ANNUAL REPORT 2010 · ing, and public debate on a future hike in the tobacco excise tax. An...

ANNUAL REPORT 2010For the Year Ended March 31, 2010

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JAPAN TOBACCO INC. ANNUAL REPORT 2010

The JT Group MISSION & The JT Group WAY

The JT Group MISSIONThe mission of the JT Group is to create, develop and nurture its unique brands to win consumer trust, while understanding and respecting the environment, and the diversity of societies and individuals.

The JT Group WAYIn achieving this, we are committed to fulfilling the expectations of our consumers and behaving responsibly, striving for quality in everything we do, through continuous improvement, and leveraging diversity across the JT Group.

JAPAN TOBACCO INC. ANNuAl RePORT 2010

Contents

Feature � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 2

FORWARD-lOOKING AND CAuTIONARY STATeMeNTS

This report contains forward-looking statements about our industry, business, plans and objectives,

financial condition and results of operations that are based on our current expectations, assump-

tions, estimates and projections� These statements discuss future expectations, identify strate-

gies, discuss market trends, contain projections of results of operations or of our financial condition,

or state other forward-looking information�

These forward-looking statements are subject to various known and unknown risks, uncertain-

ties and other factors that could cause our actual results to differ materially from those suggested

by any forward-looking statement� We assume no duty or obligation to update any forward-looking

statement or to advise of any change in the assumptions and factors on which they are based�

Risks, uncertainties or other factors that could cause actual results to differ materially from

those expressed in any forward-looking statement include, without limitation:

1� health concerns relating to the use of tobacco products;

2� legal or regulatory developments and changes, including, without limitation, tax increases and

restrictions on the sale, marketing and usage of tobacco products, and governmental investiga-

tions and privately imposed smoking restrictions;

3� litigation in Japan and elsewhere;

4� our ability to further diversify our business beyond the tobacco industry;

5� our ability to successfully expand internationally and make investments outside of Japan;

6� competition and changing consumer preferences;

7� the impact of any acquisitions or similar transactions;

8� local and global economic conditions; and

9� fluctuations in foreign exchange rates and the costs of raw materials�

unless otherwise specified in this annual report, the information herein is as of June

24, 2010.

To Our Stakeholders � � � � 13 CEO Interview � � � � � � � � � � 14

Business Environment & Risk 55Business environment for the JT Group � � � � � � � � � � � � � � � � � � � � � � � � 56Major Risks of Businesses � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 61

Responsibility 40Corporate Governance � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 41Activities Contributing to the environment and Society � � � � � � � � � � � � 49

Business & History 21At a Glance � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 22Review of Operations � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 24

• Japanese Domestic Tobacco Business � � � � � � � � � � � � � � � � � � � � � � � 24• International Tobacco Business � � � � � � � � � � � � � � � � � � � � � � � � � � � � 28• Pharmaceutical Business � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 32• Food Business � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 34

History of the JT Group � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 36

Feature & Management 2Feature � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 2Financial Highlights � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 10To Our Stakeholders � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 13CeO Interview � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 14Analysis of the Results of FY 3/2010 � � � � � � � � � � � � � � � � � � � � � � � � � � � � 18

Financial Information 63Consolidated eleven-Year Financial Summary � � � � � � � � � � � � � � � � � � � � 64Management’s Discussion and Analysis of Financial Condition and Business Results � � � � � � � � � � � � � � � � � � � � � � � 66Consolidated Balance Sheets � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 80Consolidated Statements of Income � � � � � � � � � � � � � � � � � � � � � � � � � � � � 82Consolidated Statements of Changes in equity � � � � � � � � � � � � � � � � � � � 83Consolidated Statements of Cash Flows � � � � � � � � � � � � � � � � � � � � � � � � � 84Notes to Consolidated Financial Statements � � � � � � � � � � � � � � � � � � � � � 85Independent Auditors’ Report � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 117

Fact Sheets 118Financial Data � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 119Japanese Domestic Tobacco Business � � � � � � � � � � � � � � � � � � � � � � � � � � � 127International Tobacco Business � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 138Pharmaceutical Business � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 140Food Business � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 141Number of employees � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 142

General Information 143Shareholder Information � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 143Members of the Board, Auditors, and Executive Officers � � � � � � � � � � � � � � 145Corporate Data � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 146

Unless the context indicates otherwise, references in this report to “we,” “us,” “our,” “Japan Tobacco,” “JT” or “ the JT Group” are to Japan Tobacco Inc� and its consolidated subsidiaries� References to “JTI” are to Japan Tobacco International, JT Group’s international tobacco business, and those subsidiaries of JT Group’s interna-tional tobacco business�

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Feature

In this special feature, we introduce readers to our tobacco business� Our tobacco business is the core source of profit and the driving force of profit growth for the Group� We have been growing through our geographical expansion, enhancing and developing our brand portfolio and improving our productivity and technology�

In addition to satisfying the demands of tobacco consumers around the world we believe that we have a responsibility to the public and that our continued existence relies on initiatives that build trust in JT Group by respecting all members of society�

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Business activities in 120 countries around the world

36,000 employees worldwide in the tobacco business

Community clean-up events held 1,000 times in Japan

JT and Japanese municipalities jointly set up 835 smoking areas in public places

Planting trees covering 6,100 hectares in Malawi and Tanzania

JT Group and governments fighting against illicit trade

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JT Group Share in Global Cigarette Market (2009)

1 Business activities in 120 countries around the world

JT Group operates in more than 120 countries around the world, which includes manufacturing, marketing and selling tobacco brands.

JT Group has expanded its tobacco business through the acquisitions of RJR Nabisco’s non-uS tobacco operations and Gallaher Group Plc, as well as through organic growth.

Japanese Domestic (Years ended March 31) Overseas (Years ended December 31)* Sales volume in the international tobacco business from FY 3/2009 onward includes cigars, pipe tobacco and snus, but

does not include private label and contract manufactured products

Source: Euromonitor


Feature

Tobacco Business – JT Group’s Core Source of Profits and Driving Force for Profit Growth

JT Group Sales Volume

100

200

300

500

2001

243.1

2002 2003 2004 2005 2006 2007 2008 2009* 2010*

400

445.9 434.9

237.2 229.0 218.3 213.3189.5 174.9 167.8 159.9

203.1 215.1 203.3 198.8212.4 220.3 240.1

385.6

151.9

(Billions of cigarettes)

10.4%

JT Group

4

31,476 33,428

23,738 23,935

47,459

33,872

47,977 49,665

36,03334,508

20,000

40,000

60,000

2006 2007 2008 2009 2010

20,000

40,000

60,000

Number of Employees (As of March 31)

(Employees)

2 36,000 employees worldwide in the tobacco business

People are our most valuable asset. As part of our commitment to employees, we actively improve workplace environments, provide training for personal devel-opment, and give opportunities for international assignments within the Group.

JT Group Total Tobacco Business

Rest of the World

108.4(Billions of cigarettes)

South & WestEurope


North & CentralEurope


CIS+


Japan


JT Group sold 586.8 billion sticks of tobacco products in FY 3/2010 worldwide, with global tobacco market share of 10.4% in 2009.

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20

40

80

60

2006 2007 2008 2009 2010

66.4 64.8 64.9 65.1

44.8

64.9

43.7 43.7 44.0 45.1

100

200

400

300

2006 2007 2008 2009 2010

305.8 326.5 306.7272.3 257.6

Japanese Domestic Tobacco Business – Laying a Stable Business Foundation as the Core Source of Profits

The Japanese domestic tobacco market has continued to contract mainly because of Japan’s aging population with fewer births, grow-ing public consciousness of the health risks associated with smok-ing, and public debate on a future hike in the tobacco excise tax.

An increasingly fierce competitive landscape, compounded by these changes in the business environment, means that the Japa-nese domestic tobacco business – the JT Group’s core source of profits – is actively engaged in the development and introduction of new products centered on its key brands, and in sales promotion activities, in order to maintain and expand its market share.

Furthermore, JT closed two Japanese domestic tobacco facto-ries at the end of March 2010 as part of our efforts to build an opti-mum operating structure.

JT share 64.9% down 0.2ppt

Share of key brands* 45.1% up 0.3ppt

Total sales volume151.9 billion

cigarettesdown 5.0%

eBITDA ¥257.6 billion down 5.4%

EBITDA in the Japanese Domestic Tobacco Business (Years ended March 31)

(Billions of yen)

JT Share and Total Share of Key Brands* (Years ended March 31)

(%)

Maintained a market share of 64.9%, the same level as in the previous fiscal year, amid difficult business conditions

Key brands* commanded a strong market share of 45.1%, thanks to effective brand measures Introduced new products and conducted sales promotion activities Renewed product designs with a view to enhancing brand value

Continued efforts to build an even more cost-efficient operating structure

3 Community clean-up events held 1,000 times in Japan

JT developed the “Pick up and You will love Your City” initiative in May 2004 in an effort to eradicate public littering by raising awareness of the problem and organizing rubbish collection. This initiative is aimed at community festivals and other public events in various regions across Japan and is conducted in cooperation with many different stakeholders from local governments, companies, and volunteer organiza-tions. Since these activities began in May 2004, community cleanup events have been held a total of 1,000 times throughout Japan as of April 17, 2010. To date, approximately 1,040,000 people, including 1,987 registered professional and non-professional organizations, have taken part.

JT Share Total Share of Key Brands*

* Mild Seven, Seven Stars, Pianissimo (The market share figure for key brands is inclusive and retrospective of market share figures for ‘icene’ and ‘Lucia,’ which were integrated into the Pianissimo family in January 2010)


Feature

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10

30

20

40

2006 2007 2008 2009 2010

32.2 31.6 32.0 32.3 32.1

6

3

9

12

2006 2007 2008 2009 2010

8.7 9.0 8.9 9.3 9.6

2

3

1

4

2006 2007 2008 2009 2010

2.83.1 3.2 3.3 3.4

Mild Seven Family

Seven Stars Family

Pianissimo Family

Shibuya-Ku Hachiko-mae Smoking Space

Mild Seven Brand Share (Years ended March 31)

(%)

Seven Star Brand Share (Years ended March 31)

(%)

Pianissimo Brand Share* (Years ended March 31)

(%)

4 JT and Japanese municipalities jointly set up 835 smoking areas in public places

Smoking areas in public places were set up in order to respect the wishes of smokers and nonsmokers, and to reduce cigarette butt litter.

The first smoking area was established in August 2003 in the Shimbashi Station Plaza (Tokyo), and as of March 2010, a total of 835 areas have been created in coopera-tion with 185 municipalities in Japan.

The Japanese Domestic Tobacco Business Brand PortfolioMild Seven, Seven Stars, and Pianissimo are our key brands in the Japanese market. We strive to enhance the value of each brand by actively engaging in the development and introduction of new products, and by vigorous sales promotion activities.

Mild Seven 100’s Box and Mild Seven light 100’s Box launched (June 2009)

Mild Seven Impact One Menthol Box launched (February 2010)

15 core products forming the backbone of the Mild Seven brand redesigned (February 2010)

Market share 32.1% (Change: 0.2ppt down) Market share 9.6% (Change: 0.3ppt up) Market share* 3.4% (Change: 0.1ppt up)

Seven Stars Black Charcoal Menthol Box launched (August 2009)

Seven Stars Black Impact Box launched (April 2010)

Pianissimo Icene Menthol One launched (December 2009)

Integrated the icene and luCIA brands into the Pianissimo family (January 2010)

• The Mild Seven family has won numerous loyal customers since its launch in June 1977�

• As Japan’s major cigarette brand, Mild Seven has consistently commanded the No�1* share of the Japanese domestic market for more than 30 years since 1978�

• Today, the Mild Seven Family encompasses 24 products (as of April 30, 2010), reflecting its evolution in step with the changing times and brand expansion�

* Source: TIOJ

• Launched in 1969, Seven Stars featured Japan’s first domes-tically produced charcoal filter in pursuit of better taste�

• Since its launch, Seven Stars has consistently offered unique value in terms of taste, aroma, and product design�

• The Seven Stars family comprises a lineup of 12 products (as of April 30, 2010) centered on Seven Stars, which recorded the top* performance by brand in the fiscal year ended March 2010� The Seven Stars family continues to capture a growing share of the market�

* Source: TIOJ

• In August 1995, the Pianissimo family saw the launch of Japan’s first 1 mg-tar menthol cigarette product featuring reduced odor and smoke*�

• Pianissimo, an FSK (Filter Super King) slim menthol prod-uct, has continued to achieve growth after undergoing the Japanese tobacco market’s first integration of brands in the fiscal year ended March 2010�

• The Pianissimo family, a core JT tobacco franchise, features a diverse lineup of 7 products (as of April 2010), centered on Pianissimo One, the No� 1** 1mg menthol product�

* Reduced smoke: Less smoke is released from the tip of the cigarette based on a visual comparison with conventional JT cigarette products�

** Source: TIOJ

Composition Rate of Key Brands in Sales Volume

69%

* The market share figure for Pianissimo brand is inclusive and retrospective of market share figures for ‘icene’ and ‘Lucia,’ which were integrated into the Pianissimo family in January 2010

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100

200

400

300

2005 2006 2007 2008 2009

94.1 112.7

270.8

338.0

249.9

31

69

64

36Sales

VolumeEBITA

International Tobacco Business – the Driving Force for Profit Growth

Achieved double-digit growth in dollar-based EBITDA at constant rates of exchange Strong brand portfolio drove market share gains in key markets Good geographic mix of mature and emerging markets Enhancement of leaf procurement

Japan Tobacco International (JTI), which carries out the inter-national tobacco business, conducts business operations in over 120 countries.

The international tobacco business remains the profit growth engine of the Group. JTI continues to focus on sustainable quality top-line growth through enhancing its brand portfolio and brand equity.

Total sales volume* 434.9 billion cigarettes down 2.5%

GFB sales volume 243.4 billion cigarettes down 0.9%

eBITDA ¥249.9 billion down 26.1%

eBITDA at constant rates of exchange $3,967 million up 14.9%

EBITDA of International Tobacco Business (Years ended December 31)

(Billions of yen)Geographic Mix of Mature and Emerging Markets (2009)(%)

5 Planting trees covering 6,100 hectares in Malawi and Tanzania

Across the world the JT Group is committed to both forest preservation and tree-planting.

Four years ago JT and JTI began an ambitious reforestation and social program in Malawi and Tanzania, since which time 6,100 hectares have been planted. In addition, JT and JTI have complemented this work by improving the standard of living for local communities with programs such as installing wells for clean drink-ing water and irrigation systems, and training farmers in agricultural techniques.

In Japan, JT is also committed to protecting and regenerating forests. launched in 2005, the JT Forest project has expanded its activities to eight locations nationwide.

Mature Emerging

* Total sales volume includes cigars, pipe tobacco and snus, but does not include private label and contract manufactured products


Feature

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6 JT Group and governments fighting against illicit trade

The JT Group is protecting both its consumers and its business interests and fighting ever harder against the growing problem of illicit trade through close cooperation with law enforcement authorities around the world.

Composition Rate of GFB in Sales Volume

Global Flagship Brand Portfolio

56%

The International Tobacco Business Brand PortfolioJTI possesses a portfolio of Global Flagship Brands (GFB) comprising Winston, Camel, Mild Seven, Benson & Hedges, Silk Cut, lD, Sobranie, and Glamour. JTI is leveraging its GFB brand equity in key markets around the world.

A comprehensive approachThe JT Group continues to invest in its international tobacco business programs to effectively prevent illicit trade. The initiatives span from detailed screening of customers and vendors, to controls on money collections, to applying security features allowing key brands to be traced back from the first purchaser to the manufacturing site. The international tobacco business has concluded agreements with a growing number of law enforcement authori-ties to cooperate more closely and efficiently in disrupting the flow of counterfeit and contraband tobacco products. This is the case in particular with the european union and its twenty-seven Member States where JT Group has agreed to contribute uS$400 million over 15 years to support anti-smuggling and anti-counterfeiting initiatives in the european territory.

JT Group is taking initiatives to raise awareness among the public and consumers of the risks associated with illicit trade and consumption of such products. Moreover, dedicated teams are specialized in collecting intelligence that can be used by law enforcement authorities to fight illicit trade.

JT Group is constantly developing new security features to better protect its brands from illicit trade and supports investigations and seizures of coun-terfeit tobacco products. Note: Financial data disclosed here in Feature are rounded�

EngineWinston and Camel are the engine brands driving JTI’s growth.

Future potentialSobranie and Glamour have strong future growth potential.

StrongholdFour stronghold brands have a significant presence in their respective regions increasing the competitive power of JTI’s portfolio.

First introduced in 1954, Winston has proven its status as JTI’s key growth driver, becoming in 2007 the 2nd* larg-est cigarette brand in the world. After almost a decade of strong momentum, Winston further accelerated its sales volume growth in South & West europe and North & Central europe in 2009. Winston’s performance has been strengthened by Super Slims brand extensions and ongoing product innovation.

* Source: Euromonitor, combined with R�J� Reynolds’s sales volume

First introduced in 1913, Camel is the originator of American Blend. Sold in over 100 countries, Camel is the 6th* largest cigarette brand in the world. Sales volume growth has been achieved in South & West europe and North & Central europe in 2009.The launch of Camel essential Flavor and other line extensions contributed to Camel’s performance.

* Source: Euromonitor, combined with R�J� Reynolds’s sales volume

Originating in Japan and launched in 1977, Mild Seven is the top-sell-ing premium charcoal brand and is the 3rd* largest cigarette brand in the world. Its key markets outside Japan are Taiwan, Korea, Russia and Malaysia.

* Source: Euromonitor

Originally created for the Prince of Wales in 1873, Benson & Hedges has a proud British heritage. Today, JTI owns the Benson & Hedges trademark in eu markets (excl. Baltics) where it is a leading Virginia premium brand. Benson & Hedges is continuously evolving its portfolio and brand extensions to reflect its consumers’ needs.

launched in 1963, Silk Cut estab-lished itself as one of the leading brands in the Virginia segment, both in the uK and Ireland.

JTI owns the Silk Cut trademark throughout the eu with the core markets being the uK, Ireland and Greece, where the brand enjoys a significant market share in the premium segment.

Sobranie is one of the world’s oldest tobacco brands and has been syn-onymous with luxury cigarettes since 1879. This heritage, exquisite style and the best selected tobac-cos have made Sobranie one of the most prestigious brands in the world. In 2009 innovative proposi-tions were launched in Russia.

lD was launched in 1999 as a mid-price proposition in the Russian market. The brand achieved imme-diate success and is accepted as a credible international proposition. Since 2007 lD has grown con-tinuously, expanding its presence to more than 30 countries across all regions supported by its constant portfolio expansion in response to consumer aspirations.

Glamour is JTI’s leading Super Slims brand. Since its introduction in 2005, Glamour has achieved remarkable growth consolidating its No. 1 position as a Super Slims brand in several CIS+ markets. Glamour is constantly expanding its geographical presence and evolving portfolio in the growing Super Slims segment.

56%

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Business ScaleJT Group Sales Volume

Japanese Domestic Tobacco Business151.9 Billions of cigarettes

International Tobacco Business 434.9 Billions of cigarettes

JT Group Share in Global Cigarette Market (Source: Euromonitor)

10.4 %

Net Sales Including Excise Taxes

6,134.7 Billions of yen

Adjusted Net Sales Excluding Excise Taxes*1

1,981.0 Billions of yen

EBITDA

526.7 Billions of yen

ProfitabilityEBITDA Margin*2

26.6 %

ROE

8.6 %

Per Share DataDiluted EPS

14,449 yen up 12.2%

Diluted EPS (excluding the impact of goodwill amortization)

24,621 yen up 3.0%

StabilityFree Cash Flow

250.7 Billions of yen

D/E Ratio

0.53 times

Return of Profits to ShareholdersThe Per Share Dividend

5,800 yen

The Dividend Payout Ratio

40.1 %

23.6% (Excluding the Impact of Goodwill Amortization)

Business Scale: The JT Group’s total tobacco

sales volume in Japan and abroad comes to

approximately 587 billion cigarettes per year,

accounting for around 10% of the global

market. In addition to the domestic and

international tobacco businesses, the JT

Group engages in the pharmaceutical and

food businesses, and its annual consolidated

sales including excise taxes stand at approxi-

mately ¥6,130 billion, adjusted net sales

excluding excise taxes at more than ¥1,980

billion and consolidated EBITDA at more than

¥520 billion.

Profitability: Because of the high profitability

of the tobacco business, the ratio of EBITDA

to adjusted net sales excluding taxes comes

to around 27% and ROE stands at between

8% and 9%.

Per Share Profits: Although net sales as well

as most profit figures, including EBITDA,

operating income and recurring profit,

declined in FY 3/2010, per-share EPS grew as

a result of an increase in net income due to

an improvement in extraordinary income.

Stability: Free cash flow came to approxi-

mately ¥250 billion due to a stable cash flow

generated by the tobacco business.

D/E Ratio is about 0.5 times.

Return of Profits to Shareholders: The per-

share dividend was set at ¥5,800, including

interim and term-end dividends as well as a

commemorative dividend to mark the 25th

anniversary of the incorporation of JT. The

dividend payout ratio excluding the impact of

goodwill amortization rose to 23.6%.

*1 Japanese domestic tobacco; excluding excise tax and revenue from the imported tobacco, domestic duty free, the China Division, and other miscellaneous. International tobacco; excluding excise tax and revenue from distribution, private label, contract manufacturing and other peripheral business.

*2 EBITDA margin on Adjusted Net Sales excluding excise tax (1,981.0 billion yen as of FY3/2010)

JAPAN TOBACCO INC. ANNuAl REPORT 2010

Financial HighlightsJapan Tobacco Inc. and Consolidated Subsidiaries / FY 3/2010

Financial data disclosed herein are rounded.

10

Operating Income Net Income

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2010200920082006 2007

4,637.7 4,769.4

6,409.76,832.3

6,134.7

2010200920082006 2007

145.6

223.0

–1,493.7

240.2 250.7

–1,200

–800

–400

0

200

400

500

1,000

1,500

2,000

2,500

2010200920082006 2007

1,596.2 1,633.2

2,068.4

2,243.1

1,981.0

100

200

300

400

500

600

700

800

2010200920082006 2007

433.4464.6

602.1646.2

526.7

20,000

40,000

60,000

80,000

100,000

120,000

2010200920082006 2007

105,084

22,001 24,916

12,880

23,895 24,621

14,449

2,000

4,000

6,000

8,000

2010200920082006 2007

3,200

4,000

4,800

5,4005,800

2010200920082006 2007

1,762.5

2,024.6

12.411.3

2,154.6

1,624.31,723.3

11.8

6.8

8.6

500

1,000

1,500

2,000

2,500

4

8

12

16

20

2010200920082006 2007

216.6 219.3

0.120.11

1,389.3

996.1874.3

0.670.64

0.53

500

1,000

1,500

2,000

0.2

0.4

0.6

0.8

2010200920082006 2007

201.5

332.0306.9

210.8238.7

123.4

430.6

363.8

296.5

138.4

100

200

300

400

500

Net Sales Including Excise Taxes(Billions of yen)

Interest-bearing Debt and D/E Ratio(Billions of yen/times)

Net Sales Excluding Excise Taxes(Billions of yen)

EBITDA(Billions of yen)

Free Cash Flow(Billions of yen)

EPS(Yen)

Operating Income and Net Income(Billions of yen)

Total Equity and ROE(Billions of yen/%)

Cash Dividends Applicable to the Year(Yen)

Note: A 5 for 1 stock split went into effect on April 1, 2006

Total Equity ROE

Please see Note 2 on page 12.

EPS (excluding the impact of goodwill amortization) EPS

Interest-bearing Debt D/E Ratio

Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31


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Financial HighlightsJapan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31

Millions of yen

Millions ofU.S. dollars

(Note 1)2006 2007 2008 2009 2010 2010

For the year:

Net Sales Including Excise Taxes ¥4,637,657 ¥4,769,387 ¥ 6,409,727 ¥6,832,307 ¥6,134,695 $65,936

Japanese Domestic Tobacco 3,405,281 3,416,274 3,362,398 3,200,494 3,042,836 32,705

International Tobacco 881,188 999,658 2,639,969 3,118,319 2,633,636 28,306

Pharmaceutical 49,257 45,452 49,064 56,758 44,069 474

Food 278,378 286,554 336,420 435,966 394,653 4,242

Others 23,553 21,449 21,876 20,770 19,501 209

Net Sales Excluding Excise Taxes (Note 2) 1,596,151 1,633,186 2,068,368 2,243,146 1,980,970 21,292

Japanese Domestic Tobacco 760,630 729,383 715,018 648,830 615,991 6,688

International Tobacco 484,333 550,347 945,989 1,080,821 906,756 9,845

Pharmaceutical 49,257 45,452 49,064 56,757 44,068 478

Food 278,378 286,554 336,420 435,966 394,653 4,285

Others 23,553 21,449 21,876 20,770 19,500 211

EBITDA (Note 3) 433,391 464,634 602,096 646,217 526,702 5,661


International Tobacco 94,093 112,668 270,757 337,968 249,869 2,686

Pharmaceutical (1,803) (8,197) (6,269) 4,890 (9,651) (104)

Food 11,869 12,018 8,353 17,030 14,490 156

Others 22,140 21,586 22,055 13,150 13,337 143

Elimination/Corporate 1,339 89 474 899 1,011 11

Depreciation and Amortization (Note 3) 126,445 132,643 171,542 282,411 230,197 2,474

Operating Income 306,946 331,991 430,554 363,806 296,505 3,187


International Tobacco 71,031 81,085 205,360 174,772 109,127 1,173

Pharmaceutical (5,057) (11,207) (9,644) 1,020 (13,593) (146)

Food 6,325 6,705 667 (11,451) (13,696) (147)

Others 8,673 9,331 10,448 9,695 10,557 113

Elimination/Corporate 5,879 689 1,375 1,511 771 8

Net Income 201,542 210,772 238,702 123,400 138,448 1,488

Free Cash Flow (FCF) (Note 4) 145,590 223,007 (1,493,717) 240,199 250,742 2,695

At year-end:

Total Assets 3,037,379 3,364,663 5,087,214 3,879,803 3,872,596 41,623

Interest-bearing Debt (Note 5) 216,608 219,269 1,389,296 996,079 874,330 9,397

Liabilities 1,217,306 1,340,047 2,932,585 2,255,515 2,149,317 23,101

Total Equity 1,762,512 2,024,616 2,154,629 1,624,288 1,723,279 18,522

Ratios:

Return on Equity (ROE) 12.4% 11.3% 11.8% 6.8% 8.6% —

Return on Assets (ROA) 10.4% 10.7% 10.5% 8.4% 7.8% —

Equity Ratio 58.0% 58.3% 40.8% 40.0% 42.6% —

Amounts per share: (in yen) (Note 6)

Net Income (Note 7) ¥ 21,017 ¥ 22,001 ¥ 24,916 ¥ 12,880 ¥ 14,449 —

Total Equity 183,956 204,618 216,707 162,088 172,140 —

Cash Dividends Applicable to the Year 3,200 4,000 4,800 5,400 5,800 —

Notes: 1. Figures stated in U.S. dollars in this report are translated at the rate of ¥93.04 per $1, as of March 31, 2010. 2. 2006–2008: Excluding imported tobacco in the Japanese domestic tobacco and distribution business in the international tobacco, respectively. 2009–: Excluding the imported tobacco, domestic duty free, the China Division and other miscellaneous items in the Japanese domestic tobacco business, in addition to the distribution,

private label, contract manufacturing and other peripheral businesses in the international tobacco business. 3. EBITDA = operating income + depreciation and amortization Depreciation and amortization = depreciation of tangible fixed assets + amortization of intangible fixed assets + amortization of long-term prepaid expenses + amortization of

goodwill 4. FCF = (cash flow from operating activities + cash flow from investing activities) excluding the following items: From “cash flow from operating activities”: Dividends received / interest received and its tax effect / interest paid and its tax effect From “cash flow from investing activities”: Cash outflow from purchase of marketable securities / proceeds from sales of marketable securities / cash outflow from purchases of

investment securities / proceeds from sales of investment securities / others (but not business-related investment securities, which are included in the investment securities item) 5. Interest-bearing Debt includes lease obligation after FY 2008. 6. On April 1, 2006, a 5 for 1 stock split went into effect. Amounts per share for the year ended March 2006 is on the assumption that this stock split took place at the beginning of fiscal year. 7. Diluted net income per share. 8. Financial data disclosed herein are basically rounded.

12

As its long-term vision, the JT Group is committed to global growth by providing consumers with diversified value

that is uniquely available from us. To realize this vision, we have adopted JT-11, a medium-term management plan

which covers the three years ending in March 2012. In fiscal year 2009, the first year of the plan, our consolidated

results exceeded the initial forecasts as we devoted efforts to appropriate management of business operations,

although we suffered a decline in overall demand mainly in the Japanese domestic tobacco business, and unfavor-

able foreign exchange rates in the international tobacco business. As for the outlook on fiscal year 2010, while

there are signs of recovery in some sectors, the global economy is still recovering and we expect a significant

drop in demand at the Japanese domestic tobacco business due to a tax increase of an unprecedented scale.

However, we will strive to realize our long-term vision and achieve the objectives under JT-11 by exploring

opportunities for future growth and further strengthening our business foundation in this difficult business

environment.

June 2010

Yoji Wakui

Chairman of the Board

Hiroshi Kimura

President and CEO and Representative Director


To Our Stakeholders

Yoji WakuiChairman of the Board

Hiroshi KimuraPresident and CEO and Representative Director

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10,445

11,192

9,682

5,500 6,500 7,500 8,500 9,500 10,500 11,500 1,500 2,000 2,500 3,000 3,500 4,000

3,452

2,965

3,967

Adjusted Net Sales Excl. Excise Tax* in the International Tobacco Business (Millions of US dollars)***

EBITDA** in the International Tobacco Business

(Millions of US dollars)***

FY3/2009

FY3/2010 at constant rates of exchange

FY3/2009

FY3/2010 FY3/2010

648.8

616.0

550 610580 640 670

272.3

257.6

100 200150 250 300

Adjusted Net Sales Excl. Excise Tax* in Japanese Domestic Tobacco Business(Billions of yen)

EBITDA** in Japanese Domestic Tobacco Business

(Billions of yen)

FY3/2009 FY3/2009

FY3/2010 FY3/2010

FY3/2010 at constant rates of exchange

Financial Results for FY3/2010

Q What is your assessment of the financial results for fiscal year 2009 that ended in March 2010?

AEach business division maintained its own momentum or made progress in strengthening its business foundation, although net sales as

well as most profit figures, including EBITDA, operating income and recurring profit declined. In the Japanese domestic tobacco business,

EBITDA surpassed the initial forecast of ¥246 billion despite weaker industry volumes than assumed. In fiscal year 2009, we strived to further

develop existing brands and introduce new products, mainly under our key brands, and continued efforts to build a cost-efficient operating structure.

In the international tobacco business, we increased our market share in most key markets, and achieved an increase of approximately 15% in US

dollar-based EBITDA driven by favorable pricing at constant rates of exchange. The momentum of the international tobacco business, which is

the profit growth engine of the JT Group, remains steady. For the moment, the pharmaceutical and food businesses do not make significant

contributions to the JT Group’s overall financial results. However, in our pharmaceutical business we are steadily strengthening the development

pipeline, as shown by the advance of JTK-853, an anti-hepatitis C drug, currently in the clinical development stage. In the food business, we

continued to strengthen our business foundations in the three business areas of beverages, processed foods and seasonings. In April 2009 we

completed the integration of JT’s former food business into Katokichi Co. Ltd. The food subsidiary, following acquisition, changed its name from

Katokichi to TableMark in January 2010, and aims to achieve a higher level of profitability as a result of business integration. In fiscal year 2009,

the first year of the JT-11 medium-term management plan, EBITDA came to ¥526.7 billion on a consolidated basis, exceeding the initial target

of ¥475 billion.

Q Points

• Financial Results for FY3/2010 (fiscal year 2009)• International Tobacco Business: Situation of Major Markets• Planned Actions in FY3/2011 (fiscal year 2010)• Human Resource Development• Plan for Use of Cash


CEO Interview

Hiroshi KimuraPresident and CEO and Representative Director

* Japanese domestic tobacco business, excluding revenue from imported tobacco, domestic duty-free, the China Division, and others. International tobacco business, excluding revenue from distribution, private label, and contract manufacturing.

** EBITDA=operating income+depreciation and amortization*** The US dollar is the reporting currency for our international tobacco business.

Financial data disclosed in CEO interview are rounded.

14

18.0

1,800

2,200

19.0

2,600

2,200

22.6

2,800

2,600

23.6

3,000

2,800

2010200920082007

1,000

2,000

3,000

4,000

5,000

6,000

5

10

15

20

25

30

Changes in Dividend Payout Ratio Excluding the Impact of Goodwill Amortization and Dividend per Share(Yen) (%)

Year-end dividend per share Half-year dividend per share Dividend payout ratio

(Years Ended March 31)

Q Could you explain how currency fluctuations significantly affected the financial results?

AAs a result of currency fluctuations on the international tobacco business, we had declines in net sales, EBITDA and operating income.

Specifically, the results were affected by the depreciation of local currencies in our key markets against the US dollar (which is the

reporting currency for our international tobacco business). This negative impact on EBITDA amounted to $1 billion. There was further erosion

when converted into yen as a result of the yen’s appreciation.

Q How much will be paid in annual dividend for fiscal year 2009?

AWe have announced that the year-end dividend is increased to ¥3,000 per share, made up of ¥2,800 common dividend and ¥200 commemorative

dividend. Annual dividend, together with the half-year dividend of ¥2,800, is increased to ¥5,800 per share.

We have made consistent efforts to increase our dividend with the goal of achieving a dividend payout ratio of 30% on a consolidated basis,

excluding the impact of goodwill amortization. In fiscal 2009, the dividend payout ratio came to 23.6%, surpassing the previous year’s 22.6%.

International Tobacco Business: Situation of Major Markets

Q How could the international tobacco business increase its market share in fiscal year 2009 in almost all key markets?

AIn many key markets, overall demand declined and the down-trading trend accelerated because of the recession and sharp increases in

tobacco excise taxes. Despite those negative factors, the international tobacco business managed to increase its market share in almost all

key markets because of its well-balanced brand portfolio, which is strong in the sub-premium and mid-price segments, and its efforts to enhance

brand equity and strengthen sales promotion activities.

For example, in Russia we increased both our sales volume and market share despite a decline in overall demand, because Winston continued

to maintain the largest market share and also because the growth of LD, our mid-price brand, rose sharply since this product captured the

down-trading trend. In the UK market, the sales volume and market share of Sterling, our value brand, expanded as the product attracted

the accelerated trend of down-trading customers and acted as our growth driver. In the Italian market, Camel, in the sub-premium segment,

and Winston, in the popular-price segment, drew strong demand, posting a rise in both their sales volumes and market shares. The sales

volumes and market shares of our brands also grew in Turkey where Winston maintained its position as the leading brand and Monte Carlo,

in the popular-price segment, and LD, in the value segment, also attracted strong demand.

I also believe that our continued active investments in enhancing brand equity in each market made significant contributions to the

increases in market shares.

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Planned Actions in Fiscal Year 2010

Q As the business environment continues to be difficult in Japan and abroad, what actions will the JT Group take? Will there be any change in the objectives under JT-11?

ARegarding the Japanese domestic tobacco business, we will maintain our solid position by strengthening efforts to enhance brand equity,

introducing innovative products, pursuing appropriate pricing and continuing cost reduction efforts, although the business environment is

expected to become more difficult due to such factors as an unprecedented tax increase and the strengthening of restrictions on smoking spaces.

For example, as a measure to enhance brand equity, we renewed the package design of Mild Seven, which is the No.1 brand in Japan, in early Febru-

ary 2010. In mid-May 2010, we launched Zerostyle Mint, an entirely new type of smokeless tobacco product, in Tokyo. There will be no change in

our objective of keeping the profit (EBITDA) in fiscal year 2011 at the level of fiscal year 2009. In fiscal year 2010, profits from the Japanese domestic

tobacco business are expected to decline compared with the previous year due to an accelerated downward trend in consumption. Increases in

expenses related to strengthening of retail store sales and R&D that are intended to ensure quality and services commensurate with the retail price,

and a one-time cost related to the retail price revision will also have an impact.

With regard to the international tobacco business, we expect that some of our key markets will begin to show signs of a moderate recovery

in the latter half of 2010, and therefore, we do not expect volume growth in full-year 2010. Meanwhile, we will aim to achieve growth in both net

sales and profits by continuing investments to strengthen business operations and brand equity, and seizing the opportunity for price increases.

Our objectives of the international tobacco business, the pharmaceutical business and the food business will remain the same as we committed

to in JT-11.

(Actual results may differ materially from those estimated in these statements as a result of a number of factors, including, but not limited

to, those described in “Major Risks of Businesses.”)

Human Resource Development

Q As you expand your business operations globally, how are you developing human resources?

AThe continuing expansion of our global business operations makes it all the more important to develop human resources. We benefit from

the diversity of our employees, regardless of nationality and social background, we promote interaction of personnel and create mechanisms

to ensure the company-wide sharing of best practice. For example, the Exchange Academy, a human resource development program managed

jointly by JT and JTI, brings together trainees from countries around the world, providing an opportunity to experience unfamiliar cultures while

at the same time acquiring skills necessary to manage global operations.


CEO Interview

16

Plan for use of Cash

Q How does the JT Group, which can expect a stable cash flow from the tobacco business, plan to use the cash? Will there be no change in the objective of JT-11 related to the return of profits to shareholders?

AWe will use the cash mainly for business investment, return of profits to shareholders, and repayment of interest-bearing debts.

In fiscal year 2009, the JT Group’s free cash flow was ¥250.7 billion. As we believe that there is still room for the JT Group to expand

business operations both at home and abroad, investment to further strengthen the business foundation is an important usage of cash. Such

business investment is intended to promote innovation, improve product quality and enhance customer satisfaction. Furthermore, we will

continuously look for external growth opportunities. We also place priority on the return of profits to shareholders as an important usage of

cash. There will be no change in our objective under the JT-11 medium-term management plan of raising the consolidated dividend payout

ratio (excluding the impact of goodwill amortization) in the medium term to 30%. We will proceed with the repayment of interest-bearing debts

while taking care to ensure an appropriate debt ratio.

June 2010

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Net Sales*2

Net sales in the international tobacco business were affected by the depreciation of local currencies in our key markets against the US dollar. There was further erosion when converted into yen as a result of the yen’s appreciation.

Net sales declined in the food business due to the withdrawal from the chilled processed food business and the exclusion of some subsid-iaries from the consolidated results due to the change of ownership.

Net sales fell in the Japanese domestic tobacco business, reflecting a decline in sales volume. Net sales declined in the pharmaceutical business due to the absence of the upfront fee revenue and milestone revenue that boosted the previous year’s results.

*2 Japanse domestic tobacco; excluding excise tax and revenue from the imported tobacco, domestic duty free, the China Division, and other miscellaneous. International tobacco; excluding excise tax and revenue from distribution, private label, contract manufacturing and other peripheral business.

(Billions of yen)

2,243.1

–41.3

–32.8

–12.7

–1.3

1,981.0

–174.1

1,650 1,750 1,850 1,950 2,050 2,150 2,250

FY3/2009

Japanese domestic tobacco

International tobacco

Food

FY3/2010

Others

Pharmaceutical

Actual results Decrease Increase (Decrease in case of expense)

EBITDA

EBITDA in the international tobacco business was affected by the depreciation of local currencies in our key markets against the US dollar. There was further erosion when converted into yen as a result of the yen’s appreciation.

EBITDA declined in the Japanese domestic tobacco business mainly as a result of a drop in sales volume. EBITDA dropped in the pharmaceutical business mainly due to the absence of the upfront fee revenue and milestone revenue that boosted the previous year’s results.

Despite marginal EBITDA growth in the key business*3 segments due to lower raw materials prices and cost reduction, EBITDA for the overall food business decreased due to one-time losses in the fishery product business.

*3 Key business are: Beverages, Processed foods and Seasonings

FY3/2009

Japanese domestic tobacco

International tobacco

Food

FY3/2010

Others

Pharmaceutical

470 500 530 560 590 620 650

646.2

–2.5

–14.6

–14.5

+0.2

526.7

–88.1

(Billions of yen)

Operating income fell less steeply than EBITDA because of decreases in the amortization expense in Japanese domestic tobacco business due to the completion of the amortization of the trademark rights taken over from the former RJRI, and because of decreases in the goodwill amortization expense in the international tobacco business due to the yen appreciation impact.

Operating Income(Billions of yen)

100 150 200 250 300 350 400

363.8

–119.5

296.5

＋52.2

FY3/2009

EBITDA

Depreciation and amortization

FY3/2010


Analysis of the Results of FY 3/2010*1

*1 International tobacco business: Year ended Dec. 2008 and Year ended Dec. 2009


18

Net Income

Net income increased, while profits from the sale of fixed assets decreased, and extraordinary income improved because of the absence of some expenses incurred in the previous year, including; expenses related to a change in the operating model in the Philippines; expenses associated with the demolition and removal of company housing; and the cost of introducing vending machines with the adult identification function. In addition the reversal of liability on a fine levied under UK competition law also contributed to the increase in net income.

(Billions of yen)

0 10 20 30 40 50 60 70 80 90 100 110 130120 140

123.4

–52.2

138.4

+67.3

FY3/2009

Recurring profit

Extraordinary income/loss, Income taxes, etc.

FY3/2010

As the non-operating balance improved because of a decrease in interest payments caused by the redemption of bonds, repayments of borrowings and lower interest rates, recurring profit fell less steeply than operating income.

Recurring profit is calculated by combining operating income with profits and losses arising from financing activities and other non-operating profits and losses, except for nonrecurring profits and losses or those on prior years’ adjustment.

Recurring Profit(Billions of yen)

100 120 140 160 180 200 220 240 260 280 300 320

307.6

–67.3

255.4

+15.0

FY3/2009

Operating income

Non-operating income/loss

FY3/2010

Breakdown of Net Sales(Billions of yen)

FY3/2009 FY3/2010

Net sales including excise taxes*1 6,832.3 6,134.7Japanese domestic tobacco 3,200.5 3,042.8International tobacco*1 3,118.3 2,633.6

Adjusted net sales excl. excise taxes*1*2*3 2,243.1 1,981.0

Japanese domestic tobacco*2 648.8 616.0International tobacco*1*3 1,080.8 906.8Pharmaceutical 56.8 44.1Food 436.0 394.7Others 20.8 19.5

*1 International tobacco business: Year ended Dec. 2008 and Year ended Dec. 2009*2 Excluding revenue from the imported tobacco, domestic duty free, the China Division, and

other miscellaneous.*3 Excluding revenue from distribution, private label, contract manufacturing and other periph-

eral businesses.

EBITDA by Business Segment*4

(Billions of yen)FY3/2009 FY3/2010

Consolidated EBITDA 646.2 526.7Operating income 363.8 296.5Depreciation and amortization*5 282.4 230.2

Japanese domestic tobacco EBITDA 272.3 257.6Operating income 188.3 203.3Depreciation and amortization*5 84.0 54.3

International tobacco EBITDA*6 338.0 249.9Operating income 174.8 109.1Depreciation and amortization*5 163.2 140.7

Pharmaceutical EBITDA 4.9 –9.7Operating income (loss) 1.0 –13.6Depreciation and amortization*5 3.9 3.9

Food EBITDA 17.0 14.5Operating income (loss) –11.5 –13.7Depreciation and amortization*5 28.5 28.2

Others EBITDA 13.1 13.3Operating income 9.7 10.6Depreciation and amortization*5 3.5 2.8

*4 EBITDA = operating income + depreciation and amortization*5 Depreciation and amortization = depreciation of tangible fixed assets + amortization of intan-

gible fixed assets + amortization of long-term prepaid expenses + amortization of goodwill*6 International tobacco business: Year ended Dec. 2008 and Year ended Dec. 2009

Average Exchange Rate

2008 Jan. to Dec. Average

2009 Jan. to Dec. Average

YEN/USD 103.48 93.65RUB/USD 24.84 31.77GBP/USD 0.53 0.65EUR/USD 0.68 0.73


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Consolidated Balance Sheets (Debt and Equity)

On the liability side, although CP increased, borrowings and bonds decreased.

3,600 3,650 3,700 3,750 3,800 3,850 3,900 3,950 4,000

3,872.6

–1.1

+14.4

+85.7

–25.8

+38.8

–80.8

+119.0

–157.3

3,879.8

(Billions of yen)

Mar. 31, 2009

Bank Loans

Commercial paper

Tobacco excise tax payable

Other liabilities

Retained earnings

Foreign currency translation adjustmentsOther equity

Mar. 31, 2010

Bonds

Consolidated Balance Sheets (Assets)

On the asset side, inventories increased while the value of goodwill declined. The increase in inventories reflected a rise in raw materials costs and an increase in procurement.

3,600 3,650 3,700 3,750 3,800 3,850 3,900 3,950 4,000

3,872.6

–39.5

–66.6

+3.5

+6.8

+90.9

–2.5

3,879.8

(Billions of yen)

Mar. 31, 2009Cash and deposits/Short-term investments

Trade notes and account receivablesTrademarks

Goodwill

Other assets

Mar. 31, 2010

Inventories


20


At a Glance � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 22

Review of Operations � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 24Japanese Domestic Tobacco Business � � � � � � � � � � � � � � 24

International Tobacco Business � � � � � � � � � � � � � � � � � � � � � � � � 28

Pharmaceutical Business � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 32

Food Business � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 34

History of the JT Group � � � � � � � � � � � � � � � � � � � � � � � � � � � � 36

Note: Financial data disclosed herein are rounded

Business & History

21

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Fact Sheets

General Inform

ationFeature &

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ent

2006 2007 2008 2009 2010

285.2 270.0 258.5 245.8 233.9

100

200

300

400

Source: TIOJ

Total Market(Billions of cigarettes)

2006 2007 2008 2009 2010

189.5 174.9 167.8 159.9 151.9

100

200

300

Sales Volume(Billions of cigarettes)

2006 2007 2008 2009 2010

3,405.3 3,416.3 3,362.4 3,200.5 3,042.8

1,000

2,000

3,000

4,000

Net Sales Including Taxes(Billions of yen)

2006 2007 2008 2009 2010

760.6 729.4 715.0648.8 616.0

200

800

600

400

1,000

Net Sales Excl. Excise Tax(Billions of yen)

Note: 2006 – 2008: Excluding revenue from the imported tobacco�

2009 – 2010: Excluding revenues from the imported tobacco, domestic duty free, the China Division, and other miscellaneous�

2006 2007 2008 2009 2010

49.3 45.5 49.156.8

44.1

20

40

60

80

Net Sales(Billions of yen)

EBITDA Operating Income (Loss)2006 2007 2008 2009 2010

–1.8

–8.2–6.3

4.9

–9.7

–5.1

–11.2–9.6

1.0

–13.6–15

–10

–5

0

5

10

EBITDA/Operating Income (Loss)(Billions of yen)

2006 2007 2008 2009 2010

305.8 326.5 306.7272.3 257.6

220.1245.4

222.3188.3 203.3

100

200

300

400

EBITDA/Operating Income(Billions of yen)

EBITDA Operating Income


At a Glance

Japanese Domestic Tobacco Business (Years ended March 31)

Overwhelm the competition in the home country market as the core source of profits�

JT Group

Pharmaceutical Business (Years ended March 31)

Pursuing high value-added business by developing world-class innovative drugs

The Japanese domestic tobacco business is positioned as the core source of profits for the JT Group� The business environment is becoming increasingly difficult due to a decline in overall demand in the domestic market and intensifying competition� Under such a business environment, the Japanese domestic tobacco business continues to explore opportunities for top-line growth and at the same time to build an optimum operating structure�

The international tobacco business is actively exploring opportunities for top-line growth so that it can continue to act as the JT Group’s profit growth engine�

In the pharmaceutical business, JT will continue to build world-class, unique R&D capabilities and reinforce its market presence through innovative drugs by devoting efforts to increasing and advancing compounds in a late phase of clinical trial and enhancing the R&D pipeline�

In the food business, we are devoting our efforts to the three business areas of beverages, processed foods and seasonings, implementing measures to establish the highest standard of safety management and striving to further strengthen our business foundation for future growth�

see page 24

see page 32

22

2006 2007 2008 2009 2010

278.4 286.6336.4

436.0394.7

100

200

300

400

500

Net Sales(Billions of yen)

EBITDA Operating Income (Loss)2006 2007 2008 2009 2010

11.9 12.08.4

17.014.5

6.3 6.7

0.7

–11.5 –13.7–15

–10

–5

0

5

10

15

20

EBITDA/Operating Income (Loss)(Billions of yen)

2005 2006 2007 2008 2009

220.3 240.1

385.6445.9 434.9

100

200

300

400

500

Note: 2008 – : Including cigars, pipe tobacco and snus, but does not include private label and contact manufac-tured products

Sales Volume(Billions of cigarettes)

2005 2006 2007 2008 2009

133.8 149.1

203.2

245.5 243.4

100

200

300

Note: GFB in 2005 – 2006 : Winston, Camel, Mild Seven, Salem GFB in 2007 – : Winston, Camel, Mild Seven, Benson &

Hedges, Silk Cut, LD, Sobranie, Glamour

GFB Sales Volume(Billions of cigarettes)

2005 2006 2007 2008 2009

881.2 999.7

2,640.03,118.3

2,633.6

1,000

2,000

3,000

4,000

Net Sales Including Taxes(Billions of yen)

Note: 2005 – 2007: Excluding revenue from distribution� 2008 – 2009: Excluding revenues from distribution

private label, contract manufacturing and other peripheral business�

2005 2006 2007 2008 2009

484.3550.3

946.01,080.8

906.8

300

600

900

1,200

Net Sales Excl. Excise Tax(Billions of yen)

2005 2006 2007 2008 2009

94.1 112.7

270.8

338.0

249.9

71.0 81.1

205.4174.8

109.1100

200

300

400

EBITDA/Operating Income(Billions of yen)

EBITDA Operating Income

Food Business (Years ended March 31)

Increasing profits by achieving sustainable growth based on the combined strength of group companies with world-class competitiveness

JT Group Share in Global Cigarette Market (2009)Net Sales Breakdown by Business Segment (FY 3/2010)

Pharmaceutical Business

2.2%

Food Business

19.9%

Other Business

1.0%

InternationalTobacco Business

45.8%

Japanese Domestic Tobacco Business

31.1%

International Tobacco Business (Years ended December 31)

Attain a sustainable leadership position in profitability and/or market-share within a growing number of markets, and con-tinue to be the driving force for profit growth�

Note: Japanese Domestic Tobacco Business and International Tobacco Business are Adjusted Net Sales Excl� Excise Tax

Source: Euromonitor

10.4%

see page 28

see page 34

23

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ationFeature &

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ent

272.3

–24.8

–7.0

–0.1

0

+17.3

257.6

235 240 245 250 255 260 265 270 275

648.8

–32.8

–0.1

616.0

600 610 620 630 640 650


Mitsuomi KoizumiPresident, Tobacco Business

The Japanese domestic tobacco business is positioned as the core source of profits for the JT Group. Competition for market share is becoming increasingly intense as total tobacco demand continues to decline,

due to factors such as the aging of Japanese society, growing awareness about the health risks associated with smoking and the tightening of smoking-related regulations.

Moreover, in the fiscal year ending in March 2011, a significant drop in demand is expected as a result of a steep tax increase decided for October. In this difficult business environment, JT is resolved to boost the value of its Japanese domestic tobacco business in the medium term by simultaneously pursuing a strategy for sales growth and enhancing productivity.

Japanese Domestic Tobacco Business – Adjusted Net Sales Excluding Tax*(Billions of yen)

Japanese Domestic Tobacco Business – EBITDA(Billions of yen)

FY 3/2009

Volume effect

Price and product mix effect

Cost increase

Sales promotion and others

FY 3/2010

Leaf tobacco reappraisal gain/loss

FY 3/2009

Volume effect

Price and product mix effect

FY 3/2010

* Excluding revenues from the imported tobacco, domestic duty free, the China Division, and other miscellaneous�

Amid a difficult business environment, the share of JT products remained stable compared with the previous year, with the share of key brands growing steadily.

Implemented measures to enhance the brand equity and conducted sales promotion with a particular focus on key brands

launched new products that captured market needs

Net sales and profits declined but EBITDA exceeded initial forecasts of JPY 246.0 billion.

Adjusted net sales excluding tax dropped due to a volume decline.

eBITDA declined as an increase due to the revision of the royalty rate was offset by the volume decline and increased raw materials costs.

Operating income grew due to the completion in April 2009 of the amortization of the trademark rights taken over from the former RJRI and a drop in the depreciation and amortization costs related to vending machines.


Review of Operations

FY 3/2010 Business Performance SummarySales volume 151.9 billion cigarettes down 5.0%Adjusted net sales excluding tax* ¥616.0 billion down 5.1% EBITDA ¥257.6 billion down 5.4%

Operating income ¥203.3 billion up 8.0%* Adjusted net sales excluding tax do not account for revenue from the imported tobacco, domestic duty

free, China Division and other miscellaneous�

24

Please be reminded that this section is intended to explain the business operations of JT to investors,but not to promote sales of tobacco products or encourage smoking by consumers�

As JT implemented measures to enhance the brand equity, including the launch of new products that captured market needs, and con-

ducted sales promotion activities with a particular focus on key brands, the market share of overall JT products remained stable while

the share of key brands grew steadily�

JT Share(Years ended March 31)(%)

Total Share of Key Brands*(Years ended March 31)(%)

* Mild Seven, Seven Stars, Pianissimo (The market share figure for key brands is inclusive and retrospective of market share figures for ‘icene’ and ‘Lucia,’ which were integrated into Pianissimo family on January 2010)

200763

64

64.965.1

64.964.865

66

67

2008 2009 201042

43

44

45

45.144.8

44.043.7

46

2007 2008 2009 2010

Launch New Products Centered on Key Brands

New Products Launched in FY 3/2010

June ’09 Mild Seven 100’s Box December ’09 Pianissimo Icene Menthol One (D-spec)

June ’09 Mild Seven lights 100’s Box February ’10 Mild Seven Impact One Menthol Box

August ’09 Seven Stars Black Charcoal Menthol Box March ’10 Camel Menthol Mini

October ’09 Winston lights Box

Mild Seven 100’s Box Mild Seven Impact One Menthol Box

Seven Stars Black Charcoal Menthol Box Pianissimo Icene Menthol One (D-spec)

Mild Seven Lights 100’s Box

25

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Product Strategy

From now on, our product strategy will focus on enhancing the

brand equity so as to provide value commensurate with the price,

and building a brand portfolio that offers a wider selection of prod-

ucts� Through this strategy, we will maintain and expand our market

share�

enhancing the brand equity to provide value

commensurate with the price

• Enhancingproductinnovation(enhancingR&D

capability)

• Expandingtheproductlineup

• Strengtheningprogramstoimprovetaste,package

design and other features of products

Brand Portfolio Offering a Wide Selection –

Japanese Domestic Tobacco Business:

Prices of Major Brands (application basis)

Distribution Strategy

To achieve top-line growth, the greatest challenge for our distribution

strategy is to secure overwhelming superiority in product exposure

at retail stores� Specifically, we will strive to secure product exposure

in ways suited to the characteristics of each store type through

suggestions regarding sales space and the introduction of display

boxes� As for sales through vending machines, we will strive to

make efficient allocation while making investments necessary for

increasing the attractiveness of our products�



Strategies and Specific Measures

Optimizing our Marketing Mix toward Sustainable Growth through the Provision of Quality and Services Commensurate with the Price

~ Sep� 2010

(Yen per pack)

350 Cabin PrestigePeace Infinity

320PianissimoCamelSalem

300

Mild SevenCabinSeven StarsPeaceHope

290WinstonCasterHi-Lite

Oct� 2010 ~

(Yen per pack)

470Cabin PrestigePeace Infinity

440

PianissimoCamelSalemSeven StarsPeaceHope

410

Mild SevenCabinCasterHi-Lite

400 Winston

Marketing Strategy

Our marketing force, the vast size of which eclipses the marketing

teams of our competitors, satisfies the multitude and variety of

needs of retailers scattered across the country� We will continue

to engage in efficient and effective marketing activities in ways

linked to our product and distribution strategies, while complying

with regulations and rules such as restrictions on tobacco advertis-

ing and prevention of youth smoking�

Improving Quality and Productivity

We will implement measures to maximize customer satisfaction,

including constantly improving product quality and strengthening

the shipment assurance system� In addition, in line with the planned

price revisions in October, we will make capital expenditures in

order to provide quality commensurate with the price and to meet

the increasingly diverse needs of customers�

Productivity improvement is a critical challenge for any manu-

facturing company� As part of its effort to improve productivity, JT

closed two factories at the end of March 2010 so as to optimize

our tobacco production capacity and restructure the Japanese

domestic tobacco business in ways to make it more competitive�

In addition, we will close one factory at the end of March 2011;

after that, we will have 6 factories in Japanese domestic operation

in April 2011�

We will continue to strive toward an even more cost-efficient

operating structure�

Fulfilling Our Responsibility as the Market leader

We will continue to fulfill our responsibilities as the leading tobacco

company in the Japanese market by endeavoring to achieve a har-

monious coexistence between smokers and nonsmokers� We will

also engage in initiatives to improve smoking manners and strive

harder to secure and create space and opportunity for smoking, for

example by helping to provide comfortable smoking areas�

As a Core Source of Profits for the JT GroupWe will ensure that the Japanese domestic tobacco business

continues to serve as the JT Group’s core source of profits by

overcoming challenges in the Japanese domestic market, such

as the continuing decline in total tobacco demand and intensify-

ing competition�

26

Topics

Zerostyle Mint: Innovative Smokeless Tobacco Product Developed in Quest to Meet Diverse Customer Needs

History of Tobacco enjoyment with a Great Variety of Choice

Tobacco has a rich history and is available in a large number of varieties� In different parts of the

world, smokeless tobacco including snuff and chewing tobacco are consumed in addition to ciga-

rettes� While the majority of consumers in Japan are smoking cigarettes, demand is increasing

for tobacco products designed to be used in places where consideration needs to be given for

nearby nonsmokers as well as products with better taste and flavor�

“Zerostyle Mint”: Innovative Smokeless Tobacco Product

“Zerostyle Mint” is a new type of snuff tobacco product� It does not need a flame to light it, and

thus is smokeless, allowing consumers to use it in a variety of locations while giving consideration

to neighbors at the same time� Through the introduction of the new menthol product, JT believes

that it is expanding the opportunity for consumers to use tobacco by providing consumers with

a wider selection of tobacco categories to choose from�

As conventional snuff products are relatively new to Japanese consumers, the body of “Zerostyle

Mint” is designed so as to accommodate a replaceable cartridge which contains tobacco leaves�

Commitment to Better Customer Satisfaction

Tobacco is favored among adults as a product that provides mental relaxation and helps to achieve

mental concentration, for example�

To help customers enrich their life with tobacco, JT is committed to meeting their diverse

range of needs by developing a broad range of cigarettes and other tobacco products as well as

by improving taste and flavor�

Following the launch of “Zerostyle Mint,” we will pursue our quest for innovation with an open

mind so that we can better satisfy our customers�

Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco products or encourage smoking by consumers�

Sales beginning exclusively in Tokyo in mid-May 2010

27

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9,200 9,400

10,445

–68

+815

11,192

–1,510

9,682

9,8009,600 10,000 10,40010,200 10,600 10,800 11,000 11,200

3,452

+19

–416

+913

3,967

–1,002

2,965

2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 4,000 4,200 4,400

International Tobacco Business

Pierre de laboucherePresident & CEO, Japan Tobacco International

Japan Tobacco International (JTI), JT Group’s international tobacco business, has a solid business foundation due to its geographic profile and its competitive edge in both brands and people. In 2009 JTI gained market share in its key markets due to our strong brand equity and portfolio despite an adverse economic environment.

JTI strengthened its foundation further by acquiring leaf suppliers in order to secure supply of quality leaf. While the business environment continues to be challenging, JTI remains committed to investment in its people and brands so as to further enhance its competitiveness.

FY 3/2010 Business Performance SummaryTotal sales volume* 434.9 billion cigarettes down 2.5%GFB sales volume 243.4 billion cigarettes down 0.9% Adjusted net salesexcluding excise taxes** $9,682 million down 7.3%

EBITDA $2,965 million down 14.1%

[At constant rates of exchange]Adjusted net salesexcluding excise taxes** $11,192 million up 7.2%

EBITDA $3,967 million up 14.9%* Total volume includes cigars, pipe tobacco and snus, but does not include private label and contract

manufactured products** Adjusted net sales excluding tax do not account for revenue from distribution, private label, contract

manufacturing and other peripheral businesses

JTI achieved 15% growth in dollar-based EBITDA at constant rates of exchange.*

Market share gains in key markets were achieved by • well-balanced GFB (Global Flagship Brands) portfolio, and • continued investment in brands.

Pricing as a driver of eBITDA growth at constant rates of exchange.

* Based on the assumption that the exchange rate of the previous year is applied�

International Tobacco Business – Adjusted Net Sales Excluding Tax*(Millions of US dollars)***

International Tobacco Business – EBITDA Before Royalty Payments to JT(Millions of US dollars)***

FY 3/2009 FY 3/2009

Volume effectVolume effect

Price/product mix effect

Price/product mix effect

Others

Forex impact** Forex impact**

FY 3/2010 FY 3/2010

2009 at constant rates of exchange 2009 at constant

rates of exchange

* Adjusted Net sales excluding tax do not account for revenue from distribution, private label, contract manufacturing and other peripheral businesses�

** The forex impact represents the fluctuation between US dollar and other currencies�*** The US dollar is the reporting currency for our International Tobacco Business�

Despite strong business performance, Adjusted net sales and profits declined on a reported basis due to adverse currency impacts.

Strong business performance was fully offset by the uS dollar appreciation against our major currencies. The yen’s appreciation against the dollar further eroded yen-based earnings.



28

2008* 2009* ppt change

Russia 35.7% 36.8% 1.1

France 14.2% 14.8% 0.6

Italy 17.1% 18.5% 1.4

Spain 20.5% 20.6% 0.1

UK 39.1% 40.4% 1.3

Turkey 17.0% 18.8% 1.8

Taiwan 38.7% 38.0% (0.7)

* twelve months moving average

Source: AC Nielsen, Core EPOS and JTI Internal Data

Sales Volume Performance by Cluster

Sales Volume Performance by Cluster

South&WestEurope(Unit: billions of cigarettes)

2009 Year-on-year change

Total sales volume 64.5 0�4%GFB sales volume 55.7 2�5%

● JTI increased its total sales volume and GFB sales volume, despite the acceler-ated industry volume decline�

● Camel achieved 1�6% sales volume growth, driven by strong performance in Italy�

● Winston achieved 6�1% sales volume growth, and continued as the fastest growing cigarette brand in Italy and France�

North&CentralEurope(Unit: billions of cigarettes)


Total sales volume 47.5 7�6%GFB sales volume 20.4 9�4%

● Total sales volume grew due to strong performance in the UK�● In the UK, while the down-trading trend accelerated, industry volume increased

due to reduced overseas travel from the country� As a result, Sterling, our value brand, performed strongly�

● The GFB sales volume grew, driven by LD in Poland and by Benson & Hedges, Winston and Camel in Austria�

CIS+(Unit: billions of cigarettes)


Total sales volume 214.6 –2�4%GFB sales volume 105.0 0�3%

● The overall CIS+ industry size was reduced, and consumers began down-trading to mid-price and value products�

● The GFB sales volume remained stable as LD captured consumer down-trading from the sub-premium price category�

● In Russia, LD and Glamour contributed to continued sales volume growth, and JTI demonstrated its market leadership with a competitive pricing strategy�

Rest of the World(Unit: billions of cigarettes)


Total sales volume 108.4 –8�0%GFB sales volume 62.4 –8�1%

● Excluding the impact of specific events in Iran and the Philippines, JTI’s total sales volume and GFB sales volume grew strongly, driven by Turkey and the Middle East�

● In Turkey, Winston, Monte Carlo and LD all increased market share, driving JTI’s volume growth ahead of its competitors�

Rest of the World 24.9%

North& Central europe 10.9%

CIS+ 49.3%

South&WestEurope 14.8%

Market share gain in key markets

Our competitiveness has been enhanced through continued investment in brands, including product improvement and effective marketing initiatives.

Our strength in the sub-premium and mid-price segments drove market share growth.

29

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Strong GFB PortfolioGFB Sales Volume Comparison between 2009 and 2008 (excl. specific events*)

(Unit: billions of cigarettes)

Volume/Year-on-year growth Brands % of total volume

Year-on-year change

2008 Act. 245.5

2009specific events* (7.8)

2008 excl. specific events* 237.7*

Prestige (0.9) Sobranie 0.3% (37.5%)

Premium (1.8) Camel, Mild Seven, Benson & Hedges, Silk Cut 17.3% (2.4%)

Sub-Premium 3.1 Winston, Glamour 30.4% 2.4%

Mid/Value 5.3 LD 7.9% 18.2%

Total GFB 56.0% 2.4%

2009 Act. 243.4

* For the purpose of comparison, the table above takes into account specific circumstances in Iran and the Philippines, therefore 2009 specific events are excluded from 2008 total volume correspondingly�

In 2009, JTI decided to improve its leaf supply and strengthen its capability to procure Brazilian, African and US leaf through two acquisitions

in Brazil, one in Africa, and a joint venture in the US�

Key Benefits

Actively manage the leaf-tobacco supply chain in anticipation of increased regulation in the sector.

Work directly, and build relationships with farmers and other related parties, leading to further improvements in the quality of leaf tobacco.

enhance the JT Group’s talent pool and expertise in the area of leaf tobacco procurement.

Security of Quality Leaf Supply

The acquisition of leaf suppliers improved JTI’s business fundamentals by providing enhanced capabilities from leaf to finished products.

The integration of suppliers is proceeding according to schedule.

Security of Quality leaf Supply

Improved Quality of leafDirect Relationship with Tobacco Growers enhanced Talent Pool

Price segment

GFB achieved 2.4% growth in adjusted total sales volume.

lD, our mid-price/value brand, drove GFB growth, performing strongly in Russia, Poland, ukraine and Turkey.

Winston and Glamour, our sub-premium brands, achieved 2.4% growth in adjusted total sales volume. • In South & West Europe, Winston performed strongly due to enhanced packaging and new product launches.

• Glamour achieved 7.9% growth, driven by Russia.

Prestige and premium brands struggled due to the accelerated down-trading trend. However, JTI continues to invest in these brands to ensure that they are well positioned for the long term.



30

(%)

2000

338

10%

2001

400

2002

441

2003 2004 2005

551712

925

2006

1,090

2007

2,452

2008 2009*

3,452

3,967

35%

At constant rates of exchange

2009

2,965

31%

1,000

2,000

3,000

4,000

5,000

8

16

24

32

40

JTI’s strong foundation will lead sustained mid- to long-term growth.In 2009, our commitment to top-line growth enabled JTI to overcome the challenging economic environment and deliver another solid

set of results, achieving 15% EBITDA growth at constant rates of exchange�

Our strong brand portfolio will enable us to grow market share, and we will continue to invest in GFB particularly, in order to ensure

long-term growth�

Given the current economic uncertainties, we will continue to monitor the economic situation closely in 2010 and are prepared to adapt

as we see necessary�

JTI will accelerate its growth by making the most of its strong business foundation supported by its geographic profile and competi-

tive edge in brands and people� We will continue to be the JT Group’s profit growth engine, aiming to achieve the target under the

JT-11 medium-term business plan of EBITDA growth of at least 10% CAGR at constant rates of exchange�

27% CAGR


Quality top-line growth is JTI’s overriding priority� JTI remains committed to deploying its key strategies under the guiding principle of

continuous improvement�

Build and nurture outstanding brands

Continue to enhance productivity

Sharpen focus on responsibility and credibility

Develop human resources as a cornerstone of growth

* Based on the assumption that the exchange rate of the previous year is applied� EBITDA EBITDA Margin

EBITDA and EBITDA Margin Growth Rate(Millions of US dollars)

31

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40

56.8

+5.0

–17.6

44.1

42 44 46 48 50 52 54 56 58 60 62 –10

4.9

+1.3

+1.2

–17.0

–9.7

–6–8 –4 0–2 2 4 6 8


Inthepharmaceuticalbusiness,JTwillcontinuetobuildworld-class,uniqueR&Dcapabilitiesandreinforceitsmarket presence through innovative drugs by devoting efforts to increasing and advancing compounds in a late phaseofclinicaltrialandenhancingtheR&Dpipeline,sothatitcanpursueahigh-valueaddedbusinessbasedonthe development of world-class innovative drugs.

Net sales and profits in FY 3/2010 declined due to the absence of the upfront fee revenue and milestone revenue that boosted the results of FY 3/2009.

One-time revenues in FY 3/2009 Upfrontfeerevenuerelatedtoanti-osteoporosisdrugJTT-305,whichwaslicensedtoMerck&Co.oftheUnited

States in FY 3/2009 Milestone revenue associated with progress in the development of anti-dyslipidemia compound JTT-705, which

was licensed to Roche of Switzerland in FY 3/2005

Torii Pharmaceutical Co., Ltd. posted a rise in both net sales and profits.

Sales of the Futhan® protease inhibitor declined.

Sales of ReMITCH® CAPSuleS, an anti-pruritus drug for hemodialysis patients, started in March 2009

Sales of anti-HIV drug Truvada® and anti-emesis drug Serotone® grew.

Pharmaceutical Business – Net Sales(Billions of yen)

Pharmaceutical Business – EBITDA(Billions of yen)

FY 3/2009 FY 3/2009

Torii Pharmaceutical Co�, Ltd� (non-consolidated)

R&D expenses (non-conslidated)

Royalty income, etc�

Operating income of Torii Pharmaceutical Co�, Ltd� (non-conslidated)Royalty income, etc�

FY 3/2010 FY 3/2010

Noriaki OkuboPresident, Pharmaceutical Business



FY 3/2010 Business Performance SummaryNet sales ¥44.1 billion down ¥12.7 billionEBITDA –¥9.7 billion down ¥14.5 billion Operating loss –¥13.6 billion down ¥14.6 billion

32

Out-Licensing DealsFY Code Company

3/2005 JTT-705 (anti-dyslipidemia drug) Roche (Switzerland)

3/2005 JTK-303 (anti-HIV drug) Gilead Sciences (uS)

3/2007 Pre-clinical trial stage new compound GlaxoSmithKlein (uK)

3/2007Pre-clinical trial stage anti-body drug candidate

MedImmune (uS)

3/2009 JTT-305 (anti-osteoporosis drug) Merck (uS)

In-Licensing DealsFY Code Company

3/2004 Three anti-HIV drugs Gilead Sciences (uS)

3/2008 JTT-751 (anti-hyperphosphatemia drug) Keryx Biopharmaceuticals (uS)

Pursuit of Innovative DrugsWe are engaged in an unceasing quest to develop innovative and globally competitive drugs, which we regard as the most critical

mission for our pharmaceutical business� The development of new drugs is a tough challenge, which we are tackling with a sense

of pride and high motivation� We are endeavoring to make the kinds of achievements that we alone can realize and make available drugs

that we alone can offer, so that we may deserve the respect and appreciation of patients and medical staff around the world�

R&D StatusSomeprogresswasmadeinthereinforcementoftheR&DpipelineinthefirstyearofJT-11.

Anti-hepatitis C drug JTK-853 advanced to the clinical development stage abroad, bringing the number of drugs under clinical

development to 10, and one more drug moved to a higher stage�

Clinical Development (as of April 28)Code Key Indication Stage Rights

JTT-705 (oral) Dyslipidemia Phase 2 (Japan)Roche (Switzerland) obtained the rights to develop and commercialize the compound worldwide, with the exception of Japan. (Development stage by Roche: Phase 3)

JTT-130 (oral) DyslipidemiaPhase 2 (Japan)Phase 2 (Overseas)

JTK-303 (oral) HIV infection Phase 1 (Japan)Gilead Sciences (uS) obtained the rights to develop and commercialize this compound worldwide, with the exception of Japan. (Development stage by Gilead Sciences: Phase 3)

JTT-302 (oral) Dyslipidemia Phase 2 (Overseas)

JTT-305 (oral) Osteoporosis Phase 2 (Japan)Merck (uS) obtained the rights to develop and commercialize this compound worldwide, with the exception of Japan.

JTS-653 (oral) Pain Overactive bladder Phase 1 (Japan)

JTT-654 (oral) Type 2 diabetes mellitusPhase 1 (Japan)Phase 2 (Overseas)

JTK-656 (oral) HIV infection Phase 1 (Overseas)

JTT-751 (oral) Hyperphosphatemia Phase 2 (Japan)JT obtained the rights to develop and commercialize this compound in Japan from Keryx Biopharmaceuticals (uS) (Developed jointly with Torii)

JTK-853 (oral) Hepatitis C Phase 1 (Overseas)


To strengthen the capability for clinical development, including late-stage development,and the capability for drug discov-ery research

To strengthen the capability for clinical development in order to keep up with the progress in clinical development

ToenhancethecapabilityfordrugdiscoveryresearchinordertoreinforcetheR&Dpipeline • To continue concentrating R&D resources mainly on the following four areas: glucose and lipid metabolism; virus research; immune disorders and

inflammation; and bone metabolism

To enhance licensing activity and strengthen relationships with foreign partners To explore strategic opportunities for licensing agreements in order to rapidly increase the value of

the pharmaceutical business.To further develop Torii Pharmaceutical’s expertise in its areas of strength

To further expand sales of ReMITCH® CAPSuleS and Truvada® Tablets

To develop expertise in the field of allergens.

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436.0

–1.2

–18.0

–22.0

394.7

360350 370 390380 400 410 420 430 440

17.0

–0.4

–2.2

+0.1

14.5

2.5 5.0 7.5 10.0 12.5 15.0 17.5

Food Business

Mutsuo IwaiExecutive Vice President in charge of Food Business

Factors behind the net sales decline

The net sales decline was mainly due to the withdrawal from the chilled processed food business and the exclusion of some subsidiaries from the consolidated results.

Factors behind the EBITDA decline

eBITDA increased slightly from the previous year in the key business segments* due to a drop in raw materials prices and cost reduction efforts.

However, eBITDA for the overall food business declined as a result of one-time losses** in the fishery product business. * Key business segments: Beverages, processed foods and seasonings ** One-time losses: Recording of loss provisions related to delays in the collection of some accounts receivable and valuation losses due to a steep

drop in market prices of some products

Factors behind the operating income decline

Operating income was dragged down mainly due to the decrease in eBITDA.

Amortization of goodwill related to the acquisition in June 2009 of additional shares in Green Foods Co., ltd. by Katokichi Co., ltd. (now renamed TableMark Co., ltd.), a JT subsidiary.

Food Business – Net Sales(Billions of yen)

Food Business – EBITDA(Billions of yen)

FY 3/2009 FY 3/2009

Beverage Business

Beverage Business

Processed food Business, etc�

Processed food Business, etc�

Chilled foods (Withdrawal in Nov, 2008)

Overhead costs

FY 3/2010 FY 3/2010

In the food business, we are striving to provide delicious foods that people can consume safely while wishing to “provide products that your loved ones want to eat.” We will continue to devote our efforts to the three business areas of beverages, processed foods and seasonings, aiming to retain the trust of customers by serving the people’s daily lives through our offering of food products.



FY 3/2010 Business Performance SummaryNet sales ¥394.7 billion down ¥41.3 billionEBITDA ¥14.5 billion down ¥2.5 billionOperating loss –¥13.7 billion down ¥2.2 billion

34

237,000

100,000

200,000

300,000

20102009200820072006

250,500 257,000 254,000 257,000


In the food business, we are devoting our efforts to the three business areas of beverages, processed foods and seasonings, imple-menting measures to establish the highest standard of safety management and striving to further strengthen our business foundation for future growth�

Beverages Business

Implementing measures to strengthen profitability• To strengthen the Roots flagship brand, which is acclaimed for

its authentic taste of coffee created by JT’s original technology, to mark the 10th anniversary of the brand�

• To enhance our sales networks led by Japan Beverage Inc�, a JT subsidiary responsible for operating vending machines nationwide, and to strive to provide conscientious services�

• To establish a solid profit base by pursuing entire business efficiency�

Processed Foods and Seasonings Businesses

Convert to high value business• To expand the business volume by strategic concentration in staple

food products (frozen noodles, frozen and packed cooked rice, frozen breads) and yeast products in seasonings, as high-value products, for which we can make maximal use of acquired technol-ogy and product development power in the TableMark group�

• To strengthen profitability by establishing a strong business foundation, while striving to strengthen the value chain in the whole business process, from procurement, to manufacturing, and production of sales, coupled with acceleration of cost-competitiveness�

* The company name of Katokichi was changed to TableMark as of January 1, 2010�

Food Safety Control

Actions for reducing risks• Implementing strict audits on factories and promoting the acquisition of the ISO 22000 certification (frozen processed food factories

of the JT Group and factories in commission acquired the ISO 22000 certification) for food safety management systems as well as devoting increased efforts to food defense against external purposeful attack�

• Enhancing inspection items, and double-check inspection of agricultural chemicals for imported processed foods from China, in China as well as in Japan�

Improving consumer response• Strived to enhance the system that enables collection of customer feedback on a 365-day-per-year basis and quick and appropriate

group-wide sharing of the feedback and to actively disseminate information useful for customers, while positively disclosing produc-tion plants of products as well as the main origin of raw materials�

Strengthening the institutional capability• Established the Tokyo Quality Control Center on the premises of the Food Development Center which is an R&D base• Actively incorporating diverse knowledge and viewpoints into food safety control by seeking assessment and advice from outside

experts appointed as food safety advisers, and reflecting these in business

Number of Vending Machines(Years ended March 31)(Machines)

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History in Japan from the early 20th century to 1984, when the Japan Tobacco Inc. Law was enacted.Our history in Japan dates back to 1898, when the government formed a monopoly bureau to undertake the exclusive sale of domestic leaf

tobacco. In the early 1900s, the government extended this monopoly to all tobacco products in Japan and to the domestic salt business. On

June 1, 1949, the bureau was established and duly named the Japan Tobacco and Salt Public Corporation, or JTS. This corporation helped to

ensure the stable supply of tobacco and secure fiscal revenues for the government.

JT is a joint stock corporation that was incorporated in April 1985 under the Commercial Code of Japan, pursuant to the Japan Tobacco Inc. Law, or the JT Law.

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

The JT Group’s overseas history began with the founding of Austria Tabak in 1784. Roughly 70 years later, Tom Gallaher started out in business in Northern Ireland, laying the foundations for Gallaher Group. Meanwhile, R.J Reynolds Tobacco Co. (RJR), which would subsequently create the Camel and Winston brands, was established in 1874 in the US.

In this manner, the current JT Group can trace its origins to many different countries and regions such as Austria, Northern Ireland, the US and Japan. The JT Group has a long history and extensive experience in the tobacco business.

Before 1985

1784 1857

1891 1898

1949

l Austria Tabak is founded by Emperor Joseph II.

l HOPE (10) lanched as Japan’s first domestically produced filter cigarettes. l Silk Cut launched.

l Tom Gallaher sets up his business (Londonderry, Northern Ireland).

l The Moscow-based Ducat factory is founded. l The Japanese Monopoly Bureau is established for the sale of domestic leaf tobacco.

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

JAPAN TOBACCO INC. ANNUAL RePORT 2010

History of the JT Group

19641957

l Winston launched.

l Mild Seven launched (Japan). l Mild Seven launched internationally.

1981

1954

1977

36

1969

18791874

1968

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

l Camel launched.

l Gallaher acquired by the American Tobacco Company.

l Cellophane is introduced by RJR in order to preserve the freshness of tobacco.

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

The growth in demand for cigarettes in Japan began to slow in the mid-1970s as the result of demographic trends and growing concern

about health risks associated with smoking. This trend continued, such that growth in industry sales essentially stopped. In addition to the

structural change, the domestic tobacco market was substantially opened to foreign tobacco suppliers, triggering competition between

domestic and foreign tobacco products in Japan, and foreign countries stepped up pressure on Japan to take further market-opening measures

that were difficult to implement within the framework of the monopoly tobacco sales system. Amid such pressure as well as moves toward

the reform of government-run public corporations, a government panel was established in March 1981 to conduct research on the public

corporation system. In its third report (July 30, 1982), the panel proposed drastic reform of the monopoly system and the public corporation

system. In response to this proposal, the government conducted a comprehensive review of these systems and drafted bills to:

l Abolish the tobacco monopoly law in order to liberalize tobacco imports and establish a tobacco business law in order to make necessary

adjustments related to the tobacco business.

l Abolish the JTS law, reorganize JTS as a joint stock corporation so as to enable it to pursue rational corporate management as much as possible

and establish the Japan Tobacco Inc. Law, which provides for a necessary minimum level of regulation in light of the corporation’s need to

compete with foreign tobacco companies on an equal footing in the domestic market following the liberalization of tobacco imports.

These bills were enacted on August 3, 1984 in the 101st session of the Diet and promulgated on August 10 of the same year. In April 1985,

JT was founded as an entity that took over the whole of the business operations and assets of JTS.

1913 1931

l Benson & Hedges is acquired by Gallaher. l Salem launched.

l Japan Tobacco Inc. Law enacted.

1955 1956

1984

l Seven Stars lanched, featuring Japan’s first domestically produced charcoal filter.

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The corporate history of JT is as shown in the table below. As for the international tobacco business, the history before JT’s acquisitions of RJR

Nabisco’s non-US tobacco operations and Gallaher is included.

The operating environment for JT changed drastically in just two years after the foundation of the company, as represented by the yen’s

upsurge following the Plaza Accord in 1985, a tobacco tax hike in 1986 and the abolition of tariffs on imported cigarettes in 1987. Amid the yen’s

upsurge, a price increase for JT products due to the tobacco tax hike coupled with price cuts for imported cigarettes attributable to the tariff aboli-

tion eliminated the price advantage of JT products over imported products, which had stood at around ¥60 to ¥80 when JT was founded in 1985.

As a result, competition between JT and foreign tobacco makers intensified in the Japanese market, leading to a decline in JT’s market share

from 97.6% in fiscal 1985 to 90.2% in fiscal 1987. To cope with the rapid deterioration of the operating environment, JT carried out rationalization

measures to enhance its cost-competitiveness and pursued diversification while implementing measures to strengthen its marketing capability

In and After 1985

1985 1986 1987

1995

2001

Aprill Japan Tobacco Inc. established. (Japanese tobacco market opened to foreign

tobacco manufacturers.)l The Business Development Division established to

promote new businesses.l The Business Development Division is later

reorganized into operational divisions engaged in the food and pharmaceutical businesses, finishing in July 1990.

Septemberl The Central Pharmaceutical Research Institute

established to enhance in-house research capabilities.

Mayl JT acquires the non-U.S. tobacco business of RJR

Nabisco Inc.Julyl JT acquires the food business of Asahi Kasei

Corporation, including Asahi Foods and seven other subsidiaries.

Octoberl Under a business tie-up between JT and Torii

Pharmaceutical Co., Ltd., the two companies’ R&D operations related to medical pharmaceuticals are concentrated at JT, while their promotion operations are combined at Torii Pharmaceutical.

l LD launched (Russia).

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

Octoberl Government releases first tranche of outstanding

JT shares for initial public offering (394,276 shares offered at 1,438,000 yen apiece).

l JT stock listed on the first sections of stock exchanges in Tokyo, Osaka and Nagoya.

Novemberl JT stock listed on stock exchanges in Kyoto,

Hiroshima, Fukuoka, Niigata and Sapporo.

l Acquisition of Yelets (Russia).

Aprill Import tariffs on imported cigarettes abolished.

Mayl Head office moved back to Minato-ku from

Shinagawa-ku following completion of new head office building.

l Peter I launched (Russia).

1993 1994

20001999

2007

Aprill JT terminates a licensing contract under which it

had exclusive rights to produce and sell Marlboro brand products in Japan and use the Marlboro trademark in the country.

Junel Acquisition of CRES Neva Ltd. (Russia).

l Glamour launched (Russia, Ukraine, Kazakhstan).

Aprill JT implements a five-for-one stock split in order to

expand the investor base, effective April 1, 2006.Mayl Acquisition of AD Duvanska Industrija Senta in Serbia.

Aprill JT acquires all outstanding shares of Gallaher

Group Plc.

20062005

JAPAN TOBACCO INC. ANNUAL RePORT 2010

History of the JT Group

38

1988 1991 1992

Octoberl “JT” communication name introduced.

l Acquisition of Manchester Tobacco Company Ltd.

l Acquisition of AS-Petro (Russia).

Junel Government releases second tranche of outstand-

ing JT shares (272,390 shares offered at 815,000 yen apiece).

l Acquisition of Tanzanian tobacco production facility.

Aprill JT ends its salt monopoly business in line with

abolition of the salt monopoly system.l The Tobacco Mutual Aid Pension scheme inte-

grated into the Employees’ Pension scheme.

l American Brands spins off Gallaher which becomes Gallaher Group Plc and is listed on the London and New York stock exchanges.

Octoberl JT repurchases 45,800 own shares to increase its

management options.

Aprill JT signs an agreement with Unimat Corporation

(Currently, Japan Beverage Inc.) on a tie-up regarding beverage business.

l JT later acquires a majority stake in Unimat.Decemberl JT acquires a majority stake in Torii Pharmaceutical

Co., Ltd. through a tender offer.

Junel Government releases third tranche of outstanding

JT shares (289,334 shares offered at 843,000 yen apiece), reducing its stake in JT to the minimum level allowed under law.

November–March 2005l JT repurchases 38,184 own shares to increase its

management options.

1997 1998

2003 2004

1996

2002

Januaryl JT acquires a majority stake in Katokichi Co., Ltd.

through a tender offer.Aprill JT acquires a majority stake in Fuji Foods

Corporation.Julyl JT concentrates its processed food operations,

including frozen food operations and seasonings operations, at the Katokichi Group.

Mayl JTI celebrates its 10th anniversary.Junel JTI Leaf Services (US) LLC established.Octoberl Acquisition of leaf suppliers Kannenberg & Cia.

Ltda. (Brazil) and Kannnenberg, Barker, Hail & Cotton Tabacos Ltda. (Brazil).

Novemberl Acquisition of leaf suppliers Tribac Leaf Limited (UK).

Januaryl Katokichi Co., Ltd. was renamed TableMark Co., Ltd.Mayl Smokeless tobacco product Zerostyle Mint launched

(Exclusively in Tokyo)

2009 20102008

Note: l Main topics of the JT Group. l Main topics of RJR Nabisco’s non-US operations before participating in the JT Group. l Main topics of Gallaher before participating in the JT Group.

in order to maintain the domestic sales volume. In the 1990s, JT’s competition with foreign rivals in the Japanese market heated up further.

Furthermore, overall cigarette demand in Japan peaked out in the latter half of the 1990s due to a contraction of the adult population and growing

concern about health problems associated with smoking. Amid the increasingly difficult operating environment for the domestic tobacco busi-

ness, JT took additional rationalization steps, pursued consolidation of operations in its areas of business diversification and expanded the inter-

national tobacco business, thereby strengthening its business foundation. JT significantly strengthened the international tobacco business by

acquiring RJR Nabisco’s non-US tobacco operations in 1999 and Gallaher in 2007. With its international sales volume exceeding its domestic sales

volume, the JT Group continues to grow as a global tobacco company. The international tobacco business is the engine of the JT Group’s profit

growth through its comprehensive brand portfolio which includes Winston, Camel and Mild Seven as well as Benson & Hedges, Silk Cut, LD,

Sobranie and Glamour.

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Japan Tobacco Inc. annual RepoRT 2010

Corporate Governance � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 41

Activities Contributing tothe Environment and Society � � � � � � � � � � � � � � � � � 49

Responsibility

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I Basic Concept of Corporate Governance and Basic Information Including Capital Structure and Corporate Attributes

2. Capital StructureCombined equity stakes of foreign shareholders: between 20% and 30%

Major Shareholders as of March 31, 2010

Name No� of shares held Equity stake (%)

The Minister of Finance 5,001,359 50�01

Japan Trustee Services Bank, Ltd� (Trust Account) 280,288 2�80

The Master Trust Bank of Japan, Ltd� (Trust Account) 219,754 2�20

State Street Bank and Trust Company 505223 (Standing Agent: Mizuho Corporate Bank, Ltd�, settlement division) 188,236 1�88

Mizuho Trust and Banking Co�, Ltd�, re-trusted to Trust & Custody Services Bank, Ltd�, as retirement benefit trust assets 169,000 1�69

State Street Bank and Trust Company (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 111,112 1�11

Mellon Bank N�A� as Agent for Its Client Mellon Omnibus U�S� Pension (Standing Agent: Mizuho Corporate Bank, settlement division) 86,891 0�87

Bank of Tokyo-Mitsubishi UFJ 71,455 0�71

Morgan Stanley & Co� Inc� (Standing Agent: Morgan Stanley Securities Ltd�) 64,447 0�64

HSBC BANK PLC A/C THE CHILDRENS INVESTMENT MASTER FUND (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 62,765 0�63

Total 6,255,307 62�55

(Note) In addition, 419,903 own shares are held by JT�

3. Corporate Attributes

Listed on: First sections of the Tokyo Stock Exchange, the Osaka Securities Exchange and the Nagoya Stock Exchange and the major sections of the Sapporo Securities Exchange and the Fukuoka Stock Exchange

Closing month of the annual account book March

Business sector Foods

Number of employees (consolidated basis) 1,000 or more

Net sales (consolidated basis) ¥1 trillion or more

Presence or absence of parent company None

Number of consolidated subsidiaries Between 100 and 300

and social environments change� Based on this recognition, JT has

been striving hard to enhance corporate governance as a top manage-

ment priority�

1. Basic ConceptJT recognizes that prompt and proper decision-making and business

execution are vital to increasing our corporate value and responding

appropriately to new challenges to come in the future, as the business


Corporate Governance

4. Other Factors which May Materially Affect Corporate Governance

The Japan Tobacco Inc� Law (the “JT Law”) obligates the government

to hold JT shares� As of the end of March 2010, the government held

50�01% of all outstanding JT shares�

The Minister of Finance has the authority to supervise JT under the

JT Law and Tobacco Business Law�

Torii Pharmaceutical Co�, Ltd� (hereinafter referred to as “Torii

Pharmaceutical), which engages in the pharmaceutical business, is a

consolidated subsidiary of JT and is listed on the Tokyo Stock Exchange�

While JT is responsible for R&D, Torii Pharmaceutical undertakes produc-

tion and sales� In order to perform these different functions efficiently,

the two companies maintain a cooperative relationship� JT respects the

need to ensure a certain degree of independence for Torii Pharmaceutical

by refraining from undermining the company’s business judgment�

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1. Matters Concerning the Organizational Structure and Organizational Management

Form of organization A company with auditors

Matters concerning directors

Chairman of the Board of Directors Chairman

Number of directors 9

Number of outside directors None

The reason for the adoption of the current organizational system:

While there is no outside director, JT selects persons suitable for the

post of director in light of the candidates’ personality, judgment and

experiences� In addition, in order to ensure the appropriate exercise

of the function of providing advice from the perspective of an outsider

that is expected of an outside director, JT has established the Advisory

Committee, which comprises 5 outside experts and advises the man-

agement team from a broad perspective with regard to how the

company should operate in the medium to long term, and other issues

of similar importance� In addition, JT has established an objective and

neutral management monitoring system based on audits conducted

by auditors (the majority of the auditors are outside auditors (all of the

three auditors have the status of an independent executive)) from an

independent and fair standpoint� There are also the Compensation

Advisory Panel and the Compliance Committee, both of which include

outside members with expert knowledge� In light of the above, we

believe that the existing systems enable adequate monitoring of the

execution of business�

Although JT does not have any specific plan to appoint an outside

director at the moment, it will continually consider the usefulness of

an outside director and the qualifications of candidates�

Member of advisory committee

Hiroyuki Itami

Professor, Graduate School of Management of Science and Technology,

Tokyo University of Science�

Kazuo Inamori

Founder and Chairman Emeritus, Kyocera Corporation

Sakutaro Tanino

Former Japanese Ambassador to India and China /Acting President,

Japan-China Friendship Center

Tomijiro Morita

Chairman of the Board, The Dai-ichi Life Insurance Company, Limited

Sakue Mizukoshi

President, SEVEN & i Publishing Co�, Ltd�

(The appointment is effective July 1, 2010�)

Matters concerning auditors

Presence or absence of Audit Board

The Audit Board is in place�

Number of auditors 4

cooperation between auditors and an independent auditor:

While auditors and the independent auditor (Deloitte Touche Tohmatsu

LLC) conduct audits individually, they endeavor to enhance their coop-

eration in order to ensure appropriate audits, for example by sharing

information on the results of their respective audits and, as necessary,

exchange information and opinions with each other�

Our Corporate Governance System

General Meeting of Shareholders

Board of Directors

Advisory Committee

Independent Auditors

Compliance Office

Compensation Advisory Panel

President and Chief Executive

Officerfive members

(including two outside members )

eight members (including two outside

members)

four members (including three outside

auditors)

Executive Officers

Group Companies

Lawyers

Auditor’s Office

Operational Review and

Business Assurance Division

nine members

five members (outside members)

Executive Committee

Compliance Committee

Audit Board

Departments

Selection or dismissal of members Selection or dismissal of members Selection or dismissal of members

Accounting audit/Operating auditAudit report

Accountingaudit

AdviceAccounting audit/Operating audit

Introduction of compliance-related mattersReport

Advice

Supervision of the performance

Review of the policy and the rule relating to compensation for board members andexecutive officers

Report/Proposal

Internal audit

Group audit



II Status of Business Management Organization Concerning Business Decision-Making, Execution and Supervision and Other Corporate Governance Systems

42

cooperation between auditors and the internal audit division:

While auditors and the Operational Review and Business Assurance

Division conduct audits individually, they endeavor to enhance their

cooperation in order to ensure appropriate audits, for example by

sharing information on the results of their respective audits and, as

necessary, exchange information and opinions with each other�

Information concerning outside auditors

Appointment of outside auditors There are outside auditors�

Number of outside auditors 3

There are three outside auditors at JT� Those outside auditors are

appointed in light of their experiences and broad perspective in their

respective backgrounds�

Although one of them, Mr� Koichi Ueda, is the representative director

of the Resolution and Collection Corporation, this corporation does not

have any business relations with JT� Therefore, Mr� Ueda himself has

no direct interest in JT� As well, neither of the other two outside auditors

has any direct interest in JT�

At JT, auditors including outside auditors exercise an objective and

neutral management monitoring function based on audits conducted

from an independent and fair standpoint� JT has designated all of the

three outside auditors as independent executives based on its judg-

ment that in light of the attributes of them and their close relatives,

there is not any risk of conflicts of interest arising between them and

ordinary shareholders�

Name Supplementary information Reason for appointment

Hisao Tateishi Joined the Ministry of Finance in April 1971�Appointed director-general of the Kanto-Koshinetsu Regional Taxation Bureau in July 1997�Appointed deputy director-general of the Personnel Bureau in July 1999�Appointed deputy director-general of the Personnel and Pension Bureau of the Ministry of Internal Affairs and Communications in January 2001�Appointed managing director of the Japan Foundation for Regional Vitalization in July 2001,Appointed managing director of the Federation of National Public Service Personnel Mutual Aid Associations (KKR) in July 2003�Appointed senior managing director of KKR in September 2005�Appointed standing auditor of JT in June 2007 (this appointment remains in effect)�

Also designated as independent executive�

Mr� Tateishi’s appointment is based on the judgment that he is qualified to serve as an outside auditor of JT because of the experi-ences and broad perspective acquired through his many years of service for the government and on the board of the Federation of National Public Service Personnel Mutual Aid Associations� He was also designated as an independent executive based on the judgment that in light of attributes of him and his close relatives, there is not any risk of conflicts of interest arising between him and ordinary shareholders�

Takanobu Fujita Joined Japan Broadcasting Corp� (NHK) in April 1963�Appointed a news commentator at NHK in June 1990�Retired from NHK in January 1995�Appointed professor at Kansei Gakuin University, School of Policy Studies in April 1999�Appointed visiting professor at Kansei Gakuin University, School of Policy Studies (this appointment remains in effect)�Appointed auditor of JT in June 2005 (this appointment remains in effect)


Mr� Fujita’s appointment is based on the judg-ment that he is qualified to serve as an outside auditor of JT because of the experiences and broad perspective concerning political and economic affairs that were acquired through his tenures as a news commentator at NHK and as a university professor� He was also designated as an independent executive based on the judgment that in light of the attributes of him and his close relatives, there is not any risk of conflicts of interest arising between him and ordinary shareholders�

Koichi Ueda Enrolled as a student of the Judicial Research and Training Institute in April 1967�Appointed public prosecutor in April 1969�Appointed Superintending Public Prosecutor of the Tokyo High Public Prosecutors Office in June 2006�Retired as public prosecutor in December 2006 at the mandatory retirement age�Registered as an attorney-at-law in January 2007�Appointed professor at Meiji University, Law School in April 2007 (this appoint-ment remains in effect)�Appointed as representative director of the Resolution and Collection Corporation (RCC) in January 2009�Appointed as representative director and president of RCC in March 2009 (this appointment remains in effect)�Appointed auditor of JT in June 2009 (this appointment remains in effect)�


Mr� Ueda’s appointment is based on the judg-ment that he is qualified to serve as an outside auditor of JT because of the experiences and broad perspective acquired through his service in the judicial field� He was also designated as an independent executive based on the judg-ment that in light of the attributes of him and his close relatives, there is not any risk of conflicts of interest arising between him and ordinary shareholders�

other matters concerning major activities of outside auditors:

In FY 3/2010, Mr� Tateishi and Mr� Fujita attended all of the 18 meetings

of the Board of Directors and the 16 meetings of the Audit Board, and

Mr� Ueda attended all of the 13 meetings of the Board of Directors and

all of the 12 meetings of the Audit Board since his appointment on June

23, 2009� Those outside auditors adequately performed their duties as

auditors by asking questions and making statements as necessary�

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Information concerning remuneration for senior officers:

The remuneration payments to senior officers made in FY 3/2010 are as follows:

<Total remuneration amount by officer type and by remuneration type and the number of officers concerned>

Officer type Total remuneration amount

(in millions of yen)

Total remuneration amount by remuneration type (in millions of yen) Number of officers concernedBasic pay Executive bonus Stock option grants

Directors 559 383 52 123 12

Auditors (excluding outside auditors) 33 33 — — 1

Outside officers 54 54 — — 4

Total 647 471 52 123 17

(Note 1) The amount of executive bonus is the amount of executive bonus that will be paid to directors�

(Note 2) The amount of stock option grants is the total amount of stock option grants that was given to directors within FY 3/2010�

Matters concerning incentives

Provision of incentives for directors

Introduction of a performance-linked remu-neration system and a stock option scheme

Officers eligible for stock option grants

Directors, Executive Officers

Supplementary information concerning incentives:

Remuneration for directors is linked to JT’s business performance

for each year and the company’s medium- and long-term corpo-

rate value�

Specifically, remuneration for directors who concurrently serve as

executive officers comprises basic monthly compensation and an

annual bonus linked to the company’s business performance in the

relevant year, and stock options, the value of which is linked to the

medium to long term corporate value of JT, as they are expected to

achieve targets of their assigned business through their daily execution

of business� Remuneration for directors who do not concurrently serve



as executive officers comprises basic monthly compensation and stock

options, as they are required to participate in decision-making regarding

companywide business strategies aimed at increasing the corporate

value of JT and to perform their audit-related duties�

As part of remuneration for directors and executive officers, JT

introduced a stock option scheme in order to enhance the motivation

to contribute to an increase in the corporate value and boost corpo-

rate morale�

Matters concerning remuneration for directors

Means of disclosure Annual securities report, business opera-tion report (business report), etc�

Disclosure status The total amount and its breakdown of remuneration payments to all directors is disclosed�The total amount of consolidated remunera-tion payments to persons who received consolidated remuneration of ¥100 million or more each�

The following information is disclosed in the 25th annual securities

report�

Total amount of consolidated remuneration paid to persons who

received consolidated remuneration of ¥100 million or more each�

<Policy concerning the remuneration amount and the remuneration

calculation method and the method of determining the policy>

JT’s basic concept of executive remuneration for senior officers 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 moti-

vate senior officers to enhance performance�

• Linking the remuneration to medium and long-term corporate

value

• Ensuring transparency through the implementation of deliberation

at the Compensation Advisory Panel that includes outside experts,

introduction of quantitative schemes (annual remuneration quotas

and the upper limit on stock option grants) and continuous monitor-

ing based on objective data�

In accordance with the above concept, remuneration for senior

officers comprises basic monthly compensation and a bonus linked to

the company’s business performance in the relevant year, and stock

options, the value of which is linked to the medium to long term cor-

porate value of JT�

Based on deliberation by the Compensation Advisory Panel, whose

members include outside experts, the amount of compensation for

directors is determined in consultations held by the Board of Directors

and that for auditors in consultations held by the Audit Board within

the limit approved by the General Meeting of Shareholders� The amount

of executive bonuses is determined at a meeting of the Board of

Directors in light of the business performance in the relevant business

year, based on deliberation by the Compensation Advisory Panel and

within the limit approved by the General Meeting of Shareholders�

Unlike remuneration for directors, a large portion of which is linked

to the business performance of the company, remuneration for audi-

tors comprises only basic monthly compensation in light of the main

role of auditors, which is to audit the status of compliance with laws

and regulations�

44

Meanwhile, the Executive Committee, comprising the company’s

President and other members appointed by the President, discusses

important management issues—particularly management policy and

basic plans regarding overall business operations—in addition to mat-

ters to be referred to the Board of Directors�

JT has adopted the Audit Board System, under which auditors, in

their capacity as independent agents with a mandate from shareholders,

examine the performance of duties by directors and executive officers

in order to ensure sound and sustainable growth and maintain and

enhance public trust in the company� It should be noted that Mr� Gisuke

Shiozawa, one of the auditors, has a significant level of knowledge

concerning financial and accounting affairs due to his experience as the

head of JT’s financing division�

The Operational Review and Business Assurance Division, which is

responsible for overseeing internal audits, examines and assesses the

system for internal management, including the management of group

companies, from its objective standpoint as an organization indepen-

dent from the organizations involved in business execution with due

consideration of such viewpoints as relevance, legal compliance, and

risk and submits reports and proposals to the President� The division

also reports to the Board of Directors� Furthermore, the division is

promoting efforts to enhance the audit system for the entire JT Group

by cooperating with group companies both in Japan and abroad�

JT has employed Deloitte Touche Tohmatsu LLC (DTT) as its inde-

pendent auditor, and DTT has conducted audits based on the Company

Act and the Financial Instruments and Exchange Act�

The certified public accountants who audited JT’s financial state-

ments for FY 3/2010 and the persons who assisted the auditing work

are as follows:

(Certified public accountants) Tatsuo Igarashi (five years), Shuichi

Momoki (five years), Satoshi Iizuka (three years)

* Figures in parentheses represent the number of consecutive years in which the certified

public accountants have engaged in the accounting audit of JT�

(Assistants for the audit work)

Certified public accountants: 11 persons, Junior accountants: 12 per-

sons, Others: 9 persons

While auditors, internal audit organizations including the Operational

Review and Business Assurance Division, and independent auditors

conduct audits individually, they endeavor to enhance their cooperation

in order to ensure appropriate audits, for example by sharing informa-

tion on the results of their respective audits�

As for the nomination of candidates for the posts of director and

auditor, the Board of Directors makes a decision by taking into consid-

eration the personality, judgment and experiences of the candidates,

and then the nominated candidates are proposed at a General Meeting

of Shareholders�

Support for outside auditors

JT is striving to develop an appropriate environment for audits by allocat-

ing sufficient staff to the Auditor’s Office as an organization supporting

the auditors in performing their duties and establishing an adequate

information communication system so that auditors, in their capacity

as independent agents with a mandate from shareholders, can ade-

quately audit the execution of business by directors and executive

officers in order to ensure sound and sustainable growth and maintain

and enhance public trust in the company�

When directors and executive officers detect any matter that may

cause substantial damage to the company, they are due to report it to

the Audit Board� Moreover, when directors and employees detect any

evidence of malfeasance in financial documents or serious breaches of

laws or the company’s articles of incorporation, they are due to report

it to the Audit Board, along with other relevant matters that could affect

the company’s management�

Auditors are allowed to attend not only meetings of the Board of

Directors but also other important meetings� When directors and

employees are asked by auditors to compile important documents

available for their perusal, to accept field audits and to submit reports,

they are due to respond in a prompt and appropriate manner� Directors

are due to cooperate with audits and ensure the provision of funds

necessary for covering audit-related expenses so as to secure their

effectiveness� The Operational Review and Business Assurance Divi-

sion and the Compliance Office maintain cooperation with auditors by

exchanging information�

2. Matters Concerning Functions such as the Execution of Business, Audit and Supervision, Nomination, etc.

The Board of Directors meets once a month in principle and on more

occasions if necessary, in order to make decisions with regard to the

matters specified by laws and regulations and other important matters,

to supervise business execution and to receive reports from the

directors on the status of business execution�

In order to maintain a high quality of business execution, JT has

adopted the Executive Officer System, under which executive officers

appointed by the Board of Directors execute business in their respec-

tive areas of responsibility, in accordance with a companywide business

strategy decided by the Board, by exercising the authority delegated

to them� In addition, the Chairman of the Board has been positioned

as a non-executive director in order to concentrate on the function of

supervising management�

Moreover, as part of its efforts to enhance corporate governance, JT

has established the Advisory Committee, which comprises five outside

experts and advises the management team from a broad perspective

with regard to how the company should operate in the medium to long

term, and other issues of similar importance�

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III Implementation of Measures Related to Shareholders and Other Interested Parties

1. Status of Efforts to Invigorate General Meetings of Shareholders and Facilitate the Exercise of the Voting RightSupplementary information

Sending the notice of a General Meeting of Shareholders at an early date

The notice of a General Meeting of Shareholders for 2009 was sent on June 1 of the year and that for 2010 was sent on June 2 of the year�

Avoiding scheduling a General Meeting of Shareholders for a date on which many other companies’ shareholders’ meetings are concentrated

A General Meeting of Shareholders for 2009 was held on June 23 of the year and that for 2010 on June 24 of the year�

Allowing the exercise of the voting right through electromagnetic means

JT not only allows the exercise of the voting right via the website designated by the company (E-voting) but also participates in an electronic platform for the exercise of the voting right for institutional investors that is operated by ICJ, Inc�

2. IR-Related ActivitiesSupplementary information Presence or absence of a

briefing by the representative director�

Periodic briefings for individual investors JT participates in a convention of earnings briefings sponsored by securities exchanges and other organizations several times every year�

Not provided

Periodic briefings for analysts and institutional investors

JT holds briefing sessions after the announcement of earnings at its offices or neighboring facilities�

Provided

Periodic briefings for overseas investors JT holds teleconferences for overseas investors after the announcement of earnings, and JT officials visit overseas investors several times every year to provide briefings�

Provided

Publication of IR materials on the website

JT publishes information concerning earnings, other timely disclosure materials, materials used at earnings briefings, annual securities reports or quarterly secu-rities reports, and notices of invitation to General Meetings of Shareholders�

Provided

Establishment of a division (appointment of an officer) in charge of IR

JT has appointed an officer dedicated to IR at the Media & Investor Relations Division who reports to the executive in charge of communications�

3. Status of Efforts to Respect the Standpoint of StakeholdersSupplementary information

Establishment of internal rules, etc� concerning the respect of the standpoint of stakeholders

The JT Group has set itself the mission of “creating, developing and nurturing its unique brands to win customer trust, while understanding and respecting the environment and the diversity of societies and individuals,” and there is a group-wide consensus on the mission�

Implementation of environment protec-tion activity, CSR activity, etc�

From the viewpoint of achieving the JT Group Mission, JT engages in such activities as reducing the burden on the environment, making contributions to local communities, tree-planting and forest preserva-tion, and youth education and development, and it publishes the contents of those activities through an annual CSR report�

Formulation of the policy concerning the provision of information to stakeholders

In order to clarify the authorities and responsibilities concerning the handling of various corporate infor-mation, JT has established rules concerning information disclosure and strives to ensure timely and appropriate information disclosure�

46

IV Basic Concept of the Internal Control System and Development of the System

JT has been endeavoring to ensure appropriate business operations

through efforts to enhance compliance, internal audits and risk manage-

ment, and implementing measures to ensure the effectiveness of

audits, such as improving arrangements and procedures for reporting

the necessary matters to auditors, as is required of a company adopting

the Audit Board System�

We will continue these efforts while reviewing and revising the

current system as necessary, and ensure appropriate business execu-

tion by taking the following steps:

1. System to Ensure that Directors and Employees Perform their Duties in Accordance with Laws, Regulations and the Company’s Articles of Incorporation

With regard to the compliance system, JT has established the Guide-

lines for Conduct based on internal rules concerning compliance in order

to ensure that directors and employees comply with laws, regulations,

the company’s articles of incorporation, social norms, etc�, and set up

the Compliance Committee as an organization responsible for ensuring

thorough compliance� This committee, headed by the company’s Chair-

man, includes outside experts among its members and reports directly

to the Board of Directors�

Meanwhile, the Compliance Office is charged with overseeing

efforts to improve the company-wide compliance system, identify

compliance problems and enhance the effectiveness of the compliance

system by enlightening directors and employees about compliance

through various compliance education programs�

Regarding the internal reporting system (whistle-blower system), JT

has a counter through which employees may report any misconduct

they have detected� The Compliance Office is charged with investigat-

ing reported cases and implementing company-wide measures to

prevent the recurrence of misconduct after holding consultations with

the departments and divisions concerned�

Matters of particular importance shall be referred to the Compliance

Committee for deliberation�

In order to ensure the reliability of its financial reporting, JT is operat-

ing a relevant internal control system that it has established in accor-

dance with the Financial Instruments and Exchange Act�

By allocating a sufficient level of staff to the task of evaluating

financial results and reporting them, the company is striving to maintain

and improve the reliability of its financial reporting�

The internal audit system is overseen by the Operational Review

and Business Assurance Division, which examines and evaluates

systems for supervising and managing the overall operations of the

company and the status of business execution from the viewpoints of

legality and rationality, in order to protect the company’s assets and

improve management efficiency�

2. Procedures and Arrangements for Storage and Management of Information on the Performance of Duties by the Directors

JT makes sure to properly store and manage the minutes of Annual

General Meetings of Shareholders, meetings of the Board of Directors,

and meetings of the Executive Committee, in line with laws, regulations

and internal rules�

Information on other important matters relating to business execu-

tion and decision-making are stored and managed by the relevant

departments and divisions as specified by internal rules on the alloca-

tion of responsibilities and authorities (hereinafter referred to as the

“Responsibilities/Authorities Allocation Rules”), in accordance with

rules on the supervision of the processes of decision making, procure-

ment and accounting�

3. Rules on Management of Risk of Loss and Procedures/Arrangements for Other Matters

JT has established internal rules on the management of risk of loss

relating to monetary and financial affairs, and ensures that relevant

reports are made to the Executive Committee on a quarterly basis�

With regard to risk of loss relating to other affairs, the relevant

departments and divisions specified by the Responsibilities/Authorities

Allocation Rules conduct proper management, identifying risk and

reporting it to the Executive Committee or referring it to the Committee

for deliberation, depending on the importance of the identified risk�

JT has assigned sufficient staff to the Operational Review and

Business Assurance Division, which functions as the company’s inter-

nal audit organization� This division examines and evaluates the internal

control systems of JT and JT Group companies—in light of the impor-

tance of internal control procedures and arrangements and the risks

involved—from an objective viewpoint, in its capacity as an entity

independent of the organizations responsible for business execution,

and reports its findings and present proposals to the President, as well

as reporting to the Board of Directors�

To prepare for possible emergencies, JT has produced a manual for

crisis management and disaster response� In the event of an emer-

gency or a disaster, JT is ready to establish an emergency project

system under the supervision of the Corporate Strategy Division, and

make prompt and proper responses under the leadership of senior

management and through close cooperation between the relevant

departments and divisions�

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4. System to Ensure that Directors Perform their Duties Efficiently

The Board of Directors meets once a month in principle and on more

occasions as necessary, in order to make decisions with regard to the

matters specified by laws and regulations and other important matters

and to supervise business execution� Meanwhile, the Executive

Committee, comprising the company’s President and other members

appointed by the President, discusses important management issues,

particularly management policy and basic plans regarding overall busi-

ness operations of the company, in addition to matters to be referred

to the Board of Directors�

JT has adopted the Executive Officer System, under which executive

officers appointed by the Board of Directors execute business in their

respective areas of responsibility, in accordance with a company-wide

business strategy decided by the board, by exercising the authority

delegated to them�

Moreover, in order to ensure that business operations are managed

in ways that contribute to the business efficiency and flexibility of the

company as a whole, basic matters concerning the company’s organiza-

tion, allocation of duties to officers and staff and the roles of individual

divisions are specified by the relevant internal rules� Meanwhile, in

order to enable prompt decision-making, the departments and divisions

responsible for business execution are specified by the “Responsibili-

ties/Authorities Allocation Rules�”

5. System to Ensure the Appropriateness of Business Operations within the JT Group

The JT Group has set itself the mission of creating, developing and

nurturing its unique brands to win customer trust, while understanding

and respecting the environment and the diversity of societies and

individuals, and there is a group-wide consensus on the mission� We

have specified the functions and rules necessary for group manage-

ment based on a group management policy, in order to optimize the

operations of the JT Group as a whole�

Moreover, we have been enhancing our systems for compliance

(including the internal reporting system), internal audits, financial affairs

management, etc� in cooperation with JT Group companies�

6. System for Assisting Auditors and Reporting to Auditors, and Other Systems to Ensure Effective Auditing

JT has allocated sufficient staff to the Auditor’s Office as an organization

supporting the auditors in performing their duties� In addition, the

company makes sure to review and reform the staffing structure as

necessary based on consultations with the Audit Board� The Audit

Board is involved in the selection of personnel of the Auditor’s Office

in order to ensure the office’s independence from directors�

When directors or executive officers detect any matter that may

cause substantial damage to the company, they are due to report it to

the Audit Board� Moreover, when directors and employees detect any

evidence of malfeasance in financial documents or serious breaches

of laws or the company’s articles of incorporation, they are due to

report them to the Audit Board, along with other relevant matters that

could affect the company’s management�

As auditors are allowed to attend not only meetings of the Board

of Directors but also other important meetings, they usually attend

meetings of the Executive Committee� When directors, executive

officers or employees are asked by auditors to compile important

documents available for their perusal, to accept field audits and to

submit reports, they are due to respond to the request in a prompt

and appropriate manner�

Furthermore, directors are due to cooperate with audits and ensure

the provision of funds necessary for covering audit-related expenses

so as to secure their effectiveness� The Operational Review and Busi-

ness Assurance Division and the Compliance Office maintain coopera-

tion with auditors by exchanging information�

Meanwhile, JT’s basic concept on the exclusion of anti-social ele-

ments and its efforts to exclude such elements are as follows:

1) Basic concept on the exclusion of anti-social elements

JT is resolved not to have any relations with, and to fight against,

anti-social groups and organizations that pose a threat to the order

and safety of civil society, and organizations involved in tobacco

smuggling or counterfeiting�

The company will also never engage in practices that would

promote the activities of antisocial elements� If it faces a problem

involving such elements, JT will devote company-wide efforts to

dealing with it�

2) Efforts to exclude anti-social elements

The concept on the exclusion of anti-social elements described

above is specified and fully communicated to all employees as

part of the company’s code of conduct� With the General Admin-

istration Division at JT’s headquarters assuming the responsibility

for supervising efforts to exclude anti-social elements, the officers

in charge of those efforts have been assigned to branch offices

across Japan, and are cooperating with police, lawyers and other

relevant organizations and parties to gather and share informa-

tion in order to deal with such elements in an organized way�

The measures to be taken by JT in response to unjust and unreason-

able demands from anti-social elements are specified in the company’s

manual for corporate defense, which is available for reference at all

offices and plants� JT also consistently educates employees, including

those working for its affiliates, about the importance of excluding

antisocial elements by providing relevant training as necessary�

48

100

300

200

400

500

2008 2009 2010

239.6 247.5226.4

395.0 407.4380.3

2,000

6,000

4,000

8,000

2008 2009 2010

2,303 2,139 1,977

7,2116,579

6,144

0.1

0.3

0.4

0.2

0.5

0.6

2007 2008 2009

0.4930.458 0.456

30

90

60

120

150

2008 2009 2010

96

98

97

99

100

27.1

97.6

97.297.7

97.9

97.5

96.9

25.9 25.3

43.5 41.6 41.3

(1,000t-CO2)

(1,000 m3)

(t-million cigarettes)

(1,000 t) (%)

JT Twenty-five Japanese subsidiaries

JT Twenty-five Japanese subsidiaries

Waste Generation Amount for JT Recycling Rate Waste Generation Recycling Rate Amount for Japanese subsidiaries

Our Approach to Protecting the Global EnvironmentProtecting the global environment is critical to our efforts to fulfill our

social responsibility and is a top priority for our corporate management�

In accordance with the JT Group Environmental Charter, the JT Group

has acted as a good corporate citizen in all of the countries and regions

in which it operates and promoted company-wide initiatives to further

reduce the environmental impact of its corporate activities� Moreover,

we established the JT Group Environmental Action Plan (2009-2012) as

a medium-term plan for concrete environmental protection activities,

with the aim of realizing the philosophy outlined in the JT Group Envi-

ronmental Charter� The operational divisions of JT, as well as subsidiaries

and affiliates, have been striving to achieve the targets set forth under

this medium-term plan�

Group Environmental ManagementThe JT Group recognizes that in order to deal with challenges with

which the international community as a whole is confronted, such as

the preservation of the environment and sustainable utilization of

resources, we have to further enhance environmental management of

the entire JT Group� Therefore, under the JT Group Environmental

Action Plan (2009–2012), we have expanded the scope of environmental

management to cover all consolidated subsidiaries, both in Japan and

abroad, and have gradually been introducing an environmental manage-

ment system� In addition, we have made all consolidated subsidiaries

subject to major environmental management targets — reduction

targets for the emission of greenhouse gases, the water usage and

the generation of waste — and aim to steadily achieve them�

Fight Against Global WarmingBy setting the target of reducing overall greenhouse gas emissions by

10% in 2012 compared with 2007, we are making active reduction efforts�

In 2009, JT achieved a 40�8% reduction compared with 1995 in Japan�

Our subsidiaries in Japan achieved a 6�9% reduction compared with 2007

by reducing electricity usage through renewal of refrigeration equipment

and introduction of EcoCute systems as well as efforts to make air con-

ditioning management more efficient at Plants and Laboratories�

Effective Use of ResourcesIn order to preserve the limited natural resources available, the JT

Group is striving to reduce the water usage and the generation of waste

and is promoting the reuse and recycling of used materials�


Activities Contributing to the Environment and Society

(Years ended March 31)


(Years ended December 31)


The JT Group strives to make contributions to society through a variety of corporate activities. We work to find harmony with our business environment and global environment, and aim to coexist with society as a good corporate citizen. We conduct continuing activities from this viewpoint.

Trends in Greenhouse Gas EmissionsJT/Japanese subsidiaries

Trends in Water Usage AmountJT/Japanese subsidiaries

Trends in CO2 Emissions per Million CigarettesJTI

Trends in Waste Generation and Recycling RateJT/Japanese subsidiaries

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Community Clean-up Event “Pick Up and You will Love Your City”

“Smokers’ Style” website

Campaign Advertising

Public smoking area in front of the Sakai Station in Osaka

TAMAPLAZA TERRACE Smoking Area

Toward Better Smoking Manners and a More Favorable Smoking Environment(This section only describes activities in Japan�)

We aim to help create a society in which smokers and nonsmokers

can coexist in harmony� Enshrined in this goal is our wish to see our

valued customers fully enjoy smoking at their own discretion and, at

the same time, to make sure they avoid causing discomfort to nonsmok-

ers� By engaging in various initiatives, we will fulfill our social responsibil-

ity as a tobacco company�

Examples of the Various InitiativesSetting up Smoking areasWe work closely with local governments and facility managers in setting

up smoking areas in public facilities such as railway stations and airports,

in order to promote coexistence between smokers and nonsmokers�

advice on Separation of Smoking and nonsmoking areasWe provide consultation on how to separate smoking and nonsmoking

areas within public facilities, commercial facilities and offices in a

manner suited to the characteristics of the facilities and the needs of

users� In our consulting service, which is free of charge, we offer our

know-how and put forward proposals to achieve the kind of separation

that would satisfy smokers while giving due consideration to the

concerns of nonsmokers�

“Smoking Manners” campaign advertisingSince JT believes that improving the “smoking manners” of individuals

is essential to improving those of society as a whole, we are constantly

engaged in a campaign to raise awareness about the need for appropri-

ate smoking manners, under the slogan “Pay attention, and you can

change your manners�” The advertisements used in this campaign

describe specific everyday situations in which smokers are supposed

to show good manners, in order to prompt them to pay attention, think,

and act appropriately�

community clean-up eventJT has been engaged in the “Pick Up and You will Love Your City” initia-

tive since May 2004 in an effort to eradicate public littering by raising

awareness of the problem and organizing rubbish collection� This initia-

tive is aimed at occasions such as community festivals and other public

events and conducted in cooperation with local governments, compa-

nies, and volunteers� Since these activities began in May 2004, com-

munity clean-up events have been held a total of 1,000 times in all of

Japan’s prefectures as of April 17, 2010, bringing the number of par-

ticipating parties to 1,987 and the number of participants to approxi-

mately 1�04 million�

For further information about JT’s efforts to improve the smoking

environment, please access the “Smokers’ Style” website�

URL: http://www�jti�co�jp/sstyle/index�html



50

The Scholarships for Students from Asia The Volleyball Workshop

Reforestation and Forest Preservation Activitie

The Affinis Arts Foundation(Photo: K� Miura)

The Tobacco & Salt Museum

JT Group’s Social ContributionsThe JT Group has strived to make contributions to society in all the

countries and regions in which we operate, building our relationship

with local communities by acting as a good corporate citizen� We have

established various key areas for social contribution activities in the JT

Group Social Contribution Policy�

1. JT Group’s Social Contributions PolicyThe JT Group will fulfill its corporate responsibility through making

sustained contributions to the communities in which it operates� As a

good neighbor, the JT Group will support the regeneration and revitaliza-

tion of local communities, focusing on:

• Social Welfare • Arts and Culture

• Environmental Protection • Disaster Relief

The JT Group will contribute to the development of the local com-

munities in which we operate by selecting the most critical of these

four priority areas for each and providing support� Based on this policy,

the JT Group will engage in a variety of activities that contribute to

society, so that we can build and maintain harmonious relations with

local communities while encouraging employees to be involved in such

activities themselves�

2. Contributions to Japanese SocietySocial WelfareAs part of our efforts to contribute to the regeneration and revitalization

of local communities as a good neighbor, the JT Group is implementing

a variety of social welfare programs�

The JT Group’s major activities in the field of social welfare are

as follows:

• Implementing the NPO Support Projects for Youth Development

• Providing the Scholarships for Students from Asia

• Sponsoring the JT Shogi Japan Series Tournament for Kids

• Sponsoring the JT “Honobono” concert

• Organizing Volleyball coaching

• Making company-owned facilities available for public use

arts and cultureThe JT Group engages in activities that contribute to the development

and advancement of arts and culture�

The JT Group’s major activities in the field of arts and culture are

as follows:

• Operating the Tobacco & Salt Museum

• Supporting the training of musicians

• Operating the Affinis Arts Foundation

• Operating the JT Biohistory Research Hall

• Organizing the JT Forum cultural events

environmental protectionIn appreciation of what our natural environment brings to our business

and out of consideration for its preservation, the JT Group engages in

environmental protection activities such as reforestation, forest pres-

ervation and street cleanup campaigns�

The JT Group’s major activities in the field of environmental protec-

tion are as follows:

• Conducting reforestation and forest preservation activities

• Organizing the “Pick Up and You will Love Your City” community

cleanup campaign

• Conducting local community cleanup activity

Disaster ReliefThe JT Group conducts disaster relief activities by providing assistance

to the affected areas through group-wide cooperation� Such activities

are conducted through the JTI Foundation�

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Social Shop workers supported by JTI Belgium

JTI Malaysia supports 16 elderly welfare homes

Crisis students with their tutor in a JTI UK supported class

JTI Iberia supports adult educational program with UNED

3. Social Contributions AbroadThe JT Group engages in a variety of philanthropic activities around the world, contributing to the development of the local communities in which

it operates� JTI, the international tobacco business arm of the JT Group that controls tobacco production, marketing and sales in more than 120

countries, plays the central role in our worldwide philanthropic activities� In addition to its own philanthropic activities, JTI helps to tackle critical

challenges faced by local communities as part of group-wide initiatives such as the reforestation and forest preservation programs that are

underway in Africa�

JTI Corporate PhilanthropyJTI’s Corporate Philanthropy programs enable the voluntary contribution of resources—financial, material and human—to causes that are of general

benefit to society and address a specific need� There are three main focus areas for JTI’s programs: providing social welfare to disadvantaged

groups; arts and cultural support; and disaster relief� Initiatives in the first two categories tend to be local and are led and funded by individual

markets� The third is more international in scope—response to disasters anywhere in the world—and is normally funded by the JTI Foundation�

The programs highlighted below are broadly representative of engagements undertaken by the Company and its employees in 2009�

Social WelfareMany JTI entities have initiated programs that benefit disadvantaged

groups� The needs and opportunities vary by country and community

but there are common themes� For example, JTI Belgium is active in

this area, working closely with the ’United Fund for Belgium’ to provide

free meals and other forms of assistance to the elderly and underprivi-

leged throughout the country�

JTI Russia has partnered with local authorities in Moscow, Yelets,

and St� Petersburg, to support pensioners and World War II veterans�

The ‘Silver Spring’ and ‘Autumn of Hope’ initiatives provide food, clothes

and other durable goods to its elderly citizens� JTI also assists in

developing social and cultural events for the elderly, and such activities

will spread to the other regions of Russia during 2010�

On the other side of the world, JTI Malaysia has similar projects

that contribute both financially and via other assistance to 16 elderly

welfare homes that provide shelter for those no longer able to look

after themselves� This activity also provides JTI employees with the

opportunity to volunteer their time as part of their contribution of giving

back to the communities in which they work�



JTI UK supports ‘Crisis UK’� a charity that helps single homeless

people to develop and acquire qualifications in order to reintegrate

them into society� This support enables the charity to run an extra 800

educational classes a year in numeracy, literacy and IT skills�

Education of underprivileged groups is one recurring theme in JTI’s

social welfare agenda� Promoting social diversity is another – appropri-

ate for a Company that takes pride in its ability to assimilate talent from

every corner of the world�

In Spain, JTI Iberia created and launched a new project called

‘HERMES’ in close cooperation with UNED, the Spanish Government’s

Open University� This is a national initiative to promote the social and

workforce integration of immigrant groups in a country where over

11% of the population is non-native� The intent is to remove barriers

that adult newcomers face in settling-in and enable them to become

productive members of the community by helping validate college

degrees from their own countries or complete their studies in Spain�

52

JTI Russia supports the Mariinsky Theater led by Maestro Valery Gergiev

JTI UK supported an exhibition of the work of Anish Kapoor

JTI France supported the IMAS concert conducted by Seiji Ozawa in 2009

JTI Italy was a partner of the Teatro alla Scala Japan Tour in 2009

Arts and CultureIn the UK, JTI is an important partner in bringing exhibitions of artistic,

historical and academic importance to UK audiences through its long

term support of exhibitions in the Sackler Galleries at the Royal

Academy of Arts� In autumn 2009, JTI UK also supported an exhibition

of the work of Anish Kapoor, one of the most influential and pioneering

artists of his generation� The exhibition attracted a record number

of visitors and was the largest ever devoted to a living artist at the

Royal Academy�

In Russia, JTI helps national heritage stay alive by funding the creation

of an Internet-based digital library of art treasures held in the renowned

Pushkin State Museum in Moscow� Space constraints allowed only a

very small proportion of its huge 750,000 piece collection to be on display

at any one time� In 2008 through 09, JTI’s support enabled the uploading

of 1,200 paintings that can now be viewed on-line�

JTI put considerable resources into making music more international

and accessible in 2009� Examples include JTI Russia’s long-term

cooperation with the Mariinsky Theater led by Maestro Valery Gergiev�

The company provides support to the Theater as well as to two major

programs run by the Mariinsky: the annual Moscow Easter Festival

and Stars of the White Nights Festival� Both events have become

highlights of the cultural calendar in Russia and beyond�

In addition, JTI France supported a concert at the renowned Théâtre

des Champs Elysées in Paris by the International Music Academy of

Switzerland, an institute that attracts and develops young artists from

all over the world that is led by Japanese conductor Seiji Ozawa� JTI

Italy, a partner of the Teatro alla Scala in Milan, supported La Scala

Japan Tour 2009 during which the world famous opera house staged

operas and concerts at two of Tokyo’s leading theatres�

In Canada, JTI-Macdonald Corp� partners with the Japanese Cana-

dian Cultural Centre to celebrate the joint heritage of Canada and Japan�

The cultural and historical links between the two nations date back to

the 1880s and more than 100,000 people of Japanese descent live in

Canada today� JTI-Macdonald Corp� has supported the Centre for five

years and its contributions fund a rich mix of traditional events, musical

performances and film screenings, art and history exhibitions and

language classes�

JTI-Macdonald’s partnership with the Japanese Canadian Cultural Centre in Canada

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JTI Foundation and JTI Philippines supported typhoon victims in the Philippines

Disaster ReliefThe Swiss-based JTI Foundation is an important channel for the

Company’s support for victims of natural disasters� It works closely

with governments, NGOs and emergency relief organizations around

the world�

The Foundation made substantial contributions to some of the

worst disasters to befall the global community in 2009�

In Italy, it assisted the government in a twelve month restoration

and reconstruction program to help the population of the Abruzzo

region recover from the devastating earthquake that struck in April�

In September, it donated funds for two leading relief organizations to

provide immediate support to people displaced by the typhoon that

struck the Philippines� It also supported procurement and distribution

of relief goods after monsoon rains took a heavy toll on human life

and extensively damaged property in India�

The Foundation puts a focus on proactive initiatives with a long-term

perspective� It is a principal supporter of the Turkish-based GEA search

and rescue service, usually among the first to respond to international

appeals for help when disaster strikes�

JTI Foundation also signed a four year partnership agreement with

the ETH Zürich (Swiss Federal Institute of Technology Zurich) to

support creation of a uniform independent standard for measuring

earthquake hazards in the Middle East, Caucasus and North Africa�

The goal is to combine advances in scientific, engineering and



information processing capabilities to improve prediction and risk

assessment in ways that will enable national governments and other

institutions in the region to take additional steps to protect lives and

infrastructure in the event of major incidents�

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Business Environment forthe JT Group � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 56

Major Risks of Businesses � � � � � � � � � � � � � � � � � � � � � � � 61

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The JT Group has long been committed to many of the FCTC’s provi-

sions, including the prevention of youth smoking and the elimination

of illicit trade, and has engaged in active efforts to address those issues

on a voluntary basis�

Meanwhile, JT believes that tobacco should be regulated by indi-

vidual countries in light of their own circumstances, such as their local

laws and regulations and cultural and social conditions�

Major Elements of Regulation on Global Tobacco BusinessWHO: “Framework Convention on Tobacco Control”Following six rounds of intergovernmental negotiations, the Framework

Convention on Tobacco Control (FCTC) was adopted by World Health

Assembly of the WHO in May 2003 and came into force on February

27, 2005, 90 days after its ratification by 40 signatory nations� As of

March 31, 2010, a total of 168 countries (including the EC) were party

to the FCTC� Japan signed the FCTC on March 9, 2004 and accepted

it on June 8, 2004� The FCTC contains a number of provisions, some

of which are legally binding for the signatory nations, while others allow

for discretion by each nation with regard to interpretation and

implementation�

Key provisions of the FCTC include:

— price and tax measures (implementation of tax policies and price

policies and imposition of restrictions on duty-free sales, etc.

as appropriate, without prejudice to the sovereign right of signa-

tory nations to determine and establish their tax policies)

— packaging and labeling (adoption of effective measures to

ensure (1) that tobacco product packaging and labeling do not

promote tobacco products by using terms that could create an

erroneous impression, for example, that a particular tobacco

product is less harmful than others; and (2) that health warnings

on tobacco packaging cover not less than 30% of the principal

display area)

— advertising (introduction of a comprehensive ban on tobacco

advertising, sales promotion and sponsorship, or imposition of

appropriate restrictions if a country is not in a position to imple-

ment a comprehensive ban because of its constitution or con-

stitutional principles)

— Sales to minors (adoption and implementation of effective

measures to ban sales of tobacco products to minors)

— Support for alternative activities (promotion of alternative activi-

ties for tobacco workers, growers and sellers as appropriate)

The first session of the Conference of the Parties to the WHO

Framework Convention on Tobacco Control was held in February 2006

following the convention’s entry into force� At this conference, discus-

sions were held on matters such as the procedural rules for subsequent

conferences, reports to be presented at the next conference and the

development of draft guidelines and draft protocols� In June 2007, the

second session of the convention was held� This time, guidelines for

the implementation of Article 8 (protection from exposure to tobacco

smoke) were adopted� In addition, resolutions were adopted with

regard to establishing an intergovernmental negotiating body for the

purpose of developing a protocol on Article 15 (illicit trade in tobacco

products) and with regard to the timetable for developing guidelines

concerning other major provisions� At the third session of the conven-

tion, which was held in November 2008, guidelines for Paragraph 3,

Article 5 (protection against the tobacco industry), Article 11 (packaging

and labeling) and Article 13 (tobacco advertising and promotion) were

adopted, a report was made on the progress in intergovernmental

negotiations concerning the adoption of a protocol regarding Article

15, and resolutions were adopted with regard to how to proceed with

work concerning other major matters�

The JT Group has long been committed to many of the FCTC’s provi-

sions, including the prevention of youth smoking and the elimination of

illicit trade, and engaged in active efforts to address those issues on a

voluntary basis� Meanwhile, JT believes that tobacco should be regulated

by individual countries in light of their own circumstances, such as their

local laws and regulations state of legislation and cultural and social

conditions� The JT Group has had and is ready to have dialogues with

the governments of individual signatory nations of the FCTC as neces-

sary, in order to ensure that they take appropriate and reasonable

measures suited to their own circumstances when they implement the

provisions of the convention�

International Tobacco Product Marketing StandardsIn September 2001, JT decided to commit itself to comply with the

International Tobacco Product Marketing Standards� The standards

set principles for responsible tobacco product marketing worldwide�

They represent a minimum set of standards for ensuring that brand

marketing is never aimed at youth, but exclusively at adults who

choose to smoke based on their recognition of the health risks

associated with smoking�

The key provisions of the international standards include:

— unified definitions of key words such as “advertisement/ adver-

tising,” “promotional event” and “sponsorship.”

— Tough guidelines applicable to advertising of tobacco

products:

• Print advertising is to be limited to publications with at least 75%

adult readership�

• Billboard advertising must not exceed 35 square meters in size�

• Ads on TV, radio and the Internet are prohibited unless and until

100% adult verification is achieved�

• Ads cannot run in cinemas unless there is a reasonable basis to

believe that at least 75% of the audience is adult�

• Ads cannot feature celebrities, show individuals that appear

younger than 25, or suggest that smoking enhances athletic,

professional, personal or sexual success�

— Indication of health warnings in ads and other media:

• Health warnings must appear in almost all advertising, promotional

and merchandising materials, except in rare instances such as

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— Restrictions on sponsorship:

• For events or activities that bear a tobacco product brand name,

all participants who compete or otherwise take an active part must

be adults�

• From December 1, 2006, attendance at an event or activity spon-

sored for the purpose of tobacco product brand promotion must

be comprised of at least 75% adults, and these events can only

generate incidental coverage in electronic media�

— all promotional activities are to be limited to verified adult

smokers.

Prevention of Youth SmokingThe prevention of youth smoking is an issue to be addressed by society

at large� From the viewpoint of fulfilling its corporate social responsibil-

ity, the JT Group has been conducting business operations in an

appropriate manner and working with governments and other relevant

organizations to take various steps toward dealing with this issue in

the countries in which it operates, in accordance with voluntary stan-

dards and the International Marketing Standards as well as relevant

local laws and regulations�

For detailed information on JT’s efforts to prevent youth smoking in

Japan, please refer to the following website�

http://www�jti�co�jp/corporate/enterprise/tobacco/think/activity

As for the JT Group’s similar efforts abroad, please refer to the

following website�

http://www�jti�com/cr_home/cr_positions/cr_positions_youth_smoking

Agreement with EU and EU Member States to Combat Cigarette Smuggling and CounterfeitingOn December 14, 2007, JT International S�A� and JT International

Holding B�V�, both of which are consolidated subsidiaries of JT, signed

an agreement with the European Commission, the executive branch

of the European Union (EU), and twenty-six member states of the EU

on cooperation in combating cigarette smuggling and counterfeiting�

We believe that this agreement, which builds upon initiatives imple-

mented by the JT Group over the past years, will help to jointly establish

an efficient and constructive framework for combating cigarette smug-

gling and counterfeiting with the EU and EU member states, and

protect the brand value of our products against the threat of such illegal

activities� The 27th member state, the United Kingdom joined the

agreement on April 21, 2009�

The agreement calls for the JT Group to pay US$50 million in each

of the five years from signing and US$15 million in each of the following

10 years to support anti-smuggling and anti-counterfeiting initiatives

for the European territory�

Major Elements of Regulation of Tobacco Business in JapanThe Japan Tobacco, Inc. LawJT was established under the Japan Tobacco, Inc� Law (“the JT Law”)

for the purpose of developing businesses related to the manufacture,

sale, and importation of tobacco products� The JT Law provides that

the Japanese government must continue to hold at least one-half of

all of the shares that the government acquired by voluntary conveyance

upon JT’s establishment, as adjusted for any subsequent stock split

or consolidation of shares (the number of such shares following the

share split carried out on April 1, 2006 is 5 million shares), and that

even if JT issues new shares in the future, the government must

continue to hold more than one-third of all of the issued shares� The

JT Law also states that the flotation of new shares, options to subscribe

for new shares, or in the case of a share-for-share exchange, issuance

of new shares, issuance of options for new shares, or issuance of

bonds with options or warrants to subscribe for new shares, requires

the approval of the Minister of Finance�

The JT Law grants JT the freedom to enter other non-tobacco-related

business areas in line with its overall objectives as a corporation,

dependent upon ministerial permission, in addition to the manufacture,

distribution, and importation of tobacco products and tobacco-related

businesses� JT must also obtain authorization from the Minister of

Finance for certain matters, including the appointment or dismissal of

directors, executive officers, and auditors, amendments to JT’s Articles

of Incorporation, appropriations of capital surplus (except disposal of

losses), and any merger, corporate split, or dissolution of JT�

Within three months after the end of each business year, JT must

issue its balance sheets, statements of income or loss, and business

report to the Minister of Finance�

The Tobacco Business LawThe Tobacco Business Law was enacted in August 1984 for the purpose

of achieving sound growth for Japan’s tobacco industry, securing stable

government revenues, and contributing to the healthy expansion of

the Japanese economy� The Tobacco Business Law governs the cultiva-

tion and purchase of leaf tobacco and the manufacture and distribution

of tobacco products� JT is obliged to negotiate contracts with domestic

leaf tobacco growers to determine the total area used for tobacco

cultivation and tobacco leaf prices based on type and quality� JT is also

required to purchase the entire usable domestic tobacco crop�

Contracts stipulate the area to be cultivated and the prices of leaf

tobacco for the subsequent year, and in this regard JT respects the

opinion of the Leaf Tobacco Deliberative Council�*

As the sole manufacturer of tobacco products in Japan as established

by law, JT must obtain the approval of the Minister of Finance on the

maximum wholesale price of each class of tobacco released to the

market� Tobacco product importers and wholesalers must register with

the Minister of Finance, and retailers of tobacco products are required

to obtain approval from the Minister of Finance� In addition, list prices

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for JT’s tobacco products and imported tobacco products must be

approved by the Minister of Finance, although in general, manufactur-

ers’ list prices are approved unless the Minister of Finance deems

them unfair to consumers� Tobacco retailers are only permitted to sell

tobacco products at list prices that have been approved by the Minister

of Finance�

* The Leaf Tobacco Deliberative Council is a council which confers on important matters

concerning the cultivation and purchase of domestically grown leaf tobacco in response to

inquiries by JT representatives� The council consists of no more than 11 members, appointed

by JT with the approval of the Minister of Finance from among representatives of domestic

leaf tobacco growers and academic appointees�

Health Warnings, etc.In Japan, the packages of tobacco products are required under Article

39 of the Tobacco Business Law to indicate “statements that urge

caution over the relationship between the consumption of tobacco

products and health” (health warnings) as specified in Article 36 of the

Ordinance for Enforcement of the Tobacco Business Law� Details

concerning the health warnings are specified by the Ordinance for

Enforcement of the Tobacco Business Law�

The ordinance requires the indication of warning labels regarding

risks related to eight items� Four of the eight are diseases associated

with direct smoking (lung cancer, heart attack, stroke and emphysema),

while the other four are smoking by pregnant women, passive smoking,

addiction to smoking and youth smoking� Each tobacco product pack-

age must indicate, on its main surface, a warning regarding at least

one of the four items associated with direct smoking and at least one

of the other four items� The ordinance stipulates (1) that these warnings

must be rotated throughout the year in ways to ensure that they receive

equal exposure on each product item and each type of package and

(2) that the display area must occupy 30% or more of the main surface

of the package�

In addition, the ordinance stipulates that when terms like “mild” and

“light” are used on the package, they must be accompanied by a

warning that prevents consumers from misunderstanding the relation-

ship between the consumption of tobacco and health� JT ensures

appropriate indications of the required health warnings with regard to

all products intended for shipment in the Japanese market, as pre-

scribed by the relevant laws and regulations�

Meanwhile, JT plans to continue using such terms as “mild” and

“light” in the Japanese market in ways that maintain compliance with

the provisions of the laws and regulations�

Guideline on Tobacco AdvertisingIn line with the purpose of a guideline for advertising of tobacco

products promulgated by the Japanese Minister of Finance under

Article 40 of the Tobacco Business Law, the Tobacco Institute of Japan

(TIOJ)* has established voluntary standards� All TIOJ member compa-

nies, including JT, comply with these standards� The guideline stipulates

that outdoor advertising of tobacco products (posters, billboards, etc�)

must not be displayed except where tobacco products are sold and in

designated smoking areas� It also stipulates that special care must be

taken to ensure the use of appropriate advertising methods in daily

newspapers (excluding sports tabloids, evening newspapers and the

like) and specifies matters concerning the indication and content of

the health warnings that accompany tobacco advertising� In accordance

with the TIOJ’s voluntary standards based on the guideline, the TIOJ

member companies, including JT, have been implementing necessary

measures, such as banning outdoor billboard advertising and brand-

specific advertising on public transportation, limiting the volume of

advertising in newspapers, and limiting the scope of news sections in

which ads may appear�

* Tobacco Institute of Japan: The TIOJ is a public interest corporation established for the

purpose of contributing to the promotion of a fair and objective social understanding of

tobacco through collecting and disseminating information regarding tobacco and support-

ing the sound development of Japan’s tobacco industry and the national economy as a

whole, by engaging in various activities in a manner suited to the social environment for

tobacco consumption� The TIOJ was established in 1987 as a voluntary organization based

on the Association of Tobacco Manufacturers, which was established in 1985, and reorga-

nized as an incorporated body in 1990�

Prevention of Youth Smoking— age verification vending machines

TIOJ, the Japan Tobacconist Federation and the Japan Vending Machine

Manufacturers Association announced a co-developed age verification

vending machine and started introducing the machine in March 2008,

aiming for a nationwide introduction�

This machine is intended to prevent minors from purchasing ciga-

rettes from vending machines, as it only allows cigarettes to be dis-

pensed when the customer is identified as an adult as a result of IC

card scanning� Based on the results of the first-stage trial use program

in Yokaichiba City, Chiba Prefecture, and the second trial use program

in Tanegashima island, Kagoshima Prefecture, the nationwide introduc-

tion of the machine was completed in July 2008� We are actively

involved in efforts to ensure the smooth introduction and operation of

such machines, as we respect the purpose of the cooperative initiative

to prevent youth smoking�

Regulations on Tobacco Products in Japan and AbroadIn Japan, restrictions on smoking have been increasingly introduced

in recent years in public spaces and other locations, including restau-

rants and office buildings� Since the government adopted the Guideline

on Smoking Restriction Measures in the Workplace to promote the

Health Promotion Act, which requires facility managers to take mea-

sures to prevent passive smoking, as well as smoking restriction

activities in the workplace, a variety of activities have been imple-

mented by the central and local governments and other organizations�

JT expects that similar activities will continue to be promoted� As such,

JT continues to engage in various initiatives to promote separation of

smoking and nonsmoking areas, in order to help create a society in

which smokers and nonsmokers can coexist in harmony� Japan, one



58

of the countries that are party to the FCTC, takes necessary measures

based on relevant laws and regulations, including those regarding tax,

packaging and labeling�

In overseas markets where the JT Group sells tobacco products,

regulations on sales and marketing of tobacco products and smoking

have been increasing� For example, the European Union issued a

directive concerning tobacco products in July 2001, which requires the

EU member states to harmonize their laws, regulations and administra-

tive provisions concerning the maximum tar, nicotine and carbon

monoxide yields of cigarettes; the warnings regarding health and other

information to appear on unit packets of tobacco products; and the use

on tobacco product packaging of such descriptions as “mild” and

“light�” In addition, the United Kingdom has put into force laws compris-

ing restrictions on the in-store display of tobacco products and a ban

on sales of tobacco products through vending machines� While it is

impossible to predict exactly what kinds of laws, regulations and

business guidelines will be introduced in the future in relation to sales

and marketing of tobacco products and smoking, JT expects that more

similar and new regulations (including those introduced by local govern-

ments) will be introduced in Japan and other countries where the JT

Group sells products�

Although the JT Group supports appropriate and reasonable regula-

tions on tobacco products and smoking, the JT Group has had and is

ready to have dialogue and cooperation with governments� It is our

belief that adults choose to smoke based on their recognition of the

health risks associated with smoking, and those adults should have

the freedom to smoke�

Tobacco-Related Legal ProceedingsLitigation Related to Health Risks Associated with SmokingJT and its subsidiaries are defendants in lawsuits filed by plaintiffs

seeking damages for harm allegedly caused by smoking, the marketing

of tobacco products, or exposure to tobacco smoke�

To date, JT and its subsidiaries have never lost a case or paid any

money to settle a case out of court�

In Japan, JT is currently involved in two lawsuits related to smoking

and health as described below�

In one case, three smokers who alleges that they developed

diseases as a result of smoking filed a lawsuit on January 19, 2005

with the Yokohama District Court against JT, the Government of

Japan, et al�, asking for a total of ¥30 million in compensation for

damages and a strengthening of the wording of health warnings

indicated on tobacco products, etc� The first hearing in this case took

place on April 20, 2005�

On January 20, 2010, the Yokohama District Court rendered a judg-

ment dismissing all of the plaintiff’s claims, against which the plaintiffs

filed an appeal�

In the other case, a taxi driver who alleges that he has developed

laryngeal cancer and has suffered from aggravation of arteriosclerosis

as a result of passive smoking in his car filed a lawsuit with the Tokyo

District Court on February 25, 2008, asking for ¥10 million in compensa-

tion for damages and the suspension of the production and sale of

tobacco products� The first hearing in this case took place on May 19,

2008, and the case is still pending in the district court�

Among the lawsuits filed overseas in relation to smoking and health

in which JT subsidiaries are defendants are damage suits filed by

individuals or classes of individuals and medical expense recovery suits

filed by governments and insurers� As of the end of May 2010, there

were a total of 26 such lawsuits pending in which JT subsidiaries are

named as defendants or for which JT or a subsidiary may owe certain

indemnity obligations pursuant to the relevant contracts, including the

agreement for JT’s acquisition of RJR Nabisco Inc�’s overseas (non-US)

tobacco operations�

These lawsuits include health care cost recovery actions brought by

the Canadian provinces and two class actions brought in Quebec�

The province of British Columbia filed an action under a provincial

statute, the “Tobacco Damages and Health Care Costs Recovery Act,”

which was enacted exclusively for the purpose of this action� Several

defendants challenged the statute’s constitutionality� This challenge

was ultimately rejected by the Supreme Court of Canada in September

2005� The provinces of New Brunswick and Ontario filed similar actions

in March 2008 and in September 2009, respectively� For the time being,

these actions remain in pre-trial proceedings with no decision yet made

as to the liability of the JT Group and other companies�

In Quebec, a first-instance court authorized two class actions to

proceed in February 2005� The claims were filed in September 2005,

and the actions remain in pre-trial proceedings with no decision yet

made as to the liability of the JT Group and other companies�

JT believes that it is possible that other similar smoking and health-

related lawsuits will be filed in the future�

JT is unable to predict the outcome of currently pending or future

lawsuits� However, if one or more actions result in a decision unfavor-

able to JT or its subsidiaries, its business could be materially affected

by, for example, the payment of monetary compensation�

Moreover, regardless of the results of individual lawsuits, critical

media coverage of such lawsuits may reduce social tolerance of

smoking, increase interest in the relationship between smoking and

health, strengthen public regulations concerning smoking and prompt

the filing of a number of similar lawsuits against JT or its subsidiaries,

forcing JT or its subsidiaries to bear litigation costs and materially

affecting JT’s business performance�

Other Tobacco-Related Legal ProceedingsVarious kinds of smuggling and counterfeiting of tobacco products have

posed a major challenge to the tobacco industry as a whole�

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On April 13, 2010, JTI Macdonald Corp� (“JTI-Mac”), JT’s Canadian

consolidated subsidiary, entered into a comprehensive agreement with

the Government of Canada and all provinces and territories (the

“Canadian Governments”) to establish a cooperation mechanism in

combating cigarette smuggling and contraband� In addition, JTI-Mac

pleaded to a regulatory offense for its involvement in the illicit trade of

cigarettes prior to JT’s acquisition of non-US tobacco operations of RJR

Nabisco Inc� and paid CAD150 million (approximately ¥13�8 billion at

the exchange rate as of April 13, 2010)� As a result, all of the contraband-

related claims against JTI-Mac and others associated with it by the

Canadian Governments stated above and the Notice of Assessment

from the Quebec Ministry of Revenue have been withdrawn� CCAA

proceedings have also been terminated as of April 17, 2010� At the

same time, the RJR Group entered into another agreement with the

Canadian Governments and made payment of CAD400 million (approxi-

mately ¥37�0 billion at the exchange rate as of April 13, 2010), resulting

in total payments by the JT Group and the RJR Group to the Canadian

Governments of CAD550 million (approximately ¥50�9 billion at the

exchange rate as of April 13, 2010)� As a result of the indemnification

rights under the RJRI Purchase Agreement in 1999 and subsequent

negotiations with the RJR Group, the JT Group and the RJR Group

entered into an agreement whereby the JT Group would incur CAD150

million among the aforementioned CAD550 million total�

* The following cases were pending in Canada prior to the comprehensive agreement with

Canadian Governments:

– In August 2003, the Canadian federal government filed a civil action in the Canadian

province of Ontario against RJR and its subsidiaries, as well as JT and its subsidiaries,

including JTI-Mac� The suit mainly claimed as damages taxes allegedly lost by the Canadian

government due to the smuggling of tobacco products into Canada in the 1990s�

– In August 2004, JTI-Mac received a Notice of Assessment from the Quebec Ministry of

Revenue requiring an immediate payment of approximately CAD1�36 billion (approximately

¥126�0 billion at the exchange rate as of April 13, 2010), claiming that JTI-Mac had alleg-

edly contributed to tobacco smuggling from 1990 to 1998� This amount corresponded to

the alleged loss of tobacco taxes plus penalties and interest� JTI-Mac’s failure to make the

payment could have prompted the Quebec Ministry of Revenue to confiscate the com-

pany’s business assets, making it difficult for the company to continue its normal business

operations� Therefore, in order to continue its operations, JTI-Mac filed an application with

the Ontario Superior Court of Justice for protection under the Companies’ Creditors

Arrangement Act (“CCAA”) and the application was granted�

– In May 2007, after a preliminary hearing on various charges arising from the alleged smug-

gling of tobacco products into Canada from 1991 to 1996, a preliminary inquiry judge in an

Ontario court committed JTI-Mac and one former employee to stand trial�

As for court cases not related to tobacco smuggling, there is a case

in which JT Group companies are seeking to invalidate a tax assess-

ment received from the Russian tax authorities�

In April 2008, the Office of Fair Trading (OFT), the UK competition

authority, issued a Statement of Objections against JT subsidiaries

Gallaher Group Ltd� (former Gallaher Group Plc), and Gallaher Ltd�

(hereinafter, these two companies will be collectively referred to as

“Gallaher”), alleging the possibility of anti-competitive behaviour with

respect to retail prices for tobacco products in the UK market prior to

JT’s acquisition of Gallaher� Gallaher concluded an early resolution

agreement with the OFT in July 2008 and, in April 2010, the OFT

notified Gallaher of its decision to impose a fine of approximately 50

million British pounds� The amount of the fine is smaller than the

amount of liabilities booked as a result of the risk assessment of the

imposition of a fine under the U�K� Competition Act in accounting

treatment made at the time of JT’s acquisition of Gallaher Group Plc

based on the Purchase Method� The JT Group recorded the difference

of approximately 114 million British pounds between the booked liabili-

ties, which totaled approximately 164 million British pounds, and the

amount of the fine notified by the OFT, as extraordinary profit (approxi-

mately ¥16�7 billion) on a consolidated basis for the fiscal year ended

March 2010�

As described above, in addition to lawsuits related to health risks

associated with smoking, there are other pending lawsuits that could

have a negative impact on the JT Group’s financial results and produc-

tion, sales and imports/exports of tobacco products in the event of a

court ruling unfavorable for the JT Group, and similar cases may continue

to be contested in court in the future�



60

The major risks to which the JT Group’s businesses are exposed

and factors that may materially affect investors’ judgment, are

described below� This section contains forward-looking statements

based on judgments made as of the end of the fiscal year ended

March 2010� Future potential risks include, but are not limited to,

the risks listed below�

Risks Relating to the JT Group’s Businesses, Earnings Structure and Management Policies• Anynegative impactonourdomesticand international tobacco

businesses, both of which are major contributors to the JT Group’s

sales and operating income, may adversely affect the group’s overall

business performance�

• AlthoughtheJTGroupplansto invest inourpharmaceuticaland

food businesses, as it expects them to contribute to its business

performance in the future, such investment may not generate the

anticipated benefits�

• TheJTGroupmayacquire,investin,formalliancesorbuildcoopera-

tive business frameworks with other companies, as it expects such

measures to contribute to its future business performance� However,

its future business performance may be negatively affected if results

fall short of its expectations�

• OntheJTGroup’sconsolidatedbalancesheet,thereisalargeamount

of goodwill related to the past acquisitions� We consider the goodwill

to appropriately reflect profits which could be earned from the busi-

ness values and synergy effects of those acquisitions� However, if

those acquisitions fail to generate the anticipated benefits due to

factors such as changes in the business environment or the competi-

tive situation, we may be obliged to post an impairment loss, which

may adversely affect the group’s overall business performance�

• TheJTGroup’soverseasoperationsmaybenegativelyaffectedby

exchange rate fluctuations, changes in laws and regulations, politi-

cal unrest, uncertainty over economic developments, local labor-

management relations, tax and tariff revisions, differences in

business practices, etc�

• JT’sconsolidatedfinancialstatementsmaybeaffectedbyfluctua-

tions in the exchange rates of the foreign currencies used by over-

seas subsidiaries for calculating their financial statements relative

to the Japanese yen� There is also a risk that, if an overseas affiliate

whose shares JT acquired by making payment in a foreign currency

is liquidated or sold or if the value of such a subsidiary is significantly

reduced, the gains/losses on investment in the affiliate recorded in

JT’s consolidated financial statements may be affected by fluctua-

tions in the exchange rate between the foreign currency and the

Japanese yen�

• AlthoughJTpartiallyhedgesitsexposuretoforeignexchangerisks

related to transactions conducted in foreign currencies, the possibility

cannot be ruled out that the JT Group’s business performance will

be negatively affected by exchange rate fluctuations�

Risks Relating to the JT Group’s Domestic and International Tobacco Businesses• TheJTGroup’sbusinessperformancemaybenegativelyaffected

by a decline in demand, as it expects overall cigarette demand in

Japan to continue to decline mainly due to structural factors such

as a contraction of the adult population, growing awareness about

the health risks associated with smoking and tightening of smoking-

related regulations, while demand overseas could also decrease

depending on the economic conditions and other circumstances of

the regions concerned, although the trends in demand will vary from

region to region�

• Marketsharesinthedomesticandoverseastobaccomarketsmay

fluctuate in the short term due to temporary factors, such as the launch

of new products by the JT Group and other tobacco manufacturers,

and special sales promotion activities� Local market shares may also

be affected by a number of other factors, including competition, pricing

strategies, changes in consumer preferences, brand recognition and

regional economic conditions� Such factors may lead to a decrease in

the JT Group’s market share� In addition, there is a risk that the mea-

sures adopted by the JT Group to counter the decrease in market

share may entail additional costs, reducing its profits�

• Fluctuationsinthepricesofforeignleaftobaccomayhaveadirect

impact on the JT Group’s operating income�

• ThetobaccotaxratemayberaisedinJapanoroverseas.

• Tobaccodemandmaydecreaseduetothe introductionoftighter

tobacco regulations� There is also a risk that efforts to comply with

new regulations may entail additional costs�

• Ifacountrydecidestobantheuseofsuchtermsas“mild”and“light”

in descriptions of product names, the JT Group might be prevented

from selling Mild Seven according to such a decision� In such a case,

the JT Group may have to invest a large amount of time and funds

into efforts to develop a new brand comparable to Mild Seven in that

country, and the new brand thus developed may fail to achieve the

same level of brand value and appeal�

• TheJTGrouphasbeensued inJapanandoverseasforallegedly

causing smoking-related health problems, and it may be held liable

for such health problems in these lawsuits� There is also a risk that,

regardless of the outcome of the lawsuits, negative publicity from the

litigation and other factors may make smoking less acceptable to the

public, lead to the introduction of tighter restrictions on smoking and

prompt many similar lawsuits against the JT Group, thereby forcing

it to become entangled in legal procedures and bear litigation costs�

• Inadditiontocasesrelatingtosmokingandhealth issues,theJT

Group has challenged what it regards as unreasonable notices of tax

assessment that JT subsidiaries received from the Russian tax

authorities� These claims may have a negative impact on the JT

Group’s business performance or on the manufacture, sale, importa-

tion/exportation of tobacco products if an unfavorable ruling is issued

in the respective cases�


Major Risks of Businesses

Business &

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61


Major Risks of Businesses

Risks Relating to Non-Tobacco BusinessesRisks Relating to pharmaceutical business

• TheJTGroupmayfailtodevelopandlaunchcommerciallyvaluable

pharmaceutical products� To this date, JT has never brought a phar-

maceutical product to market that it has developed on its own�

• TheJTGroupmayhavetoinvestanenormousamountoftimeand

funds in R&D before it successfully develops pharmaceutical

products�

• TheJTGroupmaybeforcedtoabandontheclinicaldevelopment

of a pharmaceutical product that involves another company as a

co-developer or a licensee on the basis of its or its partner company’s

judgment or due to some internal or external factors�

• EveniftheJTGroupsucceedsindevelopingandlaunchingacom-

mercially valuable pharmaceutical product, the R&D cost may exceed

the revenue generated from it�

• TheJTGroup’sbusinessperformancemaybecomedependent

on the sale of certain pharmaceutical products�

• TheJTGroupmay fail toachieveefficientmass-productionof

pharmaceutical products�

• EvenifapharmaceuticalproductdevelopedbytheJTGroupproves

to be commercially successful, the success may be offset by competi-

tion with rival products developed by other companies in Japan or

overseas, a government-mandated price reduction and other factors�

• TheJTGroupmaybecomedependentonthelicenseofpharmaceuti-

cal products developed by other companies and on revenues from

such products�

• TheJTGroupmaybecomedependentonacertainoutsidesource

for the supply of critical raw materials�

• Ifanyproblemarises regarding thequalityofapharmaceutical

product of the JT Group or regarding information provided by the

group about such product, the group may become the target of

lawsuits seeking product liability or making other claims, or may be

forced to suspend sales of such product�

• JT’sbusinessperformancemaybeaffectedbylawsuitsconcerning

patents and other intellectual property rights�

• Regulationmaybeappliedbroadly,coveringafullrangeofactivities

from the R&D stage to the post-launch stage of a new drug�

• TheJTGroupmaybecomedependentonacertainbusinesspartner

in the R&D or sales of a pharmaceutical product�

• InrelationtotheJTGroup’suseandmanagementofradioactiveor

other hazardous substances, social or legal problem may arise, such

as damage to the environment caused by such substances�

Risks Relating to Food Business• FoodproductsdevelopedbytheJTGroupmayfailtomeetconsumer

preferences and their product lives may prove to be short�

• TheJTGroup’sprofit/lossmayfluctuateduetofluctuationsinthe

prices of raw materials for food products (including those due to

changes in the exchange rate)�

• The sales of JT’s food products may be affected by weather

conditions�

• Theregulationoftheprocurement,manufactureandsaleoffood

products in Japan or overseas may influence the JT Group’s business

performance, including the possibility that additional costs may arise

due to compliance with such regulation�

• TheJTGroupmaybeunabletocompetewithmajorcompanieswith

larger distribution networks, stronger development capabilities and

more experience�

• TheJTGroupmaybeunable toengage inefficientmarketing

activities�

• TheJTGroupmaybeunabletoproduce,oroutsourcetheproduction

of, food products in an efficient, stable and effective manner�

• TheJTGroupmayoutsourcetheproductionofalargepartofbever-

age products to other domestic manufacturers, thus becoming

dependant on outside sources�

• IfanyproblemarisesregardingthequalityoftheJTGroup’sfood

products, the group may become the target of lawsuits seeking

product liability and making other claims, or the reputation of the

group and its products may be undermined�

Other Factors which May Materially Affect Investment Decisions• TheJapanTobaccoInc.Law(the“JTLaw”)obligatestheJapanese

government to hold at least one half of all JT shares it acquired upon

JT’s establishment, as adjusted for any subsequent stock split or

consolidation of shares, and the Japanese government must con-

tinue to hold more than one third of all outstanding JT shares� As of

the end of the fiscal year ended in March 2010, the Japanese govern-

ment held 50�01% of all outstanding JT shares�

• TheMinisterofFinancehastheauthoritytosuperviseJTunderthe

JT Law and Tobacco Business Law�

• UndertheJTLaw,thescopeofJT’sbusinessesincludesthe“manu-

facture, distribution and importation of tobacco products and ancillary

businesses, as well as businesses required for attaining the objective

of JT,” while “businesses required for attaining the objective of JT” are

subject to the Minister of Finance’s approval� Accordingly, the Minister

of Finance’s approval is required in order for JT to engage in new

businesses outside the scope of currently-approved businesses�

• TheTobaccoBusinessLawrequiresustoannuallyenter intopur-

chase contracts with tobacco growers regarding the aggregate

cultivation area for specific varieties of leaf tobacco and the prices

for leaf tobacco by variety and grade� JT must purchase all leaf

tobacco produced pursuant to such contracts, except for any not

suited for the manufacture of tobacco products� When JT decides

the aggregate cultivation area and the prices of leaf tobacco for its

contracts with tobacco growers, it is required to respect the opinion

of the Leaf Tobacco Deliberative Council (hatabako shingi kai), which

consists of members appointed by JT with the approval of the

Minister of Finance from among the representatives of domestic

leaf tobacco growers and academic appointees�

The outline of the tax reform plan for fiscal year 2010, which was

adopted upon a cabinet decision on December 22, 2009, includes a

statement to the effect that the tobacco excise tax rate will need to

be raised in order to restrain tobacco consumption from the viewpoint

of promoting public health�

62


Consolidated Eleven-YearFinancial Summary � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 64

Management’s Discussion and Analysis of Financial Condition and Business Results � � � � � � � � � � � � � � 66Consolidated Balance Sheets � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 80

Consolidated Statements of Income � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 82

Consolidated Statements of Changes in Equity � � � � � � � � � � � � � � � � � � � � � � � � � � 83

Consolidated Statements of Cash Flows � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 84

Notes to Consolidated Financial Statements � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 85

Independent Auditors’ Report � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 117


63

Responsibility

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istory

Millions of yen

Millions of U�S� dollars

(Note 1)2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010

For the year:Net sales ¥4,371,250 ¥4,501,701 ¥4,544,175 ¥4,492,264 ¥4,625,151 ¥4,664,514 ¥4,637,657 ¥4,769,387 ¥ 6,409,727 ¥6,832,307 ¥6,134,695 $65,936 Tobacco 4,024,487 4,140,270 4,178,034 4,134,466 4,236,920 — — — — — — — Japanese domestic — — — — — 3,491,488 3,405,281 3,416,274 3,362,398 3,200,494 3,042,836 32,705 International — — — — — 792,705 881,188 999,658 2,639,969 3,118,319 2,633,636 28,306 Pharmaceutical 67,790 66,414 61,868 53,927 51,242 57,676 49,257 45,452 49,064 56,758 44,069 474 Food 195,026 210,332 221,197 232,404 250,138 265,380 278,378 286,554 336,420 435,966 394,653 4,242 Others 83,947 84,685 83,076 71,467 86,851 57,265 23,553 21,449 21,876 20,770 19,501 209Taxation — — — — 2,605,343 2,650,586 2,628,878 2,718,358 3,822,331 4,005,123 3,620,543 38,914Net sales excluding excise taxes — — — — 2,019,807 2,013,927 2,008,780 2,051,029 2,587,396 2,827,184 2,514,152 27,022Adjusted net sales excluding excise taxes (Note 2) — — — — — 1,684,404 1,596,151 1,633,186 2,068,368 2,243,146 1,980,970 21,292EBITDA (Note 3) ¥ 315,132 ¥ 312,045 ¥ 334,119 ¥ 337,296 ¥ 373,435 ¥ 400,115 ¥ 433,391 ¥ 464,634 ¥ 602,096 ¥ 646,217 ¥ 526,702 $ 5,661 Tobacco 299,477 296,318 320,969 321,419 343,163 — — — — — — — Japanese domestic — — — — — 296,031 305,753 326,470 306,726 272,280 257,646 2,769 International — — — — — 65,462 94,093 112,668 270,757 337,968 249,869 2,686 Pharmaceutical (790) (3,105) (8,519) (5,110) (4,426) 5,474 (1,803) (8,197) (6,269) 4,890 (9,651) (104) Food (490) (2,660) 2,259 546 3,300 7,931 11,869 12,018 8,353 17,030 14,490 156 Others 16,093 20,033 19,617 19,674 30,674 26,810 22,140 21,586 22,055 13,150 13,337 143 Elimination/Corporate 842 1,459 (207) 767 724 (1,593) 1,339 89 474 899 1,011 11Depreciation and Amortization (Note 3) 161,160 172,080 170,314 148,333 139,401 126,744 126,445 132,643 171,542 282,411 230,197 2,474Operating income (loss) ¥ 153,972 ¥ 139,965 ¥ 163,805 ¥ 188,963 ¥ 234,034 ¥ 273,371 ¥ 306,946 ¥ 331,991 ¥ 430,554 ¥ 363,806 ¥ 296,505 $3,187 Tobacco 181,520 165,923 192,114 213,342 238,409 — — — — — — — Japanese domestic — — — — — 215,833 220,095 245,388 222,348 188,259 203,339 2,186 International — — — — — 44,458 71,031 81,085 205,360 174,772 109,127 1,173 Pharmaceutical (11,482) (12,827) (18,985) (13,855) (12,840) 1,855 (5,057) (11,207) (9,644) 1,020 (13,593) (146) Food (14,582) (17,362) (11,860) (13,168) (4,851) 1,948 6,325 6,705 667 (11,451) (13,696) (147) Others (1,764) 3,428 1,797 932 11,976 10,427 8,673 9,331 10,448 9,695 10,557 113 Elimination/Corporate 280 803 739 1,712 1,340 (1,150) 5,879 689 1,375 1,511 771 8Net income (loss) 50,792 43,687 36,850 75,302 (7,603) 62,584 201,542 210,772 238,702 123,400 138,448 1,488For the year:Net cash provided by operating activities ¥ 288,271 ¥ 393,958 ¥ 89,727 ¥ 258,057 ¥ 334,501 ¥ 250,840 ¥ 150,343 ¥ 435,958 ¥ 145,030 ¥ 275,271 ¥ 320,024 $ 3,440Net cash provided by (used in) investing activities (899,139) (90,477) (40,472) (74,877) (228,620) 176,914 (26,358) (149,692) (1,668,635) (65,008) (84,057) (903)Net cash provided by (used in) financing activities 472,593 (76,990) (124,838) (111,968) (109,335) (202,196) (48,135) (32,635) 519,001 (217,470) (250,398) (2,691)Free cash flow (Note 4) (786,499) 307,311 31,413 170,372 269,174 269,459 145,590 223,007 (1,493,717) 240,199 250,742 2,695At year-end:Net property, plant and equipment ¥ 770,639 ¥ 757,311 ¥ 743,712 ¥ 733,314 ¥ 708,221 ¥ 639,655 ¥ 596,544 ¥ 600,436 ¥ 763,332 ¥ 668,743 ¥ 679,561 $ 7,304Total assets 3,095,298 3,188,230 3,063,077 2,957,665 3,029,084 2,982,056 3,037,379 3,364,663 5,087,214 3,879,803 3,872,596 41,623Interest-bearing Debt (Note 5) 660,525 606,089 511,738 424,499 381,203 230,716 216,608 219,269 1,389,296 996,079 874,330 9,397Liabilities 1,515,539 1,618,877 1,400,384 1,283,939 1,467,322 1,430,256 1,217,306 1,340,047 2,932,585 2,255,515 2,149,317 23,101Total equity 1,526,583 1,513,846 1,613,105 1,622,654 1,507,937 1,498,204 1,762,512 2,024,616 2,154,629 1,624,288 1,723,279 18,522Ratios:Return on equity (ROE) 3�5% 2�9% 2�4% 4�7% (0�5%) 4�2% 12�4% 11�3% 11�8% 6�8% 8.6% —Return on assets (ROA) — — 5�4% 6�4% 7�9% 9�2% 10�4% 10�7% 10�5% 8�4% 7.8% —Operating income margin 3�5% 3�1% 3�6% 4�2% 5�1% 5�9% 6�6% 7�0% 6�7% 5�3% 4.8% —Total assets turnover (times) 1�64 1�43 1�45 1�49 1�55 1�55 1�54 1�49 1�52 1�52 1.58 —Equity ratio 49�3% 47�5% 52�7% 54�9% 49�8% 50�2% 58�0% 58�3% 40�8% 40�0% 42.6% —Debt/Equity ratio (times) 0�43 0�40 0�32 0�26 0�25 0�15 0�12 0�11 0�67 0�64 0.53 —Current ratio 198�2% 169�7% 196�3% 226�4% 195�3% 202�7% 256�7% 226�4% 96�1% 100�2% 108.6% —Fixed assets/Long-term capital ratio 72�5% 78�1% 74�9% 69�7% 69�9% 67�6% 60�7% 61�3% 103�4% 102�5% 99.3% —Notes: 1� Figures stated in U�S� dollars in this report are translated solely for convenience at the rate of ¥93�04 per $1, the rate of exchange as of March 31, 2010�

2� 2006–2008: Excluding imported tobacco in the Japanese domestic tobacco and distribution business in the international tobacco, respectively�

2009–: Excluding the imported tobacco, domestic duty free, the China Division and other miscellaneous items in the Japanese domestic tobacco business, in addition to the distribution, private label, contract manufacturing and other peripheral businesses in the international tobacco business�

3� EBITDA = operating income + depreciation and amortization

Depreciation and amortization = depreciation of tangible fixed assets + amortization of intangible fixed assets + amortization of long-term prepaid expenses + amortization of goodwill

4� FCF = (cash flow from operating activities + cash flow from investing activities) excluding the following items:

From “cash flow from operating activities”: Dividends received / interest received and its tax effect / interest paid and its tax effect

From “cash flow from investing activities”: Cash outflow from purchase of marketable securities / proceeds from sales of marketable securities / cash outflow from purchases of investment securities / proceeds from sales of investment securities / others (but not business-related investment securities, which are included in the investment securities item)

5� Interest-bearing Debt includes lease obligation after FY 2008�

6� Financial data disclosed herein are basically rounded�


Consolidated Eleven-Year Financial SummaryJapan Tobacco Inc� and Consolidated Subsidiaries / Years ended March 31

64

Millions of yen


(Note 1)2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010

For the year:Net sales ¥4,371,250 ¥4,501,701 ¥4,544,175 ¥4,492,264 ¥4,625,151 ¥4,664,514 ¥4,637,657 ¥4,769,387 ¥ 6,409,727 ¥6,832,307 ¥6,134,695 $65,936 Tobacco 4,024,487 4,140,270 4,178,034 4,134,466 4,236,920 — — — — — — — Japanese domestic — — — — — 3,491,488 3,405,281 3,416,274 3,362,398 3,200,494 3,042,836 32,705 International — — — — — 792,705 881,188 999,658 2,639,969 3,118,319 2,633,636 28,306 Pharmaceutical 67,790 66,414 61,868 53,927 51,242 57,676 49,257 45,452 49,064 56,758 44,069 474 Food 195,026 210,332 221,197 232,404 250,138 265,380 278,378 286,554 336,420 435,966 394,653 4,242 Others 83,947 84,685 83,076 71,467 86,851 57,265 23,553 21,449 21,876 20,770 19,501 209Taxation — — — — 2,605,343 2,650,586 2,628,878 2,718,358 3,822,331 4,005,123 3,620,543 38,914Net sales excluding excise taxes — — — — 2,019,807 2,013,927 2,008,780 2,051,029 2,587,396 2,827,184 2,514,152 27,022Adjusted net sales excluding excise taxes (Note 2) — — — — — 1,684,404 1,596,151 1,633,186 2,068,368 2,243,146 1,980,970 21,292EBITDA (Note 3) ¥ 315,132 ¥ 312,045 ¥ 334,119 ¥ 337,296 ¥ 373,435 ¥ 400,115 ¥ 433,391 ¥ 464,634 ¥ 602,096 ¥ 646,217 ¥ 526,702 $ 5,661 Tobacco 299,477 296,318 320,969 321,419 343,163 — — — — — — — Japanese domestic — — — — — 296,031 305,753 326,470 306,726 272,280 257,646 2,769 International — — — — — 65,462 94,093 112,668 270,757 337,968 249,869 2,686 Pharmaceutical (790) (3,105) (8,519) (5,110) (4,426) 5,474 (1,803) (8,197) (6,269) 4,890 (9,651) (104) Food (490) (2,660) 2,259 546 3,300 7,931 11,869 12,018 8,353 17,030 14,490 156 Others 16,093 20,033 19,617 19,674 30,674 26,810 22,140 21,586 22,055 13,150 13,337 143 Elimination/Corporate 842 1,459 (207) 767 724 (1,593) 1,339 89 474 899 1,011 11Depreciation and Amortization (Note 3) 161,160 172,080 170,314 148,333 139,401 126,744 126,445 132,643 171,542 282,411 230,197 2,474Operating income (loss) ¥ 153,972 ¥ 139,965 ¥ 163,805 ¥ 188,963 ¥ 234,034 ¥ 273,371 ¥ 306,946 ¥ 331,991 ¥ 430,554 ¥ 363,806 ¥ 296,505 $3,187 Tobacco 181,520 165,923 192,114 213,342 238,409 — — — — — — — Japanese domestic — — — — — 215,833 220,095 245,388 222,348 188,259 203,339 2,186 International — — — — — 44,458 71,031 81,085 205,360 174,772 109,127 1,173 Pharmaceutical (11,482) (12,827) (18,985) (13,855) (12,840) 1,855 (5,057) (11,207) (9,644) 1,020 (13,593) (146) Food (14,582) (17,362) (11,860) (13,168) (4,851) 1,948 6,325 6,705 667 (11,451) (13,696) (147) Others (1,764) 3,428 1,797 932 11,976 10,427 8,673 9,331 10,448 9,695 10,557 113 Elimination/Corporate 280 803 739 1,712 1,340 (1,150) 5,879 689 1,375 1,511 771 8Net income (loss) 50,792 43,687 36,850 75,302 (7,603) 62,584 201,542 210,772 238,702 123,400 138,448 1,488For the year:Net cash provided by operating activities ¥ 288,271 ¥ 393,958 ¥ 89,727 ¥ 258,057 ¥ 334,501 ¥ 250,840 ¥ 150,343 ¥ 435,958 ¥ 145,030 ¥ 275,271 ¥ 320,024 $ 3,440Net cash provided by (used in) investing activities (899,139) (90,477) (40,472) (74,877) (228,620) 176,914 (26,358) (149,692) (1,668,635) (65,008) (84,057) (903)Net cash provided by (used in) financing activities 472,593 (76,990) (124,838) (111,968) (109,335) (202,196) (48,135) (32,635) 519,001 (217,470) (250,398) (2,691)Free cash flow (Note 4) (786,499) 307,311 31,413 170,372 269,174 269,459 145,590 223,007 (1,493,717) 240,199 250,742 2,695At year-end:Net property, plant and equipment ¥ 770,639 ¥ 757,311 ¥ 743,712 ¥ 733,314 ¥ 708,221 ¥ 639,655 ¥ 596,544 ¥ 600,436 ¥ 763,332 ¥ 668,743 ¥ 679,561 $ 7,304Total assets 3,095,298 3,188,230 3,063,077 2,957,665 3,029,084 2,982,056 3,037,379 3,364,663 5,087,214 3,879,803 3,872,596 41,623Interest-bearing Debt (Note 5) 660,525 606,089 511,738 424,499 381,203 230,716 216,608 219,269 1,389,296 996,079 874,330 9,397Liabilities 1,515,539 1,618,877 1,400,384 1,283,939 1,467,322 1,430,256 1,217,306 1,340,047 2,932,585 2,255,515 2,149,317 23,101Total equity 1,526,583 1,513,846 1,613,105 1,622,654 1,507,937 1,498,204 1,762,512 2,024,616 2,154,629 1,624,288 1,723,279 18,522Ratios:Return on equity (ROE) 3�5% 2�9% 2�4% 4�7% (0�5%) 4�2% 12�4% 11�3% 11�8% 6�8% 8.6% —Return on assets (ROA) — — 5�4% 6�4% 7�9% 9�2% 10�4% 10�7% 10�5% 8�4% 7.8% —Operating income margin 3�5% 3�1% 3�6% 4�2% 5�1% 5�9% 6�6% 7�0% 6�7% 5�3% 4.8% —Total assets turnover (times) 1�64 1�43 1�45 1�49 1�55 1�55 1�54 1�49 1�52 1�52 1.58 —Equity ratio 49�3% 47�5% 52�7% 54�9% 49�8% 50�2% 58�0% 58�3% 40�8% 40�0% 42.6% —Debt/Equity ratio (times) 0�43 0�40 0�32 0�26 0�25 0�15 0�12 0�11 0�67 0�64 0.53 —Current ratio 198�2% 169�7% 196�3% 226�4% 195�3% 202�7% 256�7% 226�4% 96�1% 100�2% 108.6% —Fixed assets/Long-term capital ratio 72�5% 78�1% 74�9% 69�7% 69�9% 67�6% 60�7% 61�3% 103�4% 102�5% 99.3% —Notes: 1� Figures stated in U�S� dollars in this report are translated solely for convenience at the rate of ¥93�04 per $1, the rate of exchange as of March 31, 2010�

2� 2006–2008: Excluding imported tobacco in the Japanese domestic tobacco and distribution business in the international tobacco, respectively�

2009–: Excluding the imported tobacco, domestic duty free, the China Division and other miscellaneous items in the Japanese domestic tobacco business, in addition to the distribution, private label, contract manufacturing and other peripheral businesses in the international tobacco business�

3� EBITDA = operating income + depreciation and amortization

Depreciation and amortization = depreciation of tangible fixed assets + amortization of intangible fixed assets + amortization of long-term prepaid expenses + amortization of goodwill

4� FCF = (cash flow from operating activities + cash flow from investing activities) excluding the following items:

From “cash flow from operating activities”: Dividends received / interest received and its tax effect / interest paid and its tax effect

From “cash flow from investing activities”: Cash outflow from purchase of marketable securities / proceeds from sales of marketable securities / cash outflow from purchases of investment securities / proceeds from sales of investment securities / others (but not business-related investment securities, which are included in the investment securities item)

5� Interest-bearing Debt includes lease obligation after FY 2008�

6� Financial data disclosed herein are basically rounded�

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Management’s Discussion and Analysis of Financial Condition and Business Results• The accounts of most subsidiaries outside Japan that have December 31 fiscal year-ends have been included in consolidated financial statements ended March 31�• Financial data disclosed herein are basically rounded�

The following discussion of our financial condition and business results

should be read in reference to our consolidated financial statements

prepared in accordance with Japanese Generally Accepted Accounting

Principles (“Japanese GAAP”) and other information included in other

sections of this annual report� This discussion and analysis contains

forward-looking statements that involve risks, uncertainties and

assumptions� Actual results may differ materially from those estimated

in these statements as a result of a number of factors, including, but

not limited to, those described in “Major Risks of Businesses” (See

Page 61)�

Japan Tobacco Inc� (“JT”) is a joint stock corporation (kabushiki kaisha)

incorporated under the corporate law of Japan (the “Corporate Law”)

pursuant to the Japan Tobacco Inc� Law (the “JT Law”)� JT is primarily

engaged in the manufacture and sale of tobacco products in the Japa-

nese domestic and international markets, as one of the largest produc-

ers of tobacco products in the world� Sales of cigarettes by JT and its

consolidated subsidiaries (the “JT Group” or “Group”) in the Japanese

domestic market in the fiscal year ended March 31, 2010, amounted

to 151�9 billion cigarettes (Note 1), sales in the domestic duty-free market

and in the markets in China, Hong Kong and Macau, which are covered

by JT’s China Division, totaled 3�6 billion cigarettes and sales in other

overseas markets stood at 434�9 billion cigarettes (Note 2)�(Note 1) Excluding tobacco products purchased from overseas tobacco manufacturers and

sold to retail stores through its distribution subsidiary, TS Network Co�, Ltd� (“TS Network”)

(Note 2) Including cigars, pipe tobacco and snus, excluding private label and contract manu-facturing products�

In the Japanese domestic tobacco market, JT manufactures and

sells its tobacco products to retail stores all over the country in accor-

dance with the Tobacco Business Law� This law provides that (1) JT

shall be the sole manufacturer of tobacco products in Japan and (2) the

maximum wholesale price of each tobacco product manufactured and

sold and the retail price of each product sold in Japan, as well as any

changes in these prices, shall be subject to approval by the Minister of

Finance� The products are transported from its factories to its distribu-

tion bases by its subsidiary, JT Logistics Co�, Ltd� and then distributed

to retail stores by the subsidiary, TS Network� TS Network also acts as

the wholesaler of foreign tobacco manufacturers, purchasing and selling

their products to retail stores in the Japanese domestic market�

JT greatly expanded its international tobacco business through the

acquisition of the non-U�S� tobacco operations of RJR Nabisco, Inc�

(“RJR Nabisco”) on May 12, 1999� JT paid US$5�0 billion for the

non-U�S� tobacco operations of RJR Nabisco, which resulted in US$3�5

billion of goodwill� JT also acquired non-U�S� tobacco-related trade-

marks and intellectual properties for US$2�7 billion and other assets

for US$0�1 billion� The acquisition, worth a total of US$7�8 billion (¥940

billion at the exchange rate effective at that time), was financed by a

syndicated loan of US$5�0 billion (¥600 billion at the exchange rate

effective at that time) and US$2�8 billion (¥340 billion at the exchange

rate effective at that time) in cash� The syndicated loan was later

refinanced through domestic and foreign bond issues and long-term

loans from banks and insurance companies� JT repaid in full the

long-term loans from banks and insurance companies, redeemed the

foreign bonds by July 2004 and redeemed the domestic bonds in June

2009� As a result of this acquisition, JT obtained increased access to

overseas markets, especially in Europe and Russia, and the rights in

almost all countries outside the United States to internationally

recognized trademarks such as Winston, Camel and Salem� Since this

acquisition, JT’s international tobacco business—of which JT

International (“JTI”) constitutes the core—has consistently main-

tained strong growth� Although sales and profits of the international

tobacco business for the fiscal year ended March 2010 declined due

to currency movements, sales and profits at the constant rates of

exchange improved�

On April 18, 2007, JT completed the procedures for the acquisition

of Gallaher Group Plc to make it a wholly owned subsidiary of JT� The

acquisition price was about £7�5 billion (¥1,720 billion at the exchange

rate effective at the time), and the total acquisition price including the

assumption of net interest-bearing debt was approximately £9�44 billion

(¥2,180 billion at the exchange rate effective at the time)� This acquisi-

tion resulted in goodwill of US$15�1 billion� Of the total value, ¥820

billion was covered by our own funds, ¥450 billion by a loan from Mizuho

Bank, Ltd�, and £1�9 billion (¥450 billion at the exchange rate effective

at the time) by a syndicated loan arranged by Merrill Lynch� Of the funds

borrowed from Mizuho Bank, the JT Group repaid a total of ¥150 billion

in May and July 2007 out of its own funds and refinanced ¥300 billion

through new loans totaling ¥150 billion from other domestic banks and

through the issuance of domestic bonds totaling ¥150 billion� It repaid

the syndicated loan of £1�9 billion with its own cash, and funds bor-

rowed under a new credit line established outside Japan� As for the

domestic bonds, the JT Group is due to redeem ¥50 billion in July 2010,

¥40 billion in July 2011 and ¥60 billion in July 2012�

With the acquisition of Gallaher, we have further strengthened our

position as the world’s third largest tobacco company� In addition to

our strong business foundation in Asia, we now have an increasing

presence in Europe and the CIS region� We aim to maintain sustainable

growth as a major tobacco company on the strength of our geographi-

cally well-balanced operations and our ample growth potential� JT’s

international tobacco business aims to enhance its role as the driver

of the JT Group’s profit growth by achieving top-line growth� We count

eight brands among our list of global flagship brands (“GFB”): Winston,

Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, Sobranie and

Glamour� We intend to actively explore opportunities for top-line

growth on the strength of these GFB, which form the core of our

brand portfolio�

Business Description and Acquisition of Outside Resources

66

2006 2007 2008 2009 2010

4,637.7 4,769.4

6,409.76,832.3

6,134.7

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2006 2007 2008 2009 2010

306.9 332.0

430.6363.8

296.5

100

200

300

400

500

In addition to the tobacco business, the JT Group has been actively

engaged in its pharmaceutical and food businesses in order to diversify

its source of future profits and cash flows�

In its pharmaceutical business, the JT Group focuses on the research

and development of prescription drugs� In the Japanese domestic

market, Torii Pharmaceutical Co�, Ltd�, in which JT acquired a stake of

53�5% for approximately ¥42 billion in December 1998, manufactures

and sells prescription drugs through its extensive marketing network�

In the overseas market, JT derives revenue principally from royalties

on the licensing of its successful anti-HIV drug�

In its food business, the JT Group principally manufactures and sells

beverages, processed foods and seasonings in the Japanese domestic

market� JT’s presence in the beverage market was substantially

expanded through the acquisition of a majority stake in Unimat

Corporation, a nationwide operator of soft drink vending machines that

was later renamed Japan Beverage Inc�, for approximately ¥29 billion

in a two-stage deal implemented in April and September 1998� In

addition, JT acquired the food business of Asahi Kasei Corporation for

approximately ¥24 billion in July 1999� In January 2008, the JT Group

made Katokichi Co� a subsidiary by acquiring additional shares of the

company for approximately ¥102 billion, increasing its equity stake in

Katokichi Co� from 5% to approximately 94%� Following the acquisition

of all voting rights of Katokichi Co� on April 18, 2008, the JT Group

channeled its processed food operations, including frozen food opera-

tions and seasonings operations, through the Katokichi Group beginning

on July 1, 2008� Through this realignment, the Katokichi Group will

consolidate its foundation as a unique food manufacturer on the strength

of its processed food business—including the frozen food business,

which has the eminent scale in Japanese market—and its superior

technology for the production of seasonings� Katokichi Co� changed its

corporate name to TableMark Co�, Ltd� in January 2010�

Under the JT Law, JT must obtain approval from the Minister of

Finance with regard to certain matters, such as (1) the issuance of new

shares (as well as subscription rights for new shares and bonds with

subscription rights for new shares) and (2) resolutions adopted at

shareholder meetings for any amendments to the Articles of Incorpora-

tion and appropriation of retained earnings� Pursuant to the JT Law, the

Japanese government is required to hold one-half or more of the JT

shares that were issued upon the company’s establishment in 1985,

as adjusted for any subsequent stock split or consolidation of shares�

The amended JT Law allows JT to issue new shares to the extent that

the number of shares held by the government remains at more than

one-third of the outstanding shares�

Overview

Our net sales (Note 3) totaled ¥6,134�7 billion for the year ended in March

31, 2010 compared with ¥6,832�3 billion for the year ended March 31,

2009� The Japanese domestic and international tobacco businesses

accounted for 49�6% and 42�9%, respectively, of our net sales in the year

ended March 31, 2010, compared with 46�8% and 45�6% in the year

ended March 31, 2009� Sales for our international tobacco business have

become an important component of our total net sales�

Our operating income totaled ¥296�5 billion for the year ended

March 31, 2010, compared with ¥363�8 billion for the year ended March

31, 2009� Up to the year ended March 31, 2008 our food business has

generated operating income since the year ended March 31, 2005, it

posted an operating loss in the year ended March 31, 2009 and in the

year ended March 31, 2010� Our pharmaceutical business has posted

operating losses every year since the year ended March 31, 1998, when

we started to disclose segment-by segment information, with the

exception of the year ended March 31, 2005 and the year ended March

31, 2009� As a result, we derive almost all of our operating income from

our tobacco business�(Note 3) Including tobacco excise taxes�

Net Sales(Note 3)

(Billions of yen)

Operating Income(Billions of yen)

(Note 3) Including tobacco excise taxes�

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Management’s Discussion and Analysis of Financial Condition and Business Results

addition, in May 2010, JT released in limited regions Zerostyle Mint an

all-new style of smokeless tobacco which does not require a flame�

JT is committed to increasing customer satisfaction by meeting a

diverse range of consumer needs including the development of many

new tobacco products not limited to cigarettes as well as improving

product taste and flavor so that people can enjoy their favorite tobacco

products more� Although the Japanese domestic tobacco business

suffered a decline in cigarette sales volume, we kept our market share

almost unchanged from the previous year through aggressive sales

promotion and product launches� Meanwhile, JT closed two domestic

tobacco factories at the end of March 2010 as part of our efforts to

build an optimum operating structure�

The international tobacco business is actively exploring opportuni-

ties for top-line growth by concentrating business resources on GFBs

and improving margins through appropriate pricing, so that it can

continue to act as the JT Group’s profit growth engine� In the year

ended March 31, 2010, the total sales volume and the GFB sales

volume declined due to such factors as an unstable business environ-

ment in Iran, a change in the operating model in the Philippines from

the licensing arrangement to contract manufacturing� Despite the

impact of those specific events, both the total sales volume and the

GFB sales volume grew from the previous year� In the meantime,

although the trend of down-trading accelerated in many key markets

in the year ended March 31, 2010 due to the recession and sharp

tobacco tax increases, our international tobacco business achieved

market share growth in almost all key markets, including Russia,

France, Italy, Spain, the UK and Turkey because of its well-balanced

brand portfolio, which is strong in the sub-premium and mid-price

segments, and its efforts to enhance brand equity and strengthen sales

promotion activities� We also believe that our continued active invest-

ments in enhancing brand equity in each market made significant

contributions to the increases in many market shares�

Market shares in the Japanese domestic and overseas tobacco

markets may fluctuate in the short term due to temporary factors, such

as the launch of new products by the JT Group and other tobacco

manufacturers, and special sales promotion activities� Local market

shares may also be affected by a number of other factors, including

competition, pricing strategies, changes in consumer preferences,

brand recognition and regional economic conditions�

Such factors may lead to a decrease in the JT Group’s market share�

In addition, there is a risk that the measures adopted by the JT Group

to counter the decrease in market share may entail additional costs,

reducing its profits� The profitability of the Japanese domestic and

international tobacco businesses may fluctuate due to various factors,

including the following:

• Health concerns relating to the use of tobacco product;

• Legal or regulatory developments and changes, including, without

limitation, tax increases and restrictions on the sale, marketing

and usage of tobacco products, and governmental investigations

Overall tobacco demand in the Japanese domestic market has been

declining due to such factors as the aging of Japanese society, growing

awareness about the health risks associated with smoking and the

tightening of smoking-related regulations, and we expect this trend to

continue� As for overseas markets, too, demand may decline depending

on economic conditions and regional factors, although the situation will

vary from region to region�

The total tobacco sales of the Japanese domestic tobacco business

in the year ended March 31, 2010 fell 5�0% from the previous year to

151�9 billion cigarettes(Note 4) due to the impact of the recession as well

as the abovementioned structural factors� Meanwhile, the total tobacco

sales of the international tobacco business in the year ended March 31,

2010 declined 2�5% from the previous year to 434�9 billion cigarettes(Note 5),

as an increase in sales in Turkey, the UK, Russia and Italy was offset

by a decrease in Iran, Ukraine and the Philippines� The table below

shows the total tobacco sales of the Japanese domestic and interna-

tional tobacco businesses for the past two fiscal years�

Year ended March 31 2009 2010

Japanese domestic tobacco business (Note 4) 159�9 151.9

International tobacco business (Note 5) 445�9 434.9

Total 605�8 586.8

(Billions of Cigarettes)

(Note 4) Excluding tobacco products purchased from overseas tobacco manufacturers and sold to retail stores through its distribution subsidiary, TS Network Co�, Ltd� (“TS Network”), sales volume of domestic duty-free market and in the markets in China, Hong Kong and Macau, which are covered by JT’s China Division�

(Note 5) Including cigars, pipe tobacco and snus, excluding private label and contract manu-facturing products�

The JT Group regards the Japanese domestic tobacco business as

its core source of profits� The business environment is becoming increas-

ingly difficult due to a decline in overall demand in the Japanese domestic

market and intensifying competition� To secure a competitive edge, JT

will strive to build a strong brand portfolio and also make continuous

efforts to enhance added value of its products and improve product

quality so as to maximize customer satisfaction and establish a highly

cost efficient business framework� In the year ended March 31, 2010,

JT strived to enhance the brand portfolio by introducing new products

as well as by developing the existing brands, particularly the Mild Seven

family and the Seven Stars family, which are our core brands� Specifically,

JT launched Mild Seven 100’s Box, Mild Seven Lights 100’s Box, Seven

Stars Black Charcoal Menthol Box, Pianissimo Icene Menthol One and

Mild Seven Impact One Menthol Box nationwide and launched Camel

Menthol Mini in limited areas� And Seven Stars Black Impact Box was

released nationwide in April 2010, which was followed by the nationwide

release in June of Winston Lights 6 Box, Winston Extra 3 Box, and

Winston Ultra One 100’s Box� JT integrated the Icene and Lucia brands

into the Pianissimo brand and repackaged 15 major products of the Mild

Seven family and renewed all of the 9 brands of the Caster family in

April 2010, thereby enhancing the brand of the Pianissimo, Mild Seven

and Caster families with a view to achieving sustainable growth� In

Overview of the Japanese Domestic and International Tobacco Businesses

68

and privately imposed smoking restriction;

• Litigation in Japan and elsewhere;

• Our ability to successfully expand internationally and make invest-

ments outside of Japan;

• Competition and changing consumer preferences;

• The impact of any acquisitions;

• Local and global economic conditions; and

• Fluctuations in foreign exchange rates and the cost of raw

materials�

Please refer to “Major Risks of Businesses” (Page 61) for the details�

Consolidated Business Results and Results by Industry Segment

Consolidated Income Statement

Millions of yenMillions of

U�S� dollars

For years ended March 31 2008 2009 2010 2010

Net sales ¥6,409,727 ¥6,832,307 ¥6,134,695 $65,936

Cost of sales 5,228,926 5,554,399 5,022,637 53,984

Gross profit 1,180,801 1,277,908 1,112,058 11,952

Selling, general and administrative expenses 750,247 914,102 815,553 8,765

Operating income 430,554 363,806 296,505 3,187

Other income (expenses), net (57,940) (101,662) (20,450) (220)

Income before income taxes and minority interests 372,614 262,144 276,055 2,967

Income taxes 128,379 134,973 131,304 1,411

Income before minority interests 244,235 127,171 144,751 1,556

Minority interests 5,533 3,771 6,303 68

Net income ¥ 238,702 ¥ 123,400 ¥ 138,448 $ 1,488

Net income before goodwill amortization ¥ 242,585 ¥ 228,912 ¥ 235,875 $ 2,535

Impact of Exchange Rate Fluctuations

The JT Group has become more prone than before to exchange rate

fluctuations as a result of an expansion of its international tobacco

business� While JT itself makes consolidated financial statements in

terms of the Japanese yen, overseas subsidiaries and affiliates of the

JT Group do so in terms of foreign currencies� Consequently, the

business results, assets and liabilities of the overseas subsidiaries and

affiliates are converted into yen terms when they are reflected in JT’s

consolidated financial statements� Therefore, JT’s financial statements

are affected by the fluctuations of the foreign currencies used by the

overseas subsidiaries and affiliates against the Japanese yen� JT

International Holding B.V. (JT’s consolidated subsidiary in the Netherlands;

hereinafter referred to as “JTIH”), which is responsible for consolidating

the financial results of the JT Group’s international tobacco business,

uses the U�S� dollar for its financial accounting� However, JTIH does

business through consolidated subsidiaries and affiliates around the

world, some of which use foreign currencies other than the U�S� dollar�

This means that the JT Group’s consolidated results are affected not

only by exchange rate fluctuations between the Japanese yen and the

U�S� dollar but also by those between the U�S� dollar and other foreign

currencies used by the consolidated subsidiaries and affiliates for their

financial accounting� However, the impact of such exchange rate fluctua-

tions does not significantly affect the business fundamentals�

A substantial portion of the JT Group’s international transactions

is conducted in currencies other than the Japanese yen, and that

portion is affected by exchange rate fluctuations� Although JT partially

hedges its exposure to foreign exchange risks related to transactions

conducted in foreign currencies, the JT Group’s exchange risks cannot

be fully offset� Therefore, the possibility cannot be ruled out that the

JT Group’s business performance will be negatively affected by

exchange rate fluctuations�

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Results by Industry Segment


U�S� dollars


Net sales (Note 6) ¥6,409,727 ¥6,832,307 ¥6,134,695 $65,936

Tobacco

Japanese domestic 3,362,398 3,200,494 3,042,836 32,705

International 2,639,969 3,118,319 2,633,636 28,306

Pharmaceutical 49,064 56,758 44,069 474

Food 336,420 435,966 394,653 4,242

Others 21,876 20,770 19,501 209

(Note 6) Including tobacco tax


U�S� dollars


Adjusted net sales excluding excise taxes (Note 7) — ¥2,243,147 ¥1,980,970 $21,292

Tobacco

Japanese domestic — 648,830 615,991 6,621

International — 1,080,821 906,756 9,746

Pharmaceutical — 56,758 44,069 474

Food — 435,966 394,653 4,242

Others — 20,770 19,501 209

(Note 7) Japanese domestic tobacco; excluding excise tax and revenue from the imported tobacco, domestic duty free, the China Division, and other miscellaneous. International tobacco; excluding excise taxes and revenue from distribution, private label, contract manufacturing and other peripheral business�


U�S� dollars

2008 2009 2010 2010

Operating income ¥430,554 ¥363,806 ¥296,505 $3,187

Tobacco

Japanese domestic 222,348 188,259 203,339 2,186

International 205,360 174,772 109,127 1,173

Pharmaceutical (9,644) 1,020 (13,593) (146)

Food 667 (11,451) (13,696) (147)

Others 10,448 9,695 10,557 113

Elimination/Corporate 1,375 1,511 771 8


U�S� dollars

2008 2009 2010 2010

EBITDA ¥602,096 ¥646,217 ¥526,702 $5,661

Tobacco

Japanese domestic 306,726 272,280 257,646 2,769

International 270,757 337,968 249,869 2,686

Pharmaceutical (6,269) 4,890 (9,651) (104)

Food 8,353 17,030 14,490 156

Others 22,055 13,150 13,337 143

Elimination/Corporate 474 899 1,011 11

70

Year Ended March 31, 2010 Compared with Year Ended March 31, 2009Net SalesNet sales for the year ended March 31, 2010 decreased by ¥697�6

billion, or 10�2% from the previous year to ¥6,134�7 billion� The net

sales amounts indicated below represent the amounts excluding

inter-segment transactions�

• Japanese Domestic Tobacco Business

Net sales in our Japanese domestic tobacco business are comprised

of domestic sales of tobacco products manufactured by the JT Group

within and outside Japan (including domestic duty-free sales and sales

of imported tobaccos) (Note 8), domestic sales of products manufactured

by foreign tobacco manufacturers and distributed by our subsidiaries

as wholesalers and sales in the China, Hong Kong and Macau markets,

which are covered by JT’s China Division� Net sales for our Japanese

domestic tobacco business totaled ¥3,042�8 billion in the year ended

March 31, 2010, a decrease of ¥157�7 billion, or 4�9%, from the previous

year� Adjusted net sales excluding tax declined by ¥32�8 billion, or 5�1%,

from the previous year to ¥616�0 billion� The sales volume of JT’s

tobacco products in Japan decreased by 8�1 billion cigarettes, or 5�0%,

from the previous year to 151�9 billion cigarettes (Note 9)�

The sales volume declined due to the continued decrease in total

cigarette demand caused by factors such as: the aging Japanese popula-

tion, growing consciousness of health risks associated with smoking,

tightened smoking regulations and the economic recession� Our market

share came to 64�9%, almost unchanged compared with the previous

year� Net sales excluding excise tax per 1,000 cigarettes remained

almost unchanged from the previous year for ¥4,056�(Note 8) The margin on the sales of imported tobacco products for the Japanese domestic

tobacco business is substantially smaller than on the margin on the sales of JT products, as the JT Group’s involvement is limited to the distribution operation�

(Note 9) In addition, 3�6 billion cigarettes sold in domestic duty-free markets and in the China, Hong Kong and Macau markets, which are covered by JT’s China Division accounted for domestic sales volume�

• International Tobacco Business

Net sales for our international tobacco business totaled ¥2,633�6 billion,

a decline of ¥484�7 billion, or 15�5%, from the previous year, while

adjusted net sales excluding taxes decreased by ¥174�1 billion, or

16�1%, to ¥906�8 billion� The sales volume of our international tobacco

business dropped by 11 billion cigarettes, or 2�5%, to 434�9 billion ciga-

rettes, as robust sales growth of Winston in Italy, France and Turkey

and of Camel in Italy and Ukraine were offset by the negative impact

of an unstable business environment in Iran and a shift in the operating

model in the Philippines from the licensing arrangement to contract

manufacturing� The GFB sales volume dropped 2�1 billion cigarettes, or

0�9%, from the previous year to 243�4 billion cigarettes� Sales denomi-

nated in local currencies are first converted into the U�S� dollar terms

and then into yen terms based on the average exchange rate for the

relevant accounting period� Despite the decline in the sales volume,

U�S� dollar-based net sales increased at constant rates of exchange as

a result of favorable pricing in many markets� However, yen-based net

sales declined as a result of the depreciation of the local currencies

against the U�S� dollar and the dollar’s depreciation against the yen�

The average exchange rates of the major local currencies converted

into dollar terms were: $1=31�77 ruble, $1=0�65 pound, $1=0�73 euro

for the year ended March 31, 2010, compared with $1=24�84 ruble,

$1=0�53 pound and $1=0�68 euro for the year ended March 31, 2009�

The 12-month average exchange rate between the Japanese yen and

the U�S� dollar that was used for the conversion of sales for the year

ended March 31, 2010 was ¥93�65 to $1�00, compared with ¥103�48 to

$1�00 for the year ended March 31, 2009�

• Pharmaceutical Business

Net sales for our pharmaceutical business dropped by ¥12�7 billion, or

22�4%, from the previous year to ¥44�1 billion in the year ended March

31, 2010� While net sales for Torii Pharmaceutical increased, the con-

solidated net sales declined after the previous year’s sales were boosted

by the receipt of an upfront fee for the licensing of antiosteoporosis

oral compound JTT-305 to Merck of the United States in September

2008 and a milestone revenue associated with progress in the develop-

ment of the JTT-705 compound for the treatment of dyslipidemia, which

was licensed to Roche in October 2004�

• Food business

Net sales for our food business declined by ¥41�3 billion, or 9�5%, from

the previous year to ¥394�7 billion� Sales of beverage products declined

by ¥1�2 billion, or 0�6%, to ¥186�1 billion� Sales of processed foods fell

by ¥40�1 billion, or 16�1%, from the previous year to ¥208�5 billion, as

a result of the withdrawal from the chilled processed food business

and the exclusion of some subsidiaries from the consolidated results

due to the change in ownership�

Cost of Sales (Note 10)

Cost of sales in the year ended March 31, 2010 decreased by ¥531�8

billion, or 9�6%, from the previous year to ¥5,022�6 billion� Despite

the increase of the production cost due to the price hike of foreign

leaf tobacco, the decrease in the sales volume of the Japanese

domestic tobacco business and the adverse currency movements in

the international tobacco business contributed to the decrease in the

cost of sales�(Note 10) The cost of sales includes tobacco excise taxes

Selling, General and Administrative ExpensesSelling, general and administrative expenses in the year ended March

31, 2010 decreased by ¥98�5 billion, or 10�8%, from the previous year

to ¥815�6 billion� This was attributable to the effects of exchange rate

fluctuations on the conversion of the selling general and administrative

expenses of the international tobacco business into yen terms and the

completion of the amortization of some trademark rights in the Japa-

nese domestic tobacco business�

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EBITDA (Note 11) and Operating IncomeAs a result of the above factors, EBITDA in the year ended March 31,

2010 declined by ¥119�5 billion, or 18�5%, from the previous year to

¥526�7 billion, while operating income dropped by ¥67�3 billion, or

18�5%, to ¥296�5 billion� EBITDA and operating income by business

segment were as follows:(Note 11) In the mid-term management plan “JT-11,” we use EBITDA for the profit index that

committed to our stakeholders and for the key performance indicators� EBITDA as defined by the JT Group is operating income plus the amortization cost (the cost of the depreciation of tangible fixed assets and amortization of intangible fixed assets, long-term prepaid expenses and goodwill)� The cost of the amortization of some tangible assets is included in the cost of sales while that of other tangible assets is included in the general and administrative expenses�


EBITDA for our Japanese domestic tobacco business in the year ended

March 31, 2010 decreased by ¥14�6 billion, or 5�4%, from the previous

year to ¥257�6 billion due to a decline in net sales caused by a fall in

the sales volume� Operating income increased by ¥15�1 billion, or

8�0%, to ¥203�3 billion� The reduced net sales was offset by a drop in

the depreciation cost following the completion of the amortization of

some trademark rights�


EBITDA for our international tobacco business in the year ended March

31, 2010 declined by ¥88�1 billion, or 26�1%, from the previous year to

¥249�9 billion and operating income dropped by ¥65�6 billion, or 37�6%,

to ¥109�1 billion� This was due to a net sales decline attributable to the

depreciation of the local currencies of major markets against the U�S�

dollar, the dollar’s depreciation against the Japanese yen and a rise in

the manufacturing cost due to increased leaf tobacco prices�


Our pharmaceutical business recorded an negative EBITDA of ¥9�7

billion in the year ended March 31, 2010, representing a deterioration

of ¥14�5 billion, from the previous year, and an operating loss of ¥13�6

billion, a deterioration of ¥14�6 billion,, from the previous year� Although

net sales and profits for Torii Pharmaceutical increased, the consolidated

EBITDA and operating loss deteriorated after the previous year’s results

that were boosted by the receipt of an upfront fee for the licensing of

anti-osteoporosis oral compound JTT-305 to Merck in September 2008

and a milestone revenue associated with progress in the development

of the JTT-705 compound for the treatment of dyslipidemia, which was

licensed to Roche in October 2004�

• Food business

EBITDA for our food business in the year ended March 31, 2010

declined by ¥2�5 billion, or 14�9%, from the previous year to ¥14�5 billion

as a result of a reduced net sales and one-time factors such as losses

in the fishery business despite cost reduction�

It posted an operating loss of ¥13�7 billion, a deterioration of ¥2�2

billion from the previous year� This was due to the impact of the amor-

tization of goodwill related to TableMark Co� Ltd�’s acquisition of addi-

tional shares in Green Foods Co�, Ltd�, a subsidiary, in June 2009, as

well as the reduced EBITDA�

• Others

EBITDA for our other businesses in the year ended March 31, 2010

increased by ¥0�2 billion, or 1�4%, from the previous year to ¥13�3

billion, while operating income increased by ¥0�9 billion, or 8�9%, to

¥10�6 billion�

Other Expenses/Income (on a net basis)We booked other expenses totaling ¥20�5 billion (on a net basis) in the

year ended March 31, 2010, a decrease of ¥81�2 billion from the previ-

ous year� This was attributable to a decline in interest payments due to

reduced borrowings, redemption of bonds and lower interest rates, a

drop in exchange losses, the elimination of some expenses incurred in

the previous year, including: expenses related to a change in the operat-

ing model in the Philippines; expenses associated with the demolition

of company housing; and the cost of introducing vending machines

with the adult identification function, and a gain from the reversal of

liability on a fine levied under the UK competition law, which outweighed

a decrease in the profits from the sale of fixed assets�

Income before Income Taxes and Minority InterestsAs a result of the above factors, income before income taxes and

minority interests in the year ended March 31, 2010 increased by ¥13�9

billion, or 5�3%, from the previous year to ¥276�1 billion mainly due to

changes in the business�

Income TaxesIncome taxes in the year ended March 31, 2010 declined by ¥3�7

billion, or 2�7%, from the previous year to ¥131�3 billion� The actual

effective tax rate in the year ended March 31, 2010 decreased by 3�9

points to 47�6%�

Income before Minority InterestsIncome before minority interests in the year ended March 31, 2010

increased by ¥17�6 billion, or 13�8%, from the previous year to ¥144�8

billion� Minority interests in the year ended March 31, 2010 increased

by ¥15 billion, or 12�2%, from the previous year to ¥138�4 billion mainly

due to changes in the business�

Net IncomeAs a result of the above factors, net income in the year ended March

31, 2010 increased by ¥15 billion, or 12�2%, from the previous year to

¥138�4 billion�

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Net Profit before Goodwill AmortizationSince April 2008, we have booked the cost of goodwill amortization of

all segments in accordance with the “standard accounting treatments

to the accounting of overseas subsidiaries in the consolidated financial

statements” (a report by the Accounting Standards Board of Japan)� In

the year ended March 31, 2010, the cost of goodwill amortization (Note 12)

came to ¥97�4 billion, and net income before goodwill amortization

increased by ¥7 billion, or 3�0%, to ¥235�9 billion�(Note 12) The cost of goodwill amortization is included in the selling, general and administra-

tive expenses�

Year Ended March 31, 2009 Compared with Year Ended March 31, 2008Net SalesNet sales (Note 13) for the year ended March 31, 2009 increased by ¥422�6

billion, or 6�6% from the previous year to ¥6,832�3 billion� The net

sales amounts indicated below represent the amounts excluding

inter-segment transactions�(Note 13) Including tobacco excise taxes


Net sales in our Japanese domestic tobacco business are comprised

of domestic sales (including duty-free sales) of tobacco products manu-

factured by the JT Group in and outside Japan, domestic sales of

products manufactured by foreign tobacco manufacturers and distrib-

uted by our subsidiaries as wholesalers and sales in the China, Hong

Kong and Macau markets, which are covered by JT’s China Division�

Net sales for our Japanese domestic tobacco business totaled ¥3,200�5

billion in the year ended March 31, 2009, a decrease of ¥161�9 billion,

or 4�8%, from the previous year� The sales volume of JT’s tobacco

products in Japan decreased by 7�8 billion cigarettes, or 4�7%, from the

previous year to 159�9 billion cigarettes (Note 14)�

The sales volume declined due to the continued decrease in total

cigarette demand caused by factors such as: the aging Japanese popula-

tion, growing consciousness of health risks associated with smoking,

tightened smoking regulations, and revision of retail prices based on a

hike in the tobacco excise tax implemented in July 2006�

Our market share increased by 0�2 percentage points compared

with the previous year, to 65�1%, marking the second consecutive year

of market share increase� Net sales excluding excise tax per 1,000

cigarettes remained unchanged from the previous year at ¥4,057�(Note 14) In addition, 3�6 billion cigarettes sold in domestic duty-free markets and in the

China, Hong Kong and Macau markets, which are covered by JT’s China Division accounted for domestic sales volume�


Net sales for our international tobacco business totaled ¥3,118�3 billion,

an increase of ¥478�4 billion, or 18�1%, from the previous year�

The sales volume of our international tobacco business increased

by 66�7 billion cigarettes, or 17�3%, to 452�3 billion cigarettes, thanks

mainly to Winston’s sales growth in Russia, Turkey, Ukraine and Spain;

Camel’ sales growth in Italy, Russia and Spain; and Mild Seven’s sales

growth in Korea, Taiwan, Russia and Malaysia� The sales volume of

GFB grew 42�3 billion cigarettes, or 20�8%, to 245�5 billion cigarettes�

Sales denominated in foreign currencies are first converted into dollar

terms and then into yen terms based on the average exchange rate

for the relevant accounting period� Sales in dollar terms increased due

to an expansion in the sales volume of GFB as well as the inclusion

of the full-year results of Gallaher� However, sales in yen terms

increased despite negative effects from the yen’s appreciation against

the dollar�

The 12-month average exchange rate between the Japanese yen

and the U�S� dollar that was used for the conversion of sales for the

year ended March 31, 2009 was ¥103�48 to $1�00, compared with

¥117�85 to $1�00 for the year ended March 31, 2008�


Net sales for our pharmaceutical business increased by ¥7�7 billion, or

15�7%, from the previous year to ¥56�8 billion in the year ended March

31, 2009� A decrease in net sales for Torii Pharmaceutical was more

than offset by an upfront payment for the licensing of antiosteoporosis

oral compound JTT-305 to Merck in September 2008 and a milestone

revenue associated with progress in the development of the JTT-705

compound for the treatment of dyslipidemia, which was licensed to

Roche in October 2004�

• Food business

Net sales for our food business increased by ¥99�5 billion, or 29�6%,

from the previous year to ¥436�0 billion� Sales of beverage products

declined by ¥7�6 billion, or 3�9%, to ¥187�4 billion� Sales of processed

foods increased by ¥107�1 billion, or 75�7%, from the previous year to

¥248�6 billion, as the consolidation of the Katokichi Group outweighed

the impact of the frozen food products contamination, and negative

effects of unfavorable weather conditions and increased competition

in the beverages business as well as a slump in general consumption

caused by the recent severe economic downturn�

Cost of Sales (Note 15)

Cost of sales in the year ended March 31, 2009 increased by ¥325�5

billion, or 6�2%, from the previous year to ¥5,554�4 billion, mainly as a

result of the inclusion of the full-year results of Gallaher and the Katokichi

Group� This and other favorable factors were partially offset by a decrease

in the sales volume of the Japanese domestic tobacco business�(Note 15) The cost of sales includes tobacco excise taxes�

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Selling, General and Administrative ExpensesSelling, general and administrative expenses in the year ended March

31, 2009 increased by ¥163�9 billion, or 21�8%, from the previous year

to ¥914�1 billion� This was attributable to the inclusion of the cost of

the goodwill amortization related to the international tobacco business

following a revision of the accounting standards and the inclusion of

the full-year cost of the amortization of the goodwill of the Katokichi

Group as well as the inclusion of the full-year results of Gallaher and

the Katokichi Group�

EBITDA (Note 16) and Operating IncomeAs a result of the above factors, EBITDA in the year ended March 31,

2009 increased by ¥44�1 billion, or 7�3%, from the previous year to

¥646�2 billion� However, operating income declined by ¥66�7 billion, or

15�5%, from the previous year to ¥363�8 billion, mainly as a result of

the start of goodwill amortization following a revision of accounting

standards applied to the international tobacco business� Operating

income by business segment was as follows:(Note 16) In the mid-term management plan “JT-11,” we use EBITDA for the key performance

indicators� EBITDA as defined by the JT Group is operating income plus the amortiza-tion cost (the cost of the depreciation of tangible fixed assets and amortization of intangible fixed assets, long term prepaid expenses and goodwill)� The cost of the amortization of some tangible assets is included in the cost of sales while that of other tangible assets is included in the general and administrative expenses�


EBITDA for our Japanese domestic tobacco business in the year ended

March 31, 2009 declined by ¥34�4 billion, or 11�2%, from the previous

year, to ¥272�3 billion, while operating income decreased by ¥34�1

billion, or 15�3%, from the previous year to ¥188�3 billion� The decrease

was attributable mainly to a decline in the sales volume and an increase

in sales promotion expenses�


EBITDA for our international tobacco business in the year ended March

31, 2009 grew by ¥67�2 billion, or 24�8%, to ¥338�0 billion due to an

increase in the sales volume, mainly of GFBs, and the inclusion of the

full-year results of Gallaher� However, operating income decreased by

¥30�6 billion, or 14�9%, from the previous year to ¥174�8 billion, mainly

due to the start of the goodwill amortization following the revision of

accounting standards� A rise in the exchange rate of the Japanese yen

against the U�S� dollar contributed to the decrease in operating income

in yen terms�


Our pharmaceutical business recorded an EBITDA of ¥4�9 billion, an

improvement of ¥11�2 billion from the previous year, in the year ended

March 31, 2009, while it posted an operating income of ¥1�0 billion,

representing an improvement of ¥10�7 billion in the operating balance

from the previous year�

A decrease in net sales for Torii Pharmaceutical was more than

offset by an upfront payment for the licensing of anti-osteoporosis oral

compound JTT-305 to Merck in September 2008 and a milestone rev-

enue associated with progress in the development of the JTT-705

compound for the treatment of dyslipidemia, which was licensed to

Roche in October 2004�

• Food business

EBITDA for our food business increased by ¥8�7 billion, or 103�9%,

from the previous year, to 17�0 billion as a result of an increase in the

depreciation cost due to a revision of the leasing accounting standards�

However, the food business posted an operating loss of ¥11�5 billion

in the year ended March 31, 2009, representing a deterioration of ¥12�1

billion in the operating balance compared with the previous year� This

was attributable to a rise in general expenses, an increase in raw

materials costs and the inclusion of the full-year cost of the amortization

of the goodwill of the Katokichi Group following the consolidation of

the group�

• Others

EBITDA for our other businesses in the year ended March 31, 2009

declined by ¥8�9 billion, or 40�4%, from the previous year to ¥13�1

billion, while operating income decreased by ¥0�8 billion or 7�2% from

the previous year to ¥9�7 billion�

Other Expenses/Income (on a net basis)We booked other expenses totaling ¥101�7 billion (on a net basis) in

the year ended March 31, 2009, an increase of ¥43�7 billion from the

previous year� This reflected the inclusion of full-year interest pay-

ments related to additional debts and corporate bonds associated

with the acquisition of Gallaher, a decline in profits from the sale of

fixed assets, losses related to the demolition of company-owned

residences for employees, expenses incurred by the international

tobacco business in relation to a revision of the business model in

the Philippines market and the cost of reorganizing the Katokichi

Group’s business operations�

Income before Income Taxes and Minority InterestsAs a result of the above factors, income before income taxes and

minority interests in the year ended March 31, 2009 decreased by

¥110�5 billion, or 29�6%, from the previous year to ¥262�1 billion�

Income TaxesIncome taxes in the year ended March 31, 2009 increased by ¥6�6

billion, or 5�1%, from the previous year to ¥135�0 billion� The actual

effective tax rate in the year ended March 31, 2009 increased by 17�03

points to 51�49%, mainly due to the impact of the cost of the goodwill

amortization that was not covered by the deferred tax accounting�

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Results by Geographic Segment

We divide our operations into three geographic segments based on the

business territories of the JT Group’s main business entities: Japan,

Western Europe (including Switzerland, France and Germany) and other

regions� Our “other regions” segment comprises primarily Asia

Table Results by Geographic Segment


U�S� dollars


Net sales (Note 18) ¥6,409,727 ¥6,832,307 ¥6,134,695 $65,936

Japan 3,711,763 3,672,004 3,482,548 37,430

Western Europe 1,678,770 2,038,028 1,677,755 18,033

Other 1,019,194 1,122,275 974,392 10,473

(Note 18) including tobacco excise taxes


U�S� dollars

2008 2009 2010 2010

Operating income (loss) ¥430,554 ¥363,806 ¥296,505 $3,187

Japan 222,340 186,439 184,553 1,983

Western Europe 55,936 (24,188) (40,289) (433)

Other 151,398 199,633 150,496 1,618

Elimination/Corporate 880 1,922 1,745 19

Japan: Net sales in Japan in the year ended March 31, 2010 decreased

by ¥189�5 billion, or 5�2%, from the previous year to ¥3,482�5 billion,

due to a decline in the sales volume of the Japanese domestic tobacco

business� Operating income in the year ended March 31, 2010 declined

by ¥1�9 billion, or 1�0%, from the previous year to ¥184�6 billion� This

was due to the reduced net sales, which was partially offset by a drop

in the depreciation cost following the completion of the amortization of

some trademark rights�

Net sales in Japan in the year ended March 31, 2009 declined by

¥39�8 billion, or 1�1%, from the previous year to ¥3,672�0 billion as a

result of a decrease in the sales volume for the Japanese domestic

tobacco business� Operating income in the year ended March 31, 2009

dropped by ¥35�9 billion, or 16�1%, from the previous year to ¥186�4

Income before Minority InterestsIncome before minority interests in the year ended March 31, 2009

declined by ¥117�1 billion, or 47�9%, from the previous year to ¥127�2

billion� Minority interests in the year ended March 31, 2009 decreased

by ¥1�8 billion, or 31�8%, from the previous year to ¥3�8 billion�

Net IncomeAs a result of the above factors, net income in the year ended March

31, 2009 decreased by ¥115�3 billion, or 48�3%, from the previous year

to ¥123�4 billion�

Net Income before Goodwill AmortizationSince April 2008, we have booked the cost of goodwill amortization

in accordance with the “standard accounting treatments to the

accounting of overseas subsidiaries in the consolidated financial

statements” (a report by the Accounting Standards Board of Japan)�

In the year ended March 31, 2009, the cost of goodwill amortiza-

tion (Note 17) came to ¥105�5 billion, and net income before goodwill

amortization totaled ¥228�9 billion�(Note 17) The cost of goodwill amortization is included in the selling, general and administra-

tive expenses�

(excluding Japan but including China, Hong Kong and Macau), Canada,

Russia and the other Commonwealth of Independent States nations,

the Middle East and Africa�

billion because of the reduced sales volume for the Japanese domestic

tobacco business and the inclusion of the full-year cost of the amortiza-

tion of the goodwill of the Katokichi Group�

Western europe: Net sales in Western Europe in the year ended

March 31, 2010 decreased by ¥360�3 billion, or 17�7%, from the previ-

ous year to ¥1,677�8 billion, due to the negative forex impact of

depreciation of local currency in the main markets like the UK in the

international tobacco business� Operating losses in the year ended

March 31, 2010 totaled ¥40�2 billion, a deterioration of ¥40�3 billion

from the previous year, because of the negative forex impact as well

as the cost of goodwill amortization�

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Net sales in Western Europe in the year ended March 31, 2009

grew by ¥359�3 billion, or 21�4% from the previous year to ¥2,038�0

billion as a result of the inclusion of the full-year results of Gallaher,

which has a large market share in the United Kingdom and Ireland,

where cigarette prices are high� Operating losses in the year ended

March 31, 2009 totaled ¥24�1 billion, a deterioration of ¥80�1 billion from

the previous year, because of the cost of goodwill amortization�

Other Regions: Net sales in other regions in the year ended March

31, 2010 declined by ¥147�9 billion, or 13�2%, from the previous year

to ¥974�4 billion� This was due to the negative forex impact of

Liquidity and Capital Resources

In our financial management, we strive to maintain a stable financial

base that enables the implementation of capital expenditure, the

acquisition of outside resources, and R&D activities in a cost-efficient

manner, in order to achieve business expansion without being affected

depreciation of local currency in the main markets like Russia in the

international tobacco business� Operating income in the year ended

March 31, 2010 decreased by ¥49�1 billion, or 24�6%, from the previ-

ous year to ¥150�5 billion�

Net sales in other regions in the year ended March 31, 2009 grew

by ¥103�1 billion, or 10�1%, from the previous year to ¥1,122�3 billion

as a result of an increase in international sales by JT International,

particularly in countries such as Russia and Turkey� Operating income

in the year ended March 31, 2009 increased by ¥48�2 billion, or 31�9%

from the previous year to ¥199�6 billion�

Cash Flows• Overview:

As of March 31, 2009 and March 31, 2010, cash and cash equivalents totaled ¥167�3 billion and ¥154�4 billion, respectively�


U�S� dollars


Net cash provided by operating activities ¥ 145,030 ¥ 275,271 ¥ 320,024 $ 3,440

Net cash used in investing activities (1,668,635) (65,008) (84,057) (903)

Net cash provided by (used in) financing activities 519,001 (217,470) (250,398) (2,691)

Effect of exchange rate changes and other 40,091 (39,591) 1,542 15

Net decrease in cash and cash equivalents (964,513) (46,798) (12,889) (139)

Cash and cash equivalents at beginning of the period 1,179,522 215,009 167,258 1,798

Decrease in cash and cash equivalents resulting from

exclusion of subsidiaries from consolidation — (953) — —

Cash and cash equivalents at end of the period ¥ 215,009 ¥ 167,258 ¥ 154,369 $ 1,659

Year Ended March 31, 2010 Compared with Year Ended March 31, 2009Net cash generated by operating activities in the year ended March 31,

2010 came to ¥320�0 billion compared with ¥275�3 billion in the year

ended March 31, 2009, as an increase in inventories due to a rise in leaf

tobacco prices and increased procurement in the international tobacco

business was offset by stable cash flow from the tobacco business� Net

cash used in investment activities in the year ended March 31, 2010

was ¥84�1 billion compared with ¥65�0 billion for the year ended March

31, 2009� It was mainly due to the expenditures on the acquisition of

fixed assets�

by short-term fluctuations in revenues� We raise the necessary funds

principally from cash flows provided by operations, borrowing from

financial institutions and the issuance of long-term bonds�

Net cash used for financing activities in the year ended March 31,

2010 was ¥250�4 billion compared with ¥217�5 billion in net cash used

for such activities in the year ended March 31, 2009� This was mainly

due to the payment of dividends and the redemption of corporate bonds

and the repayment of borrowings despite of the net cash provided from

issuance of commercial paper and corporate bonds�

Year Ended March 31, 2009 Compared with Year Ended March 31, 2008Net cash generated by operating activities in the year ended March

31, 2009 came to ¥275�3 billion compared with ¥145�0 billion in the

year ended March 31, 2008, as an increase in the working capital was

more than offset by the creation of stable cash flow by the tobacco

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business, including the cash flow generated by the inclusion of the

full-year results of Gallaher� In the year ended March 31, 2009, we paid

12 months’ worth of tobacco excise tax compared with the 13 months’

worth paid in the previous year, when there was a onetime factor

related to a bank holiday� Net cash used in investment activities in the

year ended March 31, 2009 was ¥65�0 billion compared with ¥1,668�6

billion for the year ended March 31, 2008� Cash was used mainly for

Liquidity and Fund NeedsWe need liquidity mainly for capital expenditure, working capital, acquisition of outside resources and debt repayments, as well as payments of

interest, dividends and income taxes�

• Capital expenditures

Capital expenditure includes outlays on machinery and equipment for factories, trademarks and other tangible and intangible assets necessary for

enhancing the productivity of our factories and other facilities, strengthening our competitiveness, and operating in various business fields�


U�S� dollars


Capital expenditures ¥129,555 ¥134,273 ¥137,134 $1,474

In the year ended March 31, 2010, capital expenditure totaled

¥137�1 billion� In our Japanese domestic tobacco business, we spent

¥45�8 billion, mainly on measures to streamline manufacturing pro-

cesses, strengthen our ability to respond flexibly to supply and

demand fluctuations with regard to an increasingly diverse range of

products and develop new products� In our international tobacco

business, we invested ¥64�6 billion for the purpose of expanding our

production capacity� In our pharmaceutical business, we spent ¥3�0

billion on the construction of production and research facilities, while

we invested ¥23�4 billion in our food business, mainly for enhancing

production facilities� In our other businesses, capital expenditure was

¥0�3 billion�




cesses, strengthen our ability to respond flexibly to supply and demand

fluctuations with regard to an increasingly diverse range of products

and develop new products� In our international tobacco business, we

invested ¥59�8 billion for the purpose of expanding our production

capacity� In our pharmaceutical business, we spent ¥3�4 billion on the

construction of production and research facilities, while we invested

¥23�2 billion in our food business, mainly for enhancing production

facilities� In our other businesses, capital expenditure was ¥1�1 billion,

mainly for real estate development�




cesses, strengthen our ability to respond flexibly to supply and demand

fluctuations with regard to an increasingly diverse range of products,

the acquisition of additional shares in Katokichi Co� and shares in Fuji

Foods Corporation�

Net cash used for financing activities in the year ended March 31,

2009 was ¥217�5 billion, compared with ¥519�0 billion in net cash gener-

ated from such activities in the year ended March 31, 2008� This was

mainly due to the payment of dividends and the redemption of corporate

bonds and the repayment of borrowings by a foreign subsidiary�

develop new products and replace vending machines� In our interna-

tional tobacco business, we invested ¥48�4 billion for the purpose of

expanding our production capacity� In our pharmaceutical business, we

spent ¥4�3 billion on the construction of production and research facili-

ties, while we invested ¥6�0 billion in our food business, mainly for

enhancing production facilities� In our other businesses, capital expen-

diture was ¥14�8 billion, mainly for real estate development�

For the year ending March 31, 2011, we are planning for capital

expenditure to total approximately ¥172�0 billion� In our Japanese

domestic tobacco business, we plan to invest approximately ¥62�0

billion to improve productivity and reduce costs, while in our interna-

tional tobacco business, we plan to spend approximately ¥68�0 billion

to increase production capacity� We have earmarked approximately ¥2�5

billion in investment for our pharmaceutical business to improve R&D,

approximately ¥35�0 billion for our food business to enhance production

facilities and approximately ¥4�5 billion for our other businesses�

Our actual capital expenditure may differ significantly from the

planned figures as a result of a number of factors including, but not

limited to, those discussed in the “Major Risks of Businesses�”

• Working Capital

We need working capital mainly for purchasing raw materials, including

leaf tobacco and other inventory items, the payment of salaries and

wages, sales expenses, advertising and promotion expenses, tax

payments and R&D expenses�

• Acquisition of Outside Resources

As necessary, we may invest in or acquire companies deemed to have

the potential to help us diversify our cash flow sources and improve

our profitability�

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• Dividends

We need sufficient liquidity to make our scheduled dividend pay-

ments� As our basic dividend policy, we aim to achieve a consolidated

dividend payout ratio of 30% in the medium term under the Medium-

Term Management Plan “JT-11,” with the impact of goodwill amor-

tization excluded from the net income used as a basis for calculating

the payout ratio� We will continue to provide a competitive level of

return to shareholders in light of the implementation status of our

mid- to long-term growth strategies and the outlook of our consoli-

dated financial results, with a view to increasing our dividend pay-

ments further� The dividend payout ratio based on consolidated net

income before goodwill amortization for the year ended March 31,

2010 was 23�6%�

• Stock Repurchases

A repurchase of our own shares requires cash outlays� In order to

repurchase our own shares in a flexible manner, we amended the

Articles of Incorporation at the general shareholders’ meeting held on

June 24, 2004 so that we could make repurchases based on a resolution

made by the Board of Directors� As of March 31, 2010, we held 419,903

shares of common stock as treasury stock� We may continue to hold

the repurchased shares as treasury stock or use them for share retire-

ment or for other purposes� Stock repurchases provide our manage-

ment with an additional option for increasing flexibility and speed in

capital management in order to adapt to a rapidly changing business

environment� We will determine the timing, scale and manner of any

further repurchase in an appropriate manner in light of our business

needs and market trends�

Capital Resources and UseWe have historically had, and expect to continue to have, significant

cash flows from operating activities� Cash provided by operating activi-

ties was ¥275�3 billion in the year ended March 31, 2009 and ¥320�0

billion in the year ended March 31, 2010� We expect that cash generated

by operating activities will continue to cover capital expenditures and

debt repayments�

For substantial capital needs related to the acquisition of outside

resources, we may utilize debt financing, primarily borrowings from

financial institutions or the issuance of bonds, as needed� (Please see

“Long and Short-term Debt” below�)

Equity financing, including warrants and bonds with warrants,

requires the approval of the Minister of Finance under the Japan

Tobacco Inc� Law� Revisions to the Japan Tobacco Inc� Law that took

effect on April 19, 2002 provide us with the flexibility to issue new

shares upon the approval of the Minister of Finance to the extent that

the Japanese government retains more than one-third of the outstand-

ing shares in JT� In the future, we may choose to raise capital through

stock issuance, which would dilute the value of existing shareholders’

equity holdings�

Long and Short-term Debt• long-term Debt

Our long-term liabilities consist mainly of long-term debt and liabilities

for retirement benefits� As of March 31, 2010, long-term debt was

¥646�1 billion, of which bonds accounted for ¥459�4 billion� Our remain-

ing long-term debt (including the current portion) consisted of ¥172�6

billion loans from banks and life insurance companies and ¥14�1 billion

long-term lease obligations� Annual interest rates applicable to yen-

denominated long-term bank loans outstanding as of March 31, 2009

and 2010 ranged from 0�77% to 5�30% and from 0�90% to 5�30%,

respectively� Annual interest rates for long-term loans denominated in

other currencies ranged from 2�35% to 8�00% for those outstanding

as of March 31, 2009 and from 0�97% to 8�75% for those outstanding

as of March 31, 2010�

Maturities of long-term debt (including the current portion) as of

March 31, 2010 were as follows:

For years ended March 31 Millions of yenMillions of

U�S� dollars

2011 ¥306,525 $3,2952012 172,228 1,8512013 166,974 1,7952014 59,149 6362015 168,558 1,8122016 and thereafter 873 8

Total ¥874,307 $9,397

As of March 31, 2010, our long-term debt was rated Aa3 by Moody’s

Investors Service, Inc�, A+ by Standard & Poor’s Ratings Services and

AA by Rating and Investment Information, Inc� (R&I)� These ratings are

among the highest ratings for international tobacco companies� By

maintaining high credit ratings, we can finance large sums of capital at

relatively low cost from third parties as needed� Our ability to maintain

high ratings is affected by a number of factors such as developments

in our major business markets, the quality of execution of our business

strategies, and general economic trends that are beyond our control�

The credit ratings are not recommendations for purchasing, selling or

holding securities�

The ratings could be withdrawn or revised at any time� Each rating

should be evaluated separately from other ratings� Under the Japan

Tobacco Inc� Law, bonds issued by Japan Tobacco Inc� are secured by

statutory preferential rights to the property of Japan Tobacco Inc� These

rights give bondholders precedence over unsecured creditors in seeking

repayment, with the exception of national and local taxes and other

statutory obligations�

• Short-term Debt

We take in short-term loans from banks and other financial institu-

tions� Short-term loans totaled ¥113�2 billion as of March 31, 2009,

including ¥61�8 billion in foreign currency-denominated loans, and

¥228�3 billion as of March 31, 2010, including ¥60�3 billion in foreign

78

currency-denominated loans� Annual interest rates applicable to yen

denominated short-term bank loans ranged from 0�216% to 2�750%

as of March 31, 2009 and from 0�090% to 3�500% as of March 31,

2010� Annual interest rates applicable to short-term loans denomi-

nated in other currencies ranged from 0�130% to 83�000% as of

March 31, 2009 and from 1�040% to 27�250% as of March 31, 2010�

Annual interest rates applicable to commercial paper ranged from

0�106% to 0�145% as of March 31, 2010�

As a Japanese commercial custom, short-term and long-term bank

loans are extended under general agreements stipulating that, under

certain circumstances, collateral or guarantees for present and future

debts should be provided upon the request of the bank, and that the

bank shall have the right, as the debt obligations become due or in the

event of default, to offset cash deposits against debts due to it� We

have never been requested to provide such collateral or guarantees�

Derivative TransactionsWe are exposed to market risks principally from changes in interest

rates, foreign exchange rates and equity and debt security prices� Our

interest rate risk exposures primarily relate to financing activities�

Our foreign currency exposures relate to buying, selling and financ-

ing in currencies other than the local currencies of our operations� In

order to reduce foreign exchange rate risk and interest rate risk, we

use derivative financial instruments including interest rate swaps,

interest rate cap option contracts, foreign currency forward contracts,

currency swaps and currency option contracts� We do not hedge against

price fluctuations of debt and equity securities�

We have risk management policies and procedures designed to miti-

gate the risks arising from the use of derivative financial instruments�

We utilize derivatives solely for risk management purposes, and no

derivatives are held or issued for trading purposes� As part of our risk

management procedures, we identify the specific risks and transactions

to be hedged and the appropriate hedging instruments to be used to

reduce the risk, and assess the correlation between the hedged risks

and the hedging instruments� The effectiveness of our hedging activities

is assessed in accordance with our risk management policies and

practice manual for hedging transactions�

We are exposed to credit-related risk in the event of default by

counterparties to derivative financial instruments� However, we strive

to mitigate this risk by limiting counterparties to international financial

institutions with high credit ratings deemed to have no significant risk

of default�

We use interest rate swaps and interest rate cap option contracts

for the purpose of managing interest rate risk in relation to borrowings�

Interest rate swap agreements that qualify for hedge accounting under

Japanese GAAP and meet specific matching criteria are not measured

at market value, but the differential to be paid or received under the

swap agreement is accrued and included in interest expenses�

We use foreign currency forward contracts, currency swaps and

currency option contracts for the purpose of managing the risk of

fluctuations in foreign exchange rates on forecasted transactions in

foreign currencies� Gains or losses arising from changes in the value of

the contracts that qualify for hedge accounting are deferred and recog-

nized in the period in which corresponding losses or gains from transac-

tions being hedged by such contracts are recognized�

On the other hand, hedging contracts mainly related to our interna-

tional tobacco operations do not qualify for hedge accounting and

therefore we recognize changes in the value of foreign currency deriva-

tive instruments against earnings in the period in which they occur� This

could result in gains or losses from fluctuations in exchange rates

related to a derivative contract being recognized in a different period

from the one in which the gains or losses expected from the underlying

forecasted transactions are recognized�

For information about the contract and notional amount of interest

rate swaps, interest rate cap option contracts, foreign currency forward

contracts and currency swaps outstanding as of March 31, 2009 and

2010 see Note 17 to the audited consolidated financial statements

included in this annual report�

Outlook of Results for the Year Ending March 31, 2011

It is too early to forecast specific business results for the fiscal year

ending March 31, 2011� Based on current trends and other factors that

we are aware of at this point, we expect a decline in both net sales and

profits� Although we expect the favorable pricing and currency benefits

in the international tobacco business, net sales are projected to

decrease, affected by a decline in the sale volume due to a steep drop

in overall demand that the Japanese domestic tobacco business will

face as a result of a sharp increase in the tobacco excise tax scheduled

to take effect on October 1, 2010� EBITDA and operating income are

projected to decrease� Net income is likely to decrease due to a decline

in profits from the sale of fixed assets, and an increase of other expenses

due to an agreement payment to the Canadian authorities, despite the

absence of the exchange losses incurred in the previous year�

Our actual operating results may differ significantly from those

described above as a result of a number of factors including, but not

limited to, those discussed in the “Major Risks of Businesses�”

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Consolidated Balance SheetsJapan Tobacco Inc� and Consolidated Subsidiaries / March 31, 2009 and 2010

AssetsMillions of yen


(Note 2)

2009 2010 2010

Current assets:Cash and cash equivalents ¥ 167,258 ¥ 154,369 $ 1,659Short-term investments (Note 5) 2,610 13,026 140Trade notes and accounts receivable 290,069 296,885 3,191Merchandise & finished goods 122,970 151,063 1,624Semi-finished goods 119,291 109,622 1,178Work in process 6,562 5,523 59Raw materials & supplies (Note 8) 215,335 288,893 3,105Other current assets (Note 12) 174,749 180,086 1,936Allowance for doubtful accounts (3,162) (3,623) (39) Total current assets 1,095,682 1,195,844 12,853

Property, plant and equipment (Note 8):Land 147,219 138,703 1,491Buildings and structures 621,469 611,509 6,573Machinery, equipment and vehicles 642,149 668,608 7,186Tools 165,435 170,907 1,837Construction in progress 35,254 41,905 450 Total 1,611,526 1,631,632 17,537Accumulated depreciation (942,783) (952,071) (10,233) Net property, plant and equipment 668,743 679,561 7,304

Investments and other assets:Investment securities (Note 5) 66,495 60,178 647Investments in and advances to unconsolidated subsidiaries and associated companies 24,639 23,932 257Trademarks 347,372 350,901 3,772Goodwill 1,453,961 1,387,397 14,912Deferred tax assets (Note 12) 128,787 85,376 918Other assets 135,820 124,102 1,333Allowance for doubtful accounts (41,696) (34,695) (373) Total investments and other assets 2,115,378 1,997,191 21,466Total ¥3,879,803 ¥3,872,596 $ 41,623

See notes to consolidated financial statements�

80

Liabilities and EquityMillions of yen


(Note 2)

2009 2010 2010

Current liabilities:Short-term bank loans (Note 8) ¥ 113,231 ¥ 109,263 $ 1,174Commercial paper (Note 8) — 119,000 1,279Current portion of long-term debt (Note 8) 222,256 78,356 842Tobacco excise taxes payable 268,999 307,795 3,308Trade notes and accounts payable 158,544 149,462 1,606Other payable (Note 9) 62,825 73,739 793Income taxes payable (Note 12) 51,777 54,058 581Consumption taxes payable 43,848 60,105 646Other current liabilities (Notes 8, 9 and 12) 171,923 149,757 1,610 Total current liabilities 1,093,403 1,101,535 11,839

Non-current liabilities:Long-term debt (Note 8) 660,592 567,710 6,102Liabilities for retirement benefits (Note 9) 259,146 251,902 2,707Deferred tax liabilities (Note 12) 110,390 94,578 1,017Other non-current liabilities (Notes 8 and 9) 131,984 133,592 1,436 Total non-current liabilities 1,162,112 1,047,782 11,262

Commitments and contingent liabilities (Note 18)

Equity (Note 10):Common stock—authorized, 40,000,000 shares; issued, 10,000,000 shares in 2009 and 2010 100,000 100,000 1,075Capital surplus 736,400 736,407 7,915Stock acquisition rights (Note 11) 365 565 6Retained earnings 1,224,989 1,310,670 14,087Unrealized gain on available-for-sale securities 8,438 12,044 129Deferred gain on derivatives under hedge accounting 92 — —Pension liability adjustment of foreign consolidated subsidiaries (Note 9) (18,966) (26,270) (282)Foreign currency translation adjustments (423,562) (409,161) (4,397)Treasury stock, at cost—419,920 shares in 2009 and 419,903 shares in 2010 (74,578) (74,575) (802) Total 1,553,178 1,649,680 17,731Minority interests 71,110 73,599 791 Total Equity 1,624,288 1,723,279 18,522Total ¥3,879,803 ¥3,872,596 $41,623

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Millions of yen


(Note 2)

2008 2009 2010 2010

Net sales ¥6,409,727 ¥6,832,307 ¥6,134,695 $65,936Cost of sales (Note 3 (f)) 5,228,926 5,554,399 5,022,637 53,984 Gross profit 1,180,801 1,277,908 1,112,058 11,952Selling, general and administrative expenses (Notes 11 and 13) 750,247 914,102 815,553 8,765 Operating income 430,554 363,806 296,505 3,187

Other income (expenses):Interest and dividend income 13,410 12,276 6,982 75Gain on disposition of property, plant and equipment—net 57,179 32,787 21,770 234Loss on impairment of long-lived assets (Note 15) (3,825) (16,365) (6,043) (65)Interest expense (Note 8) (41,759) (51,356) (26,111) (281)Write-down of investment securities (11,154) (7,063) (1,404) (15)Business restructuring costs (Notes 9 and 15) (6,442) (24,364) (9,900) (106)Other—net (Note 15) (65,349) (47,577) (5,744) (62) Other income (expenses)—net (57,940) (101,662) (20,450) (220)Income Before Income Taxes and Minority Interests 372,614 262,144 276,055 2,967Income taxes (Note 12):Current 117,272 126,732 114,145 1,227Deferred 11,107 8,241 17,159 184Total income taxes 128,379 134,973 131,304 1,411Income Before Minority Interests 244,235 127,171 144,751 1,556Minority interests 5,533 3,771 6,303 68Net income ¥ 238,702 ¥ 123,400 ¥ 138,448 $ 1,488

Yen U�S� dollars

Amounts per share:Basic net income (Notes 3 (r) and 19) ¥ 24,917 ¥ 12,881 ¥ 14,452 $ 155Diluted net income (Notes 3 (r) and 19) 24,916 12,880 14,449 155Cash dividends applicable to the year (Note 3 (r)) 4,800 5,400 5,800 62



Consolidated Statements of IncomeJapan Tobacco Inc� and Consolidated Subsidiaries / Years ended March 31, 2008, 2009 and 2010

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Consolidated Statements of Changes in EquityJapan Tobacco Inc� and Consolidated Subsidiaries / Years ended March 31, 2008, 2009 and 2010

Thousands Millions of yen

Number of shares of common

stock issuedCommon

stockCapital surplus

Stock Acquisition

Rights (Note 11)

Retained earnings

Unrealized gain on

available-for-sale

securities

Deferred gain on

derivatives under hedge

accounting

Pension liability

adjustment of foreign

consolidated subsidiaries

(Note 9)

Foreign currency

translation adjustments

Treasury stock Total

Minority interests Total equity

Balance, March 31, 2007 10,000 ¥100,000 ¥736,400 ¥ — ¥1,158,337 ¥ 33,330 ¥14,580 ¥ (15,560) ¥ 7,745 ¥ (74,578) ¥1,960,254 ¥64,362 ¥2,024,616 Adoption of FIN 48 (Note 3 (q)) — — — — (10,548) — — — — — (10,548) — (10,548)Net income — — — — 238,702 — — — — — 238,702 — 238,702 Appropriations: Cash dividends paid (¥4,400 per share) — — — — (42,152) — — — — — (42,152) — (42,152) Adjustment to retained earnings for change in the number of equity method affiliates — — — — 151 — — — — — 151 — 151

Net Changes in the year — — — 186 — (11,991) (14,360) 4,848 (48,831) — (70,148) 14,008 (56,140)Balance, March 31, 2008 10,000 100,000 736,400 186 1,344,490 21,339 220 (10,712) (41,086) (74,578) 2,076,259 78,370 2,154,629 Adjustment of retained earnings due to an adoption of PITF No� 18 (Note 3 (b)) — — — — (193,658) — — — — — (193,658) — (193,658)

Net income — — — — 123,400 — — — — — 123,400 — 123,400 Appropriations: Cash dividends paid (¥5,200 per share) — — — — (49,816) — — — — — (49,816) — (49,816) Adjustment to retained earnings for change in the number of consolidated subsidiaries — — — — 47 — — — — — 47 — 47

Adjustment to retained earnings for change in the number of equity method affiliates — — — — 526 — — — — — 526 — 526

Net changes in the year — — — 179 — (12,901) (128) (8,254) (382,476) — (403,580) (7,260) (410,840)Balance, March 31, 2009 10,000 100,000 736,400 365 1,224,989 8,438 92 (18,966) (423,562) (74,578) 1,553,178 71,110 1,624,288 Net income — — — — 138,448 — — — — — 138,448 — 138,448 Appropriations: Cash dividends paid (¥5,600 per share) — — — — (53,648) — — — — — (53,648) — (53,648) Adjustment to retained earnings for change in the number of equity method affiliates — — — — 881 — — — — — 881 — 881

Disposal of treasury stock — — 7 — — — — — — 3 10 — 10 Net changes in the year — — — 200 — 3,606 (92) (7,304) 14,401 — 10,811 2,489 13,300 Balance, March 31, 2010 10,000 ¥100,000 ¥736,407 ¥565 ¥1,310,670 ¥ 12,044 ¥ — ¥(26,270) ¥(409,161) ¥(74,575) ¥1,649,680 ¥73,599 ¥1,723,279

Millions of U�S� dollars (Note 2)

Common stock

Capital surplus

Stock Acquisition

Rights (Note 11)

Retained earnings

Unrealized gain on

available-for-sale

securities

Deferred gain on

derivatives under hedge

accounting

Pension liability

adjustment of foreign


(Note 9)

Foreign currency

translation adjustments

Treasury stock Total

Minority interests Total equity

Balance, March 31, 2009 $1,075 $7,915 $4 $13,166 $ 91 $ 1 $ (204) $(4,552) $ (802) $16,694 $764 $17,458Net income — — — 1,488 — — — — — 1,488 — 1,488Appropriations: Cash dividends paid ($60 per share) — — — (576) — — — — — (576) — (576) Adjustment to retained earnings for change in the number of equity method affiliates — — — 9 — — — — — 9 — 9

Disposal of treasury stock — 0 — — — — — — 0 0 — 0Net changes in the year — — 2 — 38 (1) (78) 155 — 116 27 143Balance, March 31, 2010 $1,075 $7,915 $6 $14,087 $129 $— $(282) $(4,397) $(802) $17,731 $791 $18,522


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Millions of yen


(Note 2)

2008 2009 2010 2010

Operating Activities:Income before income taxes and minority interests ¥ 372,614 ¥ 262,144 ¥ 276,055 $ 2,967Adjustments for: Income taxes paid (132,725) (114,414) (116,339) (1,250) Depreciation and amortization other than goodwill 167,658 176,900 132,770 1,427 Amortization of goodwill 3,883 105,512 97,427 1,047 Gain on disposition of property, plant and equipment (57,179) (32,787) (21,770) (234) Loss on impairment of long-lived assets 3,825 16,365 6,043 65 Write-down of investment securities 11,154 7,063 1,404 15 Change in assets and liabilities: Decrease (increase) in trade notes and accounts receivable 47,485 (43,141) 5,703 61 Decrease (increase) in inventories 27,115 (47,632) (79,457) (854) Increase (decrease) in tobacco excise taxes payable (213,134) 28,981 30,842 331 Increase (decrease) in trade notes and accounts payable (16,650) 2,699 (12,821) (138) Increase (decrease) in other payable (39,956) (7,940) 14,905 160 Decrease in liabilities for retirement benefits (4,932) (13,159) (8,035) (86) Other—net (24,128) (65,320) (6,703) (71) Total adjustments (227,584) 13,127 43,969 473 Net cash provided by operating activities 145,030 275,271 320,024 3,440Investing Activities:Purchases of short-term investments (2,443) (1,643) (3,999) (43)Proceeds from sale and redemption of short-term investments 6,846 3,272 2,471 27Purchases of property, plant and equipment (124,832) (112,408) (121,459) (1,305)Proceeds from sale of property, plant and equipment 83,336 55,256 44,058 474Purchases of trademarks and other assets (6,831) (6,949) (6,639) (71)Purchases of shares of newly consolidated subsidiaries, net of cash acquired (Note 4) (1,608,081) (3,061) (9,975) (107)Other—net (16,630) 525 11,486 122 Net cash used in investing activities (1,668,635) (65,008) (84,057) (903)Financing Activities:Net increase (decrease) in short-term bank loans and commercial paper 136,063 (125,182) 93,444 1,005Proceeds from long-term debt 378,863 94,130 1,712 18Repayments of long-term debt (90,199) (54,663) (191,041) (2,053)Proceeds from issuance of bonds 149,723 — 100,304 1,078Payment for redemption of bonds (10,000) (70,810) (191,928) (2,063)Dividends paid (42,152) (49,752) (53,642) (577)Proceeds from issuance of common stock to minority shareholders — — 191 2Dividends paid to minority shareholders (2,890) (3,540) (3,681) (40)Repayments of finance lease obligations — (6,606) (5,757) (61)Other—net (407) (1,047) 0 0 Net cash provided by (used in) financing activities 519,001 (217,470) (250,398) (2,691)Foreign Currency Translation Adjustments on Cash and Cash Equivalents 40,091 (39,591) 1,542 15Net Decrease in Cash and Cash Equivalents (964,513) (46,798) (12,889) (139)Cash and Cash Equivalents, Beginning of Year 1,179,522 215,009 167,258 1,798Decrease in Cash and Cash Equivalents Resulting from Exclusion of Subsidiaries from Consolidation — (953) — —Cash and Cash Equivalents, End of Year ¥ 215,009 ¥ 167,258 ¥ 154,369 $ 1,659

Finance lease obligations regarded as non-cash transactions incurred for the year ended March, 2009 and 2010 amounted to ¥6,176 million and ¥3,417 million ($37 million), respectively�



Consolidated Statements of Cash FlowsJapan Tobacco Inc� and Consolidated Subsidiaries / Years ended March 31, 2008, 2009 and 2010

84

1. Business

Japan Tobacco Inc� (“JT”) is a joint stock corporation (kabushikikaisya)

incorporated under the companies act of Japan (the “Companies Act”)

pursuant to the Japan Tobacco Inc� Law (the “JT Law”)� JT and its

consolidated subsidiaries (the “Group”) operate primarily in the

domestic and international tobacco businesses, the pharmaceutical

business and the food business� In the Group’s domestic and interna-

tional tobacco businesses, the Group develops, manufactures,

distributes, and sells tobacco products, primarily cigarettes� In the

Group’s pharmaceutical business, the Group develops, manufactures

and sells pharmaceutical products� In the Group’s food business, the

Group develops, manufactures and sells processed food, and develops

and sells beverages� The Group’s other business segment includes its

commercial real estate and other operations�

2. Basis of Presenting Consolidated Financial Statements

The accompanying consolidated financial statements have been pre-

pared in conformity with accounting principles generally accepted in

Japan (“Japanese GAAP”) and in accordance with the provisions set

forth in the Japanese Financial Instruments and Exchange Act and its

related accounting regulations, which are different in certain respects

from application, and disclosure requirements of accounting principles

generally accepted in the United States of America (“U�S� GAAP”) and

International Financial Reporting Standards�

In the case of most foreign consolidated subsidiaries, their financial

statements are prepared in conformity with U�S� GAAP (see Note 3 (q)

Foreign Consolidated Subsidiaries) and are included in the consolidated

financial statements on that basis�

In preparing these consolidated financial statements, certain

reclassifications and rearrangements have been made to the consolidated

financial statements issued domestically in order to present them in a

form which is more familiar to readers outside Japan� In addition, certain

reclassifications have been made in the 2008 and 2009 financial state-

ments to conform to the classifications used in 2010�

The consolidated financial statements are stated in Japanese yen,

the currency of the country in which JT is incorporated and operates�

The translations of Japanese yen amounts into U�S� dollar amounts

are included solely for the convenience of readers outside Japan and

have been made at the rate of ¥93�04 to $1, the approximate rate of

exchange at March 31, 2010� Such translations should not be con-

strued as representations that the Japanese yen amounts could be

converted into U�S� dollars at that or any other rate�


Notes to Consolidated Financial StatementsJapan Tobacco Inc� and Consolidated Subsidiaries

3. Summary of Significant Accounting Policies

a) Consolidation

The consolidated financial statements as of March 31, 2010 include

the accounts of JT and its 258 significant (299 as of March 31, 2008

and 274 as of March 31, 2009) subsidiaries�

Consolidation of the remaining unconsolidated subsidiaries would

not have had a material effect on the accompanying consolidated

financial statements�

Most foreign consolidated subsidiaries have a December 31 fiscal

year-end, which differs from the March 31 fiscal year-end of JT� Any

necessary adjustments for the three-month period are made for con-

solidation purposes�

Under the control or influence concept, those companies in which

JT, directly or indirectly, is able to exercise control over operations are

fully consolidated, and those companies over which the Group has

the ability to exercise significant influence are accounted for by the

equity method�

Investments in 17 material associated companies as of March 31,

2010 (25 as of March 31, 2008 and 22 as of March 31, 2009) are

accounted for by the equity method� The equity method is not applied

to account for the investments in unconsolidated subsidiaries and the

remaining associated companies, since the effect on the accompanying

consolidated financial statements would not have been material�

Investments in the remaining unconsolidated subsidiaries and the

associated companies are stated at cost (see (d) Securities)�

All significant inter-company balances and transactions have been

eliminated in consolidation� All material unrealized gains resulting from

inter-company transactions have been eliminated�

The excess of the cost of the Group’s investments in consolidated

subsidiaries over the fair value of the net assets purchased at the date

of acquisition is recorded as goodwill� Goodwill is amortized on a

straight-line basis over five to twenty years� Such amortization expense

is included in selling, general and administrative expenses� However,

insignificant goodwill is charged to income when incurred�

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b) Unification of Accounting Policies Applied to Foreign

Subsidiaries for Consolidated Financial Statements

In May 2006, the Accounting Standards Board of Japan (the “ASBJ”)

issued ASBJ Practical Issues Task Force (PITF) No� 18, “Practical Solution

on Unification of Accounting Policies Applied to Foreign Subsidiaries for

the Consolidated Financial Statements�” PITF No� 18 prescribes: (1) the

accounting policies and procedures applied to a parent company and its

subsidiaries for similar transactions and events under similar circum-

stances should in principle be unified for the preparation of the consoli-

dated financial statements, (2) financial statements prepared by foreign

subsidiaries in accordance with either International Financial Reporting

Standards or the generally accepted accounting principles in the United

States of America tentatively may be used for the consolidation process,

(3) however, the following items should be adjusted in the consolidation

process so that net income is accounted for in accordance with Japanese

GAAP unless they are not material:

1� Amortization of goodwill

2� Scheduled amortization of actuarial gain or loss of pensions that

has been directly recorded in the equity

3� Expensing capitalized development costs of R&D

4� Cancellation of the fair value model accounting for property, plant,

and equipment and investment properties and incorporation of

the cost model accounting

5� Recording the prior years’ effects of changes in accounting poli-

cies in the income statement where retrospective adjustments

to financial statements have been incorporated

6� Exclusion of minority interests from net income, if contained

JT applied this accounting standard effective April 1, 2008� As a

result of this change, operating income and income before income

taxes and minority interests for the year ended March, 2009 decreased

by ¥94,235 million respectively, and as of April 1, 2008, retained

earnings decreased by ¥193,658 million as JT amortized goodwill

posted at consolidated foreign subsidiaries�

Also, income before income taxes and minority interests for the year

ended March 31, 2009 decreased by ¥912 million respectively, as JT

posted the retrospective adjustment in the Consolidated Statements

of Income� The adjustment was caused by an accounting policy change

in foreign subsidiaries as a result of a change of U�S� GAAP�

c) Cash Equivalents

Cash equivalents are short-term investments that are readily convert-

ible into cash and that are exposed to insignificant risk of changes in

value� All of cash equivalents mature or become due within three

months of the date of acquisition�

d) Securities

The Group’s securities are classified as held-to-maturity debt securities

or available-for-sale securities, depending on management’s holding

intent� Held-to-maturity debt securities are reported at amortized cost�

Available-for-sale marketable securities are reported at fair value, with

unrealized gains and losses, net of applicable taxes, reported in a sepa-

rate component of equity�

The cost of available-for-sale marketable securities sold is determined

based on the moving-average method� Non-marketable available-for-sale

securities are stated at cost determined by the moving-average method�

For significant impairment in value that is judged unrecoverable, carrying

amounts of securities are reduced to fair value, with a resulting charge

to income� An allowance for loss on investments is recorded to provide

for the loss on investments in certain non-marketable equity accounted

for by the cost method and is determined based on the respective

financial condition of the investees�

e) Allowance for Doubtful Accounts

The allowance for doubtful accounts is stated in amounts considered

to be appropriate based on the companies’ past credit loss experience

and an evaluation of potential losses in the receivables outstanding�

f) Inventories

Inventories are generally stated at the lower of cost or net selling

value, cost being determined by the average method�

In July 2006, the Accounting Standards Board of Japan (“ASBJ”)

issued ASBJ Statement No� 9,” Accounting Standard for Measurement

of Inventories,” and JT and its domestic subsidiaries adopted the

standard from fiscal year beginning on April 1, 2007� This standard

requires that inventories held for sale in the ordinary course of business

be measured at the lower of cost or net selling value, which is defined

as the selling price less additional estimated manufacturing costs and

estimated direct selling expenses� The replacement cost may be used

in place of the net selling value, if appropriate�

In addition, leaf tobacco held by JT was subject to annual devalu-

ation prior to April 1, 2007� JT no longer applies annual devaluation

for its leaf inventories from the year ended March 31, 2008 (see

Note 6)�

g) Property, Plant and Equipment

Property, plant and equipment are stated at cost� Depreciation is gener-

ally computed using the declining-balance method while the straight-line

method is applied to buildings acquired after April 1, 1998� The useful

lives of buildings and structures, and machinery, equipment and vehicles

are principally from 38 to 50 years and 10 years, respectively�

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For finance leases that do not transfer ownership of the leased

property to the lessee, depreciation is mainly computed using straight-

line method over the lease period as the useful life and assuming no

residual value�

(Changes in useful life of property, plant and equipment)

The useful life of property, plant and equipment with respect to

Domestic Group was changed as a result of the use review of these

assets in conjunction with the revision of the corporate tax act, princi-

pally, the useful life of tobacco manufacturing was changed from 8

years to 10 years�

The effect of this change for the year ended March, 2009 is

immaterial�

h) Impairment of Long-Lived Assets

The Domestic Group reviews its long-lived assets for impairment

whenever events or changes in circumstance indicate the carrying

amount of an asset or asset group may not be recoverable� An impair-

ment loss would be recognized if the carrying amount of an asset or

asset group exceeds the sum of the undiscounted future cash flows

expected to result from the continued use and eventual disposition of

the asset or asset group�

The impairment loss would be measured as the amount by

which the carrying amount of the asset exceeds its recoverable

amount, which is the higher of the discounted cash flows from the

continued use and eventual disposition of the asset or the net

selling price at disposition�

i) Intangible Assets

Trademarks are carried at cost less accumulated amortization, which

is calculated by the straight-line method principally over 10 years�

j) Income Taxes

The provision for income taxes is computed based on the pretax

income or loss included in the consolidated statements of income� The

asset and liability approach is used to recognize deferred tax assets

and liabilities for the expected future tax consequences of temporary

differences between the carrying amounts and the tax bases of assets

and liabilities, and tax operating loss and other credit carry-forwards�

Deferred taxes are measured by applying currently enacted tax laws

to the temporary differences, tax operating loss and other credit

carry-forwards� A valuation allowance is provided for any portion of the

deferred tax assets where it is considered more likely than not that

they will not be realized�

k) Accrued bonuses

Bonuses to directors, cooperate auditors and employees are accrued

at the year end to which such bonuses are attributable�

l) Liabilities for Retirement Benefits

(1) employees’ retirement benefits

JT has an unfunded severance indemnity plan and a cash balance

pension plan (the ‘‘Pension Plans’’) as well as a defined contribution

plan, which cover substantially all of its employees� Its consolidated

subsidiaries principally have unfunded severance indemnity plans and/

or non-contributory defined pension plans�

The Pension Plans and the subsidiaries’ plans are stated based on

actuarially estimated retirement benefit obligations, considering the

estimated fair value of plan assets at each balance sheet date� Certain

domestic subsidiaries apply a simplified method, under which retire-

ment benefit obligations are recorded based on the amount required

if all employees terminated their employment as of the balance sheet

date� Contributions to the defined contribution plan are charged to

expenses when they are paid or accrued�

(2) Obligations under the Public Official Mutual Assistance

Association law

As a formerly wholly government-owned company, JT is obligated by

the Public Official Mutual Assistance Association Law to reimburse

the Japanese government for pension expenses incurred each year by

the government for former employees of Japan Tobacco and Salt

Public Corporation (“JTSPC”), JT’s predecessor entity, and others for

their services during certain periods before July 1, 1956� Such obliga-

tions are recognized as liabilities at their present value using the

actuarially determined computation method�

m) Leases

In March 2007, the ASBJ issued ASBJ Statement No� 13, “Accounting

Standard for Lease Transactions,” which revised the previous account-

ing standard for lease transactions issued in June 1993� The revised

accounting standard for lease transactions is effective for fiscal years

beginning on or after April 1, 2008 with early adoption permitted for

fiscal years beginning on or after April 1, 2007�

–Lessee–

Under the previous accounting standard, finance leases that deem to

transfer ownership of the leased property to the lessee are to be capi-

talized� However, other finance leases were permitted to be accounted

for as operating lease transactions if certain “as if capitalized” informa-

tion is disclosed in the note to the lessee’s financial statements� The

revised accounting standard requires that all finance lease transactions

should be capitalized to recognize lease assets and lease obligations

in the balance sheet�

In addition, the revised accounting standard permits leases which

existed at the transition date and do not transfer ownership of the

leased property to the lessee to be measured at the obligations under

finance leases less interest expense at the transition date and recorded

as acquisition cost of lease assets�

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–Lessor–

Under the previous accounting standard, finance leases that deem to

transfer ownership of the leased property to the lessee are to be

treated as sales� However, other finance leases were permitted to be

accounted for as operating lease transactions if certain “as if sold”

information is disclosed in the note to the lessor’s financial statements�

The revised accounting standard requires that all finance leases that

deem to transfer ownership of the leased property to the lessee

should be recognized as lease receivables, and all finance leases that

deem not to transfer ownership of the leased property to the lessee

should be recognized as investments in lease�

JT and its domestic subsidiaries applied this accounting standard

effective April 1, 2008� In addition, the Company accounted for leases

which existed at the transition date and do not transfer ownership of

the leased property to the lessee as acquisition cost of lease assets

measured at the obligations under finance leases less interest expense

at the transition date� The effect of this change on operating income

and income before income taxes and minority interests is immaterial�

n) Appropriations of Retained Earnings

Appropriations of retained earnings are reflected in the financial state-

ments for the following year upon shareholders’ approval�

o) Foreign Currency Transactions

Receivables and payables denominated in foreign currencies are

translated into Japanese yen at the rates prevailing at each balance

sheet date� The exchange gains or losses from translation are recog-

nized in the consolidated statements of income to the extent that

hedging derivative financial instruments for foreign currency transac-

tions do not qualify for hedge accounting (see (p) Derivatives)�

All assets and liabilities of foreign consolidated subsidiaries are

translated into Japanese yen at the exchange rate at each subsidiary’s

respective fiscal year end� All revenue and expense accounts are

translated at average exchange rates during each subsidiary’s respec-

tive fiscal year�

Differences arising from such translation are shown as “Foreign

currency translation adjustments” and “Minority interests” in a sepa-

rate component of equity�

p) Derivatives

All derivatives, except for certain foreign exchange forward contracts,

foreign currency option contracts, foreign currency swap contracts and

interest rate swap contracts described below, are recognized as either

assets or liabilities and measured at fair value, and gains or losses on

derivative transactions are recognized in the consolidated statements

of income�

For derivatives which qualify for hedge accounting because of high

correlation and effectiveness between the hedging instruments and

the hedged items, gains or losses on derivatives are deferred until the

corresponding hedged items are recognized in earnings�

The Group’s trade payables that are denominated in foreign curren-

cies and have been hedged by foreign exchange forward contracts are

translated at the foreign exchange rate stipulated in the contracts�

Interest rate swaps that qualify for hedge accounting and meet

specific matching criteria are not remeasured at market value, but the

differential to be paid or received under the swap agreements are

accrued and included in interest expense or income�

q) Foreign Consolidated Subsidiaries

JT International and other foreign consolidated subsidiaries principally

maintain their accounting records in conformity with U�S� GAAP�

The significant accounting policies, which are different from JT’s

policies, are as follows:

(1) Inventories

Inventories are generally stated at the lower of cost or market, cost

being determined by the first-in, first-out method or average cost�

(2) Property, plant and equipment

Depreciation of property, plant and equipment is generally computed

using the straight-line method over the estimated useful lives of the

respective assets�

(3) Trademarks

Trademarks are principally amortized using straight-line method over

20 years�

(4) Retirement benefit pension plans

According to FASB statement 158 “Employers’ Accounting for Defined

Benefit Pension and Other Postretirement Plans—an amendment of

FASB statements No� 87, 88, 106 and 132(R)” (”FASB 158”), the dif-

ference of retirement benefits obligation and fair value of plan assets

is recognized on the consolidated balance sheets as of March 31, 2009

and 2010 as assets/liabilities�

Unrecognized actuarial net loss and prior service cost, net of

applicable taxes, are recorded as a part of equity as pension liability

adjustment of foreign consolidated subsidiaries�

(5) Derivatives

All derivatives are used to hedge the exposure to foreign exchange

risk and interest rate risk are recognized as either assets or liabilities

in the balance sheet and measured at fair value�

Changes in the fair value of derivatives are recorded in current

earnings for each fiscal year�

(6) Income Taxes

Foreign consolidated subsidiaries that apply in conformity with U�S�

GAAP adopt the provisions of FASB Interpretation (FIN) No� 48,

Accounting for Uncertainty in Income Taxes�

r) Per Share Information

Basic net income per share is computed by dividing net income avail-

able to common shareholders by the weighted-average number of

common shares outstanding in each period, which were 9,580,080

shares for the years ended March 31, 2008 and 2009, and 9,580,092

shares for the year ended March 31, 2010 (see Note 19)�

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Diluted net income per share for the year ended March 31, 2008,

2009 and 2010 reflects the potential dilution that could occur if stock

acquisition rights were exercised� Diluted net income per share of

common stock assumes full exercise of the outstanding stock acquisi-

tion rights at the beginning of the year or at the time of issuance� (see

Note 19)

Cash dividends per share presented in the Consolidated State-

ments of Income are dividends applicable to the respective years

including dividends to be paid after the end of the year�

s) Stock Option

The ASBJ Statement No� 8, ”Accounting Standard for Stock Options”

and related guidance are applicable to stock options granted on and

after May 1, 2006� This standard requires companies to recognize

compensation expense for employee stock options based on the fair

value at the date of grant and over the vesting period as consideration

for receiving goods or services� The standard also requires companies

to account for stock options granted to non-employees based on the

fair value of either the stock option or the goods or services received�

In the balance sheet, the stock option is presented as a stock acquisi-

tion right as a separate component of equity until exercised� JT has

applied the accounting standard for stock options to those granted on

and after May 1, 2006�

t) Retirement Allowances for Directors and

Corporate Auditors

Retirement allowances for directors and corporate auditors are recorded

to state the liability at the amount that would be required if all directors

and corporate auditors retired at each balance sheet date�

u) Provision for Loss on Debt guarantees

Possible losses arose from debt guarantees are provided based on the

financial position of guaranteed parties�

v) New Accounting Pronouncements

Asset Retirement Obligations—

In March 2008, the ASBJ published a new accounting standard for

asset retirement obligations, ASBJ Statement No� 18 “Accounting

Standard for Asset Retirement Obligations” and ASBJ Guidance No� 21

“Guidance on Accounting Standard for Asset Retirement Obligations�”

Under this accounting standard, an asset retirement obligation is

defined as a legal obligation imposed either by law or contract that

results from the acquisition, construction, development and the normal

operation of a tangible fixed asset and is associated with the retirement

of such tangible fixed asset�

The asset retirement obligation is recognized as the sum of the

discounted cash flows required for the future asset retirement and is

recorded in the period in which the obligation is incurred if a reasonable

estimate can be made� If a reasonable estimate of the asset retirement

obligation cannot be made in the period the asset retirement obligation

is incurred, the liability should be recognized when a reasonable estimate

of asset retirement obligation can be made� Upon initial recognition of

a liability for an asset retirement obligation, an asset retirement cost is

capitalized by increasing the carrying amount of the related fixed asset

by the amount of the liability� The asset retirement cost is subsequently

allocated to expense through depreciation over the remaining useful life

of the asset� Over time, the liability is accreted to its present value each

period� Any subsequent revisions to the timing or the amount of the

original estimate of undiscounted cash flows are reflected as an increase

or a decrease in the carrying amount of the liability and the capitalized

amount of the related asset retirement cost� This standard is effective

for fiscal years beginning on or after April 1, 2010 with early adoption

permitted for fiscal years beginning on or before March 31, 2010�

Segment Information Disclosures—

In March 2008, the ASBJ revised ASBJ Statement No� 17 “Accounting

Standard for Segment Information Disclosures” and issued ASBJ

Guidance No� 20 “Guidance on Accounting Standard for Segment

Information Disclosures�” Under the standard and guidance, an entity

is required to report financial and descriptive information about its

reportable segments� Reportable segments are operating segments

or aggregations of operating segments that meet specified criteria�

Operating segments are components of an entity about which sepa-

rate financial information is available and such information is evaluated

regularly by the chief operating decision maker in deciding how to

allocate resources and in assessing performance� Generally, segment

information is required to be reported on the same basis as is used

internally for evaluating operating segment performance and deciding

how to allocate resources to operating segments� This accounting

standard and the guidance are applicable to segment information

disclosures for the fiscal years beginning on or after April 1, 2010�

Business Combinations—

In December 2008, the ASBJ issued a revised accounting standard for

business combinations, ASBJ Statement No� 21, “Accounting Standard

for Business Combinations�” Major accounting changes under the

revised accounting standard are as follows;

(1) The current accounting standard for business combinations allows

companies to apply the pooling of interests method of accounting

when certain specific criteria are met such that the business

combination is essentially regarded as a uniting-of-interests� The

revised standard requires to account for such business combination

by the purchase method and the pooling of interests method of

accounting is no longer allowed�

(2) The current accounting standard accounts for the research and

development costs to be charged to income as incurred� Under

the revised standard, an in-process research and development

(IPR&D) acquired by the business combination is capitalized as an

intangible asset�

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(3) The current accounting standard accounts for a bargain purchase gain

(negative goodwill) to be systematically amortized within 20 years�

Under the revised standard, the acquirer recognizes a bargain pur-

chase gain in profit or loss on the acquisition date after reassessing

whether it has correctly identified all of the assets acquired and all

of the liabilities assumed with a review of such procedures used�

This standard is applicable to business combinations undertaken

on or after April 1, 2010 with early adoption permitted for fiscal

years beginning on or after April 1, 2009�

Unification of Accounting Policies Applied to Foreign Associated

Companies for the Equity Method—

The current accounting standard requires to unify accounting policies

within the consolidation group� However, the current guidance allows

to apply the equity method for the financial statements of its foreign

associated company which have been prepared in accordance with

generally accepted accounting principles in their respective jurisdic-

tions without unification of accounting policies�

In December 2008, the ASBJ issued ASBJ Statement No� 16

(Revised 2008), “Revised Accounting Standard for Equity Method of

Accounting for Investments�” The new standard requires adjust-

ments to be made to conform the associate’s accounting policies for

similar transactions and events under similar circumstances to those

of the parent company when the associate’s financial statements are

used in applying the equity method unless it is impracticable to

determine adjustments� In addition, financial statements prepared by

foreign associated companies in accordance with either International

Financial Reporting Standards or the generally accepted accounting

principles in the United States tentatively may be used in applying

the equity method if the following items are adjusted so that net

income is accounted for in accordance with Japanese GAAP unless

they are not material:

(1) amortization of goodwill

(2) scheduled amortization of actuarial gain or loss of pensions that has

been directly recorded in the equity

(3) expensing capitalized development costs of R&D

(4) cancellation of the fair value model accounting for property, plant,

and equipment and investment properties and incorporation of the

cost model accounting

(5) recording the prior years’ effects of changes in accounting policies

in the income statement where retrospective adjustments to the

financial statements have been incorporated

(6) exclusion of minority interests from net income, if contained�

This standard is applicable to equity method of accounting for

investments effective on or after April 1, 2010 with early adoption

permitted for fiscal years beginning on or after April 1, 2009�

4. Business Combinations

I� Via consolidated subsidiary JTI (UK) MANAGEMENT LTD, on April

18, 2007, JT acquired the outstanding shares of the Gallaher Group

Plc (now known as “Gallaher Group Ltd�”) of the United Kingdom

through an acquisition method under English law known as a

scheme of arrangement, converting Gallaher Group Plc into a

wholly owned subsidiary�

As the direct acquirer of the outstanding shares in Gallaher

Group Plc was JTI (UK) MANAGEMENT LTD, which follows gener-

ally accepted accounting principles and practices in the United

States (“U�S� GAAP”), the business combination was accounted

for under the purchase method, based on FASB Statement

No� 141�

In August 2007, JT reorganized JTI (UK) MANAGEMENT LTD

into a subsidiary of JT International Holding B�V�, a consolidated

subsidiary of JT�

1� The following were the name of the acquired company, business

contents, main reasons for business combination, the date of

business combination, the legal form of the business combina-

tion, and ratio of voting rights acquired�

(1) The name of acquired company: Gallaher Group Plc

(2) Business contents: Manufacturing and selling of tobacco

products

(3) Main reasons for business combination

Through the acquisition of the Gallaher Group Plc, JT could

expand its business and enjoy economies of scale, build a

well-balanced and competitive brand portfolio in each market

and price segmentation, strengthen technology/distribution

infrastructures, and synergize business growth expected by the

business combination through effective business operations�

(4) Date of business combination: April 18, 2007

(5) Legal form of the business combination: The issued shares

were acquired for cash�

(6) Ratio of voting rights acquired: 100%

2� Period of operating results included in the consolidated financial

statements:

As the closing date of the accounting period of the acquired

company is set on December 31, operating results from April

18, 2007 to December 31, 2007 for this company have been

included in the current consolidated statement of income�

3� Acquisition costs

The acquisition was conducted for 7�5 billion sterling pounds

in cash�

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4� Amount of goodwill recognized, basis for recognition, and

method and period for amortization of goodwill

(1) Amount of goodwill recognized:

¥1,721,368 million ($17,181 million)

(2) Basis for recognition:

Goodwill was recognized because the acquisition cost of the

company exceeded the net value allocated to the assets

acquired and liabilities assumed�

(3) Method and period for amortization of goodwill:

In accordance with FASB Statement No� 142, “Goodwill and

Other Intangible Assets,” the amount of goodwill recognized

shall not be amortized� Rather, the decision of whether to

recognize impairment shall be made once each year, or each

time an event occurs indicating that the fair value of goodwill

has fallen below its book value�

5� Principal details of assets acquired and liabilities assumed on

the day of the business combination were as follows:

Current assets: ¥ 410,572 million ($ 4,098 million)

Non-current assets: ¥2,531,125 million ($25,263 million)

Total assets: ¥2,941,697 million ($29,361 million)

Current liabilities: ¥ 405,712 million ($ 4,049 million)

Non-current liabilities: ¥ 749,479 million ($ 7,481 million)

Total liabilities: ¥1,155,191 million ($11,530 million)

Regarding allocation of acquisition costs, the major intangible

asset that was acquired in addition to goodwill was ¥523,263

million ($5,223 million) in trademarks� This asset has an amortiza-

tion period of 20 years�

Note: Amount of yen mentioned above is translated at the exchange rate as of

the business combination date� The amount of goodwill (¥1,791,189

million ($17,878 million)) included in non-current assets differs from the

amount of goodwill which is described in consolidated balance sheet�

II� On January 8, 2008, JT converted Katokichi Co�, Ltd� (now known

as TableMark Co�, Ltd�) into a subsidiary through tender offer for

Katokichi shares�

In addition, JT acquired all of Katokichi’s voting rights on April

18, 2008�

1� The following were the name of the acquired company, business

contents, main reasons for business combination, the date of

business combination, the legal form of the business combina-

tion, and ratio of voting rights acquired�

(1) The name of acquired company: Katokichi Co�, Ltd�

(2) Business contents: The main business contents are manu-

facturing and selling of frozen foods and frozen fishery

products� The other business contents are a distribution

business incidental to the main business and a service busi-

ness such as a hotel and restaurant management�

(3) Main reasons for business combination

JT anticipated that the Group could realize further expansion

of its business value because the Group would enjoy the

effect of mutual reinforcement and management resources

synergy through the business combination�

(4) Date of business combination: January 8, 2008

(5) Legal form of the business combination: The issued shares

were acquired for cash�

(6) Ratio of voting rights acquired: 93�89%

2� Period of operating results included in the consolidated financial

statements

From January 1, 2008 to March 31, 2008

3� Acquisition costs

The acquisition was conducted for ¥108�6 billion ($1,084 million)

in cash�

4� Amount of goodwill recognized, basis for recognition, and

method and period for amortization of goodwill

(1) Amount of goodwill recognized ¥41,885 million ($418

million)

(2) Basis for recognition

Goodwill was recognized because the acquisition cost of the

company exceeded the net value allocated to the assets

acquired and liabilities assumed�

(3) Method and period for amortization of goodwill

Method for amortization: straight-line method

Period for amortization: five years

5� Principal details of assets acquired and liabilities assumed on the

day of the business combination were as follows:

Current assets: ¥ 89,279 million ($ 891 million)

Non-current assets: ¥136,995 million ($1,367 million)

Total assets: ¥226,274 million ($2,258 million)

Current liabilities: ¥ 84,813 million ($ 847 million)

Non-current liabilities: ¥ 24,532 million ($ 244 million)

Total liabilities: ¥109,345 million ($1,091 million)

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Millions of YenMillions of

U�S� dollars

Assets acquired and liabilities assumed in acquisition of shares of Gallaher Group plc� and Katokichi Co�, Ltd mainly consist of purchase of shares of newly consolidated subsidiaries, net of cash acquired in 2008;

Current assets ¥ 499,851 $ 4,989

Non-current assets 835,046 8,335

Goodwill 1,833,074 18,296

Current liabilities (490,525) (4,897)

Non-current liabilities (774,011) (7,726)

Minority interest (11,530) (115)

Foreign currency translation adjustment (47,824) (477)

Acquisition price in 2007 (166,312) (1,660)

Acquisition price in 2008 1,677,769 16,745

Cash and cash equivalents (69,680) (695)

Payments for purchases of shares of subsidiaries 1,608,089 16,050

III� Transactions under Common Control during the year ended

March 31, 2009

1� Outline of the transactions

(1) Transferred business: Processed food business (excluding

chilled processed food business) and seasoning business

of JT

(2) Description of transferred business: Mainly manufacturing

and sales of processed frozen foods and seasoning product

(3) Legal form of the business combination: Business transfer of

JT’s processed food business and seasoning business, and

stock transfer of affiliated companies including JT Foods, and


(4) Name of the company after business combinations:

Katokichi Co�, Ltd� (now known as TableMark Co�, Ltd�)

(5) Outline and purpose of the transactions:

The business combination enables the group to integrate JT’s

food business head office function and affiliated companies

which are engaged with processed food business and sea-

soning business into Katokichi� After the combination,

Katokichi holds the processed food business including the

largest scale of frozen food business in Japan and seasoning

business with leading manufacturing capability� Katokichi

keeps implementing a business restructuring and setting up

further business fundamentals�

2� Overview of accounting methods used

These business combinations are accounted as transactions

under common control with “Accounting for Business Combina-

tions” issued by the Business Accounting Council (“BAC”) on

October 31, 2003, and “Guidance for Accounting Standard for

Business Combinations and Business Divestitures” (ASBJ

Guidance No� 10 updated on November 15, 2007)�

5. Short-term Investments and Investment Securities

Short-term investments and investment securities at March 31, 2009 and 2010 consisted of the following:


U�S� dollars2009 2010 2010

Short-term investments:

Time deposits ¥ 713 ¥ 7,856 $ 84

Government and Corporate bonds 1,700 4,698 50

Trust fund investments and other 197 472 6

Total ¥ 2,610 ¥13,026 $140

Investment securities:

Equity securities ¥54,217 ¥51,147 $550

Government and Corporate bonds 4,137 3,300 35

Trust fund investments and other 8,141 5,731 62

Total ¥66,495 ¥60,178 $647

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The costs and aggregate fair values of marketable securities at March 31, 2009 and 2010 were as follows:

Millions of yen2009

Cost Unrealized gain Unrealized loss Fair value

Available-for-sale

Equity securities ¥35,334 ¥19,286 ¥5,105 ¥49,515

Government and Corporate bonds 4,124 108 3 4,229

Trust fund investments and other 8,083 — 535 7,548

Held-to-maturity

Government bonds and municipal bonds 600 1 — 601

Millions of yen2010


Available-for-sale

Equity securities ¥29,070 ¥19,755 ¥1,874 ¥46,951

Government and Corporate bonds 7,583 128 13 7,698

Trust fund investments and other 4,641 1,048 108 5,581

Held-to-maturity


Millions of U�S� dollars2010


Available-for-sale

Equity securities $312 $213 $20 $505

Government and Corporate bonds 81 1 0 82

Trust fund investments and other 50 11 1 60

Held-to-maturity


Available-for-sale securities whose fair value cannot be reliably determined at March 31, 2009 and 2010 were as follows:


U�S� dollars2009 2010 2010

Available-for-sale

Equity securities ¥4,702 ¥4,196 $45

Corporate bonds 1,007 — —

Trust fund investments and other 791 622 7

Total ¥6,500 ¥4,818 $52

Amortized cost of held-to-maturity securities and related proceeds from sales and related realized losses on those sales for the years ended

March 31, 2008, 2009 and 2010, were as follows:


U�S� dollars2008 2009 2010 2010

Amortized cost ¥300 ¥— ¥— $—

Proceeds from sales ¥293 ¥— ¥— $—

Net realized loss ¥ (7) ¥— ¥— $—

A domestic consolidated subsidiary sold held-to-maturity security

for the year ended March 31, 2008 due to significant deterioration in

the issuer’s creditworthiness, which is considered to be a reasonable

reason consistent with Practical Guidelines on Accounting Standards

for Financial Instruments No� 83-1�

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Proceeds from sales of available-for-sale securities and related gross realized gains and losses on those sales, computed on the moving

average cost basis for the years ended March 31, 2008, 2009 and 2010, were as follows:


U�S� dollars2008 2009 2010 2010

Proceeds from sales ¥1,902 ¥2,719 ¥12,962 $139

Gross realized gains ¥ 566 ¥ 220 ¥ 3,683 $ 40

Gross realized losses (43) (48) (1,939) (21)

Net realized gain ¥ 523 ¥ 172 ¥ 1,744 $ 19

The carrying value of short-term investments and investment securities by contractual maturities at March 31, 2010 were as follows:

Millions of yen Millions of U�S� dollarsTime

depositsHeld-to-Maturity

Available for Sale

Time deposits

Held-to-Maturity

Available for Sale

Due within one year ¥7,856 ¥300 ¥4,870 $84 $3 $53

Due after one year through five years — — 2,501 — — 27

Due after five years through ten years — — 10 — — 0

Due after ten years — — — — — —

Total ¥7,856 ¥300 ¥7,381 $84 $3 $80

6. Inventories

Inventories at March 31, 2009 and 2010 consisted of the following:


U�S� dollars2009 2010 2010

Leaf tobacco ¥294,020 ¥359,152 $3,860

Finished products 88,234 123,327 1,326

Other 81,903 72,621 780

Total ¥464,157 ¥555,100 $5,966

Prior to adoption of ASBJ Statement No� 9,” Accounting Standard

for Measurement of Inventories” JT leaf tobacco inventory in excess

of the minimum amount necessary for future production was subject

to annual devaluation�

For the years ended March 31, 2008, 2009 and 2010, losses on

write-downs of securities including investments in affiliated companies

totaled ¥11,154 million, ¥7,062 million and ¥1,404 million ($15 million),

respectively� In evaluating security values, a security, whose value has

declined by more than 50% is considered to have experienced

“significant deterioration�” A security whose value has declined from

30% to 50% and the effect of the decline on JT’s financial position is

material, is considered to have experienced “significant deterioration�”

If a security has a strong chance of regaining its value, the security is

not written down�

Annual devaluation was discontinued beginning in the year ended

March 31, 2007� Effective from April 1, 2007, JT and its domestic

subsidiaries applied the “Accounting Standard for Measurement of

Inventories” (see Note 3 (f))�

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7. Investment Property

JT and certain consolidated subsidiaries hold some rental properties such as office buildings and residences in Tokyo and other areas�

The carrying amounts, changes in such balances and market prices of such properties were as follows:

Millions of yenCarrying amount Fair value

Use application April 1, 2009Increase/

(Decrease) March 31, 2010 March 31, 2010

Office buildings for rent ¥41,506 ¥ (2,420) ¥39,086 ¥140,606

Residences for rent 5,279 (143) 5,136 26,738

Others 29,271 (10,951) 18,320 66,774

Total ¥76,056 ¥(13,514) ¥62,542 ¥234,118

Millions of U�S� dollarsCarrying amount Fair value

Use application April 1, 2009Increase/

(Decrease) March 31, 2010 March 31, 2010

Office buildings for rent $446 $ (26) $420 $1,511

Residences for rent 57 (2) 55 287

Others 314 (117) 197 718

Total $817 $(145) $672 $2,516

Notes:

1) Carrying amount is net of accumulated depreciation and accumulated impairment losses, if any�

2) Decrease during the fiscal year ended March 31, 2010 primarily represents the sales of domestic idle properties of ¥11,214 million ($121 million)�

3) Fair value of investment properties at March 31, 2010 is principally measured based on the real-estate appraisal assessed by the external real-estate appraiser� And the others

are measured by the Group based on the assessed value of taxable fixed asset� However, unless the appraisal or indicators that are regarded to reflect the fair value of the

investment properties appropriately change significantly since the date of acquisition or the date of the latest appraisal, the Group measure the fair value of the investment

properties based on such appraisal or indicators�

The income and expenses for the investment properties for the year ended March 31, 2010 were as follows:

Millions of yen

Use application Income Expense Net gain/(loss)Other income/

(expense)

Office buildings for rent ¥11,546 ¥5,179 ¥6,367 ¥ (44)

Residences for rent 1,512 502 1,010 (21)

Others 2,942 3,329 (387) 21,768

Total ¥16,000 ¥9,010 ¥6,990 ¥21,703


Use application Income Expense Net gain/(loss)Other income/

(expense)

Office buildings for rent $124 $56 $68 $ 0

Residences for rent 16 5 11 0

Others 32 36 (4) 233

Total $172 $97 $75 $233

The expenses above primarily consist of depreciation, repairs and maintenance expenses, insurance expense and fixed assets tax of each

investment property�

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8. Short-term Bank Loans, Commercial Paper and Long-term Debt

Short-term bank loans and commercial paper at March 31, 2009 and 2010 consisted of the following:


U�S� dollars2009 2010 2010

Yen loans with interest rates of 0�216% to 2�750% at March 31, 2009 and of 0�090% to 3�500% at March 31, 2010 ¥ 51,444 ¥ 48,929 $ 526

Foreign currency loans with interest rates of 0�130% to 83�000% at March 31, 2009 and of 1�040% to 27�250% at March 31, 2010 61,787 60,334 648

Commercial paper with interest rates of 0�106% to 0�145% at March 31, 2010 — 119,000 1,279

Total ¥113,231 ¥228,263 $2,453

Long-term debt at March 31, 2009 and 2010 consisted of the following:


U�S� dollars2009 2010 2010

1�98% yen bonds, due 2009 ¥ 150,000 ¥ — $ —

1�34% yen bonds, due 2010 49,998 50,000 537

1�53% yen bonds, due 2011 40,000 40,000 430

1�68% yen bonds, due 2012 59,996 59,997 645

1�13% yen bonds, due 2014 — 100,000 1,075

Unsecured 6�63% Sterling pound bonds issued by foreign subsidiary due in 2009 39,523 — —

Unsecured 4�63% Euro bonds issued by foreign subsidiary due in 2011 102,673 105,829 1,137

Unsecured 5�75% Sterling pound bonds issued by foreign subsidiary due in 2013 32,733 36,514 392

Unsecured 4�50% Euro bonds issued by foreign subsidiary due in 2014 63,974 66,055 710

Other bonds 1,261 1,013 12

Long-term bank loans due through 2028 325,944 172,594 1,855

Lease obligations due through 2019 16,746 14,064 151

Total 882,848 646,066 6,944

Less current portion (222,256) (78,356) (842)

Long-term debt, less current portion ¥ 660,592 ¥567,710 $6,102

The weighted average interest rates for long-term lease obliga-

tions outstanding at March 31, 2009 and 2010 were 12�97% and

6�77%, respectively, and those for current portion were 8�16% and

8�95%, respectively�

JT entered into interest rate swap agreements in March 2004 to

convert interest payments on 1�98% yen bonds due 2009 to floating

rate payments on a LIBOR basis, which was at 1�24% at March 31

2005, in order to manage interest rate risks on these bonds� Taking

changes in market conditions into consideration, JT unwound the

above interest swap agreements in May 2005� Consequently, JT paid

a fixed rate interest of 1�61%�

In addition, certain domestic consolidated subsidiaries have entered

into interest rate swap agreements to fix variable rate interest pay-

ments of Japanese yen loans�

Annual interest rates applicable to Japanese yen long-term

loans of JT and certain domestic consolidated subsidiaries at

March 31, 2009 and 2010 ranged from 0�77% to 5�30% and 0�90%

to 5�30%, respectively�

Annual interest rates applicable to long-term loans denominated in

foreign currencies outstanding at March 31, 2009 and 2010 ranged

from 2�35% to 8�00% and 0�97% to 8�75%, respectively�

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Annual maturities of short-term bank loans, commercial paper and long-term debt at March 31, 2010 were as follows:

Years Ending March 31, Millions of yenMillions of

U�S� dollars

2011 ¥306,525 $3,295

2012 172,228 1,851

2013 166,974 1,795

2014 59,149 636

2015 168,558 1,812

2016 and thereafter 873 8

Total ¥874,307 $9,397

Under the JT Law, obligations created by the bonds issued by JT are

secured by a statutory preferential right over the property of JT�

This right entitles the holders thereof to claim satisfaction in

Substantially all of the short-term bank loans, commercial paper and long-term debt are unsecured� Secured loans and debt of certain con-

solidated subsidiaries at March 31, 2010 were as follows:


U�S� dollars

Short-term bank loans ¥10,862 $117

Long-term bank loans 5,281 57

Current portion of Long-term bank loans 1,756 19

Others 420 4

Total ¥18,319 $197

The carrying amounts of assets pledged as collateral for the above secured loans and debt at March 31, 2010 were as follows:


U�S� dollars

Buildings and structures ¥ 5,821 $ 63

Land 4,316 46

Machinery, equipment and vehicles 2,447 26

Others 4,492 49

Total ¥17,076 $184

preference to unsecured creditors (with the exception of national

and local taxes and certain other statutory obligations)�

9. Liabilities for Retirement Benefits

(1) Employees’ Retirement Benefit

JT has unfunded severance indemnity plan and a cash balance pension

plan as well as a defined contribution plan�

The unfunded severance indemnity plan provides lump-sum retire-

ment benefits based on credits earned in each year of service�

Employees are entitled to receive larger payments in certain cir-

cumstances such as involuntary termination, retirement at the manda-

tory retirement age, voluntary termination at certain specific ages prior

to mandatory retirement age or death�

The cash balance pension plan provides retirement benefits in the

form of a lump-sum payment or annuity payments based on current

and past principal credits earned and interest credits over time based

on these principal credits�

Domestic consolidated subsidiaries principally have unfunded

severance indemnity plans and/or defined benefit pension plans cover-

ing substantially all of their employees, under which benefits are

provided based on the rate of pay at the time of termination, years of

service and certain other factors�

General agreements with respective banks provide, as is customary

in Japan, that additional collateral must be provided under certain cir-

cumstances if requested by such banks and that certain banks have

the right to offset cash deposited with them against any long-term or

short-term debt or other debt payable to the banks� JT has never been

requested to provide additional collateral�

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Foreign consolidated subsidiaries principally sponsor non-contributory

defined benefit pension plans covering most of their employees� Plans

covering regular full-time employees provide pension benefits based on

credits, determined by age, earned throughout an employee’s service

and final average compensation before retirement�

Certain foreign consolidated subsidiaries also provide certain

health and life insurance benefits for retired employees and

their dependents�

The liabilities for employees’ retirement benefits at March 31, 2009 and 2010 consisted of the following:


U�S� dollars2009 2010 2010

Projected benefit obligations ¥(424,413) ¥(455,264) $(4,893)

Fair value of plan assets 280,513 321,317 3,453

Funded status (143,900) (133,947) (1,440)

Unrecognized actuarial net loss 44,997 42,196 454

Unrecognized prior service cost 6,204 4,790 51

Net amount recognized (92,699) (86,961) (935)

Pension liability adjustment of foreign consolidated subsidiaries (see Note 3 (q)) (25,662) (35,742) (384)

Prepaid pension cost (27,642) (23,391) (251)

Other current liabilities (5,136) (3,721) (40)

Liabilities for employees’ retirement benefits ¥(140,867) ¥(142,373) $(1,530)

“Pension liability adjustment of foreign consolidated subsidiaries”

is the unfunded obligation recognized by foreign consolidated subsid-

iaries applying U�S� GAAP� “Other current liabilities” is the amount by

which the actuarial present value of benefits included in the benefit

obligation payable in the next 12 months exceeds the fair value of plan

assets in foreign consolidated subsidiaries applying U�S� GAAP�

JT transferred a portion of the unfunded severance indemnity plan

to the defined contribution plan on April 1, 2006, and thereby recog-

nized ¥3,097 million for the year ended March 31, 2006 as other

expense which led to an increase of liabilities for retirement benefits

by the same amount in accordance with “Accounting for the Transfer

between Retirement Benefits Plans (ASBJ Guideline No� 1)” and

“Practical Solution on Accounting for Transfer Between Retirement

Benefit Plans (Practical Issues Task Forces Report No� 2)�”

Millions of yen2006

Settlement of projected benefit obligations ¥ 4,567

Prior service cost recognized in earnings (199)

Actuarial gain recognized in earnings 139

Decrease in liabilities for retirement benefits 4,507

Related assets due to be transferred to defined contribution plan (7,604)

Loss on partial termination of defined benefit plan ¥(3,097)

Related assets of ¥7,604 million due to be transferred to the defined contribution plan were eventually paid in installment by 2010�

The components of net periodic retirement benefit cost for the years ended March 31, 2008, 2009 and 2010 were as follows:


U�S� dollars2008 2009 2010 2010

Service cost ¥ 13,115 ¥ 13,123 ¥ 11,294 $ 121

Interest cost 20,149 21,720 18,090 194

Expected return on plan assets (19,782) (20,133) (12,902) (139)

Recognized actuarial loss (430) 748 3,876 42

Amortization of prior service cost 1,530 1,256 1,744 20

Net periodic retirement benefit costs ¥ 14,582 ¥ 16,714 ¥ 22,102 $ 238

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Significant assumptions used for the years ended March 31, 2008, 2009 and 2010 were as follows:

Year ended March 31, 2008 Japan Overseas

Discount rate principally 2�5% principally between 3�5% and 5�6%

Expected rate of return on plan assets principally 2�5% principally between 5�5% and 7�0%

Amortization period of prior service cost principally 10 years principally between 10 years and 14 years

Recognition period of actuarial gain/loss principally 10 years principally between 7 years and 22 years


Discount rate principally 2�5% principally between 3�3% and 6�3%

Expected rate of return on plan assets principally 2�5% principally between 4�3% and 6�0%




Discount rate principally 2.5% principally between 3.0% and 5.8%

Expected rate of return on plan assets principally 2.5% principally between 4.5% and 6.2%



Actuarial gains or losses that result from changes in plan experience

and actuarial assumptions are principally amortized over the employ-

ees’ average remaining service period from the next fiscal year� The

prior service cost that resulted from retroactive application of a plan

amendment is principally amortized over the employees’ average

remaining service period� The retirement benefit attributable to each

year is calculated by assigning the same amount of pension benefits

to each year of service� In determining service cost, certain foreign

subsidiaries attribute benefits to periods of service under the plan’s

benefit formula�

The Group’s contributions to the defined contribution plans which

were charged to expenses for the years ended March 31, 2008, 2009

and 2010 were ¥4,208 million, ¥ 3,948 million and ¥5,680 million ($61

million), respectively�

Certain domestic and foreign subsidiaries provided additional

retirement benefits for early-retired employees in connection with the

rationalization of the Domestic and International tobacco businesses

for the years ended March 31, 2008, 2009 and 2010�

These restructuring activities resulted in recognition of additional

retirement benefits as business restructuring costs of ¥2,285 million,

¥2,691 million and ¥7,288 million ($78 million) for the years ended

March 31, 2008, 2009 and 2010, respectively, and as other expenses

of ¥1,122 million, ¥32 million and ¥1,235 million ($13 million) for the

years ended March 31, 2008, 2009 and 2010, respectively, which

included a one-time charge for the unrecognized actuarial net loss and

unrecognized prior service cost attributable to the employees who

retired earlier than expected�

Certain domestic consolidated subsidiaries participate in multi-

employer contributory pension plans, the required contributions to

which are recognized as a net pension cost for the year� Of these

pension plans, information about Tokyo pharmaceutical industry

employees’ pension funds for the years ended March 31, 2008 and

2009 were as follows:


U�S� dollars2008 2009 2009

Fair value of plan assets ¥ 415,833 ¥ 325,177 $ 3,495

Benefit obligations (497,473) (502,794) (5,404)

Deficit ¥ (81,640) ¥(177,617) $(1,909)

2009 2010

Proportion of the Domestic consolidated subsidiary’s contributions to the entire plan 1�2% 1.3%

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(2) Obligation Under the Public Official Mutual Assistance

Association Law

Employees of JT, including former employees of JTSPC and others are

entitled to receive benefits under the government-sponsored pension

plan by the Public Official Mutual Assistance Association Law (the

“Law”)� The benefits, in the form of lifetime annuity payments by the

Social Insurance Agency, are determined based on the standard pay

rate, the length of service and other factors�

As a formerly wholly government-owned company, JT is obligated

by the Law to reimburse the Japanese government for pension

expenses incurred each year by the government in respect of former

employees of JTSPC and others for their services during certain

periods before July 1, 1956, the enactment date of the Law�

Such obligations were first recorded as liabilities at April 1, 2003

based on the actuarially determined computation method� Any actuarial

gain or loss arising subsequent to April 1, 2003 is deferred and

amortized over 10 years�

The liabilities and costs recognized for such obligations as of and for the year ended March 31, 2008, 2009 and 2010 were as follows:


U�S� dollars2009 2010 2010

Benefit obligations ¥(116,890) ¥(106,346) $(1,143)

Unrecognized actuarial (gain) loss (1,389) (3,184) (34)

Liabilities recognized ¥(118,279) ¥(109,530) $(1,177)


U�S� dollars2008 2009 2010 2010

Interest cost ¥2,094 ¥1,918 ¥1,753 $19

Recognized actuarial (gain) loss 240 107 (28) 0

Net periodic costs ¥2,334 ¥2,025 ¥1,725 $19

The assumed discount rate used in the actuarial computation for the year ended March 31, 2008, 2009 and 2010 was 1�5%�

(3) Retirement Allowances for Directors and Corporate Auditors

The Domestic Group’s liabilities for retirement benefits for directors and corporate auditors as of March 31, 2008, 2009 and 2010 were ¥744

million, ¥624 million and ¥764 million ($8 million), respectively�

10. Equity

Japanese companies are subject to the Companies Act� The signifi-

cant provisions in the Companies Act that affect financial and

accounting matters are summarized below:

(a) Dividends

Under the Companies Act, companies can pay dividends at any time

during the fiscal year in addition to the year-end dividend upon resolu-

tion at the shareholders meeting� For companies that meet certain

criteria such as; (1) having the Board of Directors, (2) having indepen-

dent auditors, (3) having the Board of Corporate Auditors, and (4) the

term of service of the directors is prescribed as one year rather than

two years of normal term by its articles of incorporation, the Board of

Directors may declare dividends (except for dividends in kind) at any

time during the fiscal year if the company has prescribed so in its

articles of incorporation�

Semiannual interim dividends may also be paid once a year upon

resolution by the Board of Directors if the articles of incorporation of

the company so stipulate� The Companies Act provides certain limita-

tions on the amounts available for dividends or the purchase of trea-

sury stock�

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(b) Increases/decreases and transfer of common stock, reserve

and surplus

The Companies Act requires that an amount equal to 10% of divi-

dends must be appropriated as a legal reserve (a component of

retained earnings) or as additional paid-in capital (a component of

capital surplus) depending on the equity account charged upon the

payment of such dividends until the total of aggregate amount of legal

reserve and additional paid-in capital equals 25% of the common

stock� Under the Companies Act, the total amount of additional paid-in

capital and legal reserve may be reversed without limitation� The

Companies Act also provides that common stock, legal reserve,

additional paid-in capital, other capital surplus and retained earnings

can be transferred among the accounts under certain conditions upon

resolution of the shareholders�

(c) Treasury stock

The Companies Act also provides for companies to purchase treasury

stock and dispose of such treasury stock by resolution of the Board of

Directors� The amount of treasury stock purchased cannot exceed the

amount available for distribution to the shareholders which is deter-

mined by specific formula�

The Special Taxation Measures Law in Japan permits companies

to take as tax deductions certain reserves if provided through year-end

book closing� Under Japanese tax laws, these reserves must be

reversed to income in future years� The deferred gain on sales of fixed

assets, net of tax, included in retained earnings provided under the

Special Taxation Measures Law at March 31, 2009 and 2010 was

¥47,969 million and ¥43,446 million ($467 million), respectively�

11. Stock Options

Stock option expense that was accounted for as Selling, general and administrative expenses on the consolidated statement of income for the

years ended March 31, 2008, 2009 and 2010 amounted to ¥186 million, ¥179 million and ¥210 million ($2 million), respectively�

The stock options outstanding as of March 31, 2010 were as follows:

Stock Option Persons GrantedNumber of

Options Granted Date of GrantExercise

Price Service Period Covered Exercise Period

2008 stock option 11 Directors 16 Executive officers

426 shares January 8, 2008 ¥1($0�01)

From June 22, 2007 to June 24, 2008

From January 9, 2008 to January 8, 2038


547 shares October 6, 2008 ¥1($0�01)


From October 7, 2008 to October 6, 2038


1,153 shares October 13, 2009 ¥1($0�01)


From October 14, 2009 to October 13, 2039

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The rights become exercisable from one year later when a holder no longer holds a position as a director, a corporate auditor or an executive officer�

The stock option activity was as follows:

2008 stock option 2009 stock option 2010 stock option

For the year ended March 31, 2009

Non-Vested (Shares) (Shares)

March 31, 2008—Outstanding 106 —

Granted — 547

Canceled — —

Vested (106) (410)

March 31, 2009—Outstanding — 137

Vested

March 31, 2008—Outstanding 320 —

Vested 106 410

Exercised — —

Canceled — —

March 31, 2009—Outstanding 426 410

For the year ended March 31, 2010

Non-Vested (Shares) (Shares) (Shares)

March 31, 2009—Outstanding — 137 —

Granted — — 1,153

Canceled — — —

Vested — (137) (865)

March 31,2010—Outstanding — — 288

Vested

March 31, 2009—Outstanding 426 410 —

Vested — 137 865

Exercised (17) — —

Canceled — — —

March 31, 2010—Outstanding 409 547 865

Exercise price ¥1 ¥1 ¥1

($0�01) ($0�01) ($0.01)

Average stock price at exercise ¥272,959 — —

Fair value price at the grant date ¥581,269 ¥285,904 ¥197,517

($2,123)

The assumptions used to measure fair value of 2010 stock options were as follows:

2010 stock option

Estimate Method Black-Scholes option pricing model

Volatility of stock price*1 34�536%

Estimated remaining outstanding period*2 15 years

Estimated dividend*3 ¥5,400 per share

($58 per share)

Interest rate with risk free*4 1�778%

*1 Calculated based on stock prices for the period on and after listing date (from October 27, 1994 to October 13, 2009)

*2 Due to difficulty in reasonably estimating due to insufficient data accumulation, expected remaining period is estimated on the assumption that stock option would be exercised

at a mid-point of exercising period�

*3 Based on interim dividend and year-end dividend for the year 2009

*4 A yield of 15-year government bond, a period of which corresponds to expected remaining period

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12. Income Taxes

The Domestic Group is subject to Japanese corporate tax, inhabitants

tax and enterprise tax based on income which, in the aggregate,

resulted in a normal effective statutory tax rate of approximately

The tax effects of significant temporary differences and loss carry-forwards which resulted in deferred tax assets and liabilities at March 31,

2009 and 2010 were as follows:


U�S� dollars2009 2010 2010

Deferred tax assets:

Liabilities for employees’ retirement benefits ¥ 55,718 ¥ 42,984 $ 462

Obligations under the Public Official Mutual Assistance Association Law 47,726 44,195 475

Net operating loss carryforwards 42,855 45,685 491

Foreign currency exchange losses 26,558 20,139 216

Allowance for doubtful accounts 16,330 10,489 113

Other 99,558 73,256 787

Less valuation allowance (64,920) (74,102) (796)

Total 223,825 162,646 1,748

Deferred tax liabilities:

Deferred gain on sales of fixed assets for income tax purposes (32,360) (26,306) (283)

Basis differences in assets acquired and liabilities assumed upon acquisition (73,387) (72,287) (777)

Prepaid pension cost (10,227) (8,783) (94)

Other (62,694) (40,214) (432)

Total (178,668) (147,590) (1,586)

Net deferred tax assets (liabilities) ¥ 45,157 ¥ 15,056 $ 162

Net deferred tax assets and liabilities at March 31, 2009 and 2010 were reflected on the accompanying consolidated balance sheets under

the following captions:


U�S� dollars2009 2010 2010

Other current assets ¥ 29,675 ¥ 26,615 $ 286

Deferred tax assets 128,787 85,376 918

Other current liabilities (2,915) (2,357) (25)

Deferred tax liabilities (110,390) (94,578) (1,017)

Net deferred tax assets (liabilities) ¥ 45,157 ¥ 15,056 $ 162

A reconciliation between the normal effective statutory tax rate for the years ended March 31, 2008, 2009 and 2010 and the actual effective

tax rate reflected in the accompanying consolidated statements of income was as follows:

2008 2009 2010

Normal effective statutory tax rate 40�35% 40�35% 40.35%

Tax rate difference applied for foreign consolidated subsidiaries (9�67) (12�60) (6.90)

Non-deductible expenses 2�34 3�77 1.95

Amortization of goodwill 0�48 10�05 8.81

Increase in valuation allowance 7�26 5�42 6.10

Increase (reduction) of FIN48 liability, net (1�51) 3�41 1.14

Increase (reduction) in enacted tax rates, net (5�49) (0�49) 0.02

Gain from the reversal of liability on a fine levied under the UK competition law — — (2.44)

Other—net 0�69 1�58 (1.47)

Actual effective tax rate 34�45% 51�49% 47.56%

40�35% for the years ended March 31, 2008, 2009 and 2010� Foreign

consolidated subsidiaries are subject to income taxes of the countries

in which they operate�

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13. Research and Development Costs and Advertising Costs

Research and development costs charged to expenses as incurred for

the years ended March 31, 2008, 2009 and 2010 were ¥45,163 million,

¥47,296 million and ¥49,645 million ($534 million), respectively�

Advertising costs were charged to expenses as incurred and totaled

¥186,607 million, ¥188,023 million and ¥165,684 million ($1,781 million)

for the years ended March 31, 2008, 2009 and 2010, respectively�

14. Lease Transactions

The Group, as a lessee, leases certain vehicles, vending machines and

other assets�

For the year ended March 31, 2008, the Group recorded an impair-

ment loss of ¥14 million on certain leased property held under finance

leases that do not transfer ownership and an allowance for impairment

loss on leased property, which is included in current liabilities�

Pro forma information of leased property, such as depreciation

expense and other information of finance lease that do not transfer

ownership of the leased property to the lessee on an “as if capitalized”

basis at March 31, 2008 was as follows:

Millions of yen2008

Depreciation expense and other information:

Depreciation expense ¥5,230

Lease payments 5,230

Reversal of allowance for impairment loss on leased property 1

Depreciation expenses, which were not reflected in the accompanying consolidated statements of income, were computed by the straight-

line method�

The minimum rental commitments under noncancellable operating leases at March 31, 2009 and 2010 were as follows:


U�S� dollars2009 2010 2010

Due within one year ¥ 7,497 ¥ 7,362 $ 79

Due after one year 24,020 21,153 227

Total ¥31,517 ¥28,515 $306

15. Other Income (Expenses)

(1) Business Restructuring Costs

Business restructuring costs for the years ended March 31, 2008, 2009 and 2010 consisted of the following:


U�S� dollars2008 2009 2010 2010

Additional Retirement Benefits (see Note 9) ¥(2,285) ¥ (2,691) ¥(7,288) $ (78)

Loss on disposition of property, plant and equipment — (404) (1,395) (15)

Others-net (4,157) (21,269) (1,217) (13)

Total ¥(6,442) ¥(24,364) ¥(9,900) $(106)

Business restructuring costs were incurred in line with the business restructuring measures mainly for the rationalization of the Domestic and

International tobacco businesses� Others-net for the year ended March 31, 2009 included a revision of the business model in the Philippines�

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(2) Loss on Impairment of Long-lived Assets

Asset grouping is based on the smallest identifiable unit that generates

cash flows that are largely independent of the cash flows from other

assets, except for idle property, which is grouped individually�

Loss on Impairment for the years ended March 31, 2008, 2009 and

2010 amounted to ¥3,825 million, ¥16,365 million and ¥6,043 million

($65 million) respectively, which relates principally to land, and certain

buildings and structures of company housing which are planned to be

demolished�

The recoverable value of such assets was calculated mainly by its

value in use, which was set at “nil�”

(3) Other—net

“Other—net” included in “Other Income (Expenses)” for the years ended March 31, 2008, 2009 and 2010 consisted of the following:


U�S� dollars2008 2009 2010 2010

Financial support for domestic tobacco growers ¥ (2,005) ¥ (768) ¥ (522) $ (6)

Foreign exchange loss—net (31,790) (21,802) (20,228) (217)

Equity in earnings of affiliates 1,773 2,370 2,401 26

Periodic costs from the Public Official Mutual Assistance Association liabilities (see Note 9) (2,334) (2,025) (1,725) (19)

Gain from the reversal of liability on a fine levied under the UK competition law — — 16,710 180

Expense for disposal of PCB-containing wastes — — (4,056) (44)

Introduction costs for vending machines with adult identification functions (12,879) (13,469) — —

Costs related to the recall of frozen foods products (5,624) — — —

Others—net (12,490) (11,883) 1,676 18

Total ¥(65,349) ¥(47,577) ¥ (5,744) $ (62)

“Introduction costs for vending machines with adult identification

functions” is the cost to establish the system of vending machines

with functions to prevent minors from purchasing cigarettes from

vending machines and to dispense cigarettes only after scanning and

verifying special IC cards that indicate whether the purchaser is an

adult or not�

“Costs related to the recall of frozen foods products” is mainly the

cost to recall some frozen foods products which were imported and

sold by the Group�

On April 16, 2010, Gallaher Group Ltd� (former Gallaher Group Plc)

and Gallaher Ltd� (together, hereinafter, “Gallaher”), JT’s tobacco

business subsidiaries in the United Kingdom, received the decision

from Office of Fair Trading (“OFT”), the UK competition authority,

concluding that a fine of approximate 50 million sterling pound was

levied to Gallaher for anti-competitive business practices relating to

the retail pricing of tobacco products in the market during the period

prior to JT’s acquisition of Gallaher�

Approximate 164 million sterling pound in total, based on the

company’s assumption about the risk of fine being levied, had been

booked as liabilities in the purchase price allocation related to JT’s

acquisition of Gallaher Group Plc (now Gallaher Group Ltd�) on April 18,

2007 and such liabilities had been included in Other current liabilities

and Other non-current liabilities on the Consolidated Balance Sheets�

As the amount of fine decided by the OFT was lower than the liabili-

ties which had been originally booked, the liability has been reversed

to the amount of fine sentenced in the decision by the OFT, and

consequently, the relevant variance of approximate 114 million sterling

pound has been recognized and disclosed in the Other income on the

Consolidated Statements of Income, which is presented “Gain from

the reversal of liability on a fine levied under the UK competition law”

in “Other—net�”

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16. Financial Instruments and Related Disclosures

(1) Policy for Financial Instruments

JT and major subsidiaries effectively raise necessary funds (for busi-

ness operations) with mainly bank loans and bonds considering their

business environment�

Cash surplus, if any, is invested in low risk and highly liquid financial

instruments�

Derivatives are used, not for speculative nor trading purposes, but

to manage risk exposure arising from business operations�

(2) Nature and Extent of Risks Arising from Financial

Instruments

Receivables such as trade notes and accounts receivable are exposed

to customer’s credit risk� Receivables in foreign currencies are exposed

to the market risk of fluctuation in foreign currency exchange rates�

Short-term investments and investment securities are mainly bonds

for surplus investment and equities of customers and suppliers of the

Group and those are exposed to the issuer’s credit risk and market

price fluctuation risk�

Payables such as trade notes and accounts payable in foreign

currencies are exposed to the market risk of fluctuation in foreign

currency exchange rates�

Bank loans, commercial paper and bonds issued by the Group are

exposed to the liquidity risk that the Group would not be able to prepare

funding to repay such debts due to deterioration of financial market�

Bank loans and bonds in variable interest rates are exposed to

market risks of interest rate fluctuation and those in foreign currencies

are exposed to the market risk of fluctuation in foreign currency

exchange rates�

Derivatives mainly include foreign currency forward contracts to

manage the market risk of fluctuation in foreign currency exchange

rate related to future cashflow in foreign currency and interest rate

swaps to manage the market risk of fluctuation interest rate related to

interest payment for bank loans and bonds� These derivatives are

exposed to counterparty’s credit risk�

For hedging instruments, hedged items, hedging policies and

assessment methods of effectiveness of hedging instruments, please

see Note 17�

(3) Risk Management for Financial Instruments

Credit Risk Management

With respect to receivables, in order to control customer’s credit risk,

JT and its major subsidiaries set credit limits or payment terms to

major customers based on the Credit Management Guideline in prin-

ciple� In addition, receivable balance of each customer is constantly

checked to reduce risk of customer’s default� The Treasury Division of

JT regularly monitors status of occurrence and collections of bad

debts, and reports them to JT’s Executive Committee�

To control credit risk related to surplus investment and derivatives,

based on an internal guide line, JT and its major subsidiaries invest

cash surplus into bonds and other financial instruments with a certain

credit grade and have derivatives with counterparties which has high

credit grade� In addition, the Treasury Division of JT regularly monitors

such transactions and reports them to it’s Executive Committee�

Foreign exchange risk management

In accordance with the internal guidelines, JT and its major subsidiaries,

to reduce the market risk of fluctuation in foreign currency exchange

rate mainly related to future cashflow in foreign currency, establishes

foreign exchange hedging strategy based on the environment and the

forecast of foreign exchange market� The foreign exchange hedging

strategy is reviewed and approved by the Financial Risk Management

Committee of JT and, based on which, the derivative transactions are

originated� The Treasury Division of JT regularly reports such derivative

transactions to the JT’s Executive Committee�

Interest rate risk management

In accordance with the internal guidelines, JT and its major subsidiaries,

to reduce the market risks of interest rate fluctuation related to bank

loans and bonds, establishes interest rate hedging strategy based on

the environment and the forecast of interest market� The interest rate

hedging strategy is reviewed and approved by the Financial Risk

Management Committee of JT and, based on which, derivative transac-

tions are originated� The Treasury Division of JT regularly reports such

derivative transactions to JT’s Executive Committee�

Risk Management of market price fluctuation

With respect to short-term investments and investment securities, JT

and its major subsidiaries regularly monitors prices and issuer’s

financial status� Except for held-to-maturity bonds, responsible divi-

sions revise investment strategy if necessary by taking relationship

with issuers into consideration�

liquidity risk management (liquidity risk comprises the risk that

the Group cannot meet it’s contractual obligations in full on

maturity dates)

In accordance with the internal guidelines, JT and its major subsidiaries

establishes finance plan based on the annual business plan and the

Treasury Division of JT regularly monitors the balance of liquidity-in-

hand and interest-bearing debts and reports them to JT’s Executive

Committee� In addition, JT and its major subsidiaries keep necessary

credit facilities to manage liquidity risk, having commitment lines with

several financial institutions�

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(a) Fair values of financial instrumentsMillions of yen

March 31, 2010 Carrying amount Fair valueUnrecognized

gain/loss

Cash and cash equivalents ¥ 154,369 ¥ 154,369 ¥ —

Trade notes and accounts receivable 296,885

Allowance for doubtful accounts*1 (2,860)

Subtotal 294,025 294,025 —

Short-term investments and Investment securities 68,385 68,386 1

Time deposits 7,856 7,856 —

Held-to-maturity securities 300 301 1

Available-for-sale securities 60,229 60,229 —

Total 516,779 516,780 1

Short-term bank loans 109,263 109,263 —

Commercial paper 119,000 119,000 —

Tobacco excise taxes payable 307,795 307,795 —

Trade notes and accounts payable 149,462 149,462 —

Other payable 73,739 73,739 —

Income taxes payable 54,058 54,058 —

Consumption taxes payable 60,105 60,105 —

Bonds 459,410 474,273 14,863

Long-term bank loans 172,595 173,733 1,138

Total 1,505,427 1,521,428 16,001

Derivatives 2,039 2,039 —


March 31, 2010 Carrying amount Fair valueUnrecognized

gain/loss

Cash and cash equivalents $ 1,659 $ 1,659 $ —

Trade notes and accounts receivable 3,191

Allowance for doubtful accounts*1 (31)

Subtotal 3,160 3,160 —

Short-term investments and Investment securities 735 735 0

Time deposits 84 84

Held-to-maturity securities 3 3 0

Available-for-sale securities 648 648 —

Total 5,554 5,554 0

Short-term bank loans 1,174 1,174 —

Commercial paper 1,279 1,279 —

Tobacco excise taxes payable 3,308 3,308 —

Trade notes and accounts payable 1,606 1,606 —

Other payable 793 793 —

Income taxes payable 581 581 —

Consumption taxes payable 646 646 —

Bonds 4,938 5,098 160

Long-term bank loans 1,855 1,867 12

Total 16,180 16,352 172

Derivatives 22 22 —

*1 Allowance for doubtful accounts are deducted from trade notes and accounts receivable to which they relate�

(4) Fair Values of Financial Instruments

Fair values of financial instruments are based on quoted price in active

markets� If quoted price is not available, other rational valuation

techniques are used instead� The results of valuation may differ

among assumptions because the rational valuation techniques include

variable factors� Also please see Note 17 for the detail of fair value

for derivatives�

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Cash and cash equivalents and receivables

The carrying values of cash and cash equivalents and receivable

approximate fair value because of their short maturities�

Short-term investments and investment securities

The fair value of short-term investments and investment securities are

measured at the quoted market price of the stock exchange for the

equity instruments, and at the quoted price obtained from the financial

institution for certain debt instruments�

The information of the fair value for the short-term investments and

investment securities by classification is included in Note 5�

Payables, short-term bank loans, commercial paper, other

payables, tobacco excise tax payables, Income taxes payable

and Consumption taxes payable

The carrying values of the liabilities approximate fair value because of

their short maturities�

(b) Financial instruments whose fair value cannot be reliably determined

Carrying amount

March 31, 2010 Millions of yenMillions of

U�S� dollars

Investments in equity instruments that do not have a quoted market price in an active market ¥28,400 $305

(5) Maturity analysis for Cash and cash equivalents and Trade notes and accounts receivable with contractual maturitiesMillions of yen Millions of U�S� dollars

March 31, 2010

Due in one year

or lessDue after one year

Due in one year

or lessDue after one year

Cash and cash equivalents ¥154,369 ¥ — $1,659 $ —

Trade notes and accounts receivable 296,885 — 3,191 —

Total 451,254 — 4,850 —

Please see Note 5 for the carrying value of short-term investments and investment securities by contractual maturities�

Please see Note 8 for annual maturities of short-term bank loans, commercial paper and long-term debt�

Bonds

The fair value of bonds that JT and its subsidiaries issued is determined

by the market price, if it is available, or by discounting the cash flows

related to the debt at the rate assumed based on debt’s maturity and

credit risk�

long-term bank loans

The fair value of long-term bank loans is determined by discounting

the cash flows related to the loans at the rate assumed based on

debt’s maturity and credit risk�

Derivatives

The information of the fair value for derivatives is included in Note 17�

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17. Derivatives

JT and certain consolidated subsidiaries use derivative financial instruments (“derivatives”), including derivatives described below, to hedge the

foreign exchange risk associated with certain assets and liabilities in foreign currencies�

Financial instruments

2008 2009 2010

Foreign currency forward contracts Foreign currency forward contracts Foreign currency forward contracts

Currency swaps Currency swaps Currency swaps

Currency options Currency options

JT and certain consolidated subsidiaries also entered into derivatives described below as a manner of managing their interest rate exposure�

Financial instruments

2008 2009 2010

Interest rate swaps Interest rate swaps Interest rate swaps

Interest rate cap options Interest rate cap options Interest rate cap options

Interest rate swaption

Derivatives are subject to market risk and credit risk� Market risk is

the exposure created by potential fluctuations in market conditions,

including interest or foreign exchange rates� Credit risk is the possibility

that a loss may result from a counterparty’s failure to perform accord-

ing to the terms and conditions of the contract�

The Group does not hold or issue derivatives for trading purposes�

The main objective of using derivatives is to hedge the Group exposure

to interest rate risks associated with certain interest payments on

borrowings and bonds and forecasted foreign currency denominated

transactions�

The effectiveness of the hedging instruments is assessed in

accordance with the Risk Management Policy and Practice Manual for

financial instruments of JT and certain consolidated subsidiaries by

comparing the accumulated amount of changes in hedging instru-

ments with hedged items� Hedging instruments and hedged items

were summarized as follows:

2008Hedging instruments Hedged items

Foreign currency forward contracts Forecasted foreign currency transactions

Currency swaps Forecasted foreign currency transactions

Currency options Forecasted foreign currency transactions



Interest rate swaps Borrowings



Interest rate swaps Borrowings

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The fair value of derivative transactions is measured at the quoted price obtained from the financial institution�

The contract or notional amounts of derivatives which are shown in the below table do not represent the amounts exchanged by the parties

and do not measure the Group’s exposure to credit or market risk�

Derivative transactions to which hedge accounting is not applied at March 31, 2008, 2009 and 2010:Millions of yen

2008 2009 2010

Contract/ Notional Amount Fair Value Gain (Loss)

Contract/ Notional Amount Fair Value Gain (Loss)

Contract/ Notional Amount

Contract Amount

due after One Year Fair Value Gain (Loss)

Foreign currency forward contracts: Buying ¥317,417 ¥311,944 ¥(5,473) ¥154,553 ¥151,600 ¥(2,953) ¥296,523 ¥ 2,894 ¥ 654 ¥ 654 Selling 607,925 611,502 (3,577) 183,728 185,286 (1,558) 133,768 2,416 (490) (490)Currency swaps: Buying 7,784 (306) (306) 59,712 (242) (242) 59,712 — (123) (123) Selling 2,193 (151) (151) 3,148 287 287 2,260 2,260 (460) (460)Currency options: Buying 1,935 1 1 — — — — — — — Selling — — — — — — — — — — Total ¥(9,506) ¥(4,466) ¥ (419)Interest rate swaps: Receive fixed pay floating 270,582 (1,218) 2,211 72,284 2,811 2,811 36,606 36,606 2,297 2,297 Receive floating pay fixed — — — 470 (5) (5) — — — —Interest rate cap options: Buying 484,867 718 718 318,042 101 (1,504) 297,744 36,606 161 (1,209) Total ¥ 2,929 ¥ 1,302 ¥ 1,088


Contract/ Notional Amount

Contract Amount

due after One Year Fair Value Gain (Loss)

Foreign currency forward contracts: Buying $3,187 $ 31 $ 7 $ 7 Selling 1,438 26 (5) (5)Currency swaps: Buying 642 — (1) (1) Selling 24 24 (5) (5)Currency options: Buying — — — — Selling — — — —

Total $ (4)

Interest rate swaps: Receive fixed pay floating 393 393 25 25 Receive floating pay fixed — — — —Interest rate cap options: Buying 3,200 393 2 (13) Total $ 12

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Derivative transactions to which hedge accounting is applied at March 31, 2010:

Millions of yen 2010

Hedged itemContract Amount

Contract Amount due

after One Year Fair Value

Interest rate swaps (fixed rate payment, floating rate receipt) Long-term bank loans ¥1,137 437 *1


Hedged itemContract Amount

Contract Amount due

after One Year Fair Value

Interest rate swaps (fixed rate payment, floating rate receipt) Long-term bank loans $12 5 *1

*1 The above interest rate swaps which qualify for hedge accounting and meet specific matching criteria are not remeasured at market value but the differential paid or received

under the swap agreements are recognized and included in interest expense�

In addition, the fair value of such interest rate swaps is included in that of hedged items (see Note 16)�

18. Commitments and Contingencies

On September 29, 2009, the Government of Ontario, Canada filed a

lawsuit against 13 tobacco manufacturers including JT’s Canadian

consolidated subsidiary JTI-Macdonald Corp� (“JTI-Mac”) and 1

industry organization� The detail is as follows�

(1) Parties to the lawsuit

Plaintiff Government of Ontario (Canada)

Defendants 13 tobacco manufacturers including JTI-Mac and 1

industry organization

(2) Content of the complaint

To seek compensation for damages for the cost of health care

benefits, resulting from the treatment of tobacco related disease or

the risk of tobacco related disease, which have been paid or will be

paid by the government of Ontario to relevant insured persons�

(3) Amount of the claim

CAD50�0 billion (approximately ¥4,568 billion)

* The statement of claim in this case contains allegations of joint and several liabili-

ties among all the defendants but does not specify any individual amount or

percentages, within the total amount of the claim, which is claimed from any

individual defendant�

JTI-Mac has valid grounds to defend the action which it will pursue

by all appropriate means with the full support of JT� There are similar

pending lawsuits against JTI-Mac and others field in Canada by the

Government of British Columbia and the Government of New Brunswick

claiming the recovery of health care costs; however, the amounts of

claims have not been specified in these lawsuits�

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19. Net Income Per Share

Reconciliation of the differences between basic and diluted net income per share (“EPS”) for the years ended March 31, 2008, 2009 and 2010

was as follows:

Millions of yen Shares Yen U�S� dollars

Net Income Weighted

average shares EPS EPS

For the year ended March 31, 2010:

Basic EPS

Net income available to common shareholders ¥138,448 9,580,092 ¥14,452 $155

Effect of dilutive securities:

Stock acquisition rights 1,849

Diluted EPS:

Net income for computation ¥138,448 9,581,941 ¥14,449 $155


Basic EPS



Stock acquisition rights 846

Diluted EPS:



Basic EPS



Stock acquisition rights 97

Diluted EPS:


20. Segment Information

The Group’s business is divided into the domestic tobacco, interna-

tional tobacco, pharmaceutical, food and other industry segments�

The domestic tobacco segment consists of manufacturing and sale

of tobacco products, primarily cigarettes, in Japan, including tobacco

products sold at duty free shops in Japan, as well as at markets in

China, Hong Kong and Macau, which are covered by the China Division�

The domestic tobacco segment includes the sales by TS Network Co�,

Ltd�, JT’s subsidiary� TS Network Co�, Ltd� distributes the tobacco

products and conducts wholesale etc� of foreign brand tobacco

products purchased from foreign tobacco manufacturers through

importers� The international tobacco segment consists of

manufacturing and sale of cigarettes in other markets worldwide not

covered by the domestic tobacco segment� The pharmaceutical

segment is concerned with the development, manufacturing and sale

of prescription drugs� The food segment involves manufacturing and

sale of beverages and processed foods� Other segments include the

real estate business and other operations�

With respect to the international tobacco business, the accounting

period of consolidated overseas subsidiaries, represented by JT

International, ends December 31, 2009 and the results for the twelve

months ended December 31, 2009 are consolidated for the year ended

March 31, 2010�

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(1) Industry Segments

Information about the industry segments of the Group for the years ended March 31, 2008, 2009 and 2010 were as follows:

Millions of yen2008

Domestic Tobacco

International Tobacco Pharmaceutical Food Others Total

Elimination/ Corporate Consolidated

Sales to customers ¥3,362,398 ¥2,639,969 ¥ 49,064 ¥336,420 ¥21,876 ¥6,409,727 ¥ — ¥6,409,727

Intersegment sales 48,981 35,341 — 115 22,332 106,769 (106,769) —

Total sales 3,411,379 2,675,310 49,064 336,535 44,208 6,516,496 (106,769) 6,409,727

Operating expenses 3,189,031 2,469,950 58,708 335,868 33,760 6,087,317 (108,144) 5,979,173

Operating income (loss) ¥ 222,348 ¥ 205,360 ¥ (9,644) ¥ 667 ¥10,448 ¥ 429,179 ¥ 1,375 ¥ 430,554

Assets ¥ 847,123 ¥3,804,414 ¥111,422 ¥353,283 ¥90,001 ¥5,206,243 ¥(119,029) ¥5,087,214

Depreciation and amortization other than goodwill 83,290 65,398 3,375 4,891 11,606 168,560 (902) 167,658

Impairment Loss 344 346 — 380 — 1,070 2,755 3,825

Amortization of goodwill 1,088 — — 2,795 — 3,883 — 3,883

Capital expenditures 57,201 48,431 4,257 6,033 14,793 130,715 (1,160) 129,555

Millions of yen2009

Domestic Tobacco





Total sales 3,248,884 3,158,950 56,758 436,099 32,814 6,933,505 (101,198) 6,832,307


Operating income (loss) ¥ 188,259 ¥ 174,772 ¥ 1,020 ¥ (11,451) ¥ 9,695 ¥ 362,295 ¥ 1,511 ¥ 363,806

Assets ¥ 788,673 ¥2,700,099 ¥111,519 ¥332,670 ¥87,432 ¥4,020,393 ¥(140,590) ¥3,879,803

Depreciation and amortization other than goodwill 82,933 68,960 3,870 18,293 3,456 177,512 (612) 176,900

Impairment Loss — — — 3,830 — 3,830 12,535 16,365

Amortization of goodwill 1,089 94,235 — 10,188 — 105,512 — 105,512

Capital expenditures 46,506 59,776 3,426 23,201 1,129 134,038 235 134,273

Millions of yen2010

Domestic Tobacco





Total sales 3,097,758 2,671,764 44,069 394,765 29,949 6,238,305 (103,610) 6,134,695


Operating income (loss) ¥ 203,339 ¥ 109,127 ¥ (13,593) ¥ (13,696) ¥10,557 ¥ 295,734 ¥ 771 ¥ 296,505

Assets ¥ 782,293 ¥2,765,948 ¥114,060 ¥311,190 ¥85,094 ¥4,058,585 ¥(185,989) ¥3,872,596

Depreciation and amortization other than goodwill 53,218 56,090 3,942 16,498 2,782 132,530 240 132,770

Impairment Loss 17 1,030 — 3,136 — 4,183 1,860 6,043

Amortization of goodwill 1,088 84,652 — 11,687 — 97,427 — 97,427

Capital expenditures 45,828 64,552 2,954 23,446 346 137,126 8 137,134

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Domestic Tobacco



Sales to customers $32,705 $28,306 $ 474 $4,242 $209 $65,936 $ — $65,936

Intersegment sales 590 410 — 1 113 1,114 (1,114) —

Total sales 33,295 28,716 474 4,243 322 67,050 (1,114) 65,936

Operating expenses 31,109 27,543 620 4,390 209 63,871 (1,122) 62,749

Operating income (loss) $ 2,186 $ 1,173 $ (146) $ (147) $113 $ 3,179 $ 8 $ 3,187

Assets $ 8,408 $29,729 $1,226 $3,345 $914 $43,622 $(1,999) $41,623

Depreciation and amortization other than goodwill 572 603 42 177 30 1,424 3 1,427

Impairment Loss 0 11 — 34 — 45 20 65

Amortization of goodwill 12 910 — 125 — 1,047 — 1,047

Capital expenditures 493 694 32 252 3 1,474 0 1,474

Operating expenses represent the aggregate amount of the cost of

sales and selling, general and administrative expenses�

Increase of long-term expenses is included in capital expenditures

and amortization expense of the long-term prepaid expenses is

included in depreciation and amortization other than goodwill�

The domestic tobacco segment includes the sales by TS Network

Co�, Ltd� Net sales of such imported tobacco products via TS Network

Co�, Ltd� for the year ended March 31, 2008, 2009 and 2010 were

¥1,193,178 million, ¥1,135,320 million and ¥1,084,321 million ($11,654

million), respectively�

Effective from April 1, 2008, JT applied the “Practical Solution on

Unification of Accounting Policies Applied to Foreign Subsidiaries for

Consolidated Financial Statements” (see Note 3 (b))� As a result of this

change, the operating income for the international tobacco segment

for the year ended March 31, 2009 decreased by ¥94,235 million as

compared to the case where the previous method was adopted�

(2) Geographical Segments

The geographical segments of the Group for the years ended March 31, 2008, 2009 and 2010 were summarized as follows:

Millions of yen2008

JapanWestern

Europe Others TotalElimination/

Corporate Consolidated

Sales to customers ¥3,711,763 ¥1,678,770 ¥1,019,194 ¥6,409,727 ¥ — ¥6,409,727

Intersegment sales 52,308 181,062 29,212 262,582 (262,582) —

Total sales 3,764,071 1,859,832 1,048,406 6,672,309 (262,582) 6,409,727

Operating expenses 3,541,731 1,803,896 897,008 6,242,635 (263,462) 5,979,173

Operating income ¥ 222,340 ¥ 55,936 ¥ 151,398 ¥ 429,674 ¥ 880 ¥ 430,554

Assets ¥1,160,749 ¥3,436,185 ¥ 420,170 ¥5,017,104 ¥ 70,110 ¥5,087,214

Millions of yen2009

JapanWestern



Sales to customers ¥3,672,004 ¥2,038,028 ¥1,122,275 ¥6,832,307 ¥ — ¥6,832,307


Total sales 3,725,338 2,261,900 1,161,461 7,148,699 (316,392) 6,832,307


Operating income (loss) ¥ 186,439 ¥ (24,188) ¥ 199,633 ¥ 361,884 ¥ 1,922 ¥ 363,806

Assets ¥1,083,962 ¥2,378,679 ¥ 351,080 ¥3,813,721 ¥ 66,082 ¥3,879,803

Amortization of goodwill 11,277 94,235 — 105,512 — 105,512

114

Millions of yen2010

JapanWestern



Sales to customers ¥3,482,548 ¥1,677,755 ¥ 974,392 ¥6,134,695 ¥ — ¥6,134,695


Total sales 3,542,437 1,874,356 1,008,718 6,425,511 (290,816) 6,134,695


Operating income (loss) ¥ 184,553 ¥ (40,289) ¥ 150,496 ¥ 294,760 ¥ 1,745 ¥ 296,505

Assets ¥1,031,911 ¥2,358,103 ¥ 433,866 ¥3,823,880 ¥ 48,716 ¥3,872,596

Amortization of goodwill 12,775 84,652 — 97,427 — 97,427


JapanWestern



Sales to customers $37,430 $18,033 $10,473 $65,936 $ — $65,936

Intersegment sales 644 2,113 369 3,126 (3,126) —

Total sales 38,074 20,146 10,842 69,062 (3,126) 65,936

Operating expenses 36,091 20,579 9,224 65,894 (3,145) 62,749

Operating income (loss) $ 1,983 $ (433) $ 1,618 $ 3,168 $ 19 $ 3,187

Assets $11,091 $25,345 $ 4,663 $41,099 $ 524 $41,623

Amortization of goodwill 137 910 — 1,047 — 1,047

“Western Europe” includes Switzerland, United Kingdom and

Germany while “Others” includes Canada, Russia and Malaysia�

Operating expenses represent the aggregate amount of the cost

of sales and selling, general and administrative expenses�

Effective from April 1, 2008, JT applied the “Practical Solution on

Unification of Accounting Policies Applied to Foreign Subsidiaries for

Consolidated Financial Statements” (see Note 3 (b))� As a result of this

change, the operating income for the Western Europe segment for

the year ended March 31, 2009 decreased by ¥94,235 million as

compared to the case where the previous method was adopted�

(3) Sales to Foreign Customers

Sales to Foreign Customers, which consist of sales of JT and its

consolidated subsidiaries in countries or regions outside Japan, for the

years ended March 31, 2008, 2009 and 2010 were as follows:


U�S� dollars2008 2009 2010 2010

Sales to foreign customers

Western Europe ¥1,634,921 ¥2,002,739 ¥1,646,648 $17,698

Others 1,070,540 1,177,113 1,008,326 10,838

Total ¥2,705,461 ¥3,179,852 ¥2,654,974 $28,536

Consolidated sales ¥6,409,727 ¥6,832,307 ¥6,134,695 $65,936

Percentage of2008 2009 2010

Sales to foreign customers

Western Europe 25�5 29�3 26.8

Others 16�7 17�2 16.5

Total 42�2 46�5 43.3

“Western Europe” includes Switzerland, United Kingdom and Germany while “Others” includes Canada, Russia and Malaysia�

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21. Subsequent Events

On April 13, 2010, JTI-Macdonald Corp� (“JTI-Mac”), JT’s Canadian

consolidated subsidiary, entered into a comprehensive agreement with

the Government of Canada and all provinces and territories (the

“Canadian Governments”) to establish a cooperation mechanism in

combating cigarette smuggling and contraband� In addition, JTI-Mac

pleaded to a regulatory offense for its involvement in the illicit trade

of cigarettes prior to JT’s acquisition of non-US tobacco operations of

RJR Nabisco Inc� and paid CAD150 million (approximately ¥13�8

billion)� As a result, all of the contraband-related claims against JTI-Mac

and others associated with it by the Canadian Governments have been

withdrawn and the Notice of Assessment from the Quebec Ministry

of Revenue has been withdrawn�

At the same time, the RJR Group entered into another agreement

with the Canadian Governments and made payments totaling CAD400

million (approximately ¥37�0 billion), resulting in total payments by the

JT Group and RJR Group to the Canadian Governments of CAD550

million (approximately ¥50�9 billion)� As a result of indemnification

rights under the purchase agreement in 1999 and subsequent negotia-

tions with the RJR Group, the JT Group and the RJR Group entered

into an agreement whereby the JT Group would incur CAD150 million

among the aforementioned CAD550 million total�

116

Independent Auditors’ Report

To the Board of Directors of

Japan Tobacco Inc.:

We have audited the accompanying consolidated balance sheets of Japan Tobacco Inc. and consolidated subsidiaries (the “Company”) as of

March 31, 2010 and 2009, and the related consolidated statements of income, changes in equity, and cash flows for each of the three years

in the period ended March 31, 2010, all expressed in Japanese yen. These consolidated financial statements are the responsibility of the

Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits 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 financial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the

accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial

position of the Company as of March 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the

three years in the period ended March 31, 2010, in conformity with accounting principles generally accepted in Japan.

Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation

has been made in conformity with the basis stated in Note 2. Such U.S. dollar amounts are presented solely for the convenience of readers

outside Japan.

June 24, 2010

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Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Japanese Domestic Tobacco Business . . . . . . . . . . . . . . . . . . . . . 127

International Tobacco Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

Pharmaceutical Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

Food Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Number of Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

Note: Financial data disclosed herein are basically rounded down.

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Net Sales Including Excise Taxes

Net Sales Excluding Excise Taxes

(Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m Total 4,501.7 4,544.1 4,492.2 4,625.1 4,664.5 4,637.6 4,769.3 6,409.7 6,832.3 6,134.6

Tobacco Business 4,140.2 4,178.0 4,134.4 4,236.9

Japanese Domestic 3,491.4 3,405.2 3,416.2 3,362.3 3,200.4 3,042.8

International 792.7 881.1 999.6 2,639.9 3,118.3 2,633.6

Pharmaceutical Business 66.4 61.8 53.9 51.2 57.6 49.2 45.4 49.0 56.7 44.0

Food Business 210.3 221.1 232.4 250.1 265.3 278.3 286.5 336.4 435.9 394.6

Other Business 84.6 83.0 71.4 86.8 57.2 23.5 21.4 21.8 20.7 19.5


m Total 1,996.6 2,041.9 2,007.5 2,019.8 2,013.9 2,008.7 2,051.0 2,587.3 2,827.1 2,514.1


Japanese Domestic 1,203.8 1,173.2 1,147.2 1,122.2 1,070.3 1,016.7

International 429.7 484.3 550.3 1,057.7 1,243.3 1,039.1


Food Business 210.3 221.1 232.4 250.1 265.3 278.3 286.5 336.4 435.9 394.6

Other Business 84.6 83.0 71.4 86.8 57.2 23.5 21.4 21.8 20.7 19.5

Adjusted Net Sales Excluding Excise Taxes(*)

Total 2,243.1 1,980.9

Tobacco Business

Japanese Domestic 648.8 615.9

International 1,080.8 906.7* Excluding the imported tobacco, domestic duty free, the China Division and other miscellaneous items in the Japanese domestic tobacco business, in addition to the distribution,

private label, contract manufacturing and other peripheral businesses in the international tobacco business

SG&A Expenses


m SG&A 790.5 781.5 733.9 707.1 677.4 596.6 592.6 750.2 914.1 815.5

Personnel (*) 220.6 222.7 209.7 205.3 183.9 150.8 158.5 206.0 231.5 216.0

Advertising and General Publicity 48.3 40.2 35.7 35.4 27.4 23.9 23.4 22.9 25.6 21.9

Sales Promotion 162.5 155.2 142.0 141.7 140.1 142.1 128.0 163.6 162.3 143.7

R&D 47.0 52.6 44.5 42.1 40.4 37.5 41.2 45.1 47.2 49.6

Depreciation 58.9 59.5 56.7 56.7 54.2 53.4 57.4 80.3 113.0 72.5

* Personnel expense is the sum of compensation, salaries, allowances, provision for retirement benefits, statutory benefits, employee bonuses and accrual of employee bonuses

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m R&D 47.0 52.7 44.5 42.2 40.5 37.5 41.2 45.1 47.2 49.6

Tobacco Business 13.7 14.5 14.8 16.6

Japanese Domestic 16.1 15.1 15.1 15.8 17.7 18.9

International 2.1 0.9 1.3 3.3 3.8 6.1


Food Business 0.7 0.7 1.2 1.0 1.0 0.8 0.7 0.7 1.1 0.7

Other Business 1.1 0.7 0.6 0.1 0.0 — — — — —

Note: R&D expense in FY2000–2005 includes expenses posted as manufacturing cost

EBITDA


m EBITDA 312.0 334.1 337.2 373.4 400.1 433.3 464.6 602.0 646.2 526.7



International 65.4 94.0 112.6 270.7 337.9 249.8

Pharmaceutical Business (3.1) (8.5) (5.1) (4.4) 5.4 (1.8) (8.1) (6.2) 4.8 (9.6)

Food Business (2.6) 2.2 0.5 3.3 7.9 11.8 12.0 8.3 17.0 14.4

Other Business 20.0 19.6 19.6 30.6 26.8 22.1 21.5 22.0 13.1 13.3

Note: EBITDA = operating income + depreciation and amortization

Operating Income


m Operating Income 139.9 163.8 188.9 234.0 273.3 306.9 331.9 430.5 363.8 296.5



International 44.4 71.0 81.0 205.3 174.7 109.1

Pharmaceutical Business (12.8) (18.9) (13.8) (12.8) 1.8 (5.0) (11.2) (9.6) 1.0 (13.5)

Food Business (17.3) (11.8) (13.1) (4.8) 1.9 6.3 6.7 0.6 (11.4) (13.6)

Other Business 3.4 1.7 0.9 11.9 10.4 8.6 9.3 10.4 9.6 10.5


Financial Data

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(Billions of yen)Non-Operating Income and Expenses


m Non-Operating Income and Expenses (7.8) (7.1) (15.7) (20.4) (3.1) (9.1) (19.9) (67.8) (56.2) (41.1)

Non-Operating Income 15.1 11.2 9.3 10.3 15.9 12.6 16.0 21.5 30.3 15.6

Financial Income (*1) 6.5 4.7 3.7 3.2 3.3 5.9 12.1 13.4 12.2 6.9

Non-Operating Expenses 23.0 18.3 25.0 30.7 19.0 21.7 35.9 89.4 86.5 56.7

Financial Expense (*2) 12.4 10.2 8.7 8.1 5.1 5.7 6.9 42.0 51.3 26.3

*1 Financial income is the sum of interest income, interest on marketable securities, interest on investment securities, dividend income, profit on redemption of securities, etc.*2 Financial expense is the sum of interest expense, bond interest paid, loss of redemption of securities, etc.

Recurring Profit


m Recurring Profit 132.0 156.6 173.2 213.5 270.2 297.8 312.0 362.6 307.5 255.3

Extraordinary Profit and Loss


m Extraordinary Profit and Loss (12.3) (58.4) (30.7) (221.2) (168.9) 3.1 25.1 9.9 (45.4) 20.6 Extraordinary Profit 20.7 30.0 18.3 29.3 79.2 65.4 50.8 68.9 48.3 58.5 Gain on Sale of Property, Plant and Equipment 16.3 28.2 15.4 17.2 73.3 60.0 47.5 66.7 46.4 32.3

Extraordinary Loss 33.0 88.5 49.0 250.5 248.2 62.3 25.7 59.0 93.8 37.8 Loss on Sale of Property, Plant and Equipment 1.6 2.2 2.6 4.8 2.2 24.8 3.1 3.2 2.1 4.2

Loss on Disposal of Property, Plant and Equipment 13.3 9.3 9.8 10.8 13.6 12.2 10.4 6.3 11.5 6.3

Business Restructuring Costs — 13.4 11.4 40.8 224.8 8.0 — 6.4 24.3 9.9 Impairment Loss — — — — 0.1 11.4 2.7 3.8 16.3 6.0

Introduction Costs for Vending Machines with Adult Identification Functions — — — — — 0.1 5.7 12.8 13.4 —

Write-down of Investment Securities — — — — — — — 11.1 7.0 1.4

Note: Extraordinary loss in FY2004 includes ¥185 billion of one-time loss on recognition of obligations under the Public Official Mutual Assistance Association Law

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Net Income (Loss)


m Net Income (Loss) 43.6 36.8 75.3 (7.6) 62.5 201.5 210.7 238.7 123.4 138.4

Earnings per Share (EPS)


m EPS 21,843 18,425 37,527 (3,966) 32,089 105,084 22,001 24,916 12,880 14,451

Diluted EPS 12,879 14,448


Return on Equity (ROE)

(Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010mc ROE 2.9 2.4 4.7 (0.5) 4.2 12.4 11.3 11.8 6.8 8.6


Financial Data

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(%)Return on Assets (ROA)

(Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010mc ROA 4.7 5.4 6.4 7.9 9.2 10.4 10.7 10.5 8.4 7.8

Note: ROA = (Operating Income + Financial Income) / Total Assets [average of beginning and ending figure for the period]

Free Cash Flow (FCF)


m FCF 307.3 31.4 170.3 269.1 269.4 145.5 223.0 (1,493.7) 240.1 250.7

Note: FCF = (cash flow from operating activities + cash flow from investing activities) excluding the following items: From “cash flow from operating activities”: Dividends received / interest received and its tax effect / interest paid and its tax effect From “cash flow from investing activities”: Cash outflow from purchase of marketable securities / proceeds from sales of marketable securities / cash outflow from purchases

of investment securities / proceeds from sales of investment securities / others (but not business-related investment securities, which are included in the investment securities item)

Capital Expenditure (CAPEX)


m Capital Expenditure 114.8 96.5 109.1 90.8 85.1 98.9 102.1 129.5 134.2 137.1



International 18.7 24.9 32.0 48.4 59.7 64.5


Food Business 4.2 6.9 7.2 9.1 7.3 4.5 4.8 6.0 23.2 23.4

Other Business 29.2 18.1 38.8 18.0 10.6 19.3 8.0 14.7 1.1 0.3

Note: CAPEX = Tangible Assets + Intangible Assets + Long-Term Prepaid Expenses

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Depreciation & Amortization


m Depreciation & Amortization 172.0 170.3 148.3 139.4 126.7 126.4 132.6 171.5 282.4 230.1



International 21.0 23.0 31.5 65.3 163.1 140.7


Food Business 14.7 14.1 13.7 8.1 5.9 5.5 5.3 7.6 28.4 28.1

Other Business 16.6 17.8 18.7 18.6 16.3 13.4 12.2 11.6 3.4 2.7

Note: Depreciation & Amortization = Depreciation of Tangible Fixed Assets + Amortization of Intangible Fixed Assets + Amortization of Long-Term Prepaid Expenses + Amortization of Goodwill

Total Assets

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m Total Assets 3,188.2 3,063.0 2,957.6 3,029.0 2,982.0 3,037.3 3,364.6 5,087.2 3,879.8 3,872.5


Japanese Domestic 1,298.2 1,131.7 1,180.3 847.1 788.6 782.2

International 838.5 994.8 1,275.0 3,804.4 2,700.0 2,765.9


Food Business 133.8 133.2 135.3 141.4 141.6 141.4 158.8 353.2 332.6 311.1

Other Business 198.1 190.1 236.5 250.2 197.0 194.4 249.6 90.0 87.4 85.0

Total Equity and Equity Ratio

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m Total Equity 1,513.8 1,613.1 1,622.6 1,507.9 1,498.2 1,762.5 2,024.6 2,154.6 1,624.2 1,723.2mc Equity Ratio 47.5 52.7 54.9 49.8 50.2 58.0 58.3 40.8 40.0 42.6

Note: Total Equity in FY1999-2006 excludes Minority Interests


Financial Data

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Book Value per Share (BPS)

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m BPS 756,922 806,552 811,204 771,516 781,813 919,780 204,617 216,707 162,087 172,139

Notes: 1. Total Equity in FY2000-2006 excludes Minority Interests 2. A 5 for 1 stock split went into effect on April 1, 2006

Liquidity and Interest-Bearing Debt

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m Liquidity (*1) 645.7 550.7 623.5 798.4 863.6 979.6 1,185.6 218.8 169.8 167.3m Interest-Bearing Debt (*2)(*3) 606.0 511.7 424.4 381.2 230.7 216.6 219.2 1,389.2 996.0 874.3

*1 Liquidity = Cash and deposits + Marketable securities + Commercial Paper received under repurchase agreement*2 Interest-Bearing Debt = Short-term Debt (includes current portion of Bonds and current portion of Long-term Debt) + Bonds + Long-term Debt*3 Interest-Bearing Debt includes lease obligation from FY2009

Debt / Equity Ratio

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010mc Debt / Equity Ratio 0.40 0.32 0.26 0.25 0.15 0.12 0.11 0.67 0.64 0.53

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(Times)Interest Coverage Ratio

(Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010mc Interest Coverage Ratio 11.8 16.5 22.1 29.3 54.2 54.9 49.9 10.6 7.3 11.5

Note: Interest Coverage Ratio = (Operating Income + Financial Income) / Financial Expense

Annual Dividends per Share


m Annual Dividends per Share 8,000 8,000 10,000 10,000 13,000 16,000 4,000 4,800 5,400 5,800

(Retroactively Adjusted) 1,600 1,600 2,000 2,000 2,600 3,200


Dividend Payout Ratio on a Consolidated Basis

(Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010mc Dividend Payout Ratio 36.6 43.4 26.6 (252.1) 40.5 15.2 18.2 19.3 41.9 40.1mc Goodwill amortization adjusted 18.0 19.0 22.6 23.6

Note: Payout Ratio before goodwill amortization


Financial Data

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Total Domestic Market


m Total Domestic Market 324.5 319.3 312.6 299.4 292.6 285.2 270.0 258.5 245.8 233.8

Source: Tobacco Institute of Japan

JT Sales Volume and JT Share


m JT Sales Volume 243.1 237.2 229.0 218.3 213.2 189.4 174.9 167.7 159.9 151.8mc JT Share 74.9 74.3 73.3 72.9 72.9 66.4 64.8 64.9 65.1 64.9

Sales Volume of China Division and Domestic Duty-Free

(Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010

m Sales Volume 5.8 6.0 5.4 5.1 3.2 3.4 3.5 3.6 3.6

Note: China Division covers China, Hong Kong, and Macau markets



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Top 20 Selling Products in Japan by Market Share (FY ended March 31, 2010)


m Mild Seven 34.0 33.2 32.5 32.6 32.9 32.2 31.6 32.0 32.3 32.1m Seven Stars 7.7 8.2 8.3 8.4 8.3 8.7 9.0 8.9 9.3 9.6m Caster 8.0 7.8 7.5 7.1 6.6 6.3 6.0 5.9 5.9 5.7m Cabin 5.0 4.7 4.4 4.1 4.2 4.0 4.0 4.0 3.8 3.9m Peace 3.1 3.0 3.0 3.0 2.9 2.9 2.8 2.8 2.8 2.7m Pianissimo (*) — — — — — 2.8 3.1 3.2 3.3 3.4m Hope 2.1 2.1 2.0 2.0 2.1 2.1 2.0 2.0 2.0 2.0m Frontier 2.9 2.8 2.6 2.2 1.9 1.7 1.5 1.4 1.2 1.1m Other Brands 12.1 12.5 13.0 13.5 14.0 5.7 4.8 4.7 4.5 4.4

Retrospective of market share figures for “icene” and “Lucia,” which were integrated into Pianissimo family on January 2010

Product Brand Owner Share (%)

1 SEVEN STARS JT 5.0 2 MILD SEVEN SUPER LIGHTS JT 4.63 MILD SEVEN LIGHTS JT 3.84 MILD SEVEN ONE 100’s BOX JT 3.4 5 MILD SEVEN JT 3.26 MILD SEVEN EXTRA LIGHTS JT 2.77 MARLBORO LIGHTS MENTHOL BOX PMJ 2.68 CASTER MILD JT 2.39 SEVEN STARS BOX JT 1.910 MILD SEVEN ONE JT 1.711 CABIN MILD BOX JT 1.612 KENT ULTRA1 100’s BOX BATJ 1.513 CASTER ONE 100’s BOX JT 1.514 PIANISSIMO ONE JT 1.515 MILD SEVEN ONE BOX JT 1.416 MILD SEVEN SUPER LIGHTS 100’s BOX JT 1.417 MARLBORO KS BOX PMJ 1.318 MILD SEVEN EXTRA LIGHTS BOX JT 1.319 HOPE (10) JT 1.320 MILD SEVEN LIGHTS BOX JT 1.2




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Market Share by Tar Level (Market Share in Top 100 Sales Products)


m 1 mg 12.9 14.0 14.6 16.1 18.4 19.9 21.2 22.7 24.0 24.3m 2–3 mg 8.1 7.9 7.5 6.6 6.7 7.4 7.0 8.2 8.5 8.6m 4–6 mg 24.8 24.0 23.8 23.5 23.1 23.2 23.4 23.0 22.4 21.0m 7–13 mg 40.8 40.8 40.9 40.3 39.8 37.7 36.3 34.1 32.9 33.6m 14 mg or Higher 13.4 13.4 13.3 13.4 12.1 11.9 12.1 12.1 12.2 12.5


Market Share by Tar Level (JT Products)


m 1 mg 5.8 6.0 6.1 7.2 8.5 11.7 12.9 14.0 14.7 15.1m 2–3 mg 5.8 5.8 5.9 5.4 5.9 6.6 6.7 6.7 6.9 7.0m 4–6 mg 18.6 17.9 17.3 17.0 16.5 14.5 13.9 14.2 14.2 13.6m 7–13 mg 32.2 32.0 31.6 30.9 30.0 22.0 19.7 18.5 17.8 17.7m 14 mg or Higher 12.6 12.5 12.5 12.4 12.0 11.6 11.6 11.5 11.5 11.5

Menthol Products Market Share

(Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010mc Menthol Products (*) 10.0 11.3 12.7 14.0 16.4 17.2 17.4 19.3 19.8 19.8mc Menthol JT Products 5.5 6.4 6.8 7.6 8.9 7.0 6.8 7.4 7.6 8.0

* Market Share in top 100 sales productsSource: Tobacco Institute of Japan

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Products Priced at ¥320 or more per pack and D-spec Products Market Share

(Years ended March 31) 2003 2004 2005 2006 2007 2008 2009 2010mc JT Products Priced at ¥320 or

more per pack (*1) 10.2 11.1 11.8 6.3 5.5 5.4 5.2 5.1mc D-spec Products (*2) 0.01 0.38 0.93 1.72 4.04 4.59 4.96 5.21

*1 ~ Jun. 03: ¥280 or more, Jul. 03 ~ Jun. 06: ¥300 or more*2 D-spec products, reduced odor segment products (known as “Less Smoke Smell” products abroad), incorporate the company’s odorreducing technology in response to customer

demands for a reduction in the unpleasant smell of smoke

JT Net Sales Excluding Excise Taxes per Thousand Cigarettes

(Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010mc JT Net Sales Excluding Excise Taxes Per

Thousand Cigarettes 3,840 3,850 3,856 3,908 3,941 3,864 3,990 4,057 4,057 4,056

Note: JT Net sales excluding excise taxes thousand cigarettes = (retail price sales – retailer margins – consumption tax – national tobacco excise tax – local tobacco excise tax – national tobacco special excise tax) / sales volume X 1,000

Composition of JT Products by Price Range


m Products Priced at ¥300 or more per pack (*1) 37.7 38.2 38.4 42.6 44.8 40.2 71.7 87.0 87.2 87.4

Products Priced at ¥320 or more per pack 12.1 14.7 16.1 9.5 8.5 8.3 8.0 7.9

Products Priced at ¥310 per pack 3.8 1.0 0.0 0.0 0.0 0.0 0.0 0.0

Products Priced at ¥300 per pack 22.5 26.9 28.7 30.7 63.2 78.7 79.2 79.5m Products Priced at ¥290 or less per pack (*2) 62.3 61.8 61.6 57.4 55.1 59.8 28.3 13.1 12.8 12.6

*1 ~ Nov. 98: ¥240 or more, Dec. 98 ~ Jun. 03: ¥260 or more, Jul. 03 ~ Jun. 06: ¥280 or more*2 ~ Nov. 98: ¥230 or less, Dec. 98 ~ Jun. 03: ¥250 or less, Jul. 03 ~ Jun. 06: ¥270 or less



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New Product Launches and Sales Area Expansion

Number of New Products Launches

Number of JT Cigarette Products

Year ended March 31, 2010 (7 products) (D-spec: one product, Menthol: four products, Tar 1mg: two products, Products at ¥320 (include ¥160 or more per pack) or more per pack: two products)

Date Product D-spec MentholTar

(mg)Nicotine

(mg)Price Sales Region

Jun-09 MILD SEVEN 100’s BOX 10 0.8 300 Nationwide

Jun-09 MILD SEVEN LIGHTS 100’s BOX 8 0.6 300 Nationwide

Aug-09 SEVEN STARS BLACK CHARCOAL MENTHOL BOX 7 0.6 300 Nationwide

Oct-09 WINSTON LIHGTS BOX 6 0.5 300 Nationwide

Dec-09 PIANISSIMO ICENE MENTHOL ONE 1 0.1 320 Nationwide

Feb-10 MILD SEVEN IMPACT ONE MENTHOL BOX 1 0.1 300 Nationwide

Mar-10 CAMEL MENTHOL MINI 8 0.7 160 Tokyo


m Number of New Products Launches 4 7 4 14 18 14 9 3 6 7

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m Number of JT Cigarette Products 99 102 98 93 95 117 106 94 96 98

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50(%)

(%)Smoking Rate (by gender)

Smoking Rate (by age)

(At the time of survey) 2000 2001 2002 2003 2004 2005 2006* 2007 2008 2009mc All Adults 32.9 32.7 30.9 30.3 29.4 29.2 26.3 26.0 25.7 24.9mc Male 53.5 52.0 49.1 48.3 46.9 45.8 41.3 40.2 39.5 38.9mc Female 13.7 14.7 14.0 13.6 13.2 13.8 12.4 12.7 12.9 11.9

Source: JT “Japan Smoking Rate Survey”* The survey method, along with the sample number, was modified from 2006, resulting in a lack of comparability with results prior to 2006

(Survey in 2009) Total 20s 30s 40s 50s over-60s

m Male 38.9 40.3 46.9 44.9 44.5 27.8m Female 11.9 15.9 16.8 14.9 14.8 6.2

Source: JT “Japan Smoking Rate Survey”



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Breakdown of Price Levels per Cigarettes Package

All tobacco products sold in Japan are subject to the national tobacco excise tax, the national tobacco special excise tax, and local tobacco excise tax. The national tobacco excise tax is set at ¥3,552 per thou-sand cigarettes, the national tobacco special excise tax at ¥820 per thousand cigarettes, and the local tobacco excise tax is set at ¥4,372 per thousand cigarettes. In addition, under the Consumption Tax Law,

Taxationa 5% consumption tax is imposed as with other goods and services. All tobacco excise taxes and consumption tax are imposed not only for tobacco products manufactured in Japan but also for imported tobacco products. From April 1987, no customs duties apply to imported tobacco products.

Changes of Tobacco Excise Taxes

Item

Tobacco Consumption Tax Tobacco excise Tax

Apr-1985 May-1986 Apr-1989 Apr-1997 Dec-1998 May-1999 Jul-2003 Jul-2006

Ad valorem(%)

Specific(¥/1,000 units)

Ad valorem(*)

(%)Specific

(¥/1,000 units)Specific






(¥/1,000 units)

National Tobacco Excise Tax 23.0 582 23.0 1,032 3,126 3,126 3,126 2,716 3,126 3,552

National Tobacco Special Excise Tax — — — — — — 820 820 820 820

Local Tobacco Excise Tax 22.4 550 22.4 1,000 3,126 3,126 3,126 3,536 3,946 4,372

Total Excise Tax 45.4 1,132 45.4 2,032 6,252 6,252 7,072 7,072 7,892 8,744

Consumption Tax — — — — 3.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Tobacco Regulation Changes

• Tobacco Consumption Tax was introduced

* ¥1,000 was deducted from tax base for Ad valorem

• Tobacco Consumption Tax was increased

• Consumption Tax was introduced

• Tobacco Consumption Tax was renamed Tobacco Excise Tax

• Consumption Tax was increased

• National Tobacco Special Excise Tax was introduced

• Review of budget allocations in line with a revision of laws

• Tobacco Excise Tax was increased

• Tobacco Excise Tax was increased

(Reference)

Retail Price of Mild Seven per pack ¥200 ¥220 ¥220 ¥230 ¥250 ¥250 ¥270 ¥300

Tax Incidence of Mild Seven per pack (incl. Consumption Tax) 56.7% 59.7% 59.7% 59.1% 61.3% 61.3% 63.2% 63.1%

list price ¥290 per pack list price ¥300 per pack list price ¥320 per pack

Consumption Tax ¥ 13.81 4.76% ¥ 14.29 4.76% ¥ 15.24 4.76%

Retailer’s Margin ¥ 29.00 10.00% ¥ 30.00 10.00% ¥ 32.00 10.00%

Total Tobacco Excise Tax ¥174.88 60.30% ¥174.88 58.29% ¥174.88 54.65%

National Tobacco Excise Tax ¥ 71.04 24.50% ¥ 71.04 23.68% ¥ 71.04 22.20%

Local Tobacco Excise Tax ¥ 87.44 30.15% ¥ 87.44 29.15% ¥ 87.44 27.33%

National Tobacco Special Excise Tax ¥ 16.40 5.66% ¥ 16.40 5.47% ¥ 16.40 5.13%

JT’s Proceeds ¥ 72.31 24.93% ¥ 80.83 26.94% ¥ 97.88 30.59%

Net sales excluding excise taxes

Net sales including excise taxes

Retail pricesales

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Tobacco Manufacturing System

Number of Domestic Cigarette Manufacturing Factories

Tobacco Manufacturing-related Factory LocationAs of March 31, 2010

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m Domestic Cigarette Manufacturing Factories 25 25 25 22 18 10 10 10 10 9

Domestic leaf tobacco

Customer

Threshing

Retailer

Drying

Packaging

Packing into a case

Rolling

Storing

Flavoring

International leaf tobacco

Cutting Blending

Leaf processing factory

Decompose leaves into mesophyll and vein.

Dry leaves to adjust moisture content appropriate for storing and ripening.

Pack cigarettes into parcels or cartons and cardboard boxes.

Pack dried-leaves in an appropriate portion for storing and transporting.

Roll cigarettes.

Ripen leaves for a certain period.

Add aromatic essences called top dressing.

Cut leaves into smaller pieces.

Blend several leaves.

Cigarette manufacturing factory

Cigarette manufacturing factories: 9 Other tobacco related factories: 4

Morioka factory (closed on March 31, 2010)

Koriyama factory

Kita-Kanto factoryTomobe factory

Odawara factory (to be closed on March 31, 2011)

Kansai factory

Hiratsuka factory

Hiratsuka factory

Hamamatsu factory

Yonago factory (closed on March 31, 2010)

Okayama printing factory

Hofu factory

Kyushu factory



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Number of Tobacco Retailers

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m Tobacco Retailers 306 307 307 305 304 304 302 298 293 289

Source: Ministry of Finance

Tobacco Sales System

JT

Customers

The Minister of Finance

Foreign Tobacco Companies

Registered Importers

approval

imports

licensing requirement for selling

approval

requirement for the approval of retail priceapprovalregistration notification

requirement for the approval of retail price

registration requirement for registered importers

by way of wholesalersor direct sales

registration for the wholesale

sales

direct sales

Number of Tobacco Vending Machines

(As of December 31) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

m Total Tobacco Vending Machines 625 629 629 626 622 616 565 520 424 405

Source: Japan Vending Machine Manufacturers Association

WholesalersRetailers

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Number of Tobacco Vending Machines (JT Tobacco Vending Machines)

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m JT Tobacco Vending Machines 220 251 254 237 226 243 228 207 196 185

Number of Domestic Tobacco Growers and Area under Domestic Leaf Tobacco Cultivation


m Number of Domestic Tobacco Growers 23 21 20 20 18 14 14 13 13 12mc Area under Domestic Leaf Tobacco

Cultivation 24 23 23 22 21 19 18 17 16 15

Volume of Domestic and International Leaf Tobacco Purchase


m Domestic 60 60 58 50 52 46 37 37 38 36

m International 94 100 85 90 85 39 60 68 73 71



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Value of Domestic Leaf Tobacco Purchase and Price per 1 kg

Leaf Tobacco Reappraisal Profit / Loss


m Amount 117.1 114.7 109.2 93.1 98.0 84.3 68.5 69.2 69.4 68.0mc Price per 1 kg 1,926 1,895 1,878 1,839 1,862 1,801 1,818 1,833 1,803 1,859


m Leaf Tobacco Reappraisal 4.1 1.9 0.7 6.6 (9.8) (9.5) 9.5 4.1 4.1 4.1

Note: ( ) indicates reappraisal loss

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Tobacco Sales Volume (by Brand)

Tobacco Sales Volume (by Region)

(Years ended December 31) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total 203.1 215.1 203.3 198.8 212.4 220.3 240.1 385.6 452.3 434.9

GFB Total 95.7 107.8 109.8 117.5 131.4 133.8 149.1 203.2 245.5 243.4

m Winston 35.0 43.0 48.0 55.9 70.1 76.4 93.9 111.0 126.4 121.2

m Camel 33.0 36.0 34.0 34.8 35.1 35.2 35.4 38.6 42.3 41.6

m Mild Seven 16.0 18.0 17.0 17.2 17.2 17.5 17.5 16.8 18.8 18.2

m Benson & Hedges 8.3 11.2 10.7

m Silk Cut 3.9 5.2 4.8

m LD 17.5 29.0 34.3

m Sobranie 1.2 2.3 1.4

m Glamour 5.9 10.3 11.1

m Other Brands 107.4 107.3 93.5 81.3 81.0 86.5 91.0 182.4 206.8 191.5

Notes: 1. Sales volume in the China Division (China, Hong Kong, and Macau) was included in 2000 and 2001, but excluded after 2001 2. GFB in FY2000–2006: Winston, Camel, Mild Seven, Salem GFB after FY2006: Winston, Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, Sobranie, Glamour 3. FY2009 –: Total volume includes cigars, pipe tobacco and snus, but does not include private label and contract manufactured products


Total 203.1 215.1 203.3 198.8 212.4 220.3 240.1 m Asia 38.0 42.0 39.0 40.4 40.6 33.5 29.1 m Europe 37.0 38.0 38.0 36.9 38.1 39.2 44.1 m Americas 11.0 11.0 10.0 9.9 9.9 9.3 8.8 m CIS & Others 118.0 124.0 116.0 111.6 123.8 138.3 158.0

Total 240.1 385.6 452.3 434.9m North & Central Europe 5.7 39.3 50.8 47.5m CIS+ 108.6 195.1 219.7 214.6m South & West Europe 40.1 55.2 64.0 64.5m Rest of the World 85.7 95.9 117.7 108.4

Notes: 1. Sales volume in the China Division (China, Hong Kong and Macau) were included in 2000 and 2001, but excluded after 2001 2. FY2009 –: Total volume includes cigars, pipe tobacco and snus, but does not include private label and contract manufactured products

International Tobacco BusinessJAPAN TOBACCO INC. ANNuAl RePORT 2010

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Number of International Factories

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m International Cigarette / OTP Manufacturing Factories 18 16 15 15 15 15 15 29 28 24

m Other Tobacco Related Factories 1 1 1 1 1 2 2 2 2 5

Net Sales Excluding Taxes per Thousand Cigarettes


m Net Sales Excluding Excise Taxes per Thousand Cigarettes 14.4 14.0 15.0 17.4 18.6 19.9 19.7 20.8 23.6

m Adjusted Net Sales Excluding Excise Taxes per Thousand Cigarettes 24.0 22.5

Notes: 1. Net sales in the China Division (China, Hong Kong, and Macau) were included in 2000 and 2001, but excluded after 2001 2. Adjusted net sales excluding excise taxes per thousand cigarettes are based on total volume, including cigars, pipe tobacco and snus, but excluding private label and contract

manufactured products, and joint ventures. (the revenues of which are not included for these purposes)

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Non-consolidated Basis


m R&D Expense on a Non-consolidated Basis 29.0 34.5 26.4 23.1 20.1 19.3 21.9 22.9 23.2 21.9

Clinical Development(As of April 28, 2010)

Code Stage Key Indication Mechanism Characteristics Rights

JTT-705 (oral)

Phase 2 (Japan)

Dyslipidemia CETP inhibitor Decreases LDL and increases HDL by inhibition of CETP–CETP: Cholesteryl Ester Transfer Protein, facilitates

transfer of cholesteryl ester from HDL to LDL–HDL: High-density lipoprotein (“good cholesterol”)–LDL: Low-density lipoprotein (“bad cholesterol”)

Roche (Switzerland) obtained the rights to develop and commercialize the compound worldwide, with the exception of Japan.

* Development stage by Roche: Phase 3

JTT-130 (oral)

Phase 2 (Japan) Phase 2 (Overseas)

Dyslipidemia MTP inhibitor Treatment of dyslipidemia by reducing absorption of cholesterol and triglycerides via inhibition of MTP–MTP: Microsomal Triglyceride Transfer Protein

JTK-303 (oral)

Phase 1 (Japan)

HIV infection Integrase inhibitor

Integrase inhibitor which works by blocking integrase, an enzyme that is involved in the replication of HIV–HIV: Human Immunodeficiency Virus

Gilead Sciences (U.S.) obtained the rights to develop and commercialize this compound worldwide, with the exception of Japan.

* Development stage by Gilead Sciences: Phase 3

JTT-302 (oral)

Phase 2 (Overseas)

Dyslipidemia CETP inhibitor Decreases LDL and increases HDL by inhibition of CETP–CETP: Cholesteryl Ester Transfer Protein, facilitates

transfer of cholesteryl ester from HDL to LDL–HDL: High-density lipoprotein (“good cholesterol”)–LDL: Low-density lipoprotein (“bad cholesterol”)

JTT-305 (oral)

Phase 2 (Japan)

Osteoporosis CaSR antagonist Increases BMD and decreases new vertebral fractures by accelerating endogenous PTH secretion via antago-nism of circulating Ca on CaSR in parathyroid cells–BMD: Bone Mineral Density–PTH: Parathyroid Hormone–CaSR: Calcium-Sensing Receptor

Merck (U.S.) obtained the rights to develop and com-mercialize this compound worldwide, with the excep-tion of Japan.

JTS-653 (oral)

Phase 1 (Japan)

Pain Overactive bladder

TRPV1 antagonist

Improves pain and overactive bladder via antagonism of TRPV1 on sensory neurons–TRPV1: Transient Receptor Potential Vanilloid subtype 1

JTT-654 (oral)

Phase 1 (Japan) Phase 2 (Overseas)

Type 2 diabetes mellitus

HSD-1 inhibitor Improves type 2 diabetes through reducing excessive glucocorticoid action by inhibiting HSD-1–HSD1: 11beta-hydroxysteroid dehydrogenase type 1

JTK-656 (oral)

Phase 1 (Overseas)

HIV infection Integrase inhibitor

Integrase inhibitor which works by blocking integrase, an enzyme that is involved in the replication of HIV–HIV: Human Immunodeficiency Virus

JTT-751 (oral)

Phase 2 (Japan)

Hyperphosphatemia Phosphate binder Decreases serum phosphorous level by binding phos-phate derived from dietary in the gastrointestinal tract

JT obtained the rights to develop and commercialize this compound in Japan from Keryx Biopharmaceuticals (U.S.) (Developed jointly with Torii)

JTK-853 (oral)

Phase 1 (Overseas)

Hepatitis C HCV RNApolymerase inhibitor

Treatment of Hepatitis C by inhibiting HCV RNA- polymerase which relates to viral proliferation

Additional Information: Glaxo Smithkline (U.K.) obtained the exclusive, worldwide rights to manufacture, develop and commercialize certain MEK inhibitors from JT on April 18, 2006.In March 2010, GSK updated its pipeline chart showing that the lead MEK inhibitor has entered into Phase 2 clinical development from Phase 1.



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0

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90,000

60,000

120,000(Machines)

Net Sales

Number of Marking / Combined Vending Machines


m Food Business 210.3 221.1 232.4 250.1 265.3 278.3 286.5 336.4 435.9 394.6

Processed Foods (*) 41.6 48.0 60.0 73.6 87.8 93.0 95.7 141.4 248.6 208.5

Beverages 165.4 173.1 172.3 176.5 177.4 185.3 190.7 194.9 187.3 186.1

* From FY2003, JTDS and HANS were included in Processed Foods, and the data for was adjusted 2002. Sales figures of Processed Foods prior to FY2002 are not comparable. In addition, JT had decided to commence proceedings to dissolve Australian chilled processed foods subsidiaries such as HANS and others on November 28, 2008. The financial results of those subsidiaries were excluded from the consolidated results since December, 2008. Therefore FY 3/2009 includes 8 months of net sales.


Vending Machines — 190,000 201,000 211,000 226,000 237,000 250,500 257,000 254,000 257,000m JT-Owned 31,000 36,500 45,500 45,000 44,500 40,500 38,000 35,500 32,000 33,000m Combined 31,000 38,500 43,500 50,500 54,000 61,500 66,000 71,500 76,500 82,000

Note: Number of vending machines includes machines operated by JT’s affiliates and cup vending machines. Combined vending machines focus on JT brand beverages but also sell non-JT brand beverages


Food Business

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30,000

40,000

20,000

50,000(Employees)Number of Employees

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m Total 40,237 39,387 38,628 39,243 32,640 31,476 33,428 47,459 47,977 49,665

Tobacco Business 30,894 29,860 28,946 28,504 24,350

Japanese Domestic 11,795 11,534 11,548 11,281 11,282

International 11,943 12,401 22,324 23,227 24,751

Pharmaceutical Business 1,670 1,580 1,530 1,551 1,566 1,532 1,554 1,569 1,616 1,634

Food Business 3,654 4,097 4,581 5,409 5,357 5,232 7,084 11,169 10,975 11,143

Other Business 2,820 2,707 2,437 2,608 706 604 461 441 429 352

Corporate 1,199 1,143 1,134 1,171 661 370 394 408 449 503Note: Number of employees is counted at working basis, unless otherwise indicated

(As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m Number of Employees (parent company) 15,588 14,462 14,172 13,769 10,124 8,855 8,930 8,999 8,908 8,961

Number of Employees Based on Enrollment (parent company) 19,355 17,815 17,272 16,690 11,300 9,931 9,984 10,010 9,973 9,883

(As of December 31) 2000 2001 2002 2003 2004

JT International (Thousands of Employees) (*) 11.8 11.7 11.6 11.9 12.0

* From FY2006, the data is disclosed as those of international tobacco business


Number of Employees

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20

40

60

80

100(%)

50.0

12.71.00.9

27.48.0

50.0

11.80.90.9

29.07.4

50.0

12.70.60.8

28.97.1

50.0

15.2

0.50.8

26.17.4

50.0

15.0

0.60.7

26.57.2

Common StockNote: A 5 for 1 stock split was completed on April 1, 2006

Authorized: 40,000,000

Issued: 10,000,000

Number of shareholders: 57,389

Administration of the Registry of ShareholdersThe Mitsubishi UFJ Trust and Banking Corporation

4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo

Stock Exchange ListingsFirst Sections of Tokyo Stock Exchange

Osaka Securities Exchange

Nagoya Stock Exchange

Sapporo Securities Exchange

Fukuoka Stock Exchange

Principal ShareholdersName Shares held

The Minister of Finance 5,001,359

Japan Trustee Services Bank, Ltd. (Trust Account) 280,288

The Master Trust Bank of Japan, Ltd. (Trust Account) 219,754

State Street Bank And Trust Company 505223 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 188,236

Mizuho Trust and Banking Co., Ltd., re-trusted to Trust & Custody Services Bank, Ltd., as retirement benefit trust assets 169,000

State Street Bank and Trust Company (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 111,112

Mellon Bank N.A. as Agent for Its Client Mellon Omnibus U.S. Pension (Standing Agent: Mizuho Corporate Bank, Ltd., settelement division) 86,891

Bank of Tokyo-Mitsubishi UFJ 71,455

Morgan Stanley & Co. Inc. (Standing Agent: Morgan Stanley Securities Ltd) 64,447

HSBC BANK PLC A/C THE CHILDRENS INVESTMENT MASTER FUND (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 62,765

Composition of Shareholders(Years ended March 31)

Individuals and others Foreign institutions and others Other institutions Securities companies Financial institutions Japanese government

2006 2007 2008 2009 2010


Shareholder Information(As of March 31, 2010)

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3,500

3,000

2,500

2,000

1,500

1,000

500

’10/3’09/3’08/3’07/3’06/3’05/3’04/3’03/3’02/3’01/3’00/3’99/3’98/3’97/3’96/3’94/10’95/3

100,000

200,000

300,000

400,000

500,000

600,000

700,000(Yen) (Points)

Offering JT Shares by Government1st Offering

Method Offering by Bids Offering by non-Bids

Offer Price(Pricing Date)

Bid Price: From ¥1,362,000 to ¥2,110,000 Weighted Average Price: ¥1,438,000 (August 29, 1994)

¥1,438,000 (August 31, 1994)

Number of Offering shares 229,920 shares 164,356 shares

Offering Term From August 15 to 18, 1994 From September 2 to 8, 1994Note: The Listing date

October 27, 1994: First Sections of Tokyo Stock Exchange, Osaka Securities Exchange, and Nagoya Stock Exchange November 7, 1994: Other Stock Exchanges

2nd and 3rd Offering2nd Offering 3rd Offering

Method Offering by Book-Building formula Offering by Book-Building formula

Offer Price (Pricing Date)

Bid Price: ¥815,000 (June 17, 1996)

¥843,000 (June 7, 2004)

Number of Offering shares Japan: 237,390 shares, International: 35,000 shares (Total: 272,390 shares)

Japan:198,334 shares, International: 91,000 shares (Total: 289,334 shares)

Offering Term From June 18 to 19, 1996 From June 8 to 10, 2004

Note: Due to a 5 for 1 stock split on April 1, 2006, stock prices reflect post-split levels

All Time HighDec. 21, 2007: ¥708,000

All Time lowApr. 7, 2003: ¥128,800

(Pre-split: ¥644,000)

Stock Price Range and Trading Volume

ReferenceTOPIX (right)

JT Stock Data(Years ended March 31)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

High (Yen) 240,000 204,000 204,000 208,000 262,000 308,000 193,800 182,800 178,000 163,600 266,000 435,000 604,000 708,000 555,000 358,000

Low (Yen) 153,200 142,000 149,600 156,400 174,000 137,200 138,000 139,000 137,600 128,800 152,800 238,000 362,000 492,000 216,000 227,000

Trading volume (shares) 207,678 162,657 330,107 362,349 315,892 567,207 448,631 464,116 500,302 596,318 1,213,156 1,412,073 6,119,498 5,660,892 7,699,734 6,589,843

Notes: 1. Highs, lows, and trading volume of shares refer to those on the First Section of the Tokyo Stock Exchange 2. Due to a 5 for 1 stock split on April 1, 2006, stock prices reflect post-split levels


Shareholder Information

144

Members of the Board

Chairman of the Board

Yoji Wakui

Representative Directors

Hiroshi Kimura

Munetaka Takeda

Masaaki Sumikawa

Mitsuomi Koizumi

Masakazu Shimizu

Members of the Board

Noriaki Okubo

Mutsuo Iwai

Yasushi Shingai

Auditors

Standing Auditors

Hisao Tateishi*

Gisuke Shiozawa

Auditors

Takanobu Fujita*

Koichi Ueda*

* Outside Corporate Auditors under the Companies Act of Japan

Executive Officers

President

Hiroshi KimuraChief Executive Officer

Executive Deputy Presidents

Munetaka TakedaAssistant to CEO in Compliance and Finance

Masaaki SumikawaAssistant to CEO in Strategy, HR, Legal, Operational

Review & Business Assurance and Food Business

Mitsuomi KoizumiPresident, Tobacco Business

Masakazu ShimizuAssistant to CEO in CSR, Communications and

General Administration

Senior Executive Vice Presidents

Kenji IijimaHead of Manufacturing General Division,

Tobacco Business

Noriaki OkuboPresident, Pharmaceutical Business

Ryuichi ShimomuraChief Legal Officer

Executive Vice President

Yoshihisa FujisakiChief Marketing & Sales Officer, Tobacco Business

Tadashi IwanamiChief R&D Officer, Tobacco Business

Akira SaekiHead of Tobacco Business Planning Division,

Tobacco Business

Mutsuo IwaiChief Strategy Officer and Executive Vice President in

charge of Food Business

Hideki MiyazakiChief Financial Officer

Senior Vice President

Shinichi MurakamiHead of Domestic Leaf Tobacco General Division,

Tobacco Business

Atsuhiro KawamataHead of China Division, Tobacco Business

Kazuhito YamashitaChief Corporate, Scientific & Regulatory Affairs Officer,

Tobacco Business

Junichi HarutaHead of Central Pharmaceutical Research Institute,


Ryoko NagataHead of Soft Drink Business Division

Satoshi MatsumotoChief Human Resources Officer

Ryoji ChijiiwaChief General Affairs Officer

Yasuyuki TanakaChief Communications Officer


Members of the Board, Auditors, and Executive Officers(As of June 24, 2010)

145

Business

Responsibility

Business E

nvironment &

Risk


Fact Sheets

General Inform

ationR

esults & M

anagement

Head Office

2-1, Toranomon 2-chome,

Minato-ku, Tokyo 105-8422, Japan

Tel: (81)3-3582-3111

Fax: (81)3-5572-1441

URL: http://www.jti.co.jp/JTI_E/

Date of Establishment

April 1, 1985

Paid-in Capital

¥100 billion

Number of Employees

49,665 (Consolidated)

8,961 (Parent Company)

Domestic Sales Offices

Hokkaido (Hokkaido)

Sendai (Miyagi)

Tokyo (Tokyo)

Nagoya (Aichi)

Osaka (Osaka)

Hiroshima (Hiroshima)

Shikoku (Kagawa)

Fukuoka (Fukuoka)

17 other sales offices

Domestic Factories

Kita-Kanto (Tochigi)

Tokai (Shizuoka)

Kansai (Kyoto)

Kyushu (Fukuoka)

9 other factories

Domestic Laboratories

Leaf Tobacco Research Laboratory (Tochigi)

Tobacco Science Research Institute (Kanagawa)

Central Pharmaceutical Research Institute (Osaka)

JT International S.A.

1, Rue de la Gabelle CH-1211 Geneva 26, Switzerland

Tel: (41)-22-7030-777

Fax: (41)-22-7030-789

URL: http://www.jti.com/

Members of JT International Executive Committee

Pierre de LaboucherePresident and Chief Executive Officer

Yasushi ShingaiExecutive Vice President and Deputy CEO

Thomas A. McCoyChief Operating Officer

Paul BourassaSenior Vice President Legal, Regulatory Affairs and Compliance

Roland KostantosSenior Vice President Finance, Information Technology and Chief Financial Officer

Jörg SchappeiSenior Vice President Human Resources

Frits VrankenSenior Vice President Business Development and Corporate Strategy

Roberto ZanniSenior Vice President Consumer and Trade Marketing

Martin BraddockRegional President CIS+

Stefan FitzRegional President Central Europe

Hans-Gerd HesseRegional President Asia Pacific

Paul NeumannSenior Vice President Global Leaf

Fadoul PekhazisRegional President Middle East / Near East / Africa / Turkey and WWDF

Eddy PirardRegional President Western Europe

Michel PoirierRegional President Americas

Bill SchulzSenior Vice President Global Supply Chain

Takehisa ShibayamaSenior Vice President Research and Development


Corporate Data( As of March 31, 2010)

146

2-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8422, JapanTel: (81) 3-3582-3111Fax: (81) 3-5572-1441URL: http://www.jti.co.jp

This annual report is printed using ink that contains less than 1% of Volatile Organic Compounds (VOCs).

Printed in Japan

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