the hedged item used as the basis for recognizing hedge ineffectiveness approximates the change in fair value of the hedging
instrument.
(Note 2) The amount, which is reclassified when the hedged item affects profit or loss, is recognized in “Revenue,” “Financial income” or “Financial costs” in the
consolidated statement of income. The amount of hedge ineffectiveness is immaterial.

The schedule of net gains (losses) on hedging instrument designated as hedge of net investment in foreign operations is as follows:
Millions of yen

As of January 1

2018

2019

10,793

17,8429,652(2,603)
17,842(7,271)(233)
10,338Other comprehensive income
Amount arising (Note 1)
Tax effects
As of December 31 (Note 2)(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 ¥17,505 million and ¥14,683 million as of December
31, 2018 and 2019 respectively those which are included in the exchange differences on translation of foreign operations.

(8) Market Price Fluctuation Risk

(9) Fair Value of Financial Instruments

With respect to securities, the Group regularly assesses the fair

The fair value hierarchy of financial instruments is categorized fromvalue and financial conditions of the issuers, and each relevant

Level 1 to Level 3 as follows:

B. Hedge of Net Investment in Foreign Operations

department reviews the portfolio held by taking into account the

The details of hedging instruments designated as hedge of net investment are mainly as follows:

relationship with counterparty entities as necessary.

Level 1: Fair value measured at the quoted price in the active
marketAs of December 31, 2018

Level 2: Fair value that is calculated using the observable priceother than categorized in Level 1 directly or indirectly

Carrying amount (Note)(Millions of yen)

Bonds in USD
Bonds in GBP

Contract amountOver one year

AssetsLiabilities

Average rate, etc.

USD 1,250 mil.
GBP 400 mil.

USD 1,250 mil.
GBP 400 mil.

——

138,384
55,216¥109.41$1.32

RUB 19,973 mil.
TWD 6,113 mil.

RUB
TWD

516
67

338
—

€0.012$0.033Foreign exchange forward contract
EUR / RUB
USD / TWD——

Level 3: Fair value that is calculated based on valuation techniques which include inputs that are not based on
observable market data
A. Financial Instruments Measured at Amortized Cost
The carrying amount and fair value hierarchy of financial instruments measured at amortized cost as of December 31 are as follows:
As of December 31, 2018
Millions of yen
Fair value

Long-term borrowings (Note)
Bonds

150 Japan Tobacco Inc. Integrated Report 2019

Carrying amount

Level 1

Level 2

Level 3

Total

129,313
610,444     —
606,495     ——

129,978—

129,978
606,495

Japan Tobacco Inc. Integrated Report 2019 151

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

35. Related Parties

As of December 31, 2019
Millions of yen
Fair value
Carrying amount

Level 1

Level 2

Level 3

Total

115,297
666,623    —
683,650

116,804—    ——

116,804
683,650

Long-term borrowings (Note)
Bonds (Note)(Note) Current portion is included.

With regard to short-term financial assets and short-term financial

The fair value of long-term borrowings is calculated based on theliabilities measured at amortized cost, their fair value approximatespresent value which is obtained by discounting the total of thethe carrying amount.

­principal and interest by the interest rate assumed in a case where
the same loan is newly made.

Based on the Japan Tobacco Inc. Act, the Japanese government shall(1) Related-party Transactions

hold more than one-third of all of the shares issued by the Company

Related-party transactions are conducted under the same conditions(excluding the type of shares, for which it is stipulated that voting

as regular business transactions.

rights may not be exercised on any matters that can be resolved by

The Group’s revenue from CJSC TK Megapolis, the local Russian

Annual Shareholders’ Meeting). As of December 31, 2019, thedistribution affiliate, was ¥216,913 million and ¥202,780 million for theJapanese government held 33.35% of all outstanding shares of theyears ended December 31, 2018 and 2019, respectively. The Group

Company.

held trade receivables of ¥44,436 million and ¥38,640 million fromCJSC TK Megapolis as of December 31, 2018 and 2019, respectively.

(2) Remuneration for Directors and Audit and Supervisory Board Members
Remuneration for directors and audit and supervisory board members for each year is as follows:

B. Financial Instruments Measured at Fair Value

Millions of yen

The fair value hierarchy of financial instruments measured at fair value as of December 31 is as follows:
Remuneration and bonuses

As of December 31, 2018

Share-based payments
Millions of yen

Derivative assets
Equity securities
Other
Total
Derivative liabilities
Total

Level 1

Level 2

Level 3 (Note)

Total

—
58,847401
59,248——

8,653—
11,025
19,677
3,176
3,176

—
5,837
4,514
10,351——

8,653
64,684
15,94089,2773,176
3,176

As of December 31, 2019

Equity securities
Other
Total
Derivative liabilities
Total

Level 1

Level 2

Level 3 (Note)

Total

—
25,829442
26,270——2,564—
17,673
20,238
7,739
7,739

—
6,919
5,008
11,927——2,564
32,747
23,12358,435
7,739
7,739

795
109
904

673
115
788

(The composition of the Group)
The composition of the Group by reportable segment as of December 31 is as follows:
2018

2019

Number ofsubsidiaries

Number of entities
accounted for using
the equity method (Note)

Number ofsubsidiaries

Number of entities
accounted for using
the equity method (Note)

13
166
2
29
14
224

1
5
—
3
2
11

13
171
2
28
17
231

1
7
—
3
2
13

Domestic Tobacco
International Tobacco
Pharmaceuticals
Processed Food
Other
Total
(Note) No associates or joint ventures are considered to be material to the Group.

There is no significant change in the composition of the Group forthe year ended December 31, 2019.

(Note) The schedule of financial instruments that are classified in Level 3 is as follows:

2019

36. Subsidiaries, Associates and Others

Reportable Segments
Millions of yen

Derivative assets

Total

2018

Regarding the restrictions on the ability to use the assets of theGroup, please refer to “7. Cash and Cash Equivalents.”

Millions of yen

As of January 1

2018

2019

9,342

10,351(341)(1003)
2,270
(81)
164
10,351

209
(182)
1,660
(140)
29
11,927

Total gain (loss)
Profit or loss (Note 1)
Other comprehensive income (Note 2)
Purchases
Sales
Other
As of December 31(Note 1) Gains and losses included in profit or loss for the years ended December 31, 2018 and 2019 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, 2018 and 2019 are related to financial assets measured atfair value through other comprehensive income as of the year end. These gains and losses are included in “Net gain (loss) on revaluation of f­inancial
assets measured at fair value through other comprehensive income.”

152 Japan Tobacco Inc. Integrated Report 201937. Commitments(1) Commitments for the Acquisition of Assets
Commitments for the acquisition of assets as of December 31 are as follows:
Millions of yen

Acquisition of property, plant and equipment
Acquisition of intangible assets
Total

2018

2019

54,0303,127
57,15735,747
1,602
37,348(2) Procurement of Domestic Leaf Tobacco

type of tobacco and the prices by type and quality of tobacco leaf.

With regard to the procurement of domestic leaf tobacco by the

Under the contracts, the Company is obligated to purchase all

Company, based on the Tobacco Business Act, the Company enters

domestic leaf tobacco produced pursuant to such contracts, except

into purchase contracts with domestic leaf tobacco growers every

for any domestic leaf tobacco not suited for the manufacture ofyear, and the contracts determine the area under cultivation by

tobacco products.
Japan Tobacco Inc. Integrated Report 2019 153

CORPORATE PROFILE

38. Contingencies

B. Class Actions

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYIn March 2019, the Quebec Court of Appeal dismissed the appeal

FINANCIAL INFORMATION

Canada British Columbia Class Action (Bourassa):

There are eight ongoing class actions in Canada against theof the defendants by substantively upholding the first instance judg-

This class action was brought against tobacco industry members

Contingent Liabilities

Company’s subsidiary and/or indemnitees.

ment and ordering a compensatory damage award jointly and sever-including JTI-Mac and the Company’s indemnitees in June 2010.

The Company and some of its subsidiaries are defendants in legal

Canada Quebec Class Action (Cecilia Letourneau):

ally against the defendants of approximately ¥1,133.6 billion

Plaintiffs are seeking unspecified compensatory and punitive dam-

proceedings. Provisions are not accounted for in matters where it

This class action was brought in September 1998 against three(approximately CAD 13.5 billion), in which the share of the total

ages for class members. The preliminary motions are pending. The

is not practicable to reasonably estimate the final outcomes.

Canadian tobacco manufacturers including JTI-Mac. Plaintiffs weredamage award against JTI-Mac is approximately ¥147.4 billion

case was dormant and is currently stayed by the CCAA Proceedings.

seeking a total of approximately ¥384.7 billion (approximately CAD(approximately CAD 1.8 billion), and a punitive damage award of

The Company and some of its subsidiaries, who are defendants
in such legal proceedings, believe that our defenses asserted in

4.6 billion) in compensatory damages, an amount for which all theapproximately ¥3 million (approximately CAD 0.04 million) per defen-

Canada British Columbia Class Action (McDermid):these proceedings are based on substantial evidence and implement

defendants are jointly and severally liable, and a total amount ofdants. The time limit for seeking leave to appeal the decision to theThis class action was brought against tobacco industry members

the system for the response to action with the assistance of external

approximately ¥384.7 billion (approximately CAD 4.6 billion) in puni-

Supreme Court of Canada is suspended during the CCAA

including JTI-Mac and the Company’s indemnitees in June 2010.

lawyers.

tive damages, to be divided among all the defendants based on their

Proceedings. Enforcement of the judgement is stayed by the CCAA

Plaintiffs are seeking unspecified compensatory and punitive dam-

respective market shares.

Proceedings.

ages for class members. The preliminary motions are pending. The(1) Smoking and Health Related Litigation

The Quebec Superior Court published the first instance judgment

The Quebec Court of Appeal rendered one judgment for bothcase was dormant and is currently stayed by the CCAA Proceedings.

The Company and some of its subsidiaries are defendants inin favor of the plaintiffs in June 2015. In June 2015, JTI-Mac andclass actions against the defendants and ordered them to make an­lawsuits filed by plaintiffs seeking damages for harm allegedly

other tobacco manufacturers appealed the judgment to the Quebec

initial deposit of approximately ¥97.3 billion (approximately CAD 1.2

Canada Ontario Class Action (Jacklin):caused by smoking, the marketing of tobacco products, or exposure

Court of Appeal, and the appeal on the merits was heard and con-billion), in which the share of JTI-Mac is approximately ¥12.2 billion

This class action was brought against tobacco industry members

to tobacco smoke. As of December 31, 2019, there were a total ofcluded in November 2016.

(approximately CAD 145 million). The obligation to pay the initial

including JTI-Mac and the Company’s indemnitees in June 2012.

deposit is stayed by the CCAA Proceedings.

Plaintiffs are seeking unspecified compensatory and punitive dam-

20 smoking and health related cases pending in which one or more

In March 2019, the Quebec Court of Appeal dismissed the appeal

members of the Group were named as a defendant or for which theof defendants by substantively upholding the first instance judgment

Company may have certain indemnity obligations pursuant to theand ordering a punitive damage award against the appellants ofCanada Saskatchewan Class Action (Adams):

agreement such as for the Company’s acquisition of RJR Nabisco

approximately ¥13.5 billion (approximately CAD 161 million), in which

This class action was brought against tobacco industry members

Inc.’s overseas (non-U.S.) tobacco operations.

the share of the total damage award against JTI-Mac is approximately

including JTI-Mac and the Company’s indemnitees in June 2009.

C. Health-Care Cost Recovery Litigation¥1.3 billion (approximately CAD 15 million). The time limit for seeking

Plaintiffs are seeking unspecified compensatory and punitive dam-

There are 10 ongoing health-care cost recovery cases in Canada

leave to appeal the decision to the Supreme Court of Canada is sus-

ages on behalf of class members who allege to be or have been

pending against the Company’s subsidiary and indemnitees brought

pended during the CCAA Proceedings. Enforcement of the judgement

addicted to nicotine contained in cigarettes manufactured by theby all the Canadian provinces (except three Canadian territories).

is stayed by the CCAA Proceedings.

defendants. The preliminary motions are pending. The case was

These provinces filed lawsuits under their own provincial legislation

dormant and is currently stayed by the CCAA Proceedings.

which was enacted exclusively for the purpose of authorizing the provin-

The major ongoing smoking and health related cases are
as follows:
On March 8, 2019, JTI-Macdonald Corp. (hereinafter referred toas “JTI-Mac”), the Company’s Canadian subsidiary, filed for protection from its creditors under the Companies’ Creditors Arrangement

ages for class members. The preliminary motions are pending. The
case was dormant and is currently stayed by the CCAA Proceedings.

Act (CCAA). The Ontario Superior Court has granted the CCAA appli-

Canada Quebec Class Action (Conseil Québécois sur le tabac et

cation and extended protection in favor of JTI-Mac (hereinafterla santé):

Canada Manitoba Class Action (Kunta):

recoup the health-care costs the government has allegedly incurredreferred to as “CCAA Proceedings”). All of the below CanadianThis class action was brought in November 1998 against three

This class action was brought against tobacco industry members

and will incur, resulting from “tobacco related wrongs.”

matters against JTI-Mac have been stayed by the CCAA Proceedings,

Canadian tobacco manufacturers including JTI-Mac. Plaintiffs were

including JTI-Mac and the Company’s indemnitees in June 2009.

under which JTI-Mac carries on business in the ordinary course.

seeking a total of approximately ¥1,042.2 billion (approximately CAD

Plaintiffs are seeking unspecified compensatory and punitive dam-

Canada British Columbia Health-Care Cost Recovery Litigation:

12.4 billion) in compensatory damages, an amount for which all theages on behalf of class members who allege to be or have beenThis health-care cost recovery litigation was filed by the Province of

A. Individual Claim

defendants are jointly and severally liable, and a total amount ofaddicted to nicotine contained in cigarettes manufactured by the

British Columbia in January 2001 against tobacco industry members

There is one individual case brought against the Company’s indemni-

approximately ¥67.9 billion (approximately CAD 0.8 billion) in punitive

defendants. The statement of claim was served on the Company’s

including JTI-Mac and the Company’s indemnitees based on its pro-tee in South Africa.

damages, to be divided among all the defendants based on theirindemnitees but not on JTI-Mac. The case was dormant and is cur-vincial legislation, the “Tobacco Damages and Health-Care Costs

South Africa Individual Claim (Joselowitz):

respective market shares.

rently stayed by the CCAA Proceedings.

Recovery Act.” The claim amount is unspecified. In 2001, several

The individual claim was brought against the Company’s indemnitee

cial government to file a direct action against tobacco manufacturers to

The Quebec Superior Court published the first instance judgment

defendants challenged the legislation’s constitutionality, which wasin South Africa in October 2000. Plaintiff seeks compensatory andin favor of the plaintiffs in June 2015. In June 2015, JTI-Mac andCanada Nova Scotia Class Action (Semple):

ultimately rejected by the Supreme Court of Canada in September

punitive damages, alleging that the Company’s indemnitee marketed

other tobacco manufacturers appealed the judgment to the QuebecThis class action was brought against tobacco industry members

2005. The action remains pending in the first instance. The case isproducts which it knew to be dangerous to health, manipulated

Court of Appeal, and the appeal on the merits was heard and con-including JTI-Mac and the Company’s indemnitees in June 2009.

stayed by the CCAA Proceedings.

nicotine content to foster addiction, failed to comply with Southcluded in November 2016.

Plaintiffs are seeking unspecified compensatory and punitive dam-African labeling requirements and participated in a clandestine world-

ages on behalf of class members who allege to be or have been

Canada New Brunswick Health-Care Cost Recovery Litigation:

wide operation to encourage children to smoke. This case has been

addicted to nicotine contained in cigarettes manufactured by theThis health-care cost recovery litigation was filed by the Province ofdormant since February 2001.

defendants. The statement of claim was served on the Company’s

New Brunswick in March 2008 against tobacco industry members

indemnitees but not on JTI-Mac. The case was dormant and is cur-including JTI-Mac and the Company’s indemnitees based on legisla-

rently stayed by the CCAA Proceedings.

tion similar to that introduced in the Province of British Columbia.

In addition, there is one individual case (which is currently­dormant) brought against the Company’s subsidiary in Ireland.

The claim amount is unspecified. The case is stayed by the CCAA
Proceedings.

154 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 155

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Canada Ontario Health-Care Cost Recovery Litigation:

legislation similar to that introduced in the Province of British(8) Other borrowing terms:

c. Replacement restrictions

This health-care cost recovery litigation was filed by the Province

Columbia. The claim amount is unspecified. The case is stayed bya. Interest deferral clause	There is no contractual provision on replacement restrictions.

of Ontario in September 2009 against tobacco industry members

the CCAA Proceedings.

The Company may, at its option, defer the payment of interest.

	  Provided, when making a prepayment of the Subordinatedincluding JTI-Mac and the Company’s indemnitees based on legisla-

Loan, the Company intends to replace it with the funds raised bytion similar to that introduced in the Province of British Columbia. The

Canada Prince Edward Island Health-Care Cost Recovery Litigation:b. Subordination clausecommon stock or financial instruments that have equity credit

statement of claim contains allegations of joint and several liabilities

This health-care cost recovery litigation was filed by the Province of	The lenders shall have subordinated claim rights subordinated toattributes approved by rating agencies to be equal to or higher

among all the defendants but does not specify any individual amountPrince Edward Island in September 2012 against tobacco industry

senior debts in liquidation proceedings, bankruptcy proceedings,

than the Subordinated Loan within twelve months prior to theor percentages within the total claimed amount of ¥27,650.7 billion

members including JTI-Mac and the Company’s indemnitees based

reorganization proceedings, civil rehabilitation proceedings or any

prepayment date. However, the Company may decide not to(CAD 330 billion). The case is stayed by the CCAA Proceedings.

on legislation similar to that introduced in the Province of British

other equivalent proceedings other than those under the laws

replace the Subordinated Loan with the approved funds that have

Columbia. The claim amount is unspecified. The case is stayed by theof Japan.

equal or higher equity credit attributes, if predefined financial

Canada Newfoundland and Labrador Health-Care Cost Recovery

CCAA Proceedings.

Litigation:	  No terms and conditions of the Subordinated Loan Agreement

This health-care cost recovery litigation was filed by the Province ofCanada Nova Scotia Health-Care Cost Recovery Litigation:

tors of the Company other than the creditors of the subordinatedNewfoundland and Labrador in February 2011 against tobacco indus-

This health-care cost recovery litigation was filed by the Province ofreceivables.

try members including JTI-Mac and the Company’s indemnitees

Nova Scotia in January 2015 against tobacco industry members

based on legislation similar to that introduced in the Province

including JTI-Mac and the Company’s indemnitees based on legisla-of British Columbia. The claim amount is unspecified. The case istion similar to that introduced in the Province of British Columbia. The

stayed by the CCAA Proceedings.

claim amount is unspecified. The claim amount is unspecified. The
case is stayed by the CCAA Proceedings.

Canada Manitoba Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province of(2) Other Legal Proceedings

Manitoba in May 2012 against tobacco industry members including

The Company and some of its subsidiaries are also engaged in other

JTI-Mac and the Company’s indemnitees based on legislation similar

legal proceedings such as commercial and tax disputes.

to that introduced in the Province of British Columbia. The claim
amount is unspecified. The case is stayed by the CCAA Proceedings.

(Note) The amount of damages sought denominated in foreign currencies istranslated into Japanese yen at the rates as of December 31, 2019.

Canada Quebec Health-Care Cost Recovery Litigation:

39. Subsequent Events

This health-care cost recovery litigation was filed by the Province ofQuebec in June 2012 against tobacco industry members including
JTI-Mac and the Company’s indemnitees based on legislation similar
to that introduced in the Province of British Columbia. The statementof claim contains allegations of joint and several liabilities among
all the defendants but does not specify any individual amount orpercentages within the total amount of the claim approximately¥5,082.5 billion (approximately CAD 60.7 billion). The case is stayedby the CCAA Proceedings.

Canada Alberta Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province ofAlberta in June 2012 against tobacco industry members including JTIMac and the Company’s indemnitees based on legislation similar to that
introduced in the Province of British Columbia. The statement of claim
contains allegations of joint and several liabilities among all the defendants but does not specify any individual amount or percentages within
the total claimed amount of at least ¥837.9 billion (CAD 10.0 billion). The
case is stayed by the CCAA Proceedings.

Canada Saskatchewan Health-Care Cost Recovery Litigation:
This health-care cost recovery litigation was filed by the Province of

requirements are met.

may be amended in a manner detrimental in any way to any credi-

OthersA. Quarterly Information for the Year ended December 31, 2019
Millions of yen

Revenue
Profit before income taxes for the period (year)
Profit attributable to owners of the parent
company for the period (year)
Basic earnings per share for the period (year) (yen)Q1
January 1, 2019 toMarch 31, 2019

Q2
January 1, 2019 toJune 30, 2019

Q3
January 1, 2019 to
September 30, 20192019
January 1, 2019 to
December 31, 2019505,422
172,727

1,058,549
290,618

1,633,748
411,564

2,175,626
465,232

120,840
67.66

226,451127.23

316,148
177.83

348,190195.97

Q1
January 1, 2019 toMarch 31, 2019

Q2
April 1, 2019 toJune 30, 2019

Q3
July 1, 2019 to
September 30, 20192019
October 1, 2019 to
December 31, 2019

67.66

59.54

50.57

18.06

The Company entered into loan agreements with banks as follows:(1) L enders: Mizuho Bank, Ltd., MUFG Bank, Ltd., Sumitomo Mitsui
Banking Corporation and Sumitomo Mitsui Trust Bank, Limited(2) Aggregate amount of borrowings: ¥100 billion(3) Interest rates: Floating rates (TIBOR plus spread)

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.

(4) Drawdown date: January 31, 2020
(5) Repayment date: January 31, 2080
The Company may, at its option, repay early all or a portion of theprincipal on any Interest Payment Date on or after the Interest
Payment Date of January 2025.
(6) Collateral/Guarantee: None(7) Use of proceeds: Repayment of existing debts and working
capitalSaskatchewan in June 2012 against tobacco industry members
including JTI-Mac and the Company’s indemnitees based on

156 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 157

CORPORATE PROFILE

158 Japan Tobacco Inc. Integrated Report 2019

VALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Japan Tobacco Inc. Integrated Report 2019 159

CORPORATE PROFILE

Glossary of Terms

STRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Unless otherwise stated, terms and numbers reported in this glossary are in accordance with IFRS.

Adjusted Operating Profit: Operating profit + Amortization
cost of acquired intangibles arising from business acquisitions + Adjusted items (income and costs).** Adjusted items (income and costs) = Impairment losses on goodwill ±restructuring income and costs ± others

ALP: Agricultural labor practices.
BnU: Billion Units.
CDP: Headquartered in London, CDP is the leading international non-profit organization that accelerates action toachieve a sustainable economy, assessing disclosure andimpacts by corporations from around the world.
Constant Exchange Rates (Constant FX): Constantexchange rates are computed by restating current year
results at the previous year’s foreign currency exchange(FX) rate. Results at constant rates of exchange should beconsidered in addition to, not as a substitute for, results
reported in accordance with IFRS.
Contraband: Genuine products smuggled from abroadthat are diverted from the legitimate supply chain and soldin a country other than the intended retail market without
payment of domestic duty in that country.
Core Revenue (International Tobacco Business): Includes
revenue from waterpipe tobacco and Reduced-Risk Products, but excludes revenue from distribution, contract
manufacturing and other peripheral businesses.
Core Revenue (Japanese Domestic Tobacco Business):
Excludes revenue from distribution of imported tobacco in
the Japanese domestic tobacco business, among others,
but includes revenue from domestic duty free, the China
business, little cigars and Reduced-Risk Products such as
Ploom TECH devices and capsules.

160 Japan Tobacco Inc. Integrated Report 2019

VALUE CREATIONCounterfeit: Fake products appearing to be genuine brandproducts protected by intellectual property rights. Counterfeit
products are manufactured without authorization from therights’ owners and with the intent to copy the genuine brandto deceive the consumer. They are also sold without duties
being paid.

GFB: Global Flagship Brands (Winston, Camel, MEVIUS, LD).

DJSI (Dow Jones Sustainability Indices): The DJSI is acollaborative initiative by S&P Dow Jones Indices of theUnited States and RobecoSAM of Switzerland. It assesses
the sustainability performance of companies, basedon economic, environmental and social criteria.

GHG Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam.

FCF (Free Cash Flow): FCF is sum of cash flows fromoperating activities and investing activities, but excludes
the following items:• From operating CF: depreciation from leasetransactions, interest received, dividends received,
interest paid and income taxes related to these items
excluding lease transactions• From investing CF: purchase of investment securities(both short-term and long-term), payments into time
deposits, proceeds from sale or redemption of investment
securities (both short-term and long-term), proceeds fromwithdrawal of time deposits and other investing activities
not for business operation purposes
Fine Cut represents tobacco products which are
packed in a loose, fine-cut form in pouches and are also
known as rolling tobacco, used for both RYO “roll-your-own”
cigarettes (made using rolling papers) and MYO “make-yourown” cigarettes (made by filling a filter tube with cut tobacco).

Revenue: Excluding tobacco excise taxes and revenue fromagent transactions.

GHG emissions: Greenhouse gas emissions.
RMC: Ready-Made Cigarettes.
GHG Scope 1: Direct GHG emissions from corporate
activities, such as burning of fossil fuels at factories.

GHG Scope 3: Other indirect emissions, including frommanufacture of products bought from other companies.

IFRS: International Financial Reporting Standards.
Illicit Whites: Tobacco products manufactured legitimately
but without any product flow control measures afterwards
and, smuggled and sold in another market.
JPY BN: Billion Japanese yen.
JT Cigarette Sales Volume(Japanese Domestic Tobacco Business): Excludes sales
volume of domestic duty free, the China business andReduced-Risk Products.

Science Based Targets (SBT): SBT is a joint initiative thatenables businesses to take swift climate action by setting
ambitious emission reduction targets.
SDGs: The Sustainable Development Goals (SDGs) wereadopted by all United Nations Member States in 2015 as auniversal call to action to end poverty, protect the planet andensure that all people enjoy peace and prosperity by 2030.
TableMark: References to “TableMark” are to TableMarkCo., Ltd.
Total Shipment Volume(International Tobacco Business): The shipment volume of
tobacco-based products which includes Fine Cut, cigars,
pipe tobacco, snus, kretek and T-Vapor but excludes contract
manufactured products, waterpipe tobacco and E-Vapor.
USD MM: Million U.S. dollars.

Profit: Profit attributable to owners of the parent.
Reduced-Risk Products (RRP): Products with the potential
to reduce the risks associated with smoking.
Restated: See “Constant Exchange Rates.”

Japan Tobacco Inc. Integrated Report 2019 161

CORPORATE PROFILEVALUE CREATION

Dow Jones Sustainability IndicesPRIDE Index

As of December 31, 2019

We are a member of the Dow Jones Sustainability Asia
Pacific Index, and we were recognized with SAM Bronze
Class 2020 ranking and as a SAM Industry Mover 2020 for
the first time.

In the PRIDE Index, which highlights the most LGBT-friendly
companies, JT achieved Gold status, the highest ranking,for the fourth consecutive year.

Common Stock

work with Pride – PRIDE index –October 2019

FTSE Blossom JapanFTSE Blossom Japan
February 2020

CDP A List and Supplier Engagement Leader

JT is certified as a childcare-supporting company by theJapanese Ministry of Health, Labor and Welfare.
Platinum Kurumin Certification (in Japanese)
2019

8,000,000,000

Issued:2,000,000,000
515,211

Share Registrar
Mitsubishi UFJ Trust and Banking Corporation
4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo
Listing
Tokyo Stock Exchange: First Section

Top Employer
Our international tobacco business was certified as a Global
Top Employer for the sixth consecutive year.

Minister of Finance
37.6%
Financial institutions20.5%
Individuals and others
18.3%
Securities companies
4.6%
Other Japanese companies 1.4%
Foreign institutions, etc.
17.6%

Top Employer
February 2020

Nadeshiko Brand

Learn more on JT.com.

JT was selected as a “Nadeshiko Brand” that encourages
women’s success in the workplace.
Nadeshiko Brand
March 2020

Science Based Targets

JT Group press release
February 2019

Authorized:

Composition of Shareholders (excluding treasury stock)

Achieving a place on CDP “A List” for climate change (press
release in January 2020) and water security (press release in
February 2020). We are also recognized as a global leader forengaging our supply chain in climate change activities.

We have set a long-term GHG emission reduction target inline with the Paris Agreement, which was approved as an
SBT by the Science Based Targets initiative.

Principal Shareholders

Number of shareholders:
Platinum Kurumin Certification

We have been selected as a member of FTSE Blossom
Japan Index every year since 2017. FTSE Blossom Index(selected by GPIF as a core ESG benchmark) is designed tomeasure the performance of Japanese companies that
demonstrate strong sustainability practices.

FINANCIAL INFORMATION

Shareholder Information

Awards and Recognition

JT Group press release
September 2019The Sustainability Yearbook 2020

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYSTRATEGY

Equal Salary Employer
In January 2019, the headquarters of JTI
became the first Geneva-based
multinational headquarters to be certified
as an equal salary employer by the EQUALSALARY Foundation.

Name

Shares held

Minister of Finance

666,926,200

The Master Trust Bank of Japan, Ltd. (Trust Account)

88,722,600

Japan Trustee Services Bank, Ltd. (Trust Account)

54,377,600

SMBC Nikko Securities Inc.

29,357,000

Trust & Custody Services Bank, Ltd. as trustee forMizuho Bank, Ltd.
Retirement Benefit Trust Account re-entrusted by
Mizuho Trust and Banking Co., Ltd.

23,660,000

Japan Trustee Services Bank, Ltd. (Trust Account 5)

23,508,500

JP Morgan Chase Bank 385151(Standing proxy: Mizuho Bank, Ltd., Settlement
Sales Department)

22,262,535

JP Morgan Chase Bank 380055(Standing proxy: Mizuho Bank, Ltd., Settlement
Sales Department)

21,612,342

State Street Bank West Client-Treaty 505234(Standing proxy: Mizuho Bank, Ltd., Settlement
Sales Department)

21,561,341

Japan Trustee Services Bank, Ltd. (Trust Account 9)18,737,300

Government Offerings of JT Shares
1st Offering
MethodOffering by Bids

Offering by non-Bids

Offer price(Pricing date)

Bid price: From ¥1,362,000 to ¥2,110,000
Weighted average price: ¥1,438,000(August 29, 1994)¥1,438,000(August 31, 1994)

Number ofshares offered

229,920 shares

164,356 shares

Offer term

From August 15 to 18, 1994

From September 2 to 8, 1994

Note:
Listing date: October 27, 1994
Exchange: First Section of Tokyo Stock Exchange

Global Child Forum
We were recognized as a “leader” by the Global Child
Forum, as part of their 2019 Global Corporate Sector andChildren’s Rights Benchmark Report “The State of Children’s
Rights and Business: From Promise to Practice.”
Final score card
November 2019White 500
JT was selected as a Certified Health and Productivity
Management Organization (White 500) for our outstanding
health-conscious management.
White 500
March 2020

2nd and 3rd, 4th Offering

MethodOffer price(Pricing date)
Number ofshares offered
Offer term

162 Japan Tobacco Inc. Integrated Report 2019

2nd Offering

3rd Offering

4th Offering

Offering by Book-Building formula

Offering by Book-Building formula

Offering by Book-Building formula¥815,000(June 17, 1996)
Japan: 237,390 shares,
International: 35,000 shares(Total: 272,390 shares)¥843,000(June 7, 2004)
Japan: 198,334 shares,
International: 91,000 shares(Total: 289,334 shares)¥2,949(March 11, 2013)
Japan: 145,625,500 shares,
International: 107,636,300 shares(Total: 253,261,800 shares)

From June 18 to 19, 1996

From June 8 to 10, 2004

From March 12 to 13, 2013

Japan Tobacco Inc. Integrated Report 2019 163

CORPORATE PROFILEVALUE CREATIONSTRATEGY

ABSOLUTE REQUIREMENTS
FOR SUSTAINABILITYFINANCIAL INFORMATION

Corporate Data
Japan Tobacco Inc.
2-1, Toranomon 2-chome,
Minato-ku, Tokyo 105-8422, Japan
Tel: +81 (0)3-3582-3111
Fax: +81 (0)3-5572-1441
URL: https://www.jt.com/

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

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

164 Japan Tobacco Inc. Integrated Report 2019Japan Tobacco Inc. Integrated Report 2019 165