[This is an English translation prepared for the convenience of non-resident shareholders. Should there be any
inconsistency between the translation and the official Japanese text, the latter shall prevail.]

Securities Code: 2914
March 1, 2017
To Our Shareholders
Mitsuomi Koizumi
President, Chief Executive Officer andRepresentative Director

Japan Tobacco Inc.
2-1, Toranomon 2-chome, Minato-ku, TokyoNOTICE OF CONVOCATION OF
THE 32ND ORDINARY GENERAL MEETING OF SHAREHOLDERS
You are cordially invited to attend the 32nd Ordinary General Meeting of Shareholders of Japan Tobacco Inc.
(“JT” or the “Company”) to be held as set forth below.
If you cannot attend the meeting, you may exercise your voting rights in written form or byelectromagnetic means including the Internet. Please see the “Reference Documents for the General
Meeting of Shareholders” hereinafter described and exercise your voting rights by 6:00 p.m., on
Thursday, March 23, 2017, in accordance with “Instructions for Exercising Your Voting Rights” onpages 3 to 5.
Particulars
1. Date and Time of the Meeting: Friday, March 24, 2017 at 10:00 a.m.
2. Place of the Meeting:

The Prince Park Tower Tokyo
Second basement, Ball Room
8-1, Shibakoen 4-chome, Minato-ku, Tokyo

3. Purpose of the Meeting:
Matters to be Reported:

1. Report on the Business Report, the Consolidated Financial Statements,
and the Independent Auditors’ Report and JT’s Audit & Supervisory
Board Report on the Consolidated Financial Statements for the 32nd
Business Term (From January 1, 2016 to December 31, 2016)
2. Report on the Non-Consolidated Financial Statements for the 32nd
Business Term (From January 1, 2016 to December 31, 2016)

Matters to be Resolved:
Item 1:
Item 2:

Appropriation of Surplus
Election of One (1) Substitute Audit & Supervisory Board Member-1-Information on Matters Posted on JT’s Web-site
1. Notes to Consolidated and Non-Consolidated Financial Statements are posted on our web-site(https://www.jti.co.jp/) in accordance with laws and regulations, and the provision in Article 17 of the
Articles of Incorporation. Therefore, they are not included in this Notice of Convocation of the 32nd
Ordinary General Meeting of Shareholders.
In addition to documents stated in the reference documents attached to the Notice of Convocation of the
32nd Ordinary General Meeting of Shareholders, Notes to Consolidated and Non-Consolidated Financial
Statements posted on the Company’s web-site are included in Consolidated and Non-Consolidated
Financial Statements audited by Audit & Supervisory Board Members and the Accounting Auditors in thecourse of preparing Audit Report and Accounting Auditors’ Report respectively.

2. If there is any amendment to the Reference Documents for the General Meeting of Shareholders, Business
Report (available in Japanese), or Non-Consolidated and Consolidated Financial Statements (available inJapanese), it will be published on our web-site (https://www.jti.co.jp/).

JT’s web-site

https://www.jti.co.jp/

Guidance to our shareholders attending the General Meeting of Shareholders* For those attending, please bring this Notice of Convocation of the 32nd Ordinary General Meeting of
Shareholders with you.
* It is expected to be crowded immediately before the meeting begins. If meeting room No.1 becomes full,
you will be ushered to meeting room No.2. We ask that you come to the meeting at your earliest
convenience.
* In case an agent attends the meeting, your agent must bring a letter of attorney along with the Voting Rights
Exercise Form. Only one other shareholder who can exercise the voting rights at the 32nd Ordinary General
Meeting of Shareholders is supposed to be eligible to serve as your agent.
* Please note that the meeting will be conducted in Japanese only. An interpreter, including a sign language
interpreter, may accompany you. If you would like to have an interpreter accompany you, please tell so at
the reception desk. It is also possible for us to arrange a Japanese sign language interpreter for you. If you
are in need of this service, please inquire us in writing by March 16 (Thursday) (your letter of inquiry mustreach us by this date).
* The Company plans to give gifts to the shareholders who attend on the day. Please note, however,shareholders will receive just one package, regardless of how many Voting Rights Exercise Forms are held.

-2-Instructions for Exercising Your Voting Rights
Exercise of voting rights at the Company’s General Meeting of Shareholders is shareholders’ important right.
Please by all means exercise your voting rights.
There are three methods to exercise your voting rights as indicated below.

A.

Attend the meeting

B.

Post the Voting Rights
Exercise FormC.

Exercise the Voting Rights
via the Internet

Please present the Voting Rights Exercise Form at thereception desk on arrival at the meeting. (Not required toplace a seal.)
Date and time of the General Meeting of Shareholders:
10:00 a.m., on Friday, March 24, 2017
Please post the Voting Rights Exercise Form indicating
whether you are for or against each of the items.
Exercise due date:
To be returned to us no later than 6:00 p.m., on Thursday,
March 23, 2017
Please access the Voting Rights Exercise Web-site(http://www.evote.jp/) and indicate whether you are for oragainst each of the items.
Exercise due date:No later than 6:00 p.m., on Thursday, March 23, 2017

Guide to filling in the Voting Rights Exercise Form
Please indicate for or against about each item.
Items 1 and 2
When you are for the proposed item, mark 〇 in the “for” box, and when you are against the item,
mark 〇 in the “against” box.
* For those attending, procedures for posting the Voting Rights Exercise Form or exercising your voting
rights via the Internet are unnecessary.

-3-

When Exercise the Voting Rights via the Internet
The exercise of the voting rights via the Internet is available only by accessing the designated web-site forthe exercise of the voting rights (“Voting Rights Exercise Web-site”) from your computer or smartphone.
Please access the Voting Rights Exercise Web-site and indicate whether you are for or against each of theitems.

Exercise due dateVoting Rights Exercise Web-site
http://www.evote.jp/

No later than 6:00 p.m., on Thursday, March 23, 2017

If you use a smartphone with a function to read QR
Codes, you can access by having your smartphoneread the QR Code on the right.

When using a computer
1.
2.
3.
4.

Click the “Next” buttonEnter the “Log-in ID” and the “Temporary Password” described on the lower right-hand side of the
Voting Rights Exercise Form
Click the “Log-in” button
Then, please indicate whether you are for or against each of the items following the directions on the
web-site

When using a smartphone
1.
2.
3.
4.

Touch the “Procedures for General Meeting of Shareholders”
Enter the “Log-in ID” and the “Temporary Password” described on the lower right-hand side of the
Voting Rights Exercise Form
Touch the “Log-in” button
Then, please indicate whether you are for or against each of the items following the directions on the
web-site* Please refer to the following page for the Cautions Regarding Exercise of the Voting Rights via theInternet.

-4-

Cautions Regarding Exercise of the Voting Rights via the Internet
For the exercise of the voting rights via the Internet, please access the Voting Rights Exercise Web-site(http://www.evote.jp/), and exercise your voting rights after confirming the items below.
For those attending, procedures for posting the Voting Rights Exercise Form or exercising your voting rights
via the Internet are unnecessary.

*

You will not be able to access the web-site from 2:00 a.m. to 5:00 a.m. each day during the exercise
period.

*If you use firewalls, etc. for the Internet connection, antivirus programs or a proxy server, you may not
be able to access the web-site depending on your Internet environment.

*

In order to prevent unauthorized access (web spoofing) or alteration of the voting by non-shareholders,
you will be asked to change your “Temporary Password” on the Voting Rights Exercise Web-site.
Please take care not to forget your new password.

*

JT will notify you of the new “Log-in ID” and “Temporary Password” at each convocation of theGeneral Meeting of Shareholders.

*

In the event voting rights are exercised more than once:(1) If the voting right is exercised both by posting the Voting Rights Exercise Form and via the Internet,
only the exercise of the voting right via the Internet shall be valid.
(2) If the voting right is exercised more than once via the Internet, only the last exercise of the voting
right shall be valid.

*

Each shareholder shall bear any fees for accessing the Voting Rights Exercise Web-site (Internet
connection fees, communications fees, etc.).

If you have any enquiries, please contact “Help Desk” shown below.
Mitsubishi UFJ Trust and Banking Corporation
Corporate Agency Division
Enquiries on systems, etc.

Help Desk
Tel: 0120-173-027 (Japanese-language only)(Business hours: 9:00 to 21:00, Toll-free)

To institutional
investors

JT participates in the electronic voting rights exercise platform operated andadministered by ICJ, Inc.

-5-

REFERENCE DOCUMENTS
FOR THE GENERAL MEETING OF SHAREHOLDERS
Item 1: Appropriation of Surplus
The Company has adopted a management resources allocation policy, under which the Company willcontinue to place a high priority on making business investments that contribute to sustainable mid- to longterm profit growth as well as to value the balance between profit growth through business investments andshareholder returns. In this context, the Company is pursuing enhanced shareholder returns in proportion to
the mid- to long-term profit growth, while maintaining a strong financial base*.
In accordance with these policies, year-end dividends and other appropriation of surplus for the 32nd
Business Term will be paid as described below.
1. Year-end dividends(1) Type of assets to be paid as dividends:
Cash(2) Allotment of assets to be paid as dividends and their aggregate amount:¥66 per share of ordinary shares of JT

Aggregate amount: ¥118,203,078,378

Together with the interim dividends of ¥64 per share paid in September 2016, the annual dividends forthe 32nd Business Term will be ¥130 per share, a ¥12 increase year on year.
(3) Effective date for distribution of surplus:
March 27, 2017

2. Other appropriation of surplus(1) Item of surplus to be increased and its amount:
Retained earnings brought forward: ¥955,300,000,000(2) Item of surplus to be decreased and its amount:
General reserve: ¥955,300,000,000
This is a transfer between accounts in “other retained earnings” on the Company’s non-consolidatedbalance sheet and therefore has no effect on the distributable amount.
* As its financial policy, JT will maintain a strong financial base that secures stability in case of changes inbusiness environment such as economic crises and flexibility enabling expeditious responses to business
investment opportunities.

Reference: Trends in dividend per share* (yen)* A 200 for 1 share split was effectuated as of July 1, 2012. The above numbers are calculated on the assumptionthat the share split was retroactively effective.

-6-

Reference

In accordance with the “Business Plan 2017,” the Group will continue to pursue mid to high singledigit*1 annual average growth rate over the mid- to long-term in adjusted operating profit at constant rates
of exchange*2. The Group’s management resources allocation policy and returns to shareholders policy are
as follows.

Management resources allocation policy
Execute management resources
allocation, based on the 4S
model that underlies theGroup’s management
principles.

・Prioritize business investments that lead to sustained profit
growth over the mid- to long-term
・ Emphasize a balance between profit growth throughbusiness investments and returns to shareholders

Returns to shareholders policy
Improve returns to shareholders
in agreement with mid- to longterm profit growth, while
maintaining a firm financial
base
*1
*2

*3

・Work toward stable and consistent growth in dividend per
share・Consider whether to execute the acquisition of treasury
shares in view of factors including the medium-term outlook
on business environment and financial positions
・Continue to monitor a trend in shareholder returns of global
FMCG*3 companies

mid to high single-digit: mid to high single-digit-percentage
Adjusted operating profit is calculated by deducting amortization cost of acquired intangibles andadjustment items (income and costs) from operating profit (loss). Adjustment items (income and costs)
are impairment losses on goodwill, restructuring income and costs, and other items. Adjusted operating
profit growth rate at constant rates of exchange is a financial measurement that excludes foreignexchange effects by translating and calculating adjusted operating profit for the fiscal year in theInternational Tobacco Business using the foreign exchange rates of the previous fiscal year.
A Fast-Moving Consumer Goods (daily consumer goods) company is a company that achieves a highgrowth business by adopting a stakeholder model.

-7-

Item 2: Election of One (1) Substitute Audit & Supervisory Board Member
In preparation against a situation where the number of Outside Audit & Supervisory Board Members falls
below the statutory required number, the election of one (1) Substitute Audit & Supervisory Board Member is
proposed.
The Audit & Supervisory Board has approved this proposition.
The candidate for the office of Substitute Audit & Supervisory Board Member is as follows:

Michio Masaki(Born February 20, 1961)

Number of the Company’s Shares Held0

Brief Personal History, Positions in the Company, and Significant Concurrent Positions outside theCompany
April 1987

Judicial Apprentice

April 1989

Appointed as Public Prosecutor

July 2003

Head of Takasaki Branch, Maebashi District
Public Prosecutors Office

April 2004

Registered as Attorney at Law
City-Yuwa Partners(Current Position)

Reasons for candidacy as a
Substitute Outside Audit &Supervisory Board Member
Michio Masaki possesses abundant
experience in the legal circles and broad
insight. Therefore, we judge he would
be able to appropriately execute his
duty as Outside Audit & Supervisory
Board Member of the Company.
While he has not been involved incorporate management except the roleof outside executive, we judged that hewould be able to appropriately execute
his duty as Outside Audit &Supervisory Board Member for theabove-mentioned reasons.

(Significant Concurrent Positions outside the Company)
Attorney at Law, City-Yuwa Partners
Outside Director, Hamai Co., Ltd.
(Notes)1.

No conflict of interest exists between the Company and the above candidate.

2.

The Company proposes Michio Masaki be elected as substitute Outside Audit & Supervisory Board Member.

3.

Should Michio Masaki assume the position of Audit & Supervisory Board Member, the Company intends to enter
into an agreement with him to limit his liabilities stipulated in Article 423, Paragraph 1 of the Companies Act to theextent permitted by the laws and regulations.

4.

Michio Masaki satisfies the Criteria for Evaluating the Independence of Outside Executives of the Company and therequirements of an independent auditor prescribed by the Tokyo Stock Exchange, Inc.

-8-

【Reference】Criteria for Evaluating the Independence of Outside Executives
The Company has established a Criteria for Evaluating the Independence of Outside Executives andIndependent Directors/Audit & Supervisory Board Members must not fall under any of the following
categories.
1 A person who belongs or belonged to JT or an affiliate or sister company of JT
2 A person who belongs to a company or any other form of organization of which JT is a major shareholder
3 A person who is a major shareholder of JT or who belongs to a company or any other form of organization
which is a major shareholder of JT
4 A person who is a major supplier or customer of JT (if the supplier or customer is a company or any otherform of organization, a person who belongs thereto)
5 A major creditor of JT including a major loan lender (if the creditor is a company or any other form oforganization, a person who belongs thereto)
6 A certified public accountant who serves as an accounting auditor or an audit advisor of JT, or a person
who belongs to an auditing firm which serves as an accounting auditor or an audit advisor of JT
7 A person who receives a large amount of fees from JT in exchange for providing professional services forlegal, financial and tax affairs or business consulting services (if the recipient of such fee is a company or
any other form of organization, a person who belongs thereto)
8 A person who receives a large amount of donation from JT (if the recipient of such donation is a company
or any other form of organization, a person who belongs thereto)
9 A person who has fit any of the descriptions in 2 to 8 above in the recent past
10 A close relative of a person who fits any of the following descriptions:(1) A person who fits any of the descriptions in 2 to 8 above (if such descriptions apply to a company or
any other form of organization, a person who performs important duties thereof)(2) A member of the board, audit & supervisory board member, audit advisor, executive officer or
employee of JT or an affiliate or sister company of JT(3) A person who has fit the descriptions in (1) or (2) in the recent past

-9-

[For your reference, we have included various graphs and photographs.][Attached Documents]

Business Report(From January 1, 2016 to December 31, 2016)

I.

Matters Concerning Present State of the Corporate Group1.

Overview and results of operations
General summary
Revenue
Revenue decreased by ¥109.6 billion, or 4.9%, from the previous fiscal year to ¥2,143.3 billion due tomajor unfavorable foreign exchange effects on the International Tobacco Business, despite increases inrevenue in the Pharmaceutical Business and the Domestic Tobacco Business.

Adjusted operating profit, operating profit and profit attributable to owners of the parent
company
Despite an increase of 11.3% year on year in adjusted operating profit at constant rates of exchange, theGroup’s management benchmarks, adjusted operating profit decreased by ¥39.9 billion, or 6.4%, fromthe previous fiscal year to ¥586.8 billion, due to major unfavorable foreign exchange effects on theInternational Tobacco Business.
Operating profit benefited from gain on sales of real estate and the like, rising by ¥28.1 billion, or 5.0%,
from the previous fiscal year to ¥593.3 billion.
Profit attributable to owners of the parent company increased by ¥23.2 billion, or 5.8%, from theprevious fiscal year to ¥421.7 billion.
Consolidated performance(Note 1)[Billions of yen]

Change [%]2,143.3(4.9)

Adjusted operating profit(Note 2)

586.8

(6.4)

Adjusted operating profit (atconstant rates of
exchange)(Note 3)

697.5

11.3

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

421.7

5.8

Revenue(Notes)1. During the previous fiscal year, the Group withdrew from the Beverages Business and thisbusiness was categorized as discontinued operations. Accordingly, consolidated performancefor the previous fiscal year for certain items used as comparators for the current fiscal year
(revenue, adjusted operating profit, operating profit and profit attributable to owners of theparent company) are reported on a continuing operations basis.
2. Adjusted operating profit is calculated by deducting amortization cost of acquired
intangibles and adjustment items (income and costs) from operating profit (loss). Adjustment
items (income and costs) are impairment losses on goodwill, restructuring income and costs,
and other items.

-10-

3. Adjusted operating profit (at constant rates of exchange) is a value that excludes foreignexchange effects by translating and calculating adjusted operating profit for the current fiscal
year in the International Tobacco Business using the foreign exchange rates of the previous
fiscal year.
4. Profit attributable to owners of the parent company including amounts for discontinued
operations for the previous fiscal year is ¥485.7 billion.

Revenue breakdown by business segment(unit: JPY billion)

Revenue

ProfitAdjusted operating profit(Attributable to owners of the parent company)-11-

Domestic Tobacco Business

Sales volume in the current fiscal year was affected by a decline in cigarette industry volume(Note 1)
caused by the expansion of the T-Vapor(Note 2) market and the downtrend in total demand, as well as theimpact of retail price amendments for some products, including Mevius, but this was partially offset by
the impact of the acquisition of the Natural American Spirit business outside the U.S. As a result, sales
volume fell by 3.1 billion cigarettes, or 2.8%, from the previous fiscal year to 106.2 billion cigarettes(Note3).
Market share, helped by the aforementioned acquisition, was 61.1% (compared with a share of 59.9% for
the previous fiscal year).
Core revenue(Note 4) rose by ¥7.5 billion, or 1.2% from the previous fiscal year to ¥649.7 billion, despite adecline in sales volume, driven by the impacts of the acquisition of the Natural American Spirit businessoutside the U.S. and the retail price amendments of certain products, including Mevius.
Adjusted operating profit rose by ¥6.2 billion, or 2.4% from the previous fiscal year to ¥260.2 billion,
due mainly to higher core revenue and the effects of measures to strengthen competitiveness.
(Notes) 1. Cigarette industry volume includes sales volume for the whole Japanese cigarette market,
but it does not include sales volume for emerging products (novel or innovative products
other than conventional cigarettes, including T-Vapor products and others) and so on.
2. T-Vapor products do use tobacco leaf, but instead of burning it they use methods such asheating the leaf to generate vapor (which includes compounds derived from the tobacco leaf)
for the user to enjoy.
3. In addition to the figure stated above for sales volume, during the fiscal year ended
December 31, 2016, 3.9 billion cigarettes were sold at duty-free shops in Japan, as well as at
markets in China, Hong Kong and Macau that are under the control of the Company’s China
Division (3.8 billion cigarettes in the previous fiscal year). Note also that the figure statedabove for sales volume does not include the sales volume associated with emerging products
and the like.
4. Core revenue in the Domestic Tobacco
Business includes revenue from thedomestic duty-free market as well asfrom markets in China, Hong Kong and
Macau that are under the control of theCompany’s China Division, in addition
to revenue related to emerging products,
but it excludes revenue related toimported tobacco delivery charges,
among others.

* The above includes Natural American Spirit’s share(JT estimate) before completion of its acquisition.

-12-

International Tobacco BusinessIn the fiscal year ended December 31, 2016, despite factors including the impact of a decline in total
demand in Russia, total shipment volume(Note 1) grew by 4.8 billion cigarettes, or 1.2% from the previous
fiscal year to 398.7 billion cigarettes, and GFB(Note 2) shipment volume increased by 10.2 billion
cigarettes, or 3.7% to 283.7 billion cigarettes. This mainly reflected the strong performance in emerging
markets and major European markets, the effects of the acquisition of an operating company in Iran and
the Natural American Spirit business outside the U.S., and positive impacts from trade inventory
adjustments primarily in the first quarter ended March 31, 2016.
Dollar-based core revenue(Note 3) and adjusted operating profit, increased by $152 million, or 1.5% fromthe previous fiscal year to $10,490 million, and decreased by $163 million, or 5.0% from the previous
fiscal year to $3,095 million respectively, as a result of unfavorable foreign exchange effects related to
local currencies, including the Russian ruble and the pound sterling. Adjusted operating profit at constantrates of exchange increased by 13.4% from the previous fiscal year.
Yen-based core revenue and adjusted operating profit fell by ¥113.7 billion, or 9.1% from the previous
fiscal year to ¥1,138.8 billion and by ¥58.2 billion, or 14.7% from the previous fiscal year to ¥336.2
billion respectively, as a result of the effects of the strong yen when making conversions to that currency.
(Notes) 1. Includes fine cut tobacco, cigars, pipe tobacco and snus, except for contract manufacturing
products, waterpipe tobacco products and emerging products.
2. GFBs (Global Flagship Brands) consist of nine brands, which serve as flagships of theGroup’s brand portfolio - Winston, Camel, Mevius, LD, Benson & Hedges, Glamour,
Sobranie, Silk Cut and Natural American Spirit.
3. Core revenue in the International Tobacco Business includes revenue related to waterpipe
tobacco products and emerging products, but excludes revenue related to the distribution
business and contract manufacturing, among others.

-13-Core revenue (USD basis)

Adjusted operating profit (USD basis)

Exchange rate per U.S. dollar
FY 2015

FY 2016121.10108.78

Ruble

60.98

67.07

Pounds sterling

0.65

0.74

Euro

0.90

0.90

Foreign exchange rate
per U.S. dollar
Yen

Main Market Shares (12-month rolling average)
2015 Dec

2016 Dec

Variance

Italy

21.1%

22.7%

1.6pptFrance

21.4%

22.0%

0.6ppt

Spain

22.3%

22.8%

0.5ppt

UK

41.9%

41.7%

(0.2ppt)

Russia(GFBs)
Turkey

33.8%
24.2%
30.3%

32.8%
24.7%
29.4%

(1.0ppt)
0.5ppt(0.9ppt)

Taiwan

39.2%

39.9%

0.7pptSource: Internal estimates, Logista, IRI, Nielsen-14-Pharmaceutical BusinessIn the Pharmaceutical Business, the Company has been striving to make a stable contribution to theGroup’s profits by promoting R&D on next-generation strategic products and by maximizing the valueof each product.
In the area of product development, seven compounds are in clinical development.
During the current fiscal year, the Company obtained approval for domestic manufacturing anddistribution of anti-HIV drug “Genvoya Combination Tablets” and “Descovy Combination Tablets LT
and HT,” and Group Company Torii Pharmaceutical Co., Ltd. launched sales of these in July 2016 andJanuary 2017 respectively.
Revenue in the fiscal year ended December 31, 2016 increased ¥11.6 billion, or 15.4%, from theprevious fiscal year to ¥87.2 billion, driven by higher royalty revenue and a one off milestone revenue
related to R&D progress of an original JT compound that has been out-licensed. Adjusted operating
profit rose by ¥12.0 billion as a result of higher revenue to reach ¥9.7 billion (compared to adjusted
operating loss of ¥2.3 billion in the previous fiscal year).

-15-

【Reference】-16-

Processed Food BusinessIn the Processed Food Business, Group Company TableMark Co., Ltd. is taking a central role in thedevelopment of the Group’s Processed Food Business, which consists primarily of staple food products
such as frozen and ambient processed foods, bakery, and seasonings. The Group has been making every
effort to produce strong staple food products with established market shares and work to improve costcompetitiveness, thus striving to improve profitability.
In the fiscal year ended December 31, 2016, we continued working to expand product sales with anemphasis on staple food products. Specifically, we launched 28 new and 48 renewed frozen andambient home-use products, such as Chinese-style “Abura Soba” noodles with other ingredients packed
in a tray, and “Japanese-style rice Beef and burdock root rice made with Japanese Koshihikari rice.”
With “Home Run - Ken” marking its 30th anniversary, we launched a product with a commemorative
logo, in addition to which we developed “Gottsu Umai Okonomiyaki” in a package supporting the
Taisou-nippon, and various other proactive marketing initiatives.
Despite growth in sales of staple food products and seasonings, revenue in the fiscal year ended
December 31, 2016 decreased by ¥1.8 billion, or 1.1%, from the previous fiscal year to ¥164.1 billion,
due to a decline in sales of other products. On the other hand, adjusted operating profit rose by ¥2.3
billion, or 83.2%, from the previous fiscal year to ¥5.0 billion, due to improvements in the sales productmix, as well as declining raw material costs caused by the stronger yen, and cost-reduction efforts.

-17-

2.

Status of capital expenditures
In this fiscal year, we made capital expenditures totaling ¥113.0 billion.
In the Domestic Tobacco Business, we spent ¥29.8 billion, mainly on investments accompanying
maintenance and upgrade of manufacturing processes, productivity improvements, adaptation to new
products, improvements in product specifications, and others. In the International Tobacco Business, weinvested ¥70.6 billion mainly for improvements in product specifications in addition to optimization of
manufacturing facilities. In the Pharmaceutical Business, we spent ¥3.8 billion on enhancing andstrengthening research and development structures and the like. In the Processed Food Business, weinvested ¥5.7 billion in improvement, maintenance and renewals of production capability.
Please note that our own capital was allocated for capital expenditures.
* Capital expenditures includes land; building and structures; machinery and vehicles; and otherproperty, plant and equipment, as well as goodwill, right of trademark, software and other intangible
assets, necessary for production improvements at factories and other facilities, strengthening
competitiveness and executing business in a variety of fields, excluding assets acquired throughbusiness combinations.

3.

Status of financing
The Company conducted an issuance of straight bonds in USD (with general mortgage) totaling $1.25
billion on April 13, 2016, to be applied to the refinancing of bridge loans related to the acquisition of the
Natural American Spirit business outside the U.S.

4.

Business transfers, absorption-type company split or incorporation-type company split
No items to report.

5.

Business transfers from other companies
On January 13, 2016, the Group acquired the Natural American Spirit business outside the U.S. from the
Reynolds American Inc. group (“RAI”). The acquisition included trademarks involved with the Natural
American Spirit business outside the U.S. and all shares of RAI’s subsidiaries outside the U.S. that aresales companies for tobacco products of the same brand.

6.

Succession of rights and obligations relating to other entities’ business as a result of absorptiontype merger or company split
No items to report.

7.

Acquisition or disposal of shares, other equities or subscription rights to shares of other companies
No items to report.

-18-

8.

Trends in assets and operating results(1) Trends in assets and operating results of the JT Group [Consolidated]

29th term
FY201330th term
From April 1,2014 toDecember 31,
2014(Reference)
From January 1,
2014 toDecember 31,
2014

31st term
From January 1,
2015 toDecember 31,
2015

32nd term
From January 1,
2016 toDecember 31,
2016

Revenue(Millions of yen)

2,399,841

2,019,745

2,259,240

2,252,884

2,143,287

Profit before
income taxes(Millions of yen)

636,203502,526

574,572

565,113578,237

Profit attributableto owners of theparent company(Millions of yen)

427,987364,502391,431

398,454421,695

Basic earnings per
share
(Yen)

235.48200.55215.36221.95235.47

Total assets(Millions of yen)

4,616,766

4,704,706

4,704,706

4,558,235

4,744,374

Total equity(Millions of yen)

2,596,091

2,622,503

2,622,503

2,521,524

2,528,041(Notes) 1. Effective from the 30th term, the Company and those of its consolidated subsidiaries withfiscal year ends other than December 31 have changed their fiscal year ends to December 31.
As a result of this change, the accounting period for the 30th term was the 9-month period
from April 1, 2014, through December 31, 2014. In addition, the fiscal year end date of JT
International Holding B.V. and its subsidiaries, which operate the Group’s International
Tobacco Business, was already December 31. Consequently, the accounting periods of thesecompanies for the 30th term were the 12-month period from January 1, 2014, throughDecember 31, 2014. For comparison and reference purposes, the results for the 12-month
period from January 1, 2014, through December 31, 2014 are presented.
2. Consolidated financial statements of the JT Group are prepared based on IFRS.
3. During the 31st term, the Group withdrew from the Beverages Business and this business
was categorized as discontinued operations, and revised figures for the 30th term arepresented here. Accordingly, revenue, profit before income taxes, profit attributable toowners of the parent company, and basic earnings per share in “30th term,” “Reference,” and“31st term” are shown for continuing operations.
4. Profit attributable to owners of the parent company including amounts for discontinued
operations for the 31st term, and basic earnings per share are ¥485,691 million and ¥270.54,
respectively.

-19-

(2) Trends in assets and non-consolidated operating results of JT [Non-consolidated]

29th term
FY201330th term
From April 1,2014 toDecember 31,
2014

31st term
From January 1,
2015 toDecember 31,
2015

32nd term
From January 1,
2016 toDecember 31,
2016

Net sales(Millions of yen)

809,967

572,323

732,483

729,286

Ordinary income(Millions of yen)

230,900

159,746

371,989

203,242

Net income(Millions of yen)

168,779

108,656

345,009

173,607

Net income per share
(Yen)

92.86

59.78

192.18

96.94

Total assets(Millions of yen)

2,732,637

2,729,270

2,756,785

2,849,913

Net assets(Millions of yen)

1,734,379

1,649,151

1,713,068

1,663,675(Notes) 1. Effective from the 30th term, the Company has changed its fiscal year end to December 31.
As a result of this change, the accounting period for the 30th term was the 9-month period
from April 1, 2014, through December 31, 2014.
2. Non-consolidated financial statements of the Company are prepared based on Japanese
GAAP.

-20-

Trends in assets and operating results of the JT Group [Consolidated](Note) As the 30th term (■April-December) was nine months (April 1, 2014 to December 31, 2014), a
reference bar (■January-December) for twelve months (January 1, 2014 to December 31, 2014) isalso presented (except for total assets and total equity).

-21-

9.

Issues to be addressed(1) Basic management policy
Our management principles are based on the pursuit of the “4S” model (“S” is for satisfaction). The
model requires us to fulfill our responsibilities to our valued consumers, shareholders, employees and thewider society, carefully considering the respective interests of these four key stakeholder groups, andexceeding their expectations wherever we can.
We created our vision and mission based on the “4S” model. Our vision is to become a company
committed to global growth by providing diversified value that is uniquely available from JT Group. Our
mission is to create, develop and nurture our unique brands to win consumer trust, while understanding
and respecting the environment and the diversity of societies and individuals.
We have also adopted “The JT Group Way” as a code of conduct which all members of the Group should
follow. The JT Group Way requires that we fulfill the expectations of our consumers and behave
responsibly, strive for quality in everything we do through continuous improvement, and leverage
diversity across the JT Group.
The JT Group has attained sustainable profit growth and will continue to do so through the pursuit of the“4S” model. Since attaining sustainable profit growth requires us to continue to provide new value andsatisfaction to consumers, we believe it is essential to steadily make business investments for future midto long-term profit growth.
We believe that the pursuit of the “4S” model will lead to a consistent increase in corporate value in themid- to long-term and therefore that it is the best approach to serve the interests of all stakeholders.

-22-(2) Mid- to long-term management strategy and issues
The JT Group formulated its business plan, a three-year plan that is renewed each year on a rolling basis
in order to speed up the Group’s ability to respond appropriately to unexpected changes in accordancewith its recognition that strengthening its “adaptability to a changing environment” is an important theme.
Through the plan, the Group intends to carry on strategies that have hitherto been implemented for theGroup’s long-term vision of becoming a “Company committed to global growth that provides consumers
diversified value uniquely available from JT” while also taking them to a higher level.
In the “Business Plan 2017,” there is no change in the Group’s management resources allocation policy,
under which we will continue to place a high priority on making business investments that contribute tosustainable mid- to long-term profit growth as well as on valuing the balance between profit growththrough business investments and shareholder returns.
In accordance with the “Business Plan 2017,” the Group will continue to pursue mid to high singledigit(Note 1) annual average growth rate over the mid- to long-term in adjusted operating profit at constantrates of exchange(Note 2).
With regard to shareholder return policies, the Group will pursue enhanced shareholder returns inproportion to the mid- to long-term profit growth by continually making proactive business investments
while maintaining a strong financial base(Note 3) that enables response to any possible environmental
changes.
Specifically, the Group will work toward stable and consistent growth in dividend per share. Whether to
execute the acquisition of treasury shares will be considered in view of factors including the mediumterm outlook on business environment and financial positions.
Adopting a stakeholder model, the Group will continue to monitor a trend in shareholder returns ofglobal FMCG(Note 4) companies which achieve a high-growth business.
The mid- to long-term targets and roles for each business are as follows.
Tobacco Business

Grow adjusted operating profit at mid to high single-digit rate perannum over the mid- to long-term as the core business and profit
growth engine of the JT Group

Domestic
InternationalCore business that serves as the highly competitive profit generator
Also a core business that serves as the profit growth engine

Pharmaceutical Business

Strive to make stable profit contribution to the JT Group throughpromotion of R&D on next-generation strategic products and value
maximization of each product

Processed Food Business

Strive to achieve operating profit margin that is, at very least, on
par with industry average and aim to make further profit
contribution to the JT Group-23-

In order to achieve the consolidated mid- to long-term profit targets, our strategic focus across all
businesses is to achieve quality top line growth by striving in accordance with each target and role. For
each business, our strategic focus is to improve cost competitiveness and business foundations that
support these efforts, thereby achieving sustainable profit growth.
We will work to strengthen our CSR initiatives further with an emphasis on the pursuit of high-level,well-balanced stakeholder satisfaction based on the “4S” model, which constitutes JT’s management
principles.
We think that the business environment surrounding the JT Group will continue to change on the global
scale and at a faster rate. In order to respond to the various changes that may happen in the future, wewill continue to strive for sustained profit growth in the mid- to long-term and steadily actualizing
shareholder returns, based on the “4S” model and through consistent business investment and an
adaptability to a changing environment.
(Notes) 1. mid to high single-digit: mid to high single-digit-percentage
2. Adjusted operating profit is calculated by deducting amortization cost of acquired intangibles
and adjustment items (income and costs) from operating profit (loss). Adjustment items(income and costs) are impairment losses on goodwill, restructuring income and costs, andother items.
Adjusted operating profit growth rate at constant rates of exchange is a financial
measurement that excludes foreign exchange effects by translating and calculating adjusted
operating profit for the current fiscal year in the International Tobacco Business using theforeign exchange rates of the previous fiscal year.
3. As its financial policy, the Group will maintain a strong financial base that secures stability
in case of changes in business environment such as economic crises and flexibility enabling
expeditious responses to business investment opportunities.
4. FMCG: Fast Moving Consumer Goods (daily consumer durables)-24-10. Main business contents
Business segment

Main business
Manufacture and sale of tobacco products, mainly Mevius andSeven Star
Manufacture and sale of tobacco products, mainly Winston and
Camel
Research and development, manufacture and sale of prescription
drugs
Manufacture and sale of frozen and ambient processed foods,
bakery products and seasonings

Domestic Tobacco Business
International Tobacco BusinessPharmaceutical Business
Processed Food Business11. Status of important subsidiaries

Company name

Equityownership(%)

CapitalMain business(Millions of yen)

TS Network Co., Ltd.
Japan Filter Technology
Co., Ltd.

460

74.5

Distribution of tobacco products

88.6

Manufacture and sale of filters for
tobacco products(100.0)

Manufacture and sale of tobacco
products(100.0)

Manufacture and sale of tobacco
products(Millions of yen)

461
(Thousands of CHF)

JT International S.A.

1,215,425(Thousands of GBP)

Gallaher Ltd.
Torii PharmaceuticalCo., Ltd.

172,495(Millions of yen)

5,190

53.5

Manufacture and sale ofprescription drugs(100.0)

Manufacture and sale ofprocessed foods(Millions of yen)

TableMark Co., Ltd.

22,500(Notes) 1. Figures in parentheses in the “Equity ownership” column indicate indirect holding rates.
2. There were 202 consolidated subsidiaries in this fiscal year, including 6 above-mentioned
important subsidiaries, as well as 12 affiliates accounted for by the equity method. In
addition, consolidated revenue for the fiscal year ended December 31, 2016 amounted to¥2,143.3 billion with profit attributable to owners of the parent company at ¥421.7 billion.
3. On the last day of the fiscal year ended December 31, 2016, there were no specified wholly
owned subsidiaries as stipulated in Article 118, item 4 of the Ordinance for Enforcement of
the Companies Act.

-25-

12. Major lenders
No items to report.
13. Major sales offices and factories(1) JT
Headquarters:

2-1, Toranomon 2-chome, Minato-ku, Tokyo, Japan

Regional sales headquarters:
Hokkaido (Hokkaido), Tohoku (Miyagi), Joshinetsu (Gunma), Kita-Kanto (Saitama),
Higashi-Kanto (Chiba), Tokyo (Tokyo), Kanagawa (Kanagawa), Hokuriku (Ishikawa),
Tokai (Aichi), Kita-Kansai (Osaka), Osaka (Osaka), Chugoku (Hiroshima),
Shikoku (Kagawa), Kyushu (Fukuoka), and Minami-Kyushu (Kagoshima)
Factories:

Kita-Kanto (Tochigi), Tokai (Shizuoka), Kansai (Kyoto), Kyushu (Fukuoka),
and Tomobe (Ibaraki)

Laboratories:

Tobacco Science Research Center (Kanagawa),
Leaf Tobacco Research Center (Tochigi),
and Central Pharmaceutical Research Institute (Osaka)(Note) At the end of March, 2016, the Company discontinued the Hiratsuka factory.
(2) Subsidiaries
TS Network Co., Ltd. (Tokyo)
Japan Filter Technology Co., Ltd. (Tokyo)
JT International S.A. (Switzerland)
Gallaher Ltd. (U.K.)
Torii Pharmaceutical Co., Ltd. (Tokyo)
TableMark Co., Ltd. (Tokyo)(Note) Text in parentheses shows the location of head office.

-26-

14. Status of employees(1) Employees of the JT Group [Consolidated]
Number of employees(Person)Business segment
Domestic Tobacco Business

9,486International Tobacco Business

26,558

Pharmaceutical Business

1,850

Processed Food BusinessCommon company-wide services
within JT

5,683
1,090

Total

44,667(Note) The above number of employees indicates the number of working employees.

(2) Employees of JT [Non-consolidated]

Male/Female
Male

Number ofYear-on-year
employees
increase (decrease)(Person)(Person)
6,216
(295)

43.0

Average years ofservice(Year)
19.8

Average age(Year old)

Female

1,082

44

36.1

11.8

Total or average

7,298

(251)

42.0

18.6

(Note) The above number of employees indicates the number of working employees.

-27-

II.

Matters Concerning Shares of JT

1. Total number of sharesauthorized:

8,000,000,000
shares

2. Total number of shares issued:

2,000,000,000
shares(Including treasury shares

209,044,267 shares)

3. Number of shareholders:4.

154,377

Major shareholders

Name of shareholders

Number of shares held
(Share)The Minister of Finance

Equity ownership (%)

666,927,200

37.24

57,243,800

3.20

56,742,000

3.17State Street Bank and Trust Company

35,920,351

2.01

Trust & Custody Services Bank, Ltd. as
trustee for Mizuho Bank, Ltd.
Retirement Benefit Trust Account reentrusted by Mizuho Trust and Banking
Co., Ltd.

33,800,000

1.89

GIC Private Limited-C

31,123,800

1.74

29,825,673

1.67

25,502,286

1.42

JPMorgan Chase Bank 380055

22,489,094

1.26

The Bank of New York 133522

20,434,226

1.14Japan Trustee Services Bank, Ltd.
(Trust Account)
The Master Trust Bank of Japan, Ltd.
(Trust Account)

State Street Bank and Trust Company
505223
State Street Bank and Trust Company
505001(Note)

Equity ownership is calculated after deducting treasury shares (209,044,267 shares).

-28-

III. Matters Concerning Subscription Rights to Shares

1.

Total number and others of subscription rights to shares as of December 31, 2016

(1) Total number of subscription rights to shares:
4,884 units(2) Class and number of shares to be delivered upon exercise of subscription rights to shares:
Ordinary shares 976,800 shares(200 shares per subscription right to shares)
2.

Status of subscription rights to shares held by Members of the Board and Audit & Supervisory
Board Members of JT as of December 31, 2016

(1) Class and number of shares to be delivered upon exercise of subscription rights to shares:
Ordinary shares 275,800 shares(200 shares per subscription right to shares)(2) Value of property to be contributed when subscription rights to shares are exercised¥1 per share(3) Assignment of subscription rights to shares
The approval of the Board of Directors is required for the assignment of subscription rights to shares.
(4) Conditions for exercising subscription rights to shares
Subscription rights to shares holder may exercise his/her subscription rights to shares only if he/she loses
his/her all position as Member of the Board, Audit & Supervisory Board Member and Executive Officer(sikkoyakuin).

-29-

(5) Status of ownership by Members of the Board and Audit & Supervisory Board Members of JT

Category

Memberof theBoard

YeargrantedPayment due upon
allotment ofsubscription rights toshares

FY2007¥581,269 per unit

FY2008¥285,904 per unit

FY2009¥197,517 per unit

FY2010¥198,386 per unit

FY2011¥277,947 per unit

FY2012¥320,000 per unit

FY2013¥513,400 per unit

FY2014¥483,200 per unit

FY2015¥711,200 per unit

FY2016¥572,600 per unit

Exercise period of
subscription rights tosharesFrom January 9, 2008
to January 8, 2038
From October 7, 2008
to October 6, 2038
From October 14, 2009
to October 13, 2039
From October 5, 2010
to October 4, 2040
From October 4, 2011
to October 3, 2041
From October 10, 2012
to October 9, 2042
From October 8, 2013
to October 7, 2043
From October 7, 2014
to October 6, 2044
From August 4, 2015
to August 3, 2045
From July 5, 2016
to July 4, 2046

Numberof units

Number ofshareholders

35

3

60

4

159

4

144

4

175

4

171

4

126

4

139

5

199

5

171

5

(Note) Outside Directors are not included in the above category of “Member of the Board.”

-30-

3.

Status of subscription rights to shares granted to employees of JT from January 1, 2016 to
December 31, 2016
(1) Class and number of shares to be delivered upon exercise of subscription rights to shares:
Ordinary shares 51,800 shares(200 shares per subscription right to shares)(2) Payment due upon allotment of subscription rights to shares¥572,600 per unit
(3) Value of property to be contributed when subscription rights to shares are exercised¥1 per share(4) Exercise period of subscription rights to shares
From July 5, 2016 to July 4, 2046
(5) Assignment of subscription rights to shares
The approval of the Board of Directors is required for the assignment of subscription rights to shares.
(6) Conditions for exercising subscription rights to shares
Subscription rights to shares holder may exercise his/her subscription rights to shares only if he/she loses
his/her all position as Member of the Board, Audit & Supervisory Board Member and Executive Officer(sikkoyakuin).
(7) Status of granting to employees of JT
259 subscription rights to shares were granted to 18 Executive Officers (sikkoyakuin) (excluding
persons serving as Members of the Board) of JT.

-31-

IV. Matters Concerning Members of the Board and Audit & Supervisory Board Members of JT

1.

Members of the Board and Audit & Supervisory Board Members
Position

Name

Chairman of the Board

Yasutake Tango

President andRepresentative Director
Executive Vice
President andRepresentative Director

Mitsuomi
KoizumiYasushi Shingai

Executive Vice
President andRepresentative
Director*
Executive Vice
President and Memberof the Board
Member of the
Board
Member of theBoard

Mutsuo Iwai

Standing Audit &Supervisory Board
MemberStanding Audit &Supervisory Board
MemberAudit & Supervisory
Board Member

Hideki Miyazaki

Responsibility

Chief Executive
Officer
Deputy Chief
Executive Officer,
Assistant to CEO in
Compliance, General
Administration,
Legal, Strategy, IT,
Business
Development, HR
and Operational
Review & Business
Assurance
President, Tobacco
Business

Significant concurrent positions
outside the Company
The Ogaki Kyoritsu Bank, Ltd.
Outside Director

Recruit Holdings Co., Ltd.
Outside Director

JT International Group Holding
B.V.
Chairman

Assistant to CEO in
Finance, CSR andCommunications

Motoyuki Oka

NEC Corporation
Outside Director
Novelist
LIXIL Group Corporation
Outside Director
Japan Exchange Group, Inc.
Outside Director

Main Kohda

FutoshiNakamura
Tomotaka
KojimaYoshinori Imai

Obayashi Law Office
Attorney at Law
Daiwa Securities Co., Ltd.
Outside Audit & Supervisory
Board Member
Audit & Supervisory
Hiroshi Obayashi
Mitsubishi Electric Corporation
Board Member
Outside Director
NIPPON STEEL & SUMITOMOMETAL CORPORATION
Outside Audit & Supervisory
Board Member(Notes) 1. Members of the Board Motoyuki Oka and Main Kohda are Outside Directors.
2. Audit & Supervisory Board Members Yoshinori Imai and Hiroshi Obayashi are Outside
Audit & Supervisory Board Members.

-32-

3. Members of the Board, Motoyuki Oka and Main Kohda, and Audit & Supervisory Board
Members, Yoshinori Imai and Hiroshi Obayashi, were designated as independent officers(directors and audit & supervisory board members) as prescribed by the Tokyo Stock
Exchange, Inc.
4. Audit & Supervisory Board Member Futoshi Nakamura and Audit & Supervisory Board
Member Tomotaka Kojima have relevant knowledge about financing and accounting as they
were the Senior Manager of the Accounting Division of JT and Deputy Head of FinanceGroup of JT, respectively.
5. The Member of the Board denoted with the asterisk * has assumed his office on March 23,
2016.
6. Members of the Board Noriaki Okubo and Akira Saeki resigned on March 23, 2016.
7. The Company has entered into agreements with each of its Members of the Board (excluding
those are Executive Directors, etc.) and Audit & Supervisory Board Members with respect tothe liability set forth in Article 423, paragraph 1 of the Companies Act, by which the liability
for damages of each of them is limited to the minimum amount set forth in Article 425,
paragraph 1 of the same Act, provided they perform their duties without knowledge of suchdamages and without gross negligence.
2.

Remunerations for Members of the Board and Audit & Supervisory Board Members(1) Total remunerations for Members of the Board and Audit & Supervisory Board Members
Audit & Supervisory
Total
Board Members
Amount to
Amount to
Amount toCategory
Number to
Number to
Number to
be paidbe paidbe paidbe paidbe paidbe paid(Millions of(Millions of(Millions of(Person)(Person)(Person)
yen)
yen)
yen)
Basic remuneration
9
346
4
103
13
449
Officers’ bonus
4
170
4
170
Stock option grants
7
117
7
117
Total
633
103
736
(Note) For officers’ bonuses, the amounts planned to be paid are shown.
Members of the Board(2) Policy concerning the remuneration amount for Members of the Board and Audit &Supervisory Board Members or the remuneration calculation method thereof and the methodof determining the policy
The Company has the Compensation Advisory Panel in place as a non-statutory advisory body to theBoard of Directors in order to increase objectivity and transparency regarding the remuneration ofMembers of the Board and Audit & Supervisory Board Members. The Compensation Advisory Panel,
which holds meetings several times a year, holds deliberations and makes reports in accordance with its
advice on such matters as the Company’s policy, system and calculation method regarding remuneration
for its Members of the Board and Executive Officers (sikkoyakuin), and monitors the status of
remuneration for Members of the Board and Audit & Supervisory Board Members at the Company. The
Compensation Advisory Panel currently consists of five members: the Chairman of the Board, who has
the role of the panel’s chairman, and two Outside Directors and two Outside Audit & Supervisory Board
Members.
Outside members of Compensation Advisory Panel
Outside Director
Motoyuki Oka
Outside Director
Main Kohda
Outside Audit & Supervisory Board Member
Outside Audit & Supervisory Board Member

Yoshinori Imai
Hiroshi Obayashi-33-

In light of reports by the Compensation Advisory Panel, JT’s basic concept of remuneration for Membersof the Board and Audit & Supervisory Board Members is as follows:•

Setting the remuneration at a level sufficient to secure personnel with superior capabilities•

Linking the remuneration to business performance so as to motivate Members of the Board and Audit& Supervisory Board Members to enhance performance•

Linking the remuneration to mid- to long-term corporate value•

Ensuring transparency based on an objective point of view and quantitative schemes

In accordance with the above concept, the remuneration for Members of the Board and Audit &Supervisory Board Members is made of three components. In addition to the monthly “basic
remuneration,” there is an “officers’ bonus,” which reflects the Company’s business performance in therelevant fiscal year, and a “stock option,” which is linked to the mid- to long-term corporate value of JT.
The said “stock option” was introduced in 2007 as remuneration that is linked to the mid- to long-term
corporate value, thereby providing an incentive towards increasing shareholder value.
The composition of the remuneration for Members of the Board is as follows:
For Members of the Board who also serve as Executive Officers (sikkoyakuin), remuneration consists of
the “basic remuneration,” the “officers’ bonus,” and the “stock option” because they are required toachieve results by executing their duties on a daily basis. If the “officers’ bonus” is paid at the standard
amount, the sum of this bonus and the “stock option” is set to be equivalent to approximately 80% of thebasic remuneration.
Members of the Board (excluding Outside Directors) who do not serve as Executive Officers(sikkoyakuin) receive remuneration that consists of the “basic remuneration” and the “stock option” since
they are required to make decisions on company-wide management strategies and fulfill supervisory
functions to enhance corporate value.
Remuneration for Outside Directors, which is not linked to business performance with the purpose ofmaintaining their independence, is composed of “basic remuneration” only.
In the light of the role of Audit & Supervisory Board Members, which is primarily to conduct audits on
legal compliance, their remuneration consists solely of the “basic remuneration.”
The upper limit of remuneration for the Company’s Members of the Board and Audit & Supervisory
Board Members, which was approved at the 22nd Ordinary General Meeting of Shareholders (held in
June 2007), is ¥870 million per year for all Directors and ¥190 million per year for all Audit &Supervisory Board Members. In addition, the upper limit of “stock option” that may be granted toMembers of the Board separately to the remuneration mentioned above is 800 units and ¥200 million per
year. This was also approved at the 22nd Ordinary General Meeting of Shareholders. The number ofunits allocated for each term, including the number allocated to Executive Officers (sikkoyakuin) who are
not also Members of the Board, is decided by resolution of the Board of Directors.
The amounts of remunerations for Members of the Board and Audit & Supervisory Board Members are
determined by resolution of the Board of Directors in the case of remuneration for Members of the Board,and through discussions among Audit & Supervisory Board Members in the case of remunerations for
Audit & Supervisory Board Members, within the approved upper limits, in light of deliberations by theCompensation Advisory Panel. These processes are carried out after benchmarking of levels of
remuneration at major Japanese manufacturers that operate globally, and whose size and profits are atsimilar levels to those of the Company, is undertaken based on third-party research into remuneration forcorporate executives.

-34-

3.

Matters concerning Outside Directors and Outside Audit & Supervisory Board Members(1) Significant concurrent positions outside the Company

Category

Name
Motoyuki Oka

Member of the
Board

Audit &
Supervisory Board
MemberMain Kohda

Hiroshi Obayashi

Organizations whereconcurrent positions are held
NEC Corporation
Novelist
LIXIL Group Corporation
Japan Exchange Group, Inc.
Obayashi Law OfficeDaiwa Securities Co., Ltd.

Mitsubishi Electric
Corporation
NIPPON STEEL &SUMITOMO METALCORPORATION

Position
Outside Director
Outside Director
Outside Director
Attorney at Law
Outside Audit &Supervisory Board
MemberOutside Director
Outside Audit &Supervisory Board
Member(Note) There are no special relationships to be mentioned between the above organizations in which
concurrent positions are held and JT.
(2) Major activities during this fiscal year

Category

Name
Motoyuki Oka

Member of the
Board
Main Kohda

Yoshinori Imai
Audit &
Supervisory Board
MemberHiroshi Obayashi

Status of main activities
Attended 15 out of 16 Board of Directors meetings held
during this fiscal year. Mr. Oka asked questions and maderemarks where necessary at these meetings, as a Memberof the Board.
Attended all 16 Board of Directors meetings held during
this fiscal year. Ms. Kohda asked questions and maderemarks where necessary at these meetings, as a Memberof the Board.
Attended all 16 Board of Directors meetings, as well as
all 13 meetings of the Audit & Supervisory Board held
during this fiscal year. Mr. Imai asked questions andmade remarks where necessary at these meetings, as an
Audit & Supervisory Board Member.
Attended all 16 Board of Directors meetings, as well as
all 13 meetings of the Audit & Supervisory Board, held
during this fiscal year. Mr. Obayashi asked questions andmade remarks where necessary at these meetings, as an
Audit & Supervisory Board Member.

(3) Total amount of remunerations
Outside Audit &Supervisory Board
Total
MemberAmount to
Amount to
Amount to
Number to
Number to
be paidbe paidbe paidbe paidbe paid(Millions of(Millions of(Millions of(Person)(Person)
yen)
yen)
yen)
30
2
26
4
56

Outside Director
Category

Basic remuneration

Number to
be paid(Person)
2

-35-

V.

Matters Relating to Independent Auditor

1.

Name of Independent Auditor: Deloitte Touche Tohmatsu LLC

2.

Fees for Independent Auditor relating to this fiscal year

(1) Fees for Independent Auditor relating to this fiscal year of JTi)ii)

Fees for audit attestation based on Article 2, paragraph 1 of
the Certified Public Accountants Act:
Fees for tasks other than audit attestation based on Article
2, paragraph 1 of the Certified Public Accountants Act:

¥330 million¥20 million(2) Amount of cash and other financial benefits to be paid by JT and its subsidiaries:¥489 million(3) Reasons for approval of the Independent Auditor’s remuneration by the Audit & Supervisory
Board:
When the Company concluded an audit contract with Independent Auditor, the Audit & Supervisory Board
Members obtained necessary materials and received reports from the Members of the Board, relevant internal
departments, and the Independent Auditor, and performed verification to confirm that the amount of
remuneration to be paid to the Independent Auditor, the persons in charge of the audits, and other details of
the audit contract were appropriate.
Based upon this verification, the Audit & Supervisory Board checked and examined matters including thecontent of the Independent Auditor’s accounting plan, the status of the performance of the auditing duties, andthe basis for calculation of the remuneration estimate, and, as a result, determined that approval was fair andreasonable.
(Notes) 1. Fees paid under the terms of the audit contract concluded between Deloitte Touche
Tohmatsu LLC and JT in relation to audit attestation based on the Companies Act and the
Financial Instruments and Exchange Act are not clearly classified and, since they cannot beeffectively classified, their total is indicated in the amount in “i)” above.
2. JT retain Deloitte Touche Tohmatsu LLC for tasks other than audit attestation based on
Article 2, Paragraph 1 of the Certified Public Accountants Act, which consist of the
preparation of comfort letters, and for which a consideration is paid to the same.
3. Among the important subsidiaries of JT, JT International S.A. and Gallaher Ltd. are auditedby Deloitte & Touche LLP. None of these subsidiaries are audited by Deloitte Touche
Tohmatsu LLC, the Independent Auditor of JT.
3.

Policy on dismissal or non-reappointment of Independent Auditor
In the case that an Independent Auditor is adjudged to fall within any of the items listed in Article 340,
paragraph 1 of the Companies Act, with the agreement of all of the Audit & Supervisory Board
Members, the Company shall dismiss the Independent Auditor. Additionally, apart from the above,should an incident occur casting serious doubt on the ability of the Independent Auditor to continue toperform its duties, the Audit & Supervisory Board shall decide the content of proposal and submit suchproposal to the General Meeting of Shareholders that the Independent Auditor should be dismissed orshould not be reappointed.

-36-

VI. Overview of the Resolutions on the Development of Systems Necessary to Ensure the Properness of
Operations and the Operating Status of the Systems
The Board of Directors has resolved with regard to the development of systems necessary to ensure thatthe execution of the duties by the Members of the Board complies with the laws and regulations and the
Articles of Incorporation, and other systems necessary to ensure the properness of operations of a stockcompany as follows:(1) Systems to ensure that the performance of duties by the Members of the Board and employees of
the Company, as well as by Directors, etc. (meaning “Directors, etc.” as provided for in Article 100,
Paragraph 1, Item 5 (i) of the Ordinance for Enforcement of the Companies Act) and employees(with Directors, etc. and employees hereafter collectively referred to as “directors and employees”)
of subsidiaries, conforms to laws, regulations, and the Articles of Incorporationi) Compliance system
The Company shall establish Code of Conduct based on regulations concerning the compliancesystem in order to ensure that directors and employees of the Company and its subsidiaries tocomply with laws and regulations, Company’s Articles of Incorporation, the social norms, etc., andset up a JT Group Compliance Committee as an organization responsible for ensuring thoroughcompliance. This committee, headed by Company’s Chairman of the Board, mainly consists ofoutside members and reports directly to the Board of Directors.
The Company appoints an Executive Officer (sikkoyakuin) in charge of compliance withoverseeing the Compliance Office in an effort to establish and promote a group-wide, crosssectional system and shed light on issues.
The compliance promotion departments of the Company and its subsidiaries (meaning theCompliance Office within the Company, and corresponding departments within subsidiaries)
distribute materials including the “JT Group Code of Conduct,” which explains the Code of
Conduct, etc., to directors and employees, and work to enhance the effectiveness of the compliancesystem by enlightening directors and employees about compliance through training and otherprograms, etc.
(Internal reporting system)
In preparation for cases in which employees or other parties detect activities, etc. suspected ofviolating laws and regulations, the Company and its subsidiaries maintain consultation andreporting desks as internal whistleblower systems. Compliance promotion departments that receivea report or request for consultation investigate the details and take necessary action, while working
to prevent recurrence of the issue.
The Company will bring matters of particular importance involving the JT Group to the JT Group
Compliance Committee, and will request deliberation or will report on the issue.
(System for excluding anti-social elements)
The Company and its subsidiaries are resolved to fight against, not to comply with, an unreasonable
demand and not to have any relations with anti-social elements.
The General Administration Division shall be the JT Group’s headquarters assuming the
responsibility for supervising efforts to exclude anti-social elements, the Company cooperates with
police, lawyers and other relevant organizations and parties to gather and share information in orderto deal with such elements in an organized way.
In addition, the Company and its subsidiaries shall prohibit involving with anti-social elements andfully communicated to all directors and employees of the Company and its subsidiaries. At the sametime, an awareness raising program for excluding antisocial elements is to be consistently
administered for all directors and employees, by providing relevant training, etc. as necessary.

-37-

ii)

System to ensure the reliability of financial reporting
The Company has in place and operates an internal control system relating to financial reporting of
JT Group in accordance with the Financial Instruments and Exchange Act. The Company strives tomaintain and improve the reliability of its financial reporting by allocating a sufficient level of staff
to the task of evaluating and reporting financial results.

iii) Internal audit system
The Operational Review and Business Assurance Division of the Company oversees the internal
audit system and examines and evaluates systems for supervising and managing the overall
operations and the status of business execution from the viewpoints of legality and rationality, inorder to protect the Company’s assets and improve management efficiency. In coordination with theinternal audit functions of all subsidiaries, the Operational Review and Business Assurance Divisionalso undertakes the planning and performance of the JT Group’s internal audit systems and policies,
and supplements the internal audit functions of subsidiaries.

(2) Procedures and arrangements for storage and management of information on the performance of
duties by the Members of the Board of the Companyi)

Storage and management of minutes
The Company makes sure to properly stores and manages the minutes of General Meetings ofShareholders and meetings of the Board of Directors, in line with laws and regulations.

ii)

Storage and management of other information
The Company makes sure that the information on important matters relating to business execution
and decision-making including the conclusion of corporate contracts are stored and managed by therelevant departments and divisions as specified by the “Responsibilities/Authorities Allocation
Rules,” in accordance with rules on the supervision of the processes of decision-making,procurement and accounting.

(3) System for reporting matters concerning the performance of duties by Directors, etc. of
subsidiaries to the Company
The Company will require subsidiaries to regularly report important information to the Company
departments and divisions that are in charge of the subsidiaries.
(4) Rules on management of risk of loss of the Company and its subsidiaries, andprocedures/arrangements for other mattersi)

System to evaluate and manage risk of loss under normal circumstances
The Company has established internal policies, rules and manuals relating to JT Group for the
management of risk of loss relating to monetary and financial affairs, and ensures that relevant
reports are made to the President and Chief Executive Officer and the Board of Directors on aquarterly basis via Chief Financial Officer. With regard to the risk of loss relating to other affairs, inaccordance with authority delegated to each department and division as per the
Responsibilities/Authorities Allocation Rules, responsible departments and divisions take on asupervisory role creating all types of committees to conduct proper management and, depending on
the level of importance, report risks to the President and Chief Executive Officer and obtainapproval for countermeasures.
In cooperation with the internal audit functions of subsidiaries, the Operational Review andBusiness Assurance Division of the Company examines and evaluates the internal control systems,
etc. of the JT Group companies in light of the level of importance and the risks involved, and froman objective standpoint that is independent of organizations responsible for business execution. It
provides reports and counsel to the President and Chief Executive Officer and also reports to theBoard of Directors.

-38-

ii)

Preparedness for possible emergencies
The Company has produced a manual for crisis management and disaster response. In the event ofan emergency or a disaster, JT is ready to establish an emergency project system, and make prompt
and proper responses under the leadership of senior management and through close cooperation
between the relevant departments and divisions and subsidiaries. Events to which a response has
been made and the details of such events shall be reported to the Board of Directors.

(5) System to ensure that Members of the Board of the Company and Directors, etc. of its subsidiaries
can perform their duties efficientlyi)

Board of Directors of the Company
The Board of Directors of the Company meets once a month in principle and on more occasions asnecessary, in order to make decisions with regard to the matters specified by laws and regulations
and other important matters and to supervise business execution.
The Board of Directors of the Company receives reports from Members of the Board of theCompany on the status of business execution at least once every three months.

ii)

Proper delegation of authority and system of responsibilities of the Company
For important management issues, particularly management policy and basic plans regarding overallbusiness operations of the Company, in addition to matters to be referred to the Board of Directorsof the Company, a clear decision-making process is stipulated in the Responsibilities/Authorities
Allocation Rules to have a system that enables to realize swift decision-making and high-quality
business execution.
Executive Officers (sikkoyakuin) appointed by the Board of Directors execute business properly by
exercising the authority delegated to them in their respective areas in accordance with a companywide business strategy decided by the Board.
In order to manage business operations in ways that contribute to the business efficiency andflexibility of the Company, basic matters concerning the Company’s organization, allocation ofduties to officers and staff and the roles of individual divisions are specified by the relevant internal
rules.

iii) Formulation, etc. of rules and policies that apply to the JT GroupThe Company will construct an efficient system for business execution within the JT Group throughthe formulation, etc. of rules and policies that apply to the JT Group.

(6) Systems necessary to ensure the properness of operations in the Company and the business groupwhich consists of the Company and its subsidiaries
i)

Mission of the JT GroupThe JT Group has set itself the mission of creating, developing and nurturing its unique brands to
win consumer trust, while understanding and respecting the environment and the diversity ofsocieties and individuals, and there is a group-wide consensus on the mission.

ii)

Group management
The JT Group shall specify the functions and rules common for all group companies to effectuategroup management that optimizes the operations of the entire JT Group as a whole.
The Company has put in place systems for compliance (including the internal reporting system),internal audits, financial affairs management, etc. in cooperation with its subsidiaries.

-39-

(7) Matters for employees assisting Audit & Supervisory Board Members of the Company in theirduties in the event such employees were requested by Audit & Supervisory Board Membersi)Establishment of Audit & Supervisory Board Member’s Office
The Company has established an Audit & Supervisory Board Member’s Office as an organization toassist the duties of the Company’s Audit & Supervisory Board Members (hereinafter simply “Audit& Supervisory Board Members,” with the terms “Audit & Supervisory Board,” “Audit &Supervisory Board Member’s Office,” and “Manager of the Audit & Supervisory Board Member’s
Office” also referring to those items within the Company).

ii)

Allocation of staff
The Company has allocated sufficient staff to the Audit & Supervisory Board Member’s Office. In
addition, the Company makes sure to review and reform the staffing structure as necessary based on
consultations with the Audit & Supervisory Board.

(8) Matters relating to the independence of employees belonging to the Audit & Supervisory Board
Member’s Office from the Company’s Members of the Board, and matters relating to theassurance of the effectiveness of instruction by Audit & Supervisory Board Members to those
employeesi)Management of employees affiliated with the Audit & Supervisory Board Member’s Office
The evaluation of the Manager of the Audit & Supervisory Board Member’s Office is made by the
Audit & Supervisory Board and the evaluation of the other employees assigned to the Audit &Supervisory Board Member’s Office is made by the Manager of the Audit & Supervisory Board
Member’s Office based on the advice of the Audit & Supervisory Board. The transfer and disciplineof employees assigned to the Audit & Supervisory Board Member’s Office is to be deliberated inadvance with the Audit & Supervisory Board.

ii)

Duties of employees belonging to the Audit & Supervisory Board Member’s Office
Employees belonging to the Audit & Supervisory Board Member’s Office will follow the direction
and orders of Audit & Supervisory Board Members in assisting the duties of the latter, and will not
be assigned to other concurrent positions relating to the business execution of the Company.

(9) System for reporting by directors and employees of the Company and its subsidiaries or persons
reported by directors and employees of its subsidiaries to the Audit & Supervisory Board andAudit & Supervisory Board Membersi)Reporting to the Audit & Supervisory Board
When directors and employees of the Company and its subsidiaries detect any evidence ofmalfeasance in financial documents or serious breaches of laws or regulations or the Company’s
Articles of Incorporation, they are due to report them to the Audit & Supervisory Board, along withother relevant matters that could affect the Company’s management.

ii)

Appropriate reporting in response to requests by Audit & Supervisory Board Members
Directors and employees of the Company and its subsidiaries shall respond in a prompt andappropriate manner when they are asked by Audit & Supervisory Board Members to compile
important documents for their perusal, to accept field audits and to submit reports.

iii) Reporting on the status of whistleblowing
The Compliance Office will report regularly to Audit & Supervisory Board Members on the statusof whistleblowing involving the JT Group, and will make non-regular reports as necessary.

-40-(10) System to ensure that persons reporting to Audit & Supervisory Board Members are not subject
to disadvantageous treatment due to having reported
The Company will thoroughly communicate within the JT Group that persons engaging in
consultation or whistleblowing are not to be subject to any disadvantageous treatment for reason of
those actions.

(11) Matters concerning policies for the prepayment of expenses involving the performance of duties by
Audit & Supervisory Board Members, procedures for reimbursement, and the handling of otherexpenses or debts involving the performance of those dutiesi) Handling of expenses or debts in accordance with Article 388 of the Companies Act
When an Audit & Supervisory Board Member has made claim to the Company for the prepaymentof expenses, etc. in accordance with Article 388 of the Companies Act, the Company will promptly
handle the relevant expenses or debt, with the exception of cases in which the Company deems theclaimed expenses or debt to be unnecessary to the performance of the duties of the Audit &Supervisory Board Member.
ii)

Setting of budgets, etc.
With regard to miscellaneous expenses for audits by Audit & Supervisory Board Members, theCompany will set a budget in order to secure the effectiveness of the audits. The Company will also
bear the portion of miscellaneous expenses for audits by Audit & Supervisory Board Members thatare in excess of budget, with the exception of cases in which the Company deems the expenses to beunnecessary to the performance of duties.

(12) Other systems to ensure effective auditing by Audit & Supervisory Board Membersi)

Attendance at important meetings
Audit & Supervisory Board Members are allowed to attend not only meetings of the Board of
Directors of the Company but also other important meetings of the Company.

ii)

Coordination between the Operational Review and Business Assurance Division andCompliance Office and the Audit & Supervisory Board Members
The Operational Review and Business Assurance Division and the Compliance Office maintaincooperation with Audit & Supervisory Board Members by exchanging information.

The status of systems necessary to ensure the properness of operationsi)

Status of initiatives concerning compliance・The JT Group has set itself the mission of creating, developing, and nurturing its unique brands to win
consumer trust, while understanding and respecting the environment and the diversity of societies andindividuals. The Company communicates this mission throughout the JT Group by means including its
inclusion in the “JT Group Code of Conduct” booklet, which is distributed to the directors andemployees of the Company and its subsidiaries.
・In accordance with the JT Group Compliance Rules, the Company performs appropriate reporting to
the Board of Directors on the performance of the annual Compliance Plan, the occurrence of serious
compliance violations, actions taken in response to these, and other matters of importance.
・In order to improve awareness of compliance and prevent improper actions, the Company conducts
regular training for the directors and employees of the Company and its subsidiaries.

-41-

・With regard to whistleblowing systems, the Company maintains consultation and reporting desks
inside and outside the Company, and thoroughly communicates to employees of the Company and its
subsidiaries that persons who engage in consultation or whistleblowing are not to be subject to any
disadvantageous treatment for reason of those actions. In addition, the content of consultations andwhistleblowing are regularly reported within the JT Group Compliance Committee.
・With regard to the handling of anti-social elements, the Company continues to collect related
declarations and pledges from suppliers, and conducts regular training and other programs for the
directors and employees of the Company and its subsidiaries.

ii)

Status of initiatives to manage the risk of loss
・With regard to the monetary and financial risks, the Company makes quarterly reports to the President
and Chief Executive Officer and the Board of Directors in accordance with the Basic Rules on
Financial Work of the Group.
・With regard to the evaluation and examination of internal management systems, the Operational
Review and Business Assurance Division provides reports and counsel to the President and Chief
Executive Officer and also reports to the Board of Directors, in accordance with the Rules for Internal
Audits.
・With regard to crises and disasters, the Company makes quarterly reports to the Board of Directors
concerning events to which responses were made and the details of the events, in accordance with the“Decision Concerning the Preparation of Basic Policies and Systems Concerning the Construction ofInternal Control Systems.”iii) Status of initiatives concerning the properness and efficiency of the execution of duties
・Meetings of the Board of Directors are held every month and as appropriate, in accordance with theRegulations of the Board of Directors. The Members of the Board in charge of businesses makequarterly reports to the Board of Directors on the status of business execution within each business,
including within its subsidiaries.
・With regard to decision-making, etc. on execution of important business, etc., the Company isconverting resolution procedures to electronic methods and is constructing a fast and efficientmanagement system. The Company also accurately records and creates minutes of meetings of theBoard of Directors, and performs appropriate storage and management of the information.
iv) Securing the effectiveness of audits by Audit & Supervisory Board Members
・Audit & Supervisory Board Members receive reports as appropriate from directors and employees of
the Company and its subsidiaries, regarding necessary information for audits. In addition to attending
important conferences, Audit & Supervisory Board Members also perform appropriate checks of thecontent of electronic resolutions concerning decision-making on the execution of business. In addition,
Audit & Supervisory Board Members regularly exchange opinions and otherwise communicate witheach subsidiary’s own Audit & Supervisory Board Members to enhance audits performed by all Audit& Supervisory Board Members inside the JT Group.
・The Operational Review and Business Assurance Division and the Compliance Office also coordinate
on conducting regular exchanges of information with Audit & Supervisory Board Members.
・In order to assist the duties of Audit & Supervisory Board Members, the Company has established an
Audit & Supervisory Board Member’s Office that is independent of divisions responsible for
execution, and has assigned necessary personnel to the Office. In addition, through consultation with
Audit & Supervisory Board Members, the Company records a budget for expenses expected to benecessary for the duties of the Audit & Supervisory Board Members.

-42-【Reference】＜Fundamental Policy Concerning Corporate Governance＞
We have enhanced our corporate governance, based on our belief that it is the means for conducting
transparent, fair, timely and decisive decision-making for pursuing JT's management principle, the ''4S
model''. Specifically the 4S model aims ''to fulfill our responsibilities to our valued consumers,
shareholders, employees and the wider society, carefully considering the respective interests of thesefour key stakeholder groups, and exceeding their expectations wherever we can.''
We have set out the ''JT Corporate Governance Policies'' on 4 February, 2016, and continuously
strive to make enhancements based on our belief that it will enable us to achieve mid- to long-termsustainable profit growth and increase corporate value, which will contribute to the development ofour group’s stakeholders and eventually the economic society as a whole.
''JT Corporate Governance Policies'' is posted on our web-site (https://www.jti.co.jp/).
＜JT's Corporate Governance System＞* All figures contained in this Business Report are rounded to the nearest unit.

-43-Consolidated Statement of Financial Position(As of December 31, 2016)(Millions of yen)Account title

AmountCurrent assets

Account title

AmountCurrent liabilities

Cash and cash equivalents

294,157

Trade and other payables

377,933

Trade and other receivables

396,934

Bonds and borrowings

208,521

Inventories

558,846

Income tax payables

54,940

Other financial assets

14,921Other financial liabilities

13,023

Other current assets

340,312

Provisions

12,5291,605,169

Other current liabilities

689,629

821

Total current liabilities

1,356,574

Subtotal
Non-current assets held-for-sale
Total current assets

1,605,990

Non-current liabilities
Non-current assets
Property, plant and equipment
Goodwill

680,835

Bonds and borrowings

339,036

1,601,987

Other financial liabilities

9,009

Intangible assets

423,970

Retirement benefit liabilities

Investment property

18,184

Provisions

Retirement benefit assets

23,680

Other non-current liabilities

102,221

Investments accounted for using theequity method

123,753

Deferred tax liabilities

71,660

Other financial assets

99,358

Total non-current liabilities

859,759

Deferred tax assets

166,617

Total non-current assets

3,138,384

Total liabilities

4,744,374

4,423

2,216,333

EquityShare capital

100,000

Capital surplus

736,400

Treasury shares(443,822)

Other components of equity(303,554)

Retained earnings

2,367,067

Equity attributable to owners of theparent company

2,456,091

Non-controlling interests

Total assets

333,410

71,950Total equity

2,528,041

Total liabilities and equity

4,744,374-44-

Consolidated Statement of Income(Year ended December 31, 2016)(Millions of yen)Account title

AmountRevenue

2,143,287

Cost of sales(872,433)

Gross profit

1,270,854

Other operating income

70,101

Share of profit in investments accounted for using the equity method

6,489

Selling, general and administrative expenses(754,115)

Operating profit

593,329

Financial income

6,618

Financial costs(21,710)

Profit before income taxes

578,237

Income taxes(152,464)

Profit for the period

425,773

Attributable to:
Owners of the parent company

421,695

Non-controlling interests

4,078

-45-

Consolidated Statement of Changes in Equity(Year ended December 31, 2016)(Millions of yen)
Equity attributable to owners of the parent company
Other components of equity
Net gain (loss)

SharecapitalCapitalsurplusTreasurysharesNet gainon revaluation
Exchange(loss) onof financial
Subscription differences
derivatives
assets measured
rights toon translation designated as at fair value
sharesof foreign
cash flow
through otheroperations
hedgescomprehensive
incomeAs of January 1, 2016

100,000

736,400(444,333)

1,941(172,473)

125

33,284

Profit for the period

－

－

－

－

－

－

－

Other comprehensive
income (loss)

－

－

－

－

(163,169)(1,479)(3,069)Comprehensive income(loss) for the period

－

－

－

－

(163,169)(1,479)(3,069)

－

－

(0)

－

－

－

－

－

－

512

(413)

－

－

－

Share-based payments

－

－

－

265

－

－

－

Dividends

－

－

－

－

－

－

－

Changes in the scope of
consolidation

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

(360)

－

－

－

－

－

1,794

－

－

－

512

(147)

－

1,794

(360)

100,000

736,400(443,822)

1,794(335,642)

440

29,854

Acquisition of treasury
shares
Disposal of treasury
sharesChanges in theownership interest in a
subsidiary without aloss of control
Transfer from othercomponents of equity
to retained earnings
Other increase(decrease)
Total transactions withthe owners
As of December 31, 2016-46-

(Millions of yen)
Equity attributable to owners of the parent company
Other components of equity
RemeasureRetained
ments of
Total
earnings
definedTotal
benefitplans

Noncontrollinginterests

Total equity

As of January 1, 2016－

(137,122)

2,196,651

2,451,596

69,9292,521,524

Profit for the period－－

421,695

421,695

4,078

425,773

Other comprehensive
income (loss)(22,387)(190,105)－(190,105)(419)(190,523)

Comprehensive income(loss) for the period(22,387)(190,105)

421,695

231,590

3,660

235,250

Acquisition of treasury
shares

－

－

－

(0)

－

(0)

Disposal of treasury
shares

－

(413)

(99)

0

－

0

Share-based payments

－

265

－

265

4

270

Dividends－－(229,223)(229,223)(2,038)(231,261)

－

－

－

－

1,069

1,069

－

－

69

69

(675)

(606)

22,38722,027(22,027)

－

－

－

－

1,794

－

1,794

－

1,794

22,387

23,674(251,280)(227,094)(1,639)(228,733)－(303,554)

2,367,067

2,456,091

71,9502,528,041

Changes in the scope of
consolidation
Changes in theownership interest in a
subsidiary without aloss of control
Transfer from othercomponents of equity
to retained earnings
Other increase(decrease)
Total transactions withthe owners
As of December 31, 2016-47-

Nonconsolidated Balance Sheet(As of December 31, 2016)
Account title

Other
Allowance for doubtful accounts
Noncurrent assets

Account title

378,907

Current liabilities
Accounts payable–trade
Short-term loans payable
Current portion of bonds
Lease obligations
Accounts payable–other
National tobacco excise taxes payable
National tobacco special excise taxes payable
Local tobacco excise taxes payable
Income taxes payable
Accrued consumption taxes
Cash management system deposits received
Provision for bonuses
Other705,045

Noncurrent liabilities
Bonds payable
Lease obligations

481,194

LIABILITIES
74,56554,41050,00030,76740,421
2,793
43,053
2,196
6,826
13,01744,085
16,802(27)
2,471,006

Property, plant and equipment

240,321

Provision for retirement benefits

Buildings
Structures

86,673

Deferred tax liabilities
Other

2,912

Total liabilities

52,941

Vehicles

1,654

Tools, furniture and fixtures

18,492

Shareholders’ equity

Land
Construction in progress

75,118Intangible assets

487,539

Patent right
Right of trademark

149,174

Software13,172

Goodwill
Other

321,939

Capital stock
Capital surplus
Legal capital surplus
Retained earnings
Legal retained earnings
Other retained earnings
Reserve for investment loss on developing
new businessReserve for reduction entry
Special account for reduction entry

Investment securities
Shares of subsidiaries and affiliates

8,618
58,24520,0003,754
60,46489,763
13,882
102,616
24,994
31,192
278,136
5,596
7,785

335,808
6,355
131,165
4,987
2,877
1,186,238

Machinery and equipment

Investments and other assets

AmountAmountASSETS
Current assets
Cash and deposits
Accounts receivable–trade
Securities
Merchandise and finished goods
Semi-finished goods
Work in process
Raw materials and supplies
Advance payments–trade
Prepaid expenses
Deferred tax assets
Short-term loans receivable from subsidiaries
and affiliates(Millions of yen)

NET ASSETS

2,530

363

2,892

General reserve

1,743,146

1,639,047
100,000
736,400
736,400
1,246,469
18,776
1,227,692
28
43,687
3,057
955,300

Long-term loans receivable from subsidiaries
and affiliates

3,519

Long-term prepaid expenses

5,904

Retained earnings brought forward
Treasury shares
Valuation and translation adjustments
Valuation difference on available-for-salesecurities
Deferred gains or losses on hedges

Other

9,338

Subscription rights to shares

Allowance for doubtful accounts(291)

Total net assets

1,663,675

Total liabilities and net assets

2,849,913

Total assets

54,961
1,669,714

2,849,913-48-

225,620(443,822)
22,833
26,207(3,373)
1,794

Nonconsolidated Statement of Income(Year ended December 31, 2016)(Millions of yen)Account title

AmountNet sales

729,286

Cost of sales

208,648

Gross profit

520,638

Selling, general and administrative expenses

323,938

Operating income

196,700

Non-operating income
Interest income

237

Dividends income

6,929

Other

6,944

14,109Non-operating expenses
Interest expenses

2,020Interest on bonds

3,884

Other

1,663

7,567
203,242

Ordinary income
Extraordinary income
Gain on sales of noncurrent assets

36,638Gain on sales of shares of subsidiaries

28,503

Other

1,073

66,214Extraordinary losses
Loss on sales of noncurrent assets

1,186

Loss on retirement of noncurrent assets

8,680

Impairment loss

593

Other

2,781

13,240256,217

Income before income taxes
Income taxes–current

65,901

Income taxes–deferred

16,70882,609173,607

Net income-49-Nonconsolidated Statement of Changes in Net Assets(Year ended December 31, 2016)(Millions of yen)
Shareholders’ equity
Capital surplus

Retained earnings
Other retained earnings

CapitalReserve forinvestment Reserve for
reduction
loss onentry
developing
new business

stock

Legal
capitalsurplusTotal
capitalsurplusSpecialaccount for
reduction
entry

Generalreserve

Retainedearnings
brought
forwardTotal
retainedearnings

100,000

736,400

736,400

18,776－47,587

2,582

955,300

277,938

1,302,183

Provision of reserve forinvestment loss ondeveloping new
business

－

－

－

－

28

－

－

－

(28)

－

Provision of reserve for
reduction entry

－

－

－

－

－

3,913

－

－

(3,913)－

Reversal of reserve for
reduction entry

－

－

－

－

－

(8,805)

－

－

8,805

－

Adjustment to reserve
due to change in tax
rate

－

－

－

－

－

992

－

－

(992)

－

Provision of special
account for reduction
entry

－

－

－

－

－

－

2,987

－

(2,987)－

Reversal of special
account for reduction
entry

－

－

－

－

－

－

(2,582)

－

2,582

－

Adjustment to special
account due to change
in tax rate

－

－

－

－

－

－

69

－

(69)

－

Dividends from surplus

－

－

－

－

－

－

－

－

(229,223)(229,223)

Net income

－

－

－

－

－

－

－

－

173,607173,607

Purchase of treasury
shares

－

－

－

－

－

－

－

－

－

－

Disposal of treasury
shares

－

－

－

－

－

－

－

－

(99)

(99)

Net changes of items
other thanshareholders’ equity

－

－

－

－

－

－

－

－

－

－

Total changes of items
during the period

－

－

－

－

28

(3,900)474－(52,318)(55,714)100,000

736,400

736,400

18,77628

43,687

3,057

955,300

225,620

1,246,469

As of January 1, 2016

Legal
retainedearnings

Changes of items during
the period

As of December 31, 2016

-50-

(Millions of yen)
Shareholders’ equity

Valuation and translation adjustments

Treasury shares

Total
shareholders’equityValuationdifference on
available-forsale securities

Deferred gains
or losses onhedgesTotal valuationand translation
adjustments

rights to shares(444,333)

1,694,250

29,791(12,914)

16,877

1,941

1,713,068

Provision of reserve forinvestment loss ondeveloping new
business

–

–

–

–

–

–

–

Provision of reserve for
reduction entry

–

–

–

–

–

–

–

Reversal of reserve for
reduction entry

–

–

–

–

–

–

–

Adjustment to reserve
due to change in tax
rate

–

–

–

–

–

–

–

Provision of special
account for reduction
entry

–

–

–

–

–

–

–

Reversal of special
account for reduction
entry

–

–

–

–

–

–

–

Adjustment to special
account due to change
in tax rate

–

–

–

–

–

–

–

Dividends from surplus–(229,223)

–

–

–

–

(229,223)

Net income–

173,607

–

–

–

–

173,607

Purchase of treasury
shares

(0)

(0)

–

–

–

–

(0)

Disposal of treasury
shares

512

413

–

–

–

–

413

Net changes of items
other thanshareholders’ equity––(3,584)

9,541

5,956

(147)

5,809

Total changes of items
during the period

512(55,203)(3,584)

9,541

5,956

(147)

(49,394)(443,822)

1,639,047

26,207(3,373)

22,833

1,794

1,663,675

As of January 1, 2016

Subscription

Total net assets

Changes of items during
the period

As of December 31, 2016

-51-

(TRANSLATION)

INDEPENDENT AUDITOR'S REPORT

February 7, 2017

To the Board of Directors ofJapan Tobacco Inc.:

Deloitte Touche Tohmatsu LLC

Designated Unlimited Liability Partner,
Engagement Partner,
Certified Public Accountant:

Masahiko Tezuka(Seal)

Designated Unlimited Liability Partner,
Engagement Partner,
Certified Public Accountant:

Koji Ishikawa(Seal)

Designated Unlimited Liability Partner,
Engagement Partner,
Certified Public Accountant:

Takenao Ohashi(Seal)

Pursuant to the fourth paragraph of Article 444 of the Companies Act, we have audited the consolidated financial
statements, namely, the consolidated statement of financial position as of December 31, 2016 of Japan Tobacco Inc.
and its consolidated subsidiaries, and the related consolidated statements of income and changes in equity for the
fiscal year from January 1, 2016 to December 31, 2016, and the related notes of significant matters for preparing
consolidated financial statements and other related notes to consolidated financial statements.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
pursuant to the provisions of the second sentence of the first paragraph of Article 120 of the Ordinance on Company
Accounting, which allows companies to prepare consolidated financial statements with the omission of a part of thedisclosures required under International Financial Reporting Standards ("IFRS"), and for such internal control as
management determines is necessary to enable the preparation of consolidated financial statements that are free frommaterial misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in Japan. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements arefree from material misstatement.

-52-

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessmentof the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentationof the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Audit Opinion
In our opinion, the consolidated financial statements referred to above, prepared with the omission of a part of thedisclosures required under IFRS pursuant to the provisions of the second sentence of the first paragraph of Article 120of the Ordinance on Company Accounting, present fairly, in all material respects, the financial position of Japan
Tobacco Inc. and its consolidated subsidiaries as of December 31, 2016, and the results of their operations for the year
then ended.
Interest
Our firm and the engagement partners do not have any interest in Japan Tobacco Inc. for which disclosure is required
under the provisions of the Certified Public Accountants Act.

The above represents a translation, for convenience only, of the original report issued in the Japanese language.

-53-

(TRANSLATION)

INDEPENDENT AUDITOR'S REPORT

February 7, 2017

To the Board of Directors ofJapan Tobacco Inc.:

Deloitte Touche Tohmatsu LLC

Designated Unlimited Liability Partner,
Engagement Partner,
Certified Public Accountant:

Masahiko Tezuka(Seal)

Designated Unlimited Liability Partner,
Engagement Partner,
Certified Public Accountant:

Koji Ishikawa(Seal)

Designated Unlimited Liability Partner,
Engagement Partner,
Certified Public Accountant:

Takenao Ohashi(Seal)

Pursuant to the first item, second paragraph of Article 436 of the Companies Act, we have audited thenonconsolidated financial statements, namely, the nonconsolidated balance sheet as of December 31, 2016 of Japan
Tobacco Inc. and the related nonconsolidated statements of income and changes in net assets for the 32nd fiscal year
from January 1, 2016 to December 31, 2016, and the related notes of significant accounting policies and other related
notes to nonconsolidated financial statements, and the accompanying supplemental schedules.
Management's Responsibility for the Nonconsolidated Financial Statements
Management is responsible for the preparation and fair presentation of these nonconsolidated financial statements andthe accompanying supplemental schedules in accordance with accounting principles generally accepted in Japan, andfor such internal control as management determines is necessary to enable the preparation of nonconsolidated
financial statements and the accompanying supplemental schedules that are free from material misstatement, whether
due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these nonconsolidated financial statements and the accompanying
supplemental schedules based on our audit. We conducted our audit in accordance with auditing standards generally
accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the nonconsolidated financial statements and the accompanying supplemental schedules are free frommaterial misstatement.

-54-

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thenonconsolidated financial statements and the accompanying supplemental schedules. The procedures selected dependon the auditor's judgment, including the assessment of the risks of material misstatement of the nonconsolidated
financial statements and the accompanying supplemental schedules, whether due to fraud or error. In making thoserisk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of thenonconsolidated financial statements and the accompanying supplemental schedules in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the nonconsolidated financial statements and the accompanying supplemental schedules.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Audit Opinion
In our opinion, the nonconsolidated financial statements and the accompanying supplemental schedules referred toabove present fairly, in all material respects, the nonconsolidated financial position of Japan Tobacco Inc. as ofDecember 31, 2016, and the results of its operations for the year then ended in accordance with accounting principles
generally accepted in Japan.
Interest
Our firm and the engagement partners do not have any interest in Japan Tobacco Inc. for which disclosure is required
under the provisions of the Certified Public Accountants Act.

The above represents a translation, for convenience only, of the original report issued in the Japanese language and"the accompanying supplemental schedules" referred to in this report are not included in the attached financial
documents.

-55-

[The following represents a translation, for convenience only, of the original report issued in the Japanese
language.]
Audit Report of the Audit & Supervisory Board

AUDIT REPORTRegarding the performance of duties by the Members of the Board for the 32nd fiscal year from January 1,
2016 to December 31, 2016, the Audit & Supervisory Board hereby submits its audit report, which has been
prepared through discussions based on the audit report prepared by each Audit & Supervisory Board Member.

1. Auditing Methods Employed by Audit & Supervisory Board Members and the Audit & Supervisory Board
and Details of Such Methods(1) The Audit & Supervisory Board established auditing policies, allocation of duties, and other relevant
matters, and received reports from each Audit & Supervisory Board Member regarding his or her audits andresults thereof, as well as received reports from the Members of the Board, other relevant personnel, andIndependent Auditors regarding performance of their duties, and sought explanations as necessary.

(2) Each Audit & Supervisory Board Member complied with the auditing standards of Audit & Supervisory
Board Members established by the Audit & Supervisory Board, followed the auditing policies, allocation ofduties, and other relevant matters, communicated with the Members of the Board, and any other relevant
personnel, and made efforts to optimize the environment for information collection and audit, and conducted
his or her audits in the following methods:i) We participated in the Board of Directors’ meetings and other important meetings, received reports from theMembers of the Board, and other relevant personnel regarding performance of their duties, sought
explanations as necessary, examined important documents, and studied the operations and financial positions
at the head office and principal offices. With respect to subsidiaries, we communicated and exchanged
information with Members of the Board, Audit & Supervisory Board Members, and other relevant personnelof the subsidiaries, and received business reports from subsidiaries as necessary.
ii) We monitored and verified the details of the resolution of the Board of Directors related to the system that
ensures Members of the Boards are carrying out their duties in compliance with laws and regulations and the
Articles of Incorporation, and other systems that ensure the propriety of the operations of the corporate group
comprised of a stock company and its subsidiaries, which are described in paragraphs 1 and 3 of Article 100of the Ordinance for Enforcement of the Companies Act. We also monitored and verified the condition of thesystem (internal control system) put in place in accordance with the aforesaid resolution.
iii) We monitored and verified whether the Independent Auditors maintained their independence andimplemented appropriate audits, and we received reports from the Independent Auditors regarding theperformance of their duties and sought explanations as necessary. In addition, we received notice from the
Independent Auditors that “the system for ensuring that duties are performed properly” (matters set forth ineach item of Article 131 of the Ordinance on Accounting of Companies) is organized in accordance with the“Quality Management Standards Regarding Audits” (Business Accounting Council, October 28, 2005) andother relevant regulations, and sought explanations as necessary.
Based on the above methods, we examined the business report and the accompanying supplemental schedules,
the non-consolidated financial statements (non-consolidated balance sheet, non-consolidated statement of-56-

income, and non-consolidated statement of changes in net assets) and the accompanying supplemental
schedules, as well as consolidated financial statements (consolidated statement of financial position,
consolidated statement of income, and consolidated statement of changes in equity, which omit somedisclosure items required under International Financial Reporting Standards (IFRS) in accordance withthe provision of the second sentence of Article 120, paragraph 1 of the Ordinance on Accounting ofCompanies) related to the relevant business year.

2. Audit Results(1) Results of Audit of Business Report and Other Relevant Documents
1. In our opinion, the business report and the accompanying supplemental schedules are inaccordance with the related laws and regulations and Articles of Incorporation, and fairly
represent JT’s condition.
2. With regard to the performance of duties by the Members of the Board, we have found noevidence of wrongful action or material violation of related laws and regulations, nor of any
violation with respect to the Articles of Incorporation.
3. In our opinion, the contents of the resolutions of the Board of Directors regarding the internal
controls system are fair and reasonable, and, furthermore, the development, implementation andmaintenance of the internal controls system are appropriate.

(2) Results of Audit of Non-Consolidated Financial Statements and the accompanying supplemental schedules
In our opinion, the methods and results employed and rendered by the Independent Auditors, Deloitte
Touche Tohmatsu LLC, are fair and reasonable.

(3) Results of Audit of Consolidated Financial Statements
In our opinion, the methods and results employed and rendered by the Independent Auditors, Deloitte
Touche Tohmatsu LLC, are fair and reasonable.

February 10, 2017

The Audit & Supervisory Board, Japan Tobacco Inc.
Standing Audit & Supervisory Board Member

Futoshi Nakamura(seal)

Standing Audit & Supervisory Board Member

Tomotaka Kojima(seal)

Audit & Supervisory Board Member

Yoshinori Imai(seal)

Audit & Supervisory Board Member

Hiroshi Obayashi(seal)(Note) Audit & Supervisory Board Members Yoshinori Imai and Hiroshi Obayashi are Outside Audit &Supervisory Board Members provided for by Article 2, item 16 and Article 335, paragraph 3 of theCompanies Act.

-57-