ANNUAL REPORT 2010 for the Year Ended March 31, 2010 JAPAN TOBACCO INC

Home , Gallaher Group, Japan Tobacco, Nil (cigarette), Peace (cigarette), Seven Stars (cigarette)

ANNU AL RE POR T 2 010

ANNUAL REPORT 2010 For the Year Ended March 31, 2010 JAPAN TOBACCO INC. Annual Report 2010 The JT Group MISSION & The JT Group WAY

The JT Group MISSION The 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 WAY In 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 & Management Feature & Management 2 Feature �� 2 Financial Highlights �� 10 To Our Stakeholders �� 13 CEO Interview �� 14 Analysis of the Results of FY 3/2010 �� 18 Business & History Business & History 21 At a Glance �� 22 Feature �� 2 Review of Operations �� 24 • Japanese Domestic Tobacco Business �� 24 • International Tobacco Business �� 28 • Pharmaceutical Business �� 32 • Food Business �� 34 History of the JT Group �� 36 Responsibility Responsibility 40 Corporate Governance �� 41 To Our Stakeholders �� 13 CEO Interview �� 14 Activities Contributing to the Environment and Society �� 49 uiesEvrnet&Rs Financial Information Business Environment & Risk Business Environment & Risk 55 Business Environment for the JT Group �� 56 Major Risks of Businesses �� 61

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 international tobacco business.

FORWARD-LOOKING AND CAUTIONARY STATEMENTS Financial Information 63 This report contains forward-looking statements about our industry, business, plans and objectives, Consolidated Eleven-Year Financial Summary �� 64 financial condition and results of operations that are based on our current expectations, assump- Management’s Discussion and Analysis of tions, estimates and projections. These statements discuss future expectations, identify strate- Financial Condition and Business Results �� 66 gies, discuss market trends, contain projections of results of operations or of our financial condition, Consolidated Balance Sheets �� 80 or state other forward-looking information. Consolidated Statements of Income �� 82 These forward-looking statements are subject to various known and unknown risks, uncertain- Consolidated Statements of Changes in Equity �� 83 ties and other factors that could cause our actual results to differ materially from those suggested Consolidated Statements of Cash Flows �� 84 by any forward-looking statement. We assume no duty or obligation to update any forward-looking Notes to Consolidated Financial Statements �� 85 statement or to advise of any change in the assumptions and factors on which they are based. Independent Auditors’ Report �� 117

Risks, uncertainties or other factors that could cause actual results to differ materially from Fact Sheets those expressed in any forward-looking statement include, without limitation: Fact Sheets 118 1. health concerns relating to the use of tobacco products; Financial Data �� 119 2. legal or regulatory developments and changes, including, without limitation, tax increases and Japanese Domestic Tobacco Business �� 127 restrictions on the sale, marketing and usage of tobacco products, and governmental investiga- International Tobacco Business �� tions and privately imposed smoking restrictions; 138 Pharmaceutical Business �� 3. litigation in Japan and elsewhere; 140 4. our ability to further diversify our business beyond the tobacco industry; Food Business �� 141 5. our ability to successfully expand internationally and make investments outside of Japan; Number of Employees �� 142 6. competition and changing consumer preferences; 7. the impact of any acquisitions or similar transactions; 8. local and global economic conditions; and General Information 9. fluctuations in foreign exchange rates and the costs of raw materials. General Information 143

Unless otherwise specified in this annual report, the information herein is as of June Shareholder Information �� 143 24, 2010. Members of the Board, Auditors, and Executive Officers �� 145 Corporate Data �� 146

1 JAPAN TOBACCO INC. Annual Report 2010 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.

2 4 Feature & Management Business & History

1 Business activities in 120 countries around the world JT and Japanese municipalities jointly set up 835 smoking areas in public places

5 Responsibility Business Environment & Risk

2 36,000 employees worldwide in the tobacco business Planting trees covering 6,100 hectares in Malawi and Tanzania

6 Financial Information Fact Sheets

3 Community clean-up events held 1,000 times in Japan JT Group and governments fighting against illicit trade General Information

3 JAPAN TOBACCO INC. Annual Report 2010 Feature

JT Group Sales Volume

(Billions of cigarettes) 500 445.9 434.9 385.6 400

243.1 237.2 229.0 213.3 300 218.3 212.4 220.3 240.1 203.1 215.1 203.3 198.8 189.5 174.9 167.8 200 159.9 151.9

100

2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 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

JT Group Share in Global Cigarette Market (2009)

10.4% JT Group

Source: Euromonitor

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

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.

4 North & Central CIS+ Europe 214.6 Feature & Management 47.5 (Billions of cigarettes) (Billions of cigarettes) South & West Europe

64.5 Business & History (Billions of cigarettes) Responsibility

Japan 151.9 (Billions of cigarettes) Business Environment & Risk

Rest of the World

108.4 Financial Information (Billions of cigarettes)

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.

2 36,000 employees worldwide in the tobacco business Fact Sheets

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

Number of Employees (As of March 31) General Information (Employees) 60,000 47,459 47,977 49,665

36,033 40,000 31,476 33,428 33,872 34,508 23,738 23,935 20,000 JT Group Total Tobacco Business 2006 2007 2008 2009 2010

5 JAPAN TOBACCO INC. Annual Report 2010 Feature

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

The Japanese domestic tobacco market has continued to contract mainly because of Japan’s aging population with fewer births, growing public consciousness of the health risks associated with smoking, and public debate on a future hike in the tobacco excise tax. JT share 64.9% down 0.2ppt An increasingly fierce competitive landscape, compounded by these changes in the business environment, means that the Japa- Share of key brands* 45.1% up 0.3ppt nese domestic tobacco business – the JT Group’s core source of 151.9 billion profits – is actively engaged in the development and introduction of Total sales volume down 5.0% new products centered on its key brands, and in sales promotion cigarettes activities, in order to maintain and expand its market share. EBITDA ¥257.6 billion down 5.4% Furthermore, JT closed two Japanese domestic tobacco factories at the end of March 2010 as part of our efforts to build an optimum operating structure.

EBITDA in the Japanese Domestic JT Share and Total Share of Key Brands* (Years ended March 31) Tobacco Business (Years ended March 31) (%) (Billions of yen) 80 400 66.4 64.8 64.9 65.1 64.9 326.5 305.8 306.7 272.3 60 300 257.6 43.7 43.7 44.0 44.8 45.1

40 200

20 100

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 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)

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 organizations. 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.

6 Feature & Management The Japanese Domestic Tobacco Business Composition Rate of Key Brands in Sales Volume Brand Portfolio Mild 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 69% of new products, and by vigorous sales promotion activities. Business & History

Mild Seven Seven Stars Pianissimo Family Family Family

• The Mild Seven family has won numerous loyal customers • Launched in 1969, Seven Stars featured Japan’s first domes- • In August 1995, the Pianissimo family saw the launch of since its launch in June 1977. tically produced charcoal filter in pursuit of better taste. Japan’s first 1 mg-tar menthol cigarette product featuring • As Japan’s major cigarette brand, Mild Seven has • Since its launch, Seven Stars has consistently offered unique reduced odor and smoke*. consistently commanded the No.1* share of the value in terms of taste, aroma, and product design. • Pianissimo, an FSK (Filter Super King) slim menthol prod- Japanese domestic market for more than 30 years • The Seven Stars family comprises a lineup of 12 products uct, has continued to achieve growth after undergoing the since 1978. (as of April 30, 2010) centered on Seven Stars, which Japanese tobacco market’s first integration of brands in • Today, the Mild Seven Family encompasses 24 products recorded the top* performance by brand in the fiscal year the fiscal year ended March 2010. Responsibility (as of April 30, 2010), reflecting its evolution in step with ended March 2010. The Seven Stars family continues to • The Pianissimo family, a core JT tobacco franchise, features the changing times and brand expansion. capture a growing share of the market. a diverse lineup of 7 products (as of April 2010), centered * Source: TIOJ * Source: TIOJ 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

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

Mild Seven 100’s Box and Mild Seven Light Seven Stars Black Charcoal Menthol Box Pianissimo Icene Menthol One launched 100’s Box launched (June 2009) launched (August 2009) (December 2009) Mild Seven Impact One Menthol Box Seven Stars Black Impact Box launched Integrated the icene and LUCIA brands into Business Environment & Risk launched (February 2010) (April 2010) the Pianissimo family (January 2010) 15 core products forming the backbone of the Mild Seven brand redesigned (February 2010)

Mild Seven Brand Share (Years ended March 31) Seven Star Brand Share (Years ended March 31) Pianissimo Brand Share* (Years ended March 31) (%) (%) (%) 40 12 4 3.4 32.2 32.0 32.3 32.1 9.6 3.2 3.3 31.6 9.0 9.3 3.1 8.7 8.9 2.8 30 9 3 Financial Information 20 6 2

10 3 1

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

* 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

4 JT and Japanese municipalities jointly set up 835 Fact Sheets 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- Shibuya-Ku Hachiko-mae Smoking Space tion with 185 municipalities in Japan. General Information

7 JAPAN TOBACCO INC. Annual Report 2010 Feature

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 international tobacco business, conducts business operations in over 120 countries. 434.9 billion The international tobacco business remains the profit growth Total sales volume* down 2.5% cigarettes engine of the Group. JTI continues to focus on sustainable 243.4 billion quality top-line growth through enhancing its brand portfolio GFB sales volume down 0.9% cigarettes and brand equity. EBITDA ¥249.9 billion down 26.1%

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

* Total sales volume includes cigars, pipe tobacco and snus, but does not include private label and contract manufactured products EBITDA of International Tobacco Business (Years ended December 31) Geographic Mix of Mature and Emerging Markets (2009) (Billions of yen) (%) 400 338.0 270.8 300 249.9 31 200 112.7 36 94.1 Sales EBITA 100 Volume 64 2005 2006 2007 2008 2009 69

Mature Emerging

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.

8 Feature & Management The International Tobacco Business Composition Rate of GFB in Sales Volume Brand Portfolio JTI 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 56% equity in key markets around the world. Business & History

Global Flagship Brand Portfolio Engine Stronghold Future potential Winston and Camel are the Engine brands Four stronghold brands have a significant presence in Sobranie and Glamour have driving JTI’s growth. their respective regions increasing the competitive power strong future growth potential. of JTI’s portfolio. Responsibility

First introduced in 1954, Winston has proven its status as Originating in Japan and launched Launched in 1963, Silk Cut estab- Sobranie is one of the world’s oldest JTI’s key growth driver, becoming in 2007 the 2nd* larg- in 1977, Mild Seven is the top-sell- lished itself as one of the leading tobacco brands and has been syn- est cigarette brand in the world. After almost a decade ing premium charcoal brand and is brands in the Virginia segment, onymous with luxury cigarettes of strong momentum, Winston further accelerated its the 3rd* largest cigarette brand in both in the UK and Ireland. since 1879. This heritage, exquisite sales volume growth in South & West Europe and North the world. Its key markets outside JTI owns the Silk Cut trademark style and the best selected tobac- & Central Europe in 2009. Winston’s performance has Japan are Taiwan, Korea, Russia throughout the EU with the core cos have made Sobranie one of been strengthened by Super Slims brand extensions and and Malaysia. markets being the UK, Ireland and the most prestigious brands in the ongoing product innovation. Greece, where the brand enjoys world. In 2009 innovative proposi- * Source: Euromonitor a significant market share in the tions were launched in Russia.

* Source: Euromonitor, combined with R.J. Reynolds’s sales volume Business Environment & Risk premium segment.

First introduced in 1913, Camel is the originator of Originally created for the Prince of LD was launched in 1999 as a mid- Glamour is JTI’s leading Super American Blend. Sold in over 100 countries, Camel is the Wales in 1873, Benson & Hedges price proposition in the Russian Slims brand. Since its introduction 6th* largest cigarette brand in the world. Sales volume has a proud British heritage. market. The brand achieved imme- in 2005, Glamour has achieved growth has been achieved in South & West Europe and Today, JTI owns the Benson & diate success and is accepted as a remarkable growth consolidating North & Central Europe in 2009.The launch of Camel Hedges trademark in EU markets credible international proposition. its No. 1 position as a Super Slims Financial Information Essential Flavor and other line extensions contributed to (excl. Baltics) where it is a leading Since 2007 LD has grown con- brand in several CIS+ markets. Camel’s performance. Virginia premium brand. Benson & tinuously, expanding its presence Glamour is constantly expanding Hedges is continuously evolving its to more than 30 countries across all its geographical presence and * Source: Euromonitor, combined with R.J. Reynolds’s sales volume portfolio and brand extensions to regions supported by its constant evolving portfolio in the growing reflect its consumers’ needs. portfolio expansion in response to Super Slims segment. consumer aspirations.

6 JT Group and governments fighting against illicit trade Fact Sheets

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.

A comprehensive approach The JT Group continues to invest in its international tobacco business programs to effectively prevent illicit trade. The initiatives span from detailed General Information 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 authorities 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 counterfeit tobacco products. Note: Financial data disclosed here in Feature are rounded.

9 JAPAN TOBACCO INC. Annual Report 2010 Financial Highlights Japan Tobacco Inc. and Consolidated Subsidiaries / FY 3/2010

Business Scale Business Scale: The JT Group’s total tobacco JT Group Sales Volume sales volume in Japan and abroad comes to approximately 587 billion cigarettes per year, Japanese Domestic Tobacco Business151.9 Billions of cigarettes accounting for around 10% of the global market. In addition to the domestic and International Tobacco Business Billions of cigarettes 434.9 international tobacco businesses, the JT JT Group Share in Global Cigarette Market (Source: Euromonitor) Group engages in the pharmaceutical and food businesses, and its annual consolidated % 10.4 sales including excise taxes stand at approxi- Net Sales Including Excise Taxes mately ¥6,130 billion, adjusted net sales excluding excise taxes at more than ¥1,980 6,134.7 Billions of yen billion and consolidated EBITDA at more than Adjusted Net Sales Excluding Excise Taxes*1 ¥520 billion. 1,981.0 Billions of yen Profitability: Because of the high profitability EBITDA of the tobacco business, the ratio of EBITDA 526.7 Billions of yen to adjusted net sales excluding taxes comes to around 27% and ROE stands at between Profitability 8% and 9%. EBITDA Margin*2 Per Share Profits: Although net sales as well 26.6 % as most profit figures, including EBITDA, ROE operating income and recurring profit, declined in FY 3/2010, per-share EPS grew as 8.6 % a result of an increase in net income due to an improvement in extraordinary income. Per Share Data Diluted EPS Stability: Free cash flow came to approximately ¥250 billion due to a stable cash flow 14,449 yen up 12.2% generated by the tobacco business. Diluted EPS (excluding the impact of goodwill amortization) D/E Ratio is about 0.5 times. 24,621 yen up 3.0% Return of Profits to Shareholders: The per- Stability share dividend was set at ¥5,800, including Free Cash Flow interim and term-end dividends as well as a commemorative dividend to mark the 25th 250.7 Billions of yen anniversary of the incorporation of JT. The D/E Ratio dividend payout ratio excluding the impact of goodwill amortization rose to 23.6%. 0.53 times Return of Profits to Shareholders The Per Share Dividend

5,800 yen *1 Japanese domestic tobacco; excluding excise tax and The Dividend Payout Ratio revenue from the imported tobacco, domestic duty free, the China Division, and other miscellaneous. International tobacco; excluding excise tax and revenue 40.1 % from distribution, private label, contract manufacturing and other peripheral business. *2 EBITDA margin on Adjusted Net Sales excluding excise 23.6% (Excluding the Impact of Goodwill Amortization) tax (1,981.0 billion yen as of FY3/2010) Financial data disclosed herein are rounded.

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

Net Sales Including Excise Taxes Net Sales Excluding Excise Taxes EBITDA Feature & Management (Billions of yen) (Billions of yen) (Billions of yen)

8,000 2,500 800 2,243.1 6,832.3 7,000 2,068.4 700 6,409.7 1,981.0 646.2 6,134.7 2,000 602.1 6,000 600 526.7 1,596.2 1,633.2 4,769.4 5,000 4,637.7 500 464.6 1,500 433.4

4,000 400 Business & History

1,000 3,000 300

2,000 200 500 1,000 100

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

Please see Note 2 on page 12. Responsibility

Operating Income and Net Income Total Equity and ROE Interest-bearing Debt and D/E Ratio (Billions of yen) (Billions of yen/%) (Billions of yen/times)

500 2,500 20 2,000 0.8

430.6 2,154.6 0.67 2,024.6 0.64 400 363.8 2,000 16 1,762.5 1,500 0.6 1,723.3 1,389.3 Business Environment & Risk 332.0 12.4 1,624.3 306.9 296.5 11.8 11.3 0.53 300 1,500 12 996.1 238.7 8.6 1,000 874.3 0.4 201.5 210.8 200 1,000 8 138.4 6.8 123.4 500 0.2 100 500 4 0.12 0.11 216.6 219.3 Financial Information 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

Operating Income Net Income Total Equity ROE Interest-bearing Debt D/E Ratio

Free Cash Flow EPS Cash Dividends Applicable to the Year (Billions of yen) (Yen) (Yen)

400 120,000 8,000

105,084 Fact Sheets 223.0 240.2 250.7 200 145.6 100,000 5,800 6,000 5,400 0 80,000 4,800

4,000 –400 60,000 4,000 3,200

–800 40,000 24,916 24,621 22,001 23,895 2,000 General Information –1,200 20,000 12,880 14,449

–1,493.7 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

EPS (excluding the impact of goodwill amortization) EPS

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

Financial data disclosed herein are rounded.

11 JAPAN TOBACCO INC. Annual Report 2010 Financial Highlights Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31

Millions of U.S. dollars Millions of yen (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 Japanese Domestic Tobacco 305,753 326,470 306,726 272,280 257,646 2,769 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 Japanese Domestic Tobacco 220,095 245,388 222,348 188,259 203,339 2,186 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 JAPAN TOBACCO INC. Annual Report 2010 To Our Stakeholders Feature & Management Business & History Responsibility

Yoji Wakui Hiroshi Kimura Chairman of the Board President and CEO and Representative Director

As its long-term vision, the JT Group is committed to global growth by providing consumers with diversified value Business Environment & Risk 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 unfavorable 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 Financial Information 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 Fact Sheets

Yoji Wakui

Chairman of the Board General Information

Hiroshi Kimura President and CEO and Representative Director

13 JAPAN TOBACCO INC. Annual Report 2010 CEO Interview

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 Hiroshi Kimura President and CEO and Representative Director Financial Results for FY3/2010

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

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

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

FY3/2009 648.8 FY3/2009 272.3

FY3/2010 616.0 FY3/2010 257.6

550 580 610 640 670 100 150 200 250 300

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

FY3/2009 10,445 FY3/2009 3,452

FY3/2010 at constant FY3/2010 at constant 11,192 3,967 rates of exchange rates of exchange

FY3/2010 9,682 FY3/2010 2,965

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 * 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 Feature & Management Could you explain how currency fluctuations significantly affected Q the financial results?

As a result of currency fluctuations on the international tobacco business, we had declines in net sales, EBITDA and operating income. A 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. Business & History

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

We have announced that the year-end dividend is increased to ¥3,000 per share, made up of ¥2,800 common dividend and ¥200 commemorative A 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, Responsibility excluding the impact of goodwill amortization. In fiscal 2009, the dividend payout ratio came to 23.6%, surpassing the previous year’s 22.6%.

Changes in Dividend Payout Ratio Excluding the Impact of Goodwill Amortization and Dividend per Share (Yen) (%) 6,000 30 23.6 5,000 22.6 25 18.0 19.0 3,000 2,800

4,000 20 Business Environment & Risk 2,600 3,000 2,200 15

2,000 10 2,800 2,200 2,600 Year-end dividend per share 1,800 1,000 5 Half-year dividend per share Dividend payout ratio (Years Ended March 31) 2007 2008 2009 2010 Financial Information

International Tobacco Business: Situation of Major Markets

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

In many key markets, overall demand declined and the down-trading trend accelerated because of the recession and sharp increases in A Fact Sheets 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, General Information 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.

15 JAPAN TOBACCO INC. Annual Report 2010 CEO Interview

Planned Actions in Fiscal Year 2010

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

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

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

16 Feature & Management Plan for Use of Cash

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

We will use the cash mainly for business investment, return of profits to shareholders, and repayment of interest-bearing debts. Business & History A 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. Responsibility

June 2010 Business Environment & Risk Financial Information Fact Sheets General Information

17 JAPAN TOBACCO INC. Annual Report 2010 Actual results 1 Analysis of the Results of FY 3/2010* Decrease Increase (Decrease in case of expense) *1 International tobacco business: Year ended Dec. 2008 and Year ended Dec. 2009

Net Sales*2

(Billions of yen) FY3/2009 2,243.1

Japanese domestic tobacco –32.8

International tobacco –174.1

Pharmaceutical –12.7

Food –41.3

Others –1.3

FY3/2010 1,981.0

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

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 subsidiaries 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.

EBITDA

(Billions of yen) FY3/2009 646.2

Japanese domestic tobacco –14.6

International tobacco –88.1

Pharmaceutical –14.5

Food –2.5

Others +0.2

FY3/2010 526.7

470 500 530 560 590 620 650

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

Operating Income

(Billions of yen) FY3/2009 363.8

EBITDA –119.5

Depreciation and amortization ＋52.2

FY3/2010 296.5

100 150 200 250 300 350 400

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. Financial data disclosed herein are rounded.

18 Feature & Management Recurring Profit

(Billions of yen) FY3/2009 307.6

Operating income –67.3

Non-operating income/loss +15.0

FY3/2010 255.4

100 120 140 160 180 200 220 240 260 280 300 320 Business & History 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.

Net Income Responsibility

(Billions of yen) FY3/2009 123.4

Recurring profit –52.2 Extraordinary income/loss, Income taxes, etc. +67.3 FY3/2010 138.4

0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 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 Business Environment & Risk 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.

Breakdown of Net Sales EBITDA by Business Segment*4 (Billions of yen) (Billions of yen) FY3/2009 FY3/2010 FY3/2009 FY3/2010

Consolidated EBITDA 646.2 526.7 Financial Information Net sales including excise taxes*1 6,832.3 6,134.7 Operating income 363.8 296.5 Japanese domestic tobacco 3,200.5 3,042.8 Depreciation and amortization*5 282.4 230.2 1 International tobacco* 3,118.3 2,633.6 Japanese domestic tobacco EBITDA 272.3 257.6 Adjusted net sales Operating income 188.3 203.3 1 2 3 excl. excise taxes* * * 2,243.1 1,981.0 Depreciation and amortization*5 84.0 54.3 2 Japanese domestic tobacco* 648.8 616.0 International tobacco EBITDA*6 338.0 249.9 International tobacco*1*3 1,080.8 906.8 Operating income 174.8 109.1 Pharmaceutical 56.8 44.1 Depreciation and amortization*5 163.2 140.7 Food 436.0 394.7 Pharmaceutical EBITDA 4.9 –9.7 Fact Sheets Others 20.8 19.5 Operating income (loss) 1.0 –13.6 Depreciation and amortization*5 3.9 3.9 *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 Food EBITDA 17.0 14.5 other miscellaneous. Operating income (loss) –11.5 –13.7 *3 Excluding revenue from distribution, private label, contract manufacturing and other periph- Depreciation and amortization*5 28.5 28.2 eral businesses. Others EBITDA 13.1 13.3 Operating income 9.7 10.6 Depreciation and amortization*5 3.5 2.8 *4 EBITDA = operating income + depreciation and amortization Average Exchange Rate *5 Depreciation and amortization = depreciation of tangible fixed assets + amortization of intan- General Information gible fixed assets + amortization of long-term prepaid expenses + amortization of goodwill 2008 Jan. to Dec. 2009 Jan. to Dec. *6 International tobacco business: Year ended Dec. 2008 and Year ended Dec. 2009 Average Average YEN/USD 103.48 93.65 RUB/USD 24.84 31.77 GBP/USD 0.53 0.65 EUR/USD 0.68 0.73

Financial data disclosed herein are rounded.

19 Consolidated Balance Sheets (Assets)

(Billions of yen)

Mar. 31, 2009 3,879.8 Cash and deposits/Short-term –2.5 investments Inventories +90.9 Trade notes and account +6.8 receivables Trademarks +3.5

Goodwill –66.6

Other assets –39.5

Mar. 31, 2010 3,872.6

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

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.

Consolidated Balance Sheets (Debt and Equity)

(Billions of yen)

Mar. 31, 2009 3,879.8

Bank Loans –157.3

Commercial paper +119.0

Bonds –80.8

Tobacco excise tax payable +38.8

Other liabilities –25.8

Retained earnings +85.7 Foreign currency translation +14.4 adjustments Other equity –1.1

Mar. 31, 2010 3,872.6

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

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

Financial data disclosed herein are rounded.

20 JAPAN TOBACCO INC. Annual Report 2010 Feature & Management Business & History Responsibility Business & History uiesEvrnet&Rs Financial Information Business Environment & Risk

At a Glance �� 22

Review of Operations �� 24

Japanese 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 Fact Sheets General Information

21 JAPAN TOBACCO INC. Annual Report 2010 At a Glance

JT Group

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

Japanese Domestic Tobacco Business (Years ended March 31) Overwhelm the competition in the home country market as the core source of profits.

Total Market Sales Volume Net Sales Including Taxes (Billions of cigarettes) (Billions of cigarettes) (Billions of yen) 400 300 4,000 3,405.3 3,416.3 3,362.4 3,200.5 3,042.8 285.2 270.0 300 258.5 245.8 189.5 3,000 233.9 200 174.9 167.8 159.9 151.9 200 2,000 100 100 1,000

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Source: TIOJ

Net Sales Excl. Excise Tax EBITDA/Operating Income (Billions of yen) (Billions of yen) 1,000 400 326.5 760.6 729.4 305.8 306.7 800 715.0 272.3 648.8 616.0 300 245.4 257.6 220.1 222.3 600 188.3 203.3 200 400 100 200

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Note: 2006 – 2008: Excluding revenue from the imported EBITDA Operating Income tobacco. 2009 – 2010: Excluding revenues from the imported tobacco, domestic duty free, the China Division, and other miscellaneous.

see page 32

Pharmaceutical Business (Years ended March 31) Pursuing high value-added business by developing world-class innovative drugs

Net Sales EBITDA/Operating Income (Loss) (Billions of yen) (Billions of yen) 80 10 4.9 56.8 5 60 49.3 49.1 1.0 45.5 44.1 0 40 –1.8 –5 –5.1 –6.3 20 –8.2 –10 –9.6 –9.7 –11.2 –13.6 2006 2007 2008 2009 2010 –15 2006 2007 2008 2009 2010 EBITDA Operating Income (Loss)

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

Pharmaceutical Business Other Business

2.2% 1.0% Food Business 10.4% International 19.9% Business & History Tobacco Business Japanese Domestic Tobacco Business 45.8% 31.1% Source: Euromonitor Note: Japanese Domestic Tobacco Business and International Tobacco Business are Adjusted Net Sales Excl. Excise Tax

see page 28

International Tobacco Business (Years ended December 31) Responsibility Attain a sustainable leadership position in profitability and/or market-share within a growing number of markets, and continue to be the driving force for profit growth. Sales Volume GFB Sales Volume Net Sales Including Taxes (Billions of cigarettes) (Billions of cigarettes) (Billions of yen)

500 445.9 434.9 300 4,000 245.5 385.6 243.4 3,118.3 400 203.2 3,000 2,640.0 2,633.6 200 300 149.1 220.3 240.1 133.8 2,000 200 Financial Information Business Environment & Risk 100 881.2 999.7 1,000 100

2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Note: 2008 – : Including cigars, pipe tobacco and snus, but Note: GFB in 2005 – 2006 : Winston, Camel, Mild Seven, Salem does not include private label and contact manufac- GFB in 2007 – : Winston, Camel, Mild Seven, Benson & tured products Hedges, Silk Cut, LD, Sobranie, Glamour

Net Sales Excl. Excise Tax EBITDA/Operating Income (Billions of yen) (Billions of yen) 1,200 1,080.8 400 338.0 946.0 906.8 270.8 900 300 249.9 205.4 550.3 600 484.3 200 174.8 94.1 112.7 109.1 81.1 300 100 71.0

2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Note: 2005 – 2007: Excluding revenue from distribution. EBITDA Operating Income 2008 – 2009: Excluding revenues from distribution

private label, contract manufacturing and other Fact Sheets peripheral business. see page 34

Food Business (Years ended March 31) Increasing profits by achieving sustainable growth based on the combined strength of group companies with world- class competitiveness

Net Sales EBITDA/Operating Income (Loss) (Billions of yen) (Billions of yen) General Information 500 20 17.0 436.0 14.5 394.7 15 11.9 12.0 400 336.4 8.4 10 6.3 6.7 278.4 286.6 300 5 0.7 200 0 –5 100 –10 –11.5 –13.7 2006 2007 2008 2009 2010 –15 2006 2007 2008 2009 2010 EBITDA Operating Income (Loss)

23 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations

Japanese Domestic 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.

FY 3/2010 Business Performance Summary Sales 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.

Mitsuomi Koizumi President, Tobacco Business

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.

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

FY 3/2009 648.8 FY 3/2009 272.3

Volume effect –24.8

Volume effect Price and product –32.8 mix effect –0.1

Cost increase –7.0 Leaf tobacco Price and product –0.1 reappraisal gain/ 0 mix effect loss Sales promotion +17.3 and others

FY 3/2010 616.0 FY 3/2010 257.6

600 610 620 630 640 650 235 240 245 250 255 260 265 270 275 * Excluding revenues from the imported tobacco, domestic duty free, the China Division, and other miscellaneous.

24 Feature & Management

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

67 46

45.1 44.8 66 45

65.1 44.0 64.8 64.9 64.9 Business & History 65 44 43.7

64 43

63 42 2007 2008 2009 2010 2007 2008 2009 2010 * 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) Responsibility As JT implemented measures to enhance the brand equity, including the launch of new products that captured market needs, and conducted 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.

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) Financial Information Business Environment & Risk

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 Fact Sheets

Mild Seven 100’s Box Mild Seven Lights 100’s Box Mild Seven Impact One Menthol Box General Information

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

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.

25 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations

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

Product Strategy Marketing Strategy From now on, our product strategy will focus on enhancing the Our marketing force, the vast size of which eclipses the marketing brand equity so as to provide value commensurate with the price, teams of our competitors, satisfies the multitude and variety of and building a brand portfolio that offers a wider selection of prod- needs of retailers scattered across the country. We will continue ucts. Through this strategy, we will maintain and expand our market to engage in efficient and effective marketing activities in ways share. linked to our product and distribution strategies, while complying with regulations and rules such as restrictions on tobacco advertis- Enhancing the brand equity to provide value ing and prevention of youth smoking. commensurate with the price • Enhancing product innovation (enhancing R&D Improving Quality and Productivity capability) We will implement measures to maximize customer satisfaction, • Expanding the product lineup including constantly improving product quality and strengthening • Strengthening programs to improve taste, package the shipment assurance system. In addition, in line with the planned design and other features of products price revisions in October, we will make capital expenditures in order to provide quality commensurate with the price and to meet Brand Portfolio Offering a Wide Selection – the increasingly diverse needs of customers. Japanese Domestic Tobacco Business: Productivity improvement is a critical challenge for any manu- Prices of Major Brands (application basis) facturing company. As part of its effort to improve productivity, JT closed two factories at the end of March 2010 so as to optimize ~ Sep. 2010 Oct. 2010 ~ our tobacco production capacity and restructure the Japanese

(Yen per pack) (Yen per pack) domestic tobacco business in ways to make it more competitive. Cabin Prestige 350 Cabin Prestige In addition, we will close one factory at the end of March 2011; Peace Infinity 470 Peace Infinity after that, we will have 6 factories in Japanese domestic operation Pianissimo Pianissimo in April 2011. 320 Camel Camel Salem Salem We will continue to strive toward an even more cost-efficient 440 Seven Stars operating structure. Mild Seven Peace Cabin Hope 300 Seven Stars Fulfilling Our Responsibility as the Market Leader Peace Mild Seven Cabin We will continue to fulfill our responsibilities as the leading tobacco Hope 410 Caster company in the Japanese market by endeavoring to achieve a har- Winston Hi-Lite 290 Caster monious coexistence between smokers and nonsmokers. We will Hi-Lite 400 Winston 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. Distribution Strategy To achieve top-line growth, the greatest challenge for our distribution As a Core Source of Profits for the JT Group strategy is to secure overwhelming superiority in product exposure We will ensure that the Japanese domestic tobacco business at retail stores. Specifically, we will strive to secure product exposure continues to serve as the JT Group’s core source of profits by in ways suited to the characteristics of each store type through overcoming challenges in the Japanese domestic market, such suggestions regarding sales space and the introduction of display as the continuing decline in total tobacco demand and intensify- boxes. As for sales through vending machines, we will strive to ing competition. make efficient allocation while making investments necessary for increasing the attractiveness of our products.

26 Feature & Management

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 Business & History 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 cigarettes. 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 Responsibility “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. Financial Information Business Environment & Risk

Sales beginning exclusively in Tokyo in mid-May 2010 Fact Sheets

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. General Information 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.

27 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations

International Tobacco Business

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 Summary Total sales volume* 434.9 billion cigarettes down 2.5% GFB sales volume 243.4 billion cigarettes down 0.9% Adjusted net sales $9,682 million down 7.3% excluding excise taxes** EBITDA $2,965 million down 14.1%

[At constant rates of exchange] Adjusted net sales $11,192 million up 7.2% Pierre de Labouchere excluding excise taxes** President & CEO, Japan Tobacco International 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.

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.

International Tobacco Business – International Tobacco Business – Adjusted Net Sales Excluding Tax* EBITDA Before Royalty Payments to JT (Millions of US dollars)*** (Millions of US dollars)***

FY 3/2009 10,445 FY 3/2009 3,452

Volume effect +19 Volume effect –68 Price/product +913 mix effect Price/product +815 mix effect Others –416 2009 at constant 11,192 rates of exchange 2009 at constant 3,967 rates of exchange –1,510 Forex impact** Forex impact** –1,002

FY 3/2010 9,682 FY 3/2010 2,965 9,200 9,400 9,600 9,800 10,000 10,200 10,400 10,600 10,800 11,000 11,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 4,000 4,200 4,400 * 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.

28 Feature & Management

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.

2008* 2009* ppt change Business & History 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) Responsibility

* twelve months moving average Source: AC Nielsen, Core EPOS and JTI Internal Data

Sales Volume Performance by Cluster

Rest of the World 24.9% uiesEvrnet&Rs Financial Information Business Environment & Risk

Sales Volume CIS+ 49.3% North & Performance by Cluster Central Europe 10.9%

South & West Europe 14.8%

South & West Europe CIS+ (Unit: billions of cigarettes) (Unit: billions of cigarettes) 2009 Year-on-year change 2009 Year-on-year change Total sales volume 64.5 0.4% Total sales volume 214.6 –2.4% GFB sales volume 55.7 2.5% GFB sales volume 105.0 0.3%

● JTI increased its total sales volume and GFB sales volume, despite the acceler- ● The overall CIS+ industry size was reduced, and consumers began down- ated industry volume decline. trading to mid-price and value products. Fact Sheets ● Camel achieved 1.6% sales volume growth, driven by strong performance ● The GFB sales volume remained stable as LD captured consumer down- in Italy. trading from the sub-premium price category. ● Winston achieved 6.1% sales volume growth, and continued as the fastest ● In Russia, LD and Glamour contributed to continued sales volume growth, and growing cigarette brand in Italy and France. JTI demonstrated its market leadership with a competitive pricing strategy.

North & Central Europe Rest of the World (Unit: billions of cigarettes) (Unit: billions of cigarettes) General Information 2009 Year-on-year change 2009 Year-on-year change Total sales volume 47.5 7.6% Total sales volume 108.4 –8.0% GFB sales volume 20.4 9.4% GFB sales volume 62.4 –8.1%

● Total sales volume grew due to strong performance in the UK. ● Excluding the impact of specific events in Iran and the Philippines, JTI’s total ● In the UK, while the down-trading trend accelerated, industry volume increased sales volume and GFB sales volume grew strongly, driven by Turkey and the due to reduced overseas travel from the country. As a result, Sterling, our value Middle East. brand, performed strongly. ● In Turkey, Winston, Monte Carlo and LD all increased market share, driving ● The GFB sales volume grew, driven by LD in Poland and by Benson & Hedges, JTI’s volume growth ahead of its competitors. Winston and Camel in Austria.

29 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations

Strong GFB Portfolio GFB Sales Volume Comparison between 2009 and 2008 (excl. specific events*) (Unit: billions of cigarettes) % of total Year-on-year Volume/Year-on-year growth Brands volume change 2008 Act. 245.5 2009 specific events* (7.8) 2008 excl. specific events* 237.7* Prestige (0.9) Sobranie 0.3% (37.5%) Camel, Mild Seven, Premium (1.8) 17.3% (2.4%) Price Benson & Hedges, Silk Cut segment 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.

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.

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

Direct Relationship with Tobacco Growers Improved Quality of Leaf Enhanced Talent Pool

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.

30 Feature & Management

Strategies and Specific Measures 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 Business & History Sharpen focus on responsibility and credibility Develop human resources as a cornerstone of growth

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 Responsibility 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 competitive 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.

EBITDA and EBITDA Margin Growth Rate Financial Information Business Environment & Risk (Millions of US dollars) (%) 5,000 40 35%

3,967 31% 4,000 32 3,452

2,965 3,000 24 2,452

2,000 16 10% 1,090 925 1,000 712 8 551 338 400 441

At constant rates of exchange 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2009 27% CAGR Fact Sheets EBITDA EBITDA Margin * Based on the assumption that the exchange rate of the previous year is applied. General Information

31 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations

Pharmaceutical Business

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, so that it can pursue a high-value added business based on the development of world-class innovative drugs.

FY 3/2010 Business Performance Summary Net sales ¥44.1 billion down ¥12.7 billion EBITDA –¥9.7 billion down ¥14.5 billion Operating loss –¥13.6 billion down ¥14.6 billion

Noriaki Okubo President, Pharmaceutical Business

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 Upfront fee revenue related to anti-osteoporosis drug JTT-305, which was licensed to Merck & Co. of the United 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 – Pharmaceutical Business – Net Sales EBITDA (Billions of yen) (Billions of yen)

FY 3/2009 56.8 FY 3/2009 4.9

R&D expenses Torii Pharmaceutical (non-conslidated) +1.3 Co., Ltd. +5.0 (non-consolidated) Operating income of Torii Pharmaceutical +1.2 Co., Ltd. Royalty income, (non-conslidated) etc. –17.6 Royalty income, –17.0 etc.

FY 3/2010 44.1 FY 3/2010 –9.7

40 42 44 46 48 50 52 54 56 58 60 62 –10 –6–8 –4 0–2 2 4 6 8

32 Feature & Management

R&D Status Some progress was made in the reinforcement of the R&D pipeline in the first year of JT-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 Business & History Roche (Switzerland) obtained the rights to develop and commercialize the compound JTT-705 (oral) Dyslipidemia Phase 2 (Japan) worldwide, with the exception of Japan. (Development stage by Roche: Phase 3) Phase 2 (Japan) JTT-130 (oral) Dyslipidemia Phase 2 (Overseas) Gilead Sciences (US) obtained the rights to develop and commercialize this compound JTK-303 (oral) HIV infection Phase 1 (Japan) worldwide, with the exception of Japan. (Development stage by Gilead Sciences: Phase 3) JTT-302 (oral) Dyslipidemia Phase 2 (Overseas) Merck (US) obtained the rights to develop and commercialize this compound worldwide, JTT-305 (oral) Osteoporosis Phase 2 (Japan) with the exception of Japan.

JTS-653 (oral) Pain Overactive bladder Phase 1 (Japan) Responsibility Phase 1 (Japan) JTT-654 (oral) Type 2 diabetes mellitus Phase 2 (Overseas) JTK-656 (oral) HIV infection Phase 1 (Overseas) JT obtained the rights to develop and commercialize this compound in Japan from Keryx JTT-751 (oral) Hyperphosphatemia Phase 2 (Japan) Biopharmaceuticals (US) (Developed jointly with Torii) JTK-853 (oral) Hepatitis C Phase 1 (Overseas)

Strategies and Specific Measures uiesEvrnet&Rs Financial Information Business Environment & Risk To strengthen the capability for clinical development, including late-stage development,and the capability for drug discovery research To strengthen the capability for clinical development in order to keep up with the progress in clinical development To enhance the capability for drug discovery research in order to reinforce the R&D pipeline • 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.

Out-Licensing Deals In-Licensing Deals FY Code Company FY Code Company

3/2005 JTT-705 (anti-dyslipidemia drug) Roche (Switzerland) 3/2004 Three anti-HIV drugs Gilead Sciences (US) Fact Sheets 3/2005 JTK-303 (anti-HIV drug) Gilead Sciences (US) 3/2008 JTT-751 (anti-hyperphosphatemia drug) Keryx Biopharmaceuticals (US) 3/2007 Pre-clinical trial stage new compound GlaxoSmithKlein (UK) Pre-clinical trial stage anti-body drug 3/2007 MedImmune (US) candidate 3/2009 JTT-305 (anti-osteoporosis drug) Merck (US)

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

33 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations

Food Business

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 Summary Net sales ¥394.7 billion down ¥41.3 billion EBITDA ¥14.5 billion down ¥2.5 billion Operating loss –¥13.7 billion down ¥2.2 billion

Mutsuo Iwai Executive 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 – Food Business – Net Sales EBITDA (Billions of yen) (Billions of yen)

FY 3/2009 436.0 FY 3/2009 17.0

Beverage Beverage –1.2 –0.4 Business Business

Processed food Processed food –18.0 –2.2 Business, etc. Business, etc. Chilled foods (Withdrawal in –22.0 Overhead costs +0.1 Nov, 2008)

FY 3/2010 394.7 FY 3/2010 14.5

340 360350370 390380400 410 420 430 440 2.5 5.0 7.5 10.0 12.5 15.0 17.5

34 Feature & Management

Strategies and Specific Measures 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.

Beverages Business Number of Vending Machines (Years ended March 31) Business & History Implementing measures to strengthen profitability (Machines) • To strengthen the Roots flagship brand, which is acclaimed for 300,000 250,500 257,000 254,000 257,000 its authentic taste of coffee created by JT’s original technology, 237,000 to mark the 10th anniversary of the brand. • To enhance our sales networks led by Japan Beverage Inc., a 200,000 JT subsidiary responsible for operating vending machines nationwide, and to strive to provide conscientious services. 100,000 • To establish a solid profit base by pursuing entire business efficiency. 2006 2007 2008 2009 2010 Responsibility

Processed Foods and Seasonings Businesses Financial Information Business Environment & Risk 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 technology 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 Fact Sheets • 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- General Information 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

35 JAPAN TOBACCO INC. Annual Report 2010 History of the JT Group

Before 1985

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 exclusive 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.

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.

1784 1857

l Austria Tabak is founded by Emperor Joseph II. l Tom Gallaher sets up his business (Londonderry, Northern Ireland).

1891 1898

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

1949 1954

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

1957 1964

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

1977 1981

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

36 Feature & Management

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 Business & History 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 Responsibility 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.

1874 1879 uiesEvrnet&Rs Financial Information Business Environment & Risk l RJR is founded by Richard Joshua Reynolds in Winston, North Carolina. l Sobranie is registered in London, to become one of the oldest cigarette brands in the world.

1913 1931

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

1955 1956

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

1968 1969

l Gallaher acquired by the American Tobacco Company. l Seven Stars lanched, featuring Japan’s first domestically produced charcoal filter. General Information

1984

l Japan Tobacco Inc. Law enacted.

37 JAPAN TOBACCO INC. Annual Report 2010 History of the JT Group

In and After 1985

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 abolition 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

1985 1986 1987

April April l Japan Tobacco Inc. established. l Import tariffs on imported cigarettes abolished. (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.

1993 1994 1995

September October May l The Central Pharmaceutical Research Institute l Government releases first tranche of outstanding l Head office moved back to Minato-ku from established to enhance in-house research JT shares for initial public offering (394,276 shares Shinagawa-ku following completion of new head capabilities. offered at 1,438,000 yen apiece). office building. l JT stock listed on the first sections of stock exchanges in Tokyo, Osaka and Nagoya. l Peter I launched (Russia). November l JT stock listed on stock exchanges in Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo.

l Acquisition of Yelets (Russia).

1999 2000 2001

May l Acquisition of Liggett-Ducat (Russia). l Acquisition of Austria Tabak. l JT acquires the non-U.S. tobacco business of RJR Nabisco Inc. July l JT acquires the food business of Asahi Kasei Corporation, including Asahi Foods and seven other subsidiaries. October l 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). 2005 2006 2007

April April April l JT terminates a licensing contract under which it l JT implements a five-for-one stock split in order to l JT acquires all outstanding shares of Gallaher had exclusive rights to produce and sell Marlboro expand the investor base, effective April 1, 2006. Group Plc. brand products in Japan and use the Marlboro May trademark in the country. l Acquisition of AD Duvanska Industrija Senta in Serbia. June l Acquisition of CRES Neva Ltd. (Russia).

l Glamour launched (Russia, Ukraine, Kazakhstan).

38 Feature & Management

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 business, JT took additional rationalization steps, pursued consolidation of operations in its areas of business diversification and expanded the international tobacco business, thereby strengthening its business foundation. JT significantly strengthened the international tobacco business by Business & History 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.

1988 1991 1992

October l Acquisition of Manchester Tobacco Company Ltd. Responsibility l “JT” communication name introduced. l Acquisition of AS-Petro (Russia).

1996 1997 1998 Financial Information Business Environment & Risk

June April April l Government releases second tranche of outstand- l JT ends its salt monopoly business in line with l JT signs an agreement with Unimat Corporation ing JT shares (272,390 shares offered at 815,000 abolition of the salt monopoly system. (Currently, Japan Beverage Inc.) on a tie-up yen apiece). l The Tobacco Mutual Aid Pension scheme inte- regarding beverage business. grated into the Employees’ Pension scheme. l JT later acquires a majority stake in Unimat. l Acquisition of Tanzanian tobacco production facility. December l American Brands spins off Gallaher which l JT acquires a majority stake in Torii Pharmaceutical becomes Gallaher Group Plc and is listed on the Co., Ltd. through a tender offer. London and New York stock exchanges.

2002 2003 2004

October June l JT repurchases 45,800 own shares to increase its l Government releases third tranche of outstanding management options. 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 2005 l JT repurchases 38,184 own shares to increase its management options. Fact Sheets

2008 2009 2010

January May January l JT acquires a majority stake in Katokichi Co., Ltd. l JTI celebrates its 10th anniversary. l Katokichi Co., Ltd. was renamed TableMark Co., Ltd. through a tender offer. June May April l JTI Leaf Services (US) LLC established. l Smokeless tobacco product Zerostyle Mint launched

l JT acquires a majority stake in Fuji Foods October (Exclusively in Tokyo) General Information Corporation. l Acquisition of leaf suppliers Kannenberg & Cia. July Ltda. (Brazil) and Kannnenberg, Barker, Hail & l JT concentrates its processed food operations, Cotton Tabacos Ltda. (Brazil). including frozen food operations and seasonings November operations, at the Katokichi Group. l Acquisition of leaf suppliers Tribac Leaf Limited (UK).

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.

39 Japan Tobacco Inc. annual Report 2010

Responsibility

Corporate Governance �� 41 Activities Contributing to the Environment and Society �� 49

40 Japan Tobacco Inc. annual Report 2010 Corporate Governance Feature & Management I Basic Concept of Corporate Governance and Basic Information Including Capital Structure and Corporate Attributes

1. Basic Concept and social environments change. Based on this recognition, JT has JT recognizes that prompt and proper decision-making and business been striving hard to enhance corporate governance as a top manage- execution are vital to increasing our corporate value and responding ment priority. appropriately to new challenges to come in the future, as the business Business & History

2. Capital Structure Combined 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 Responsibility 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 uiesEvrnet&Rs Financial Information Business Environment & Risk 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 Fact Sheets Presence or absence of parent company None Number of consolidated subsidiaries Between 100 and 300

4. Other Factors which May Materially Affect Corporate Torii Pharmaceutical Co., Ltd. (hereinafter referred to as “Torii Governance Pharmaceutical), which engages in the pharmaceutical business, is a The Japan Tobacco Inc. Law (the “JT Law”) obligates the government consolidated subsidiary of JT and is listed on the Tokyo Stock Exchange. to hold JT shares. As of the end of March 2010, the government held While JT is responsible for R&D, Torii Pharmaceutical undertakes produc- General Information 50.01% of all outstanding JT shares. tion and sales. In order to perform these different functions efficiently, The Minister of Finance has the authority to supervise JT under the the two companies maintain a cooperative relationship. JT respects the JT Law and Tobacco Business Law. need to ensure a certain degree of independence for Torii Pharmaceutical by refraining from undermining the company’s business judgment.

41 Japan Tobacco Inc. annual Report 2010 Corporate Governance

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

1. Matters Concerning the Organizational Structure and Although JT does not have any specific plan to appoint an outside Organizational Management director at the moment, it will continually consider the usefulness of an outside director and the qualifications of candidates. Form of organization A company with auditors

Member of Advisory Committee Matters concerning directors Hiroyuki Itami

Chairman of the Board of Directors Chairman Professor, Graduate School of Management of Science and Technology, Tokyo University of Science. Number of directors 9 Kazuo Inamori Number of outside directors None Founder and Chairman Emeritus, Kyocera Corporation Sakutaro Tanino The reason for the adoption of the current organizational system: Former Japanese Ambassador to India and China /Acting President, While there is no outside director, JT selects persons suitable for the Japan-China Friendship Center post of director in light of the candidates’ personality, judgment and Tomijiro Morita experiences. In addition, in order to ensure the appropriate exercise Chairman of the Board, The Dai-ichi Life Insurance Company, Limited of the function of providing advice from the perspective of an outsider Sakue Mizukoshi that is expected of an outside director, JT has established the Advisory President, SEVEN & i Publishing Co., Ltd. Committee, which comprises 5 outside experts and advises the man- (The appointment is effective July 1, 2010.) agement team from a broad perspective with regard to how the company should operate in the medium to long term, and other issues Matters concerning auditors of similar importance. In addition, JT has established an objective and Presence or absence of Audit The Audit Board is in place. neutral management monitoring system based on audits conducted Board by auditors (the majority of the auditors are outside auditors (all of the Number of auditors 4 three auditors have the status of an independent executive)) from an independent and fair standpoint. There are also the Compensation Cooperation between auditors and an independent auditor: Advisory Panel and the Compliance Committee, both of which include While auditors and the independent auditor (Deloitte Touche Tohmatsu outside members with expert knowledge. In light of the above, we LLC) conduct audits individually, they endeavor to enhance their coop- believe that the existing systems enable adequate monitoring of the eration in order to ensure appropriate audits, for example by sharing execution of business. 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

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

Audit report Board of Accounting audit/Operating audit Audit Board Directors Introduction of compliance-related matters Report nine members four members Review of the policy and the (including three outside Independent Advisory Supervision rule relating to compensation Compliance auditors) of the for board members and Committee Auditors Committee Advice Accounting performance executive officers audit five members eight members (outside members) Auditor’s Office Compensation (including two outside President and members) Chief Executive Advisory Panel Operational Officer Review and five members Business Report/ Executive (including two outside Compliance Assurance Proposal Committee members ) Office Division Executive Lawyers Internal audit Officers Advice Departments Accounting audit/Operating audit

Group audit Group Companies

42 Feature & Management Cooperation between auditors and the internal audit division: Although one of them, Mr. Koichi Ueda, is the representative director While auditors and the Operational Review and Business Assurance of the Resolution and Collection Corporation, this corporation does not Division conduct audits individually, they endeavor to enhance their have any business relations with JT. Therefore, Mr. Ueda himself has cooperation in order to ensure appropriate audits, for example by no direct interest in JT. As well, neither of the other two outside auditors sharing information on the results of their respective audits and, as has any direct interest in JT. necessary, exchange information and opinions with each other. At JT, auditors including outside auditors exercise an objective and neutral management monitoring function based on audits conducted Information concerning outside auditors from an independent and fair standpoint. JT has designated all of the Business & History three outside auditors as independent executives based on its judg- Appointment of outside auditors There are outside auditors. ment that in light of the attributes of them and their close relatives, Number of outside auditors 3 there is not any risk of conflicts of interest arising between them and There are three outside auditors at JT. Those outside auditors are ordinary shareholders. appointed in light of their experiences and broad perspective in their respective backgrounds. Responsibility Name Supplementary information Reason for appointment Hisao Tateishi Joined the Ministry of Finance in April 1971. Mr. Tateishi’s appointment is based on the Appointed director-general of the Kanto-Koshinetsu Regional Taxation Bureau in judgment that he is qualified to serve as an July 1997. outside auditor of JT because of the experi- Appointed deputy director-general of the Personnel Bureau in July 1999. ences and broad perspective acquired through Appointed deputy director-general of the Personnel and Pension Bureau of the his many years of service for the government Ministry of Internal Affairs and Communications in January 2001. and on the board of the Federation of National Appointed managing director of the Japan Foundation for Regional Vitalization in Public Service Personnel Mutual Aid July 2001, Associations. He was also designated as an Appointed managing director of the Federation of National Public Service independent executive based on the judgment Financial Information Business Environment & Risk Personnel Mutual Aid Associations (KKR) in July 2003. that in light of attributes of him and his close Appointed senior managing director of KKR in September 2005. relatives, there is not any risk of conflicts of Appointed standing auditor of JT in June 2007 (this appointment remains in effect). interest arising between him and ordinary shareholders. Also designated as independent executive. Takanobu Fujita Joined Japan Broadcasting Corp. (NHK) in April 1963. Mr. Fujita’s appointment is based on the judg- Appointed a news commentator at NHK in June 1990. ment that he is qualified to serve as an outside Retired from NHK in January 1995. auditor of JT because of the experiences and Appointed professor at Kansei Gakuin University, School of Policy Studies in broad perspective concerning political and April 1999. economic affairs that were acquired through Appointed visiting professor at Kansei Gakuin University, School of Policy Studies his tenures as a news commentator at NHK (this appointment remains in effect). and as a university professor. He was also Appointed auditor of JT in June 2005 (this appointment remains in effect) 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 Also designated as independent executive. and ordinary shareholders. Koichi Ueda Enrolled as a student of the Judicial Research and Training Institute in April 1967. Mr. Ueda’s appointment is based on the judg- Appointed public prosecutor in April 1969. ment that he is qualified to serve as an outside Fact Sheets Appointed Superintending Public Prosecutor of the Tokyo High Public Prosecutors auditor of JT because of the experiences and Office in June 2006. broad perspective acquired through his service Retired as public prosecutor in December 2006 at the mandatory retirement age. in the judicial field. He was also designated as Registered as an attorney-at-law in January 2007. an independent executive based on the judg- Appointed professor at Meiji University, Law School in April 2007 (this appointment that in light of the attributes of him and ment remains in effect). his close relatives, there is not any risk of Appointed as representative director of the Resolution and Collection Corporation conflicts of interest arising between him and (RCC) in January 2009. ordinary shareholders. Appointed as representative director and president of RCC in March 2009 (this General Information appointment remains in effect). Appointed auditor of JT in June 2009 (this appointment remains in effect).

Also designated as independent executive.

Other matters concerning major activities of outside auditors: all of the 12 meetings of the Audit Board since his appointment on June In FY 3/2010, Mr. Tateishi and Mr. Fujita attended all of the 18 meetings 23, 2009. Those outside auditors adequately performed their duties as of the Board of Directors and the 16 meetings of the Audit Board, and auditors by asking questions and making statements as necessary. Mr. Ueda attended all of the 13 meetings of the Board of Directors and

43 Japan Tobacco Inc. annual Report 2010 Corporate Governance

Matters concerning incentives as executive officers comprises basic monthly compensation and stock

Provision of incentives Introduction of a performance-linked remu- options, as they are required to participate in decision-making regarding for directors neration system and a stock option companywide business strategies aimed at increasing the corporate scheme value of JT and to perform their audit-related duties. Officers eligible for stock Directors, Executive Officers As part of remuneration for directors and executive officers, JT option grants introduced a stock option scheme in order to enhance the motivation to contribute to an increase in the corporate value and boost corpo- Supplementary information concerning incentives: rate morale. Remuneration for directors is linked to JT’s business performance for each year and the company’s medium- and long-term corpo- Matters concerning remuneration for directors rate value. Means of disclosure Annual securities report, business opera- Specifically, remuneration for directors who concurrently serve as tion report (business report), etc. executive officers comprises basic monthly compensation and an Disclosure status The total amount and its breakdown of annual bonus linked to the company’s business performance in the remuneration payments to all directors is relevant year, and stock options, the value of which is linked to the disclosed. medium to long term corporate value of JT, as they are expected to The total amount of consolidated remuneration payments to persons who received achieve targets of their assigned business through their daily execution consolidated remuneration of ¥100 million of business. Remuneration for directors who do not concurrently serve or more each.

Information concerning remuneration for senior officers: The remuneration payments to senior officers made in FY 3/2010 are as follows: Officer type Total remuneration Total remuneration amount by remuneration type (in millions of yen) Number of officers amount Basic pay Executive bonus Stock option grants concerned (in millions of yen) 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.

The following information is disclosed in the 25th annual securities In accordance with the above concept, remuneration for senior report. officers comprises basic monthly compensation and a bonus linked to Total amount of consolidated remuneration paid to persons who the company’s business performance in the relevant year, and stock received consolidated remuneration of ¥100 million or more each. options, the value of which is linked to the medium to long term corporate value of JT. members include outside experts, the amount of compensation for JT’s basic concept of executive remuneration for senior officers is as directors is determined in consultations held by the Board of Directors follows: and that for auditors in consultations held by the Audit Board within • Setting the remuneration at a level sufficient to secure personnel the limit approved by the General Meeting of Shareholders. The amount with superior capabilities of executive bonuses is determined at a meeting of the Board of • Linking the remuneration to business performance so as to moti- Directors in light of the business performance in the relevant business vate senior officers to enhance performance. year, based on deliberation by the Compensation Advisory Panel and • Linking the remuneration to medium and long-term corporate within the limit approved by the General Meeting of Shareholders. value Unlike remuneration for directors, a large portion of which is linked • Ensuring transparency through the implementation of deliberation to the business performance of the company, remuneration for audi- at the Compensation Advisory Panel that includes outside experts, tors comprises only basic monthly compensation in light of the main introduction of quantitative schemes (annual remuneration quotas role of auditors, which is to audit the status of compliance with laws and the upper limit on stock option grants) and continuous monitor- and regulations. ing based on objective data.

44 Feature & Management Support for outside auditors Meanwhile, the Executive Committee, comprising the company’s JT is striving to develop an appropriate environment for audits by allocat- President and other members appointed by the President, discusses ing sufficient staff to the Auditor’s Office as an organization supporting important management issues—particularly management policy and the auditors in performing their duties and establishing an adequate basic plans regarding overall business operations—in addition to mat- information communication system so that auditors, in their capacity ters to be referred to the Board of Directors. as independent agents with a mandate from shareholders, can ade- JT has adopted the Audit Board System, under which auditors, in quately audit the execution of business by directors and executive their capacity as independent agents with a mandate from shareholders, officers in order to ensure sound and sustainable growth and maintain examine the performance of duties by directors and executive officers Business & History and enhance public trust in the company. in order to ensure sound and sustainable growth and maintain and When directors and executive officers detect any matter that may enhance public trust in the company. It should be noted that Mr. Gisuke cause substantial damage to the company, they are due to report it to Shiozawa, one of the auditors, has a significant level of knowledge the Audit Board. Moreover, when directors and employees detect any concerning financial and accounting affairs due to his experience as the evidence of malfeasance in financial documents or serious breaches of head of JT’s financing division. laws or the company’s articles of incorporation, they are due to report The Operational Review and Business Assurance Division, which is

it to the Audit Board, along with other relevant matters that could affect responsible for overseeing internal audits, examines and assesses the Responsibility the company’s management. system for internal management, including the management of group Auditors are allowed to attend not only meetings of the Board of companies, from its objective standpoint as an organization indepen- Directors but also other important meetings. When directors and dent from the organizations involved in business execution with due employees are asked by auditors to compile important documents consideration of such viewpoints as relevance, legal compliance, and available for their perusal, to accept field audits and to submit reports, risk and submits reports and proposals to the President. The division they are due to respond in a prompt and appropriate manner. Directors also reports to the Board of Directors. Furthermore, the division is are due to cooperate with audits and ensure the provision of funds promoting efforts to enhance the audit system for the entire JT Group uiesEvrnet&Rs Financial Information Business Environment & Risk necessary for covering audit-related expenses so as to secure their by cooperating with group companies both in Japan and abroad. effectiveness. The Operational Review and Business Assurance Divi- JT has employed Deloitte Touche Tohmatsu LLC (DTT) as its inde- sion and the Compliance Office maintain cooperation with auditors by pendent auditor, and DTT has conducted audits based on the Company exchanging information. Act and the Financial Instruments and Exchange Act. The certified public accountants who audited JT’s financial state- 2. Matters Concerning Functions such as the Execution ments for FY 3/2010 and the persons who assisted the auditing work of Business, Audit and Supervision, Nomination, etc. are as follows: The Board of Directors meets once a month in principle and on more (Certified public accountants) Tatsuo Igarashi (five years), Shuichi occasions if necessary, in order to make decisions with regard to the Momoki (five years), Satoshi Iizuka (three years) matters specified by laws and regulations and other important matters, * Figures in parentheses represent the number of consecutive years in which the certified to supervise business execution and to receive reports from the public accountants have engaged in the accounting audit of JT. directors on the status of business execution. In order to maintain a high quality of business execution, JT has (Assistants for the audit work) adopted the Executive Officer System, under which executive officers Certified public accountants: 11 persons, Junior accountants: 12 per-

appointed by the Board of Directors execute business in their respec- sons, Others: 9 persons Fact Sheets tive areas of responsibility, in accordance with a companywide business While auditors, internal audit organizations including the Operational strategy decided by the Board, by exercising the authority delegated Review and Business Assurance Division, and independent auditors to them. In addition, the Chairman of the Board has been positioned conduct audits individually, they endeavor to enhance their cooperation as a non-executive director in order to concentrate on the function of in order to ensure appropriate audits, for example by sharing informa- supervising management. tion on the results of their respective audits. Moreover, as part of its efforts to enhance corporate governance, JT As for the nomination of candidates for the posts of director and has established the Advisory Committee, which comprises five outside auditor, the Board of Directors makes a decision by taking into consid- General Information experts and advises the management team from a broad perspective eration the personality, judgment and experiences of the candidates, with regard to how the company should operate in the medium to long and then the nominated candidates are proposed at a General Meeting term, and other issues of similar importance. of Shareholders.

45 Japan Tobacco Inc. annual Report 2010 Corporate Governance

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 Right Supplementary information Sending the notice of a General Meeting The notice of a General Meeting of Shareholders for 2009 was sent on June 1 of the year and that for of Shareholders at an early date 2010 was sent on June 2 of the year. Avoiding scheduling a General Meeting A General Meeting of Shareholders for 2009 was held on June 23 of the year and that for 2010 on June of Shareholders for a date on which 24 of the year. many other companies’ shareholders’ meetings are concentrated Allowing the exercise of the voting right JT not only allows the exercise of the voting right via the website designated by the company (E-voting) through electromagnetic means 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 Activities Supplementary 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 Not provided exchanges and other organizations several times every year. Periodic briefings for analysts and JT holds briefing sessions after the announcement of earnings at its offices or Provided institutional investors neighboring facilities. Periodic briefings for overseas investors JT holds teleconferences for overseas investors after the announcement of Provided earnings, and JT officials visit overseas investors several times every year to provide briefings. Publication of IR materials on the JT publishes information concerning earnings, other timely disclosure materials, Provided website materials used at earnings briefings, annual securities reports or quarterly securities reports, and notices of invitation to General Meetings of Shareholders. Establishment of a division (appointment JT has appointed an officer dedicated to IR at the Media & Investor Relations of an officer) in charge of IR Division who reports to the executive in charge of communications.

3. Status of Efforts to Respect the Standpoint of Stakeholders Supplementary information Establishment of internal rules, etc. The JT Group has set itself the mission of “creating, developing and nurturing its unique brands to win concerning the respect of the standpoint customer trust, while understanding and respecting the environment and the diversity of societies and of stakeholders individuals,” and there is a group-wide consensus on the mission. Implementation of environment protec- From the viewpoint of achieving the JT Group Mission, JT engages in such activities as reducing the tion activity, CSR activity, etc. burden on the environment, making contributions to local communities, tree-planting and forest preservation, and youth education and development, and it publishes the contents of those activities through an annual CSR report. Formulation of the policy concerning the In order to clarify the authorities and responsibilities concerning the handling of various corporate infor- provision of information to stakeholders mation, JT has established rules concerning information disclosure and strives to ensure timely and appropriate information disclosure.

46 Feature & Management IV Basic Concept of the Internal Control System and Development of the System

JT has been endeavoring to ensure appropriate business operations 2. Procedures and Arrangements for Storage and through efforts to enhance compliance, internal audits and risk manage- Management of Information on the Performance of ment, and implementing measures to ensure the effectiveness of Duties by the Directors audits, such as improving arrangements and procedures for reporting JT makes sure to properly store and manage the minutes of Annual the necessary matters to auditors, as is required of a company adopting General Meetings of Shareholders, meetings of the Board of Directors, the Audit Board System. and meetings of the Executive Committee, in line with laws, regulations Business & History We will continue these efforts while reviewing and revising the and internal rules. current system as necessary, and ensure appropriate business execu- Information on other important matters relating to business execution by taking the following steps: tion and decision-making are stored and managed by the relevant departments and divisions as specified by internal rules on the alloca- 1. System to Ensure that Directors and Employees Perform tion of responsibilities and authorities (hereinafter referred to as the their Duties in Accordance with Laws, Regulations and “Responsibilities/Authorities Allocation Rules”), in accordance with

the Company’s Articles of Incorporation rules on the supervision of the processes of decision making, procure- Responsibility With regard to the compliance system, JT has established the Guide- ment and accounting. lines for Conduct based on internal rules concerning compliance in order to ensure that directors and employees comply with laws, regulations, 3. Rules on Management of Risk of Loss and the company’s articles of incorporation, social norms, etc., and set up Procedures/Arrangements for Other Matters the Compliance Committee as an organization responsible for ensuring JT has established internal rules on the management of risk of loss thorough compliance. This committee, headed by the company’s Chair- relating to monetary and financial affairs, and ensures that relevant man, includes outside experts among its members and reports directly reports are made to the Executive Committee on a quarterly basis. uiesEvrnet&Rs Financial Information Business Environment & Risk to the Board of Directors. With regard to risk of loss relating to other affairs, the relevant Meanwhile, the Compliance Office is charged with overseeing departments and divisions specified by the Responsibilities/Authorities efforts to improve the company-wide compliance system, identify Allocation Rules conduct proper management, identifying risk and compliance problems and enhance the effectiveness of the compliance reporting it to the Executive Committee or referring it to the Committee system by enlightening directors and employees about compliance for deliberation, depending on the importance of the identified risk. through various compliance education programs. JT has assigned sufficient staff to the Operational Review and Regarding the internal reporting system (whistle-blower system), JT Business Assurance Division, which functions as the company’s inter- has a counter through which employees may report any misconduct nal audit organization. This division examines and evaluates the internal they have detected. The Compliance Office is charged with investigat- control systems of JT and JT Group companies—in light of the impor- ing reported cases and implementing company-wide measures to tance of internal control procedures and arrangements and the risks prevent the recurrence of misconduct after holding consultations with involved—from an objective viewpoint, in its capacity as an entity the departments and divisions concerned. independent of the organizations responsible for business execution, Matters of particular importance shall be referred to the Compliance and reports its findings and present proposals to the President, as well Committee for deliberation. as reporting to the Board of Directors.

In order to ensure the reliability of its financial reporting, JT is operat- To prepare for possible emergencies, JT has produced a manual for Fact Sheets ing a relevant internal control system that it has established in accor- crisis management and disaster response. In the event of an emer- dance with the Financial Instruments and Exchange Act. gency or a disaster, JT is ready to establish an emergency project By allocating a sufficient level of staff to the task of evaluating system under the supervision of the Corporate Strategy Division, and financial results and reporting them, the company is striving to maintain make prompt and proper responses under the leadership of senior and improve the reliability of its financial reporting. management and through close cooperation between the relevant The internal audit system is overseen by the Operational Review departments and divisions. and Business Assurance Division, which examines and evaluates General Information 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.

47 Japan Tobacco Inc. annual Report 2010 Corporate Governance

4. System to Ensure that Directors Perform When directors or executive officers detect any matter that may their Duties Efficiently cause substantial damage to the company, they are due to report it to The Board of Directors meets once a month in principle and on more the Audit Board. Moreover, when directors and employees detect any occasions as necessary, in order to make decisions with regard to the evidence of malfeasance in financial documents or serious breaches matters specified by laws and regulations and other important matters of laws or the company’s articles of incorporation, they are due to and to supervise business execution. Meanwhile, the Executive report them to the Audit Board, along with other relevant matters that Committee, comprising the company’s President and other members could affect the company’s management. appointed by the President, discusses important management issues, As auditors are allowed to attend not only meetings of the Board particularly management policy and basic plans regarding overall busi- of Directors but also other important meetings, they usually attend ness operations of the company, in addition to matters to be referred meetings of the Executive Committee. When directors, executive to the Board of Directors. officers or employees are asked by auditors to compile important JT has adopted the Executive Officer System, under which executive documents available for their perusal, to accept field audits and to officers appointed by the Board of Directors execute business in their submit reports, they are due to respond to the request in a prompt respective areas of responsibility, in accordance with a company-wide and appropriate manner. business strategy decided by the board, by exercising the authority Furthermore, directors are due to cooperate with audits and ensure delegated to them. the provision of funds necessary for covering audit-related expenses Moreover, in order to ensure that business operations are managed so as to secure their effectiveness. The Operational Review and Busi- in ways that contribute to the business efficiency and flexibility of the ness Assurance Division and the Compliance Office maintain coopera- company as a whole, basic matters concerning the company’s organization with auditors by exchanging information. tion, allocation of duties to officers and staff and the roles of individual Meanwhile, JT’s basic concept on the exclusion of anti-social ele- divisions are specified by the relevant internal rules. Meanwhile, in ments and its efforts to exclude such elements are as follows: order to enable prompt decision-making, the departments and divisions 1) Basic concept on the exclusion of anti-social elements responsible for business execution are specified by the “Responsibili- JT is resolved not to have any relations with, and to fight against, ties/Authorities Allocation Rules.” anti-social groups and organizations that pose a threat to the order and safety of civil society, and organizations involved in tobacco 5. System to Ensure the Appropriateness of Business smuggling or counterfeiting. Operations within the JT Group The company will also never engage in practices that would The JT Group has set itself the mission of creating, developing and promote the activities of antisocial elements. If it faces a problem nurturing its unique brands to win customer trust, while understanding involving such elements, JT will devote company-wide efforts to and respecting the environment and the diversity of societies and dealing with it. individuals, and there is a group-wide consensus on the mission. We 2) Efforts to exclude anti-social elements have specified the functions and rules necessary for group manage- The concept on the exclusion of anti-social elements described ment based on a group management policy, in order to optimize the above is specified and fully communicated to all employees as operations of the JT Group as a whole. part of the company’s code of conduct. With the General Admin- Moreover, we have been enhancing our systems for compliance istration Division at JT’s headquarters assuming the responsibility (including the internal reporting system), internal audits, financial affairs for supervising efforts to exclude anti-social elements, the officers management, etc. in cooperation with JT Group companies. in charge of those efforts have been assigned to branch offices across Japan, and are cooperating with police, lawyers and other 6. System for Assisting Auditors and Reporting to relevant organizations and parties to gather and share informa- Auditors, and Other Systems to tion in order to deal with such elements in an organized way. Ensure Effective Auditing The measures to be taken by JT in response to unjust and unreason- JT has allocated sufficient staff to the Auditor’s Office as an organization able demands from anti-social elements are specified in the company’s supporting the auditors in performing their duties. In addition, the manual for corporate defense, which is available for reference at all company makes sure to review and reform the staffing structure as offices and plants. JT also consistently educates employees, including necessary based on consultations with the Audit Board. The Audit those working for its affiliates, about the importance of excluding Board is involved in the selection of personnel of the Auditor’s Office antisocial elements by providing relevant training as necessary. in order to ensure the office’s independence from directors.

48 Japan Tobacco Inc. annual Report 2010 Activities Contributing to the Environment and Society Feature & Management 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.

Our Approach to Protecting the Global Environment management to cover all consolidated subsidiaries, both in Japan and Protecting the global environment is critical to our efforts to fulfill our abroad, and have gradually been introducing an environmental manage- social responsibility and is a top priority for our corporate management. ment system. In addition, we have made all consolidated subsidiaries

In accordance with the JT Group Environmental Charter, the JT Group subject to major environmental management targets — reduction Business & History has acted as a good corporate citizen in all of the countries and regions targets for the emission of greenhouse gases, the water usage and in which it operates and promoted company-wide initiatives to further the generation of waste — and aim to steadily achieve them. reduce the environmental impact of its corporate activities. Moreover, we established the JT Group Environmental Action Plan (2009-2012) as Fight Against Global Warming a medium-term plan for concrete environmental protection activities, By setting the target of reducing overall greenhouse gas emissions by with the aim of realizing the philosophy outlined in the JT Group Envi- 10% in 2012 compared with 2007, we are making active reduction efforts. ronmental Charter. The operational divisions of JT, as well as subsidiaries In 2009, JT achieved a 40.8% reduction compared with 1995 in Japan. Responsibility and affiliates, have been striving to achieve the targets set forth under Our subsidiaries in Japan achieved a 6.9% reduction compared with 2007 this medium-term plan. by reducing electricity usage through renewal of refrigeration equipment and introduction of EcoCute systems as well as efforts to make air con- Group Environmental Management ditioning management more efficient at Plants and Laboratories. The JT Group recognizes that in order to deal with challenges with which the international community as a whole is confronted, such as Effective Use of Resources the preservation of the environment and sustainable utilization of In order to preserve the limited natural resources available, the JT resources, we have to further enhance environmental management of Group is striving to reduce the water usage and the generation of waste uiesEvrnet&Rs Financial Information Business Environment & Risk the entire JT Group. Therefore, under the JT Group Environmental and is promoting the reuse and recycling of used materials. Action Plan (2009–2012), we have expanded the scope of environmental

Trends in Greenhouse Gas Emissions Trends in CO2 Emissions per Million Cigarettes JT/Japanese subsidiaries JTI

(1,000t-CO2) (t-million cigarettes) 500 0.6

395.0 407.4 0.493 380.3 0.5 0.458 0.456 400

0.4 300 239.6 247.5 226.4 0.3 200 0.2

100 0.1

2008 2009 2010 2007 2008 2009

JT (Years ended March 31) (Years ended December 31) Fact Sheets Twenty-five Japanese subsidiaries

Trends in Water Usage Amount Trends in Waste Generation and Recycling Rate JT/Japanese subsidiaries JT/Japanese subsidiaries

(1,000 m3) (1,000 t) (%) 8,000 7,211 150 100 6,579 6,144 120 99 6,000 97.9 General Information 90 97.6 98 97.5 4,000 97.7 97.2 96.9 60 97 2,303 43.5 2,139 1,977 41.6 41.3 2,000 27.1 25.9 25.3 30 96

2008 2009 2010 2008 2009 2010 JT (Years ended March 31) Waste Generation Amount for JT Recycling Rate (Years ended March 31) Twenty-five Japanese subsidiaries Waste Generation Recycling Rate Amount for Japanese subsidiaries

49 Japan Tobacco Inc. annual Report 2010 Activities Contributing to the Environment and Society

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 nonsmokers. By engaging in various initiatives, we will fulfill our social responsibility as a tobacco company.

Examples of the Various Initiatives Setting Up Smoking Areas We work closely with local governments and facility managers in setting Campaign Advertising up smoking areas in public facilities such as railway stations and airports, in order to promote coexistence between smokers and nonsmokers. Community Clean-up Event JT has been engaged in the “Pick Up and You will Love Your City” initiative since May 2004 in an effort to eradicate public littering by raising awareness of the problem and organizing rubbish collection. This initiative is aimed at occasions such as community festivals and other public events and conducted in cooperation with local governments, companies, and volunteers. Since these activities began in May 2004, community 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 participating parties to 1,987 and the number of participants to approxi-

Public smoking area in front of the TAMAPLAZA TERRACE Smoking Area mately 1.04 million. Sakai Station in Osaka

Advice on Separation of Smoking and Nonsmoking Areas We 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. Community Clean-up Event “Pick Up and You will Love Your City”

“Smoking Manners” Campaign Advertising For further information about JT’s efforts to improve the smoking Since JT believes that improving the “smoking manners” of individuals environment, please access the “Smokers’ Style” website. is essential to improving those of society as a whole, we are constantly URL: http://www.jti.co.jp/sstyle/index.html engaged in a campaign to raise awareness about the need for appropriate 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.

“Smokers’ Style” website

50 Feature & Management JT Group’s Social Contributions Arts and Culture The JT Group has strived to make contributions to society in all the The JT Group engages in activities that contribute to the development countries and regions in which we operate, building our relationship and advancement of arts and culture. with local communities by acting as a good corporate citizen. We have The JT Group’s major activities in the field of arts and culture are established various key areas for social contribution activities in the JT as follows: Group Social Contribution Policy. • Operating the Tobacco & Salt Museum • Supporting the training of musicians

1. JT Group’s Social Contributions Policy • Operating the Affinis Arts Foundation Business & History The JT Group will fulfill its corporate responsibility through making • Operating the JT Biohistory Research Hall sustained contributions to the communities in which it operates. As a • Organizing the JT Forum cultural events good neighbor, the JT Group will support the regeneration and revitalization of local communities, focusing on: • Social Welfare • Arts and Culture • Environmental Protection • Disaster Relief Responsibility The JT Group will contribute to the development of the local communities 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 The Affinis Arts Foundation The Tobacco & Salt Museum (Photo: K. Miura) local communities while encouraging employees to be involved in such activities themselves. Environmental Protection In appreciation of what our natural environment brings to our business uiesEvrnet&Rs Financial Information Business Environment & Risk 2. Contributions to Japanese Society and out of consideration for its preservation, the JT Group engages in Social Welfare environmental protection activities such as reforestation, forest pres- As part of our efforts to contribute to the regeneration and revitalization ervation and street cleanup campaigns. of local communities as a good neighbor, the JT Group is implementing The JT Group’s major activities in the field of environmental protec- a variety of social welfare programs. tion are as follows: The JT Group’s major activities in the field of social welfare are • Conducting reforestation and forest preservation activities as follows: • Organizing the “Pick Up and You will Love Your City” community • Implementing the NPO Support Projects for Youth Development cleanup campaign • Providing the Scholarships for Students from Asia • Conducting local community cleanup activity • 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 Fact Sheets

Reforestation and Forest Preservation Activitie

Disaster Relief

The JT Group conducts disaster relief activities by providing assistance General Information The Scholarships for Students from Asia The Volleyball Workshop to the affected areas through group-wide cooperation. Such activities are conducted through the JTI Foundation.

51 Japan Tobacco Inc. annual Report 2010 Activities Contributing to the Environment and Society

3. Social Contributions Abroad The 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 Philanthropy JTI’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 Welfare Many JTI entities have initiated programs that benefit disadvantaged JTI UK supports ‘Crisis UK’. a charity that helps single homeless groups. The needs and opportunities vary by country and community people to develop and acquire qualifications in order to reintegrate but there are common themes. For example, JTI Belgium is active in them into society. This support enables the charity to run an extra 800 this area, working closely with the ’United Fund for Belgium’ to provide educational classes a year in numeracy, literacy and IT skills. free meals and other forms of assistance to the elderly and underprivileged throughout the country. Education of underprivileged groups is one recurring theme in JTI’s JTI Russia has partnered with local authorities in Moscow, Yelets, social welfare agenda. Promoting social diversity is another – appropri- and St. Petersburg, to support pensioners and World War II veterans. ate for a Company that takes pride in its ability to assimilate talent from The ‘Silver Spring’ and ‘Autumn of Hope’ initiatives provide food, clothes every corner of the world. and other durable goods to its elderly citizens. JTI also assists in In Spain, JTI Iberia created and launched a new project called developing social and cultural events for the elderly, and such activities ‘HERMES’ in close cooperation with UNED, the Spanish Government’s will spread to the other regions of Russia during 2010. Open University. This is a national initiative to promote the social and On the other side of the world, JTI Malaysia has similar projects workforce integration of immigrant groups in a country where over that contribute both financially and via other assistance to 16 elderly 11% of the population is non-native. The intent is to remove barriers welfare homes that provide shelter for those no longer able to look that adult newcomers face in settling-in and enable them to become after themselves. This activity also provides JTI employees with the productive members of the community by helping validate college opportunity to volunteer their time as part of their contribution of giving degrees from their own countries or complete their studies in Spain. back to the communities in which they work.

Social Shop workers supported by JTI Belgium Crisis students with their tutor in a JTI UK supported class

JTI Malaysia supports 16 elderly welfare homes JTI Iberia supports adult educational program with UNED 52 Feature & Management Arts and Culture In 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 Business & History 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 JTI UK supported an exhibition of at any one time. In 2008 through 09, JTI’s support enabled the uploading the work of Anish Kapoor of 1,200 paintings that can now be viewed on-line. Responsibility

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. JTI Russia supports the Mariinsky Theater led by Financial Information Business Environment & Risk In addition, JTI France supported a concert at the renowned Théâtre Maestro Valery Gergiev 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 JTI France supported the IMAS

concert conducted by Seiji Ozawa Fact Sheets language classes. in 2009

JTI Italy was a partner of the Teatro alla Scala Japan Tour in 2009 General Information

JTI-Macdonald’s partnership with the Japanese Canadian Cultural Centre in Canada 53 Japan Tobacco Inc. annual Report 2010 Activities Contributing to the Environment and Society

Disaster Relief The Swiss-based JTI Foundation is an important channel for the information processing capabilities to improve prediction and risk Company’s support for victims of natural disasters. It works closely assessment in ways that will enable national governments and other with governments, NGOs and emergency relief organizations around institutions in the region to take additional steps to protect lives and the world. infrastructure in the event of major incidents. 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 and JTI Philippines supported JTI Foundation also signed a four year partnership agreement with typhoon victims in the Philippines 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

54 Japan Tobacco Inc. annual Report 2010 Feature & Management Business & History Responsibility Business Environment & Risk Business Environment & Risk

Business Environment for the JT Group �� 56

Major Risks of Businesses �� 61 Financial Information Fact Sheets General Information

55 Japan Tobacco Inc. annual Report 2010 Business Environment for the JT Group

The JT Group has long been committed to many of the FCTC’s provi- smoke) were adopted. In addition, resolutions were adopted with sions, including the prevention of youth smoking and the elimination regard to establishing an intergovernmental negotiating body for the of illicit trade, and has engaged in active efforts to address those issues purpose of developing a protocol on Article 15 (illicit trade in tobacco on a voluntary basis. products) and with regard to the timetable for developing guidelines Meanwhile, JT believes that tobacco should be regulated by indi- concerning other major provisions. At the third session of the conven- vidual countries in light of their own circumstances, such as their local tion, which was held in November 2008, guidelines for Paragraph 3, laws and regulations and cultural and social conditions. Article 5 (protection against the tobacco industry), Article 11 (packaging and labeling) and Article 13 (tobacco advertising and promotion) were Major Elements of Regulation on adopted, a report was made on the progress in intergovernmental Global Tobacco Business negotiations concerning the adoption of a protocol regarding Article WHO: “Framework Convention on Tobacco Control” 15, and resolutions were adopted with regard to how to proceed with Following six rounds of intergovernmental negotiations, the Framework work concerning other major matters. Convention on Tobacco Control (FCTC) was adopted by World Health The JT Group has long been committed to many of the FCTC’s provi- Assembly of the WHO in May 2003 and came into force on February sions, including the prevention of youth smoking and the elimination of 27, 2005, 90 days after its ratification by 40 signatory nations. As of illicit trade, and engaged in active efforts to address those issues on a March 31, 2010, a total of 168 countries (including the EC) were party voluntary basis. Meanwhile, JT believes that tobacco should be regulated to the FCTC. Japan signed the FCTC on March 9, 2004 and accepted by individual countries in light of their own circumstances, such as their it on June 8, 2004. The FCTC contains a number of provisions, some local laws and regulations state of legislation and cultural and social of which are legally binding for the signatory nations, while others allow conditions. The JT Group has had and is ready to have dialogues with for discretion by each nation with regard to interpretation and the governments of individual signatory nations of the FCTC as neces- implementation. sary, in order to ensure that they take appropriate and reasonable Key provisions of the FCTC include: measures suited to their own circumstances when they implement the — Price and tax measures (implementation of tax policies and price provisions of the convention. policies and imposition of restrictions on duty-free sales, etc. as appropriate, without prejudice to the sovereign right of signa- International Tobacco Product Marketing Standards tory nations to determine and establish their tax policies) In September 2001, JT decided to commit itself to comply with the — Packaging and labeling (adoption of effective measures to International Tobacco Product Marketing Standards. The standards ensure (1) that tobacco product packaging and labeling do not set principles for responsible tobacco product marketing worldwide. promote tobacco products by using terms that could create an They represent a minimum set of standards for ensuring that brand erroneous impression, for example, that a particular tobacco marketing is never aimed at youth, but exclusively at adults who product is less harmful than others; and (2) that health warnings choose to smoke based on their recognition of the health risks on tobacco packaging cover not less than 30% of the principal associated with smoking. display area) The key provisions of the international standards include: — Advertising (introduction of a comprehensive ban on tobacco — Unified definitions of key words such as “advertisement/ adver- advertising, sales promotion and sponsorship, or imposition of tising,” “promotional event” and “sponsorship.” appropriate restrictions if a country is not in a position to imple- — Tough guidelines applicable to advertising of tobacco ment a comprehensive ban because of its constitution or con- products: stitutional principles) • Print advertising is to be limited to publications with at least 75% — Sales to minors (adoption and implementation of effective adult readership. measures to ban sales of tobacco products to minors) • Billboard advertising must not exceed 35 square meters in size. — Support for alternative activities (promotion of alternative activi- • Ads on TV, radio and the Internet are prohibited unless and until ties for tobacco workers, growers and sellers as appropriate) 100% adult verification is achieved. The first session of the Conference of the Parties to the WHO • Ads cannot run in cinemas unless there is a reasonable basis to Framework Convention on Tobacco Control was held in February 2006 believe that at least 75% of the audience is adult. following the convention’s entry into force. At this conference, discus- • Ads cannot feature celebrities, show individuals that appear sions were held on matters such as the procedural rules for subsequent younger than 25, or suggest that smoking enhances athletic, conferences, reports to be presented at the next conference and the professional, personal or sexual success. development of draft guidelines and draft protocols. In June 2007, the — Indication of health warnings in ads and other media: second session of the convention was held. This time, guidelines for • Health warnings must appear in almost all advertising, promotional the implementation of Article 8 (protection from exposure to tobacco and merchandising materials, except in rare instances such as point-of-sale materials smaller than 250 square centimeters.

56 Feature & Management — Restrictions on sponsorship: Major Elements of Regulation of • For events or activities that bear a tobacco product brand name, Tobacco Business in Japan all participants who compete or otherwise take an active part must The Japan Tobacco, Inc. Law be adults. JT was established under the Japan Tobacco, Inc. Law (“the JT Law”) • From December 1, 2006, attendance at an event or activity spon- for the purpose of developing businesses related to the manufacture, sored for the purpose of tobacco product brand promotion must sale, and importation of tobacco products. The JT Law provides that be comprised of at least 75% adults, and these events can only the Japanese government must continue to hold at least one-half of generate incidental coverage in electronic media. all of the shares that the government acquired by voluntary conveyance Business & History — All promotional activities are to be limited to verified adult upon JT’s establishment, as adjusted for any subsequent stock split smokers. 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 Prevention of Youth Smoking even if JT issues new shares in the future, the government must The prevention of youth smoking is an issue to be addressed by society continue to hold more than one-third of all of the issued shares. The at large. From the viewpoint of fulfilling its corporate social responsibil- JT Law also states that the flotation of new shares, options to subscribe ity, the JT Group has been conducting business operations in an for new shares, or in the case of a share-for-share exchange, issuance Responsibility appropriate manner and working with governments and other relevant of new shares, issuance of options for new shares, or issuance of organizations to take various steps toward dealing with this issue in bonds with options or warrants to subscribe for new shares, requires the countries in which it operates, in accordance with voluntary stan- the approval of the Minister of Finance. dards and the International Marketing Standards as well as relevant The JT Law grants JT the freedom to enter other non-tobacco-related local laws and regulations. business areas in line with its overall objectives as a corporation, For detailed information on JT’s efforts to prevent youth smoking in dependent upon ministerial permission, in addition to the manufacture, Japan, please refer to the following website. distribution, and importation of tobacco products and tobacco-related Business Environment & Risk http://www.jti.co.jp/corporate/enterprise/tobacco/think/activity businesses. JT must also obtain authorization from the Minister of As for the JT Group’s similar efforts abroad, please refer to the Finance for certain matters, including the appointment or dismissal of following website. directors, executive officers, and auditors, amendments to JT’s Articles http://www.jti.com/cr_home/cr_positions/cr_positions_youth_smoking of Incorporation, appropriations of capital surplus (except disposal of losses), and any merger, corporate split, or dissolution of JT. Agreement with EU and EU Member States to Combat Within three months after the end of each business year, JT must Cigarette Smuggling and Counterfeiting issue its balance sheets, statements of income or loss, and business On December 14, 2007, JT International S.A. and JT International report to the Minister of Finance. Financial Information Holding B.V., both of which are consolidated subsidiaries of JT, signed an agreement with the European Commission, the executive branch The Tobacco Business Law of the European Union (EU), and twenty-six member states of the EU The Tobacco Business Law was enacted in August 1984 for the purpose on cooperation in combating cigarette smuggling and counterfeiting. of achieving sound growth for Japan’s tobacco industry, securing stable We believe that this agreement, which builds upon initiatives imple- government revenues, and contributing to the healthy expansion of mented by the JT Group over the past years, will help to jointly establish the Japanese economy. The Tobacco Business Law governs the cultiva-

an efficient and constructive framework for combating cigarette smug- tion and purchase of leaf tobacco and the manufacture and distribution Fact Sheets gling and counterfeiting with the EU and EU member states, and of tobacco products. JT is obliged to negotiate contracts with domestic protect the brand value of our products against the threat of such illegal leaf tobacco growers to determine the total area used for tobacco activities. The 27th member state, the United Kingdom joined the cultivation and tobacco leaf prices based on type and quality. JT is also agreement on April 21, 2009. required to purchase the entire usable domestic tobacco crop. The agreement calls for the JT Group to pay US$50 million in each Contracts stipulate the area to be cultivated and the prices of leaf of the five years from signing and US$15 million in each of the following tobacco for the subsequent year, and in this regard JT respects the 10 years to support anti-smuggling and anti-counterfeiting initiatives opinion of the Leaf Tobacco Deliberative Council.* General Information for the European territory. 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

57 Japan Tobacco Inc. annual Report 2010 Business Environment for the JT Group

for JT’s tobacco products and imported tobacco products must be designated smoking areas. It also stipulates that special care must be approved by the Minister of Finance, although in general, manufactur- taken to ensure the use of appropriate advertising methods in daily ers’ list prices are approved unless the Minister of Finance deems newspapers (excluding sports tabloids, evening newspapers and the them unfair to consumers. Tobacco retailers are only permitted to sell like) and specifies matters concerning the indication and content of tobacco products at list prices that have been approved by the Minister the health warnings that accompany tobacco advertising. In accordance of Finance. with the TIOJ’s voluntary standards based on the guideline, the TIOJ

* The Leaf Tobacco Deliberative Council is a council which confers on important matters member companies, including JT, have been implementing necessary concerning the cultivation and purchase of domestically grown leaf tobacco in response to measures, such as banning outdoor billboard advertising and brand- inquiries by JT representatives. The council consists of no more than 11 members, appointed specific advertising on public transportation, limiting the volume of by JT with the approval of the Minister of Finance from among representatives of domestic advertising in newspapers, and limiting the scope of news sections in leaf tobacco growers and academic appointees. which ads may appear.

Health Warnings, etc. * Tobacco Institute of Japan: The TIOJ is a public interest corporation established for the In Japan, the packages of tobacco products are required under Article purpose of contributing to the promotion of a fair and objective social understanding of 39 of the Tobacco Business Law to indicate “statements that urge tobacco through collecting and disseminating information regarding tobacco and supporting the sound development of Japan’s tobacco industry and the national economy as a caution over the relationship between the consumption of tobacco whole, by engaging in various activities in a manner suited to the social environment for products and health” (health warnings) as specified in Article 36 of the tobacco consumption. The TIOJ was established in 1987 as a voluntary organization based Ordinance for Enforcement of the Tobacco Business Law. Details on the Association of Tobacco Manufacturers, which was established in 1985, and reorganized as an incorporated body in 1990. 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 Prevention of Youth Smoking risks related to eight items. Four of the eight are diseases associated — Age verification vending machines with direct smoking (lung cancer, heart attack, stroke and emphysema), TIOJ, the Japan Tobacconist Federation and the Japan Vending Machine while the other four are smoking by pregnant women, passive smoking, Manufacturers Association announced a co-developed age verification addiction to smoking and youth smoking. Each tobacco product pack- vending machine and started introducing the machine in March 2008, age must indicate, on its main surface, a warning regarding at least aiming for a nationwide introduction. one of the four items associated with direct smoking and at least one This machine is intended to prevent minors from purchasing ciga- of the other four items. The ordinance stipulates (1) that these warnings rettes from vending machines, as it only allows cigarettes to be dis- must be rotated throughout the year in ways to ensure that they receive pensed when the customer is identified as an adult as a result of IC equal exposure on each product item and each type of package and card scanning. Based on the results of the first-stage trial use program (2) that the display area must occupy 30% or more of the main surface in Yokaichiba City, Chiba Prefecture, and the second trial use program of the package. in Tanegashima island, Kagoshima Prefecture, the nationwide introduc- In addition, the ordinance stipulates that when terms like “mild” and tion of the machine was completed in July 2008. We are actively “light” are used on the package, they must be accompanied by a involved in efforts to ensure the smooth introduction and operation of warning that prevents consumers from misunderstanding the relation- such machines, as we respect the purpose of the cooperative initiative ship between the consumption of tobacco and health. JT ensures to prevent youth smoking. appropriate indications of the required health warnings with regard to all products intended for shipment in the Japanese market, as pre- Regulations on Tobacco Products in Japan scribed by the relevant laws and regulations. and Abroad Meanwhile, JT plans to continue using such terms as “mild” and In Japan, restrictions on smoking have been increasingly introduced “light” in the Japanese market in ways that maintain compliance with in recent years in public spaces and other locations, including restau- the provisions of the laws and regulations. rants and office buildings. Since the government adopted the Guideline on Smoking Restriction Measures in the Workplace to promote the Guideline on Tobacco Advertising Health Promotion Act, which requires facility managers to take mea- In line with the purpose of a guideline for advertising of tobacco sures to prevent passive smoking, as well as smoking restriction products promulgated by the Japanese Minister of Finance under activities in the workplace, a variety of activities have been imple- Article 40 of the Tobacco Business Law, the Tobacco Institute of Japan mented by the central and local governments and other organizations. (TIOJ)* has established voluntary standards. All TIOJ member compa- JT expects that similar activities will continue to be promoted. As such, nies, including JT, comply with these standards. The guideline stipulates JT continues to engage in various initiatives to promote separation of that outdoor advertising of tobacco products (posters, billboards, etc.) smoking and nonsmoking areas, in order to help create a society in must not be displayed except where tobacco products are sold and in which smokers and nonsmokers can coexist in harmony. Japan, one

58 Feature & Management of the countries that are party to the FCTC, takes necessary measures In the other case, a taxi driver who alleges that he has developed based on relevant laws and regulations, including those regarding tax, laryngeal cancer and has suffered from aggravation of arteriosclerosis packaging and labeling. as a result of passive smoking in his car filed a lawsuit with the Tokyo In overseas markets where the JT Group sells tobacco products, District Court on February 25, 2008, asking for ¥10 million in compensa- regulations on sales and marketing of tobacco products and smoking tion for damages and the suspension of the production and sale of have been increasing. For example, the European Union issued a tobacco products. The first hearing in this case took place on May 19, directive concerning tobacco products in July 2001, which requires the 2008, and the case is still pending in the district court. EU member states to harmonize their laws, regulations and administra- Among the lawsuits filed overseas in relation to smoking and health Business & History tive provisions concerning the maximum tar, nicotine and carbon in which JT subsidiaries are defendants are damage suits filed by monoxide yields of cigarettes; the warnings regarding health and other individuals or classes of individuals and medical expense recovery suits information to appear on unit packets of tobacco products; and the use filed by governments and insurers. As of the end of May 2010, there on tobacco product packaging of such descriptions as “mild” and were a total of 26 such lawsuits pending in which JT subsidiaries are “light.” In addition, the United Kingdom has put into force laws compris- named as defendants or for which JT or a subsidiary may owe certain ing restrictions on the in-store display of tobacco products and a ban indemnity obligations pursuant to the relevant contracts, including the

on sales of tobacco products through vending machines. While it is agreement for JT’s acquisition of RJR Nabisco Inc.’s overseas (non-US) Responsibility impossible to predict exactly what kinds of laws, regulations and tobacco operations. business guidelines will be introduced in the future in relation to sales These lawsuits include health care cost recovery actions brought by and marketing of tobacco products and smoking, JT expects that more the Canadian provinces and two class actions brought in Quebec. similar and new regulations (including those introduced by local govern- The province of British Columbia filed an action under a provincial ments) will be introduced in Japan and other countries where the JT statute, the “Tobacco Damages and Health Care Costs Recovery Act,” Group sells products. which was enacted exclusively for the purpose of this action. Several Although the JT Group supports appropriate and reasonable regula- defendants challenged the statute’s constitutionality. This challenge Business Environment & Risk tions on tobacco products and smoking, the JT Group has had and is was ultimately rejected by the Supreme Court of Canada in September ready to have dialogue and cooperation with governments. It is our 2005. The provinces of New Brunswick and Ontario filed similar actions belief that adults choose to smoke based on their recognition of the in March 2008 and in September 2009, respectively. For the time being, health risks associated with smoking, and those adults should have these actions remain in pre-trial proceedings with no decision yet made the freedom to smoke. as to the liability of the JT Group and other companies. In Quebec, a first-instance court authorized two class actions to Tobacco-Related Legal Proceedings proceed in February 2005. The claims were filed in September 2005, Litigation Related to Health Risks Associated and the actions remain in pre-trial proceedings with no decision yet Financial Information with Smoking made as to the liability of the JT Group and other companies. JT and its subsidiaries are defendants in lawsuits filed by plaintiffs JT believes that it is possible that other similar smoking and health- seeking damages for harm allegedly caused by smoking, the marketing related lawsuits will be filed in the future. of tobacco products, or exposure to tobacco smoke. JT is unable to predict the outcome of currently pending or future To date, JT and its subsidiaries have never lost a case or paid any lawsuits. However, if one or more actions result in a decision unfavor- money to settle a case out of court. able to JT or its subsidiaries, its business could be materially affected

In Japan, JT is currently involved in two lawsuits related to smoking by, for example, the payment of monetary compensation. Fact Sheets and health as described below. Moreover, regardless of the results of individual lawsuits, critical In one case, three smokers who alleges that they developed media coverage of such lawsuits may reduce social tolerance of diseases as a result of smoking filed a lawsuit on January 19, 2005 smoking, increase interest in the relationship between smoking and with the Yokohama District Court against JT, the Government of health, strengthen public regulations concerning smoking and prompt Japan, et al., asking for a total of ¥30 million in compensation for the filing of a number of similar lawsuits against JT or its subsidiaries, damages and a strengthening of the wording of health warnings forcing JT or its subsidiaries to bear litigation costs and materially indicated on tobacco products, etc. The first hearing in this case took affecting JT’s business performance. General Information place on April 20, 2005. On January 20, 2010, the Yokohama District Court rendered a judg- Other Tobacco-Related Legal Proceedings ment dismissing all of the plaintiff’s claims, against which the plaintiffs Various kinds of smuggling and counterfeiting of tobacco products have filed an appeal. posed a major challenge to the tobacco industry as a whole.

59 Japan Tobacco Inc. annual Report 2010 Business Environment for the JT Group

On April 13, 2010, JTI Macdonald Corp. (“JTI-Mac”), JT’s Canadian As for court cases not related to tobacco smuggling, there is a case consolidated subsidiary, entered into a comprehensive agreement with in which JT Group companies are seeking to invalidate a tax assess- the Government of Canada and all provinces and territories (the ment received from the Russian tax authorities. “Canadian Governments”) to establish a cooperation mechanism in In April 2008, the Office of Fair Trading (OFT), the UK competition combating cigarette smuggling and contraband. In addition, JTI-Mac authority, issued a Statement of Objections against JT subsidiaries pleaded to a regulatory offense for its involvement in the illicit trade of Gallaher Group Ltd. (former Gallaher Group Plc), and Gallaher Ltd. cigarettes prior to JT’s acquisition of non-US tobacco operations of RJR (hereinafter, these two companies will be collectively referred to as Nabisco Inc. and paid CAD150 million (approximately ¥13.8 billion at “Gallaher”), alleging the possibility of anti-competitive behaviour with the exchange rate as of April 13, 2010). As a result, all of the contraband- respect to retail prices for tobacco products in the UK market prior to related claims against JTI-Mac and others associated with it by the JT’s acquisition of Gallaher. Gallaher concluded an early resolution Canadian Governments stated above and the Notice of Assessment agreement with the OFT in July 2008 and, in April 2010, the OFT from the Quebec Ministry of Revenue have been withdrawn. CCAA notified Gallaher of its decision to impose a fine of approximately 50 proceedings have also been terminated as of April 17, 2010. At the million British pounds. The amount of the fine is smaller than the same time, the RJR Group entered into another agreement with the amount of liabilities booked as a result of the risk assessment of the Canadian Governments and made payment of CAD400 million (approxi- imposition of a fine under the U.K. Competition Act in accounting mately ¥37.0 billion at the exchange rate as of April 13, 2010), resulting treatment made at the time of JT’s acquisition of Gallaher Group Plc in total payments by the JT Group and the RJR Group to the Canadian based on the Purchase Method. The JT Group recorded the difference Governments of CAD550 million (approximately ¥50.9 billion at the of approximately 114 million British pounds between the booked liabili- exchange rate as of April 13, 2010). As a result of the indemnification ties, which totaled approximately 164 million British pounds, and the rights under the RJRI Purchase Agreement in 1999 and subsequent amount of the fine notified by the OFT, as extraordinary profit (approxi- negotiations with the RJR Group, the JT Group and the RJR Group mately ¥16.7 billion) on a consolidated basis for the fiscal year ended entered into an agreement whereby the JT Group would incur CAD150 March 2010. million among the aforementioned CAD550 million total. As described above, in addition to lawsuits related to health risks associated with smoking, there are other pending lawsuits that could * The following cases were pending in Canada prior to the comprehensive agreement with have a negative impact on the JT Group’s financial results and produc- Canadian Governments: tion, sales and imports/exports of tobacco products in the event of a – In August 2003, the Canadian federal government filed a civil action in the Canadian court ruling unfavorable for the JT Group, and similar cases may continue 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 to be contested in court in the future. 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 allegedly 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 company’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 smuggling 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.

60 Japan Tobacco Inc. annual Report 2010 Major Risks of Businesses Feature & Management The major risks to which the JT Group’s businesses are exposed Risks Relating to the JT Group’s Domestic and and factors that may materially affect investors’ judgment, are International Tobacco Businesses described below. This section contains forward-looking statements • The JT Group’s business performance may be negatively affected based on judgments made as of the end of the fiscal year ended by a decline in demand, as it expects overall cigarette demand in March 2010. Future potential risks include, but are not limited to, Japan to continue to decline mainly due to structural factors such the risks listed below. as a contraction of the adult population, growing awareness about the health risks associated with smoking and tightening of smoking-

Risks Relating to the JT Group’s Businesses, related regulations, while demand overseas could also decrease Business & History Earnings Structure and Management Policies depending on the economic conditions and other circumstances of • Any negative impact on our domestic and international tobacco the regions concerned, although the trends in demand will vary from businesses, both of which are major contributors to the JT Group’s region to region. sales and operating income, may adversely affect the group’s overall • Market shares in the domestic and overseas tobacco markets may business performance. fluctuate in the short term due to temporary factors, such as the launch • Although the JT Group plans to invest in our pharmaceutical and of new products by the JT Group and other tobacco manufacturers, food businesses, as it expects them to contribute to its business and special sales promotion activities. Local market shares may also Responsibility performance in the future, such investment may not generate the be affected by a number of other factors, including competition, pricing anticipated benefits. strategies, changes in consumer preferences, brand recognition and • The JT Group may acquire, invest in, form alliances or build coopera- regional economic conditions. Such factors may lead to a decrease in tive business frameworks with other companies, as it expects such the JT Group’s market share. In addition, there is a risk that the mea- measures to contribute to its future business performance. However, sures adopted by the JT Group to counter the decrease in market its future business performance may be negatively affected if results share may entail additional costs, reducing its profits. fall short of its expectations. • Fluctuations in the prices of foreign leaf tobacco may have a direct • On the JT Group’s consolidated balance sheet, there is a large amount impact on the JT Group’s operating income. Business Environment & Risk of goodwill related to the past acquisitions. We consider the goodwill • The tobacco tax rate may be raised in Japan or overseas. to appropriately reflect profits which could be earned from the busi- • Tobacco demand may decrease due to the introduction of tighter ness values and synergy effects of those acquisitions. However, if tobacco regulations. There is also a risk that efforts to comply with those acquisitions fail to generate the anticipated benefits due to new regulations may entail additional costs. factors such as changes in the business environment or the competi- • If a country decides to ban the use of such terms as “mild” and “light” tive situation, we may be obliged to post an impairment loss, which in descriptions of product names, the JT Group might be prevented may adversely affect the group’s overall business performance. from selling Mild Seven according to such a decision. In such a case,

• The JT Group’s overseas operations may be negatively affected by the JT Group may have to invest a large amount of time and funds Financial Information exchange rate fluctuations, changes in laws and regulations, politi- into efforts to develop a new brand comparable to Mild Seven in that cal unrest, uncertainty over economic developments, local labor- country, and the new brand thus developed may fail to achieve the management relations, tax and tariff revisions, differences in same level of brand value and appeal. business practices, etc. • The JT Group has been sued in Japan and overseas for allegedly • JT’s consolidated financial statements may be affected by fluctua- causing smoking-related health problems, and it may be held liable tions in the exchange rates of the foreign currencies used by over- for such health problems in these lawsuits. There is also a risk that, seas subsidiaries for calculating their financial statements relative regardless of the outcome of the lawsuits, negative publicity from the Fact Sheets to the Japanese yen. There is also a risk that, if an overseas affiliate litigation and other factors may make smoking less acceptable to the whose shares JT acquired by making payment in a foreign currency public, lead to the introduction of tighter restrictions on smoking and is liquidated or sold or if the value of such a subsidiary is significantly prompt many similar lawsuits against the JT Group, thereby forcing reduced, the gains/losses on investment in the affiliate recorded in it to become entangled in legal procedures and bear litigation costs. JT’s consolidated financial statements may be affected by fluctua- • In addition to cases relating to smoking and health issues, the JT tions in the exchange rate between the foreign currency and the Group has challenged what it regards as unreasonable notices of tax Japanese yen. assessment that JT subsidiaries received from the Russian tax

• Although JT partially hedges its exposure to foreign exchange risks authorities. These claims may have a negative impact on the JT General Information related to transactions conducted in foreign currencies, the possibility Group’s business performance or on the manufacture, sale, importa- cannot be ruled out that the JT Group’s business performance will tion/exportation of tobacco products if an unfavorable ruling is issued be negatively affected by exchange rate fluctuations. in the respective cases.

61 Japan Tobacco Inc. annual Report 2010 Major Risks of Businesses

Risks Relating to Non-Tobacco Businesses performance, including the possibility that additional costs may arise Risks Relating to Pharmaceutical Business due to compliance with such regulation. • The JT Group may fail to develop and launch commercially valuable • The JT Group may be unable to compete with major companies with pharmaceutical products. To this date, JT has never brought a phar- larger distribution networks, stronger development capabilities and maceutical product to market that it has developed on its own. more experience. • The JT Group may have to invest an enormous amount of time and • The JT Group may be unable to engage in efficient marketing funds in R&D before it successfully develops pharmaceutical activities. products. • The JT Group may be unable to produce, or outsource the production • The JT Group may be forced to abandon the clinical development of, food products in an efficient, stable and effective manner. of a pharmaceutical product that involves another company as a • The JT Group may outsource the production of a large part of bever- co-developer or a licensee on the basis of its or its partner company’s age products to other domestic manufacturers, thus becoming judgment or due to some internal or external factors. dependant on outside sources. • Even if the JT Group succeeds in developing and launching a com- • If any problem arises regarding the quality of the JT Group’s food mercially valuable pharmaceutical product, the R&D cost may exceed products, the group may become the target of lawsuits seeking the revenue generated from it. product liability and making other claims, or the reputation of the • The JT Group’s business performance may become dependent group and its products may be undermined. on the sale of certain pharmaceutical products. • The JT Group may fail to achieve efficient mass-production of Other Factors which May Materially pharmaceutical products. Affect Investment Decisions • Even if a pharmaceutical product developed by the JT Group proves • The Japan Tobacco Inc. Law (the “JT Law”) obligates the Japanese to be commercially successful, the success may be offset by competi- government to hold at least one half of all JT shares it acquired upon tion with rival products developed by other companies in Japan or JT’s establishment, as adjusted for any subsequent stock split or overseas, a government-mandated price reduction and other factors. consolidation of shares, and the Japanese government must con- • The JT Group may become dependent on the license of pharmaceuti- tinue to hold more than one third of all outstanding JT shares. As of cal products developed by other companies and on revenues from the end of the fiscal year ended in March 2010, the Japanese govern- such products. ment held 50.01% of all outstanding JT shares. • The JT Group may become dependent on a certain outside source • The Minister of Finance has the authority to supervise JT under the for the supply of critical raw materials. JT Law and Tobacco Business Law. • If any problem arises regarding the quality of a pharmaceutical • Under the JT Law, the scope of JT’s businesses includes the “manu- product of the JT Group or regarding information provided by the facture, distribution and importation of tobacco products and ancillary group about such product, the group may become the target of businesses, as well as businesses required for attaining the objective lawsuits seeking product liability or making other claims, or may be of JT,” while “businesses required for attaining the objective of JT” are forced to suspend sales of such product. subject to the Minister of Finance’s approval. Accordingly, the Minister • JT’s business performance may be affected by lawsuits concerning of Finance’s approval is required in order for JT to engage in new patents and other intellectual property rights. businesses outside the scope of currently-approved businesses. • Regulation may be applied broadly, covering a full range of activities • The Tobacco Business Law requires us to annually enter into pur- from the R&D stage to the post-launch stage of a new drug. chase contracts with tobacco growers regarding the aggregate • The JT Group may become dependent on a certain business partner cultivation area for specific varieties of leaf tobacco and the prices in the R&D or sales of a pharmaceutical product. for leaf tobacco by variety and grade. JT must purchase all leaf • In relation to the JT Group’s use and management of radioactive or tobacco produced pursuant to such contracts, except for any not other hazardous substances, social or legal problem may arise, such suited for the manufacture of tobacco products. When JT decides as damage to the environment caused by such substances. the aggregate cultivation area and the prices of leaf tobacco for its contracts with tobacco growers, it is required to respect the opinion Risks Relating to Food Business of the Leaf Tobacco Deliberative Council (hatabako shingi kai), which • Food products developed by the JT Group may fail to meet consumer consists of members appointed by JT with the approval of the preferences and their product lives may prove to be short. Minister of Finance from among the representatives of domestic • The JT Group’s profit/loss may fluctuate due to fluctuations in the leaf tobacco growers and academic appointees. prices of raw materials for food products (including those due to changes in the exchange rate). The outline of the tax reform plan for fiscal year 2010, which was • The sales of JT’s food products may be affected by weather adopted upon a cabinet decision on December 22, 2009, includes a conditions. statement to the effect that the tobacco excise tax rate will need to • The regulation of the procurement, manufacture and sale of food be raised in order to restrain tobacco consumption from the viewpoint products in Japan or overseas may influence the JT Group’s business of promoting public health.

62 JAPAN TOBACCO INC. Annual Report 2010 Feature & Management Business & History Responsibility Financial Information Business Environment & Risk

Consolidated Eleven-Year Financial Summary �� 64 Management’s Discussion and

Analysis of Financial Condition and Business Results �� 66 Financial Information

Consolidated Balance Sheets �� 80

Consolidated Statements of Income �� 82

Consolidated Statements of Changes in Equity �� 83 Fact Sheets Consolidated Statements of Cash Flows �� 84

Notes to Consolidated Financial Statements �� 85

Independent Auditors’ Report �� 117 General Information

63 JAPAN TOBACCO INC. Annual Report 2010 Consolidated Eleven-Year Financial Summary Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31

Millions of U.S. dollars 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 19,501 209 Taxation — — — — 2,605,343 2,650,586 2,628,878 2,718,358 3,822,331 4,005,123 3,620,543 38,914 Net 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 27,022 Adjusted 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 21,292 EBITDA (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 11 Depreciation 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 2,474 Operating 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 8 Net income (loss) 50,792 43,687 36,850 75,302 (7,603) 62,584 201,542 210,772 238,702 123,400 138,448 1,488 For 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 $ 3,440 Net 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 2,695 At 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 $ 7,304 Total 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 41,623 Interest-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 9,397 Liabilities 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 23,101 Total 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 18,522 Ratios: 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. 64 Millions of Feature & Management U.S. dollars 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 Business & History 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 19,501 209 Taxation — — — — 2,605,343 2,650,586 2,628,878 2,718,358 3,822,331 4,005,123 3,620,543 38,914 Net 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 27,022 Adjusted 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 21,292 EBITDA (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 Responsibility 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 11 Depreciation 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 2,474 Operating 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 Business Environment & Risk 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 8 Net income (loss) 50,792 43,687 36,850 75,302 (7,603) 62,584 201,542 210,772 238,702 123,400 138,448 1,488 For 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 $ 3,440 Net 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) Financial Information 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 2,695 At 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 $ 7,304 Total 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 41,623 Interest-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 9,397 Liabilities 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 23,101 Total 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 18,522 Ratios: 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% — Fact Sheets 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. General Information 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. 65 JAPAN TOBACCO INC. Annual Report 2010 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 forward-looking statements that involve risks, uncertainties and should be read in reference to our consolidated financial statements assumptions. Actual results may differ materially from those estimated prepared in accordance with Japanese Generally Accepted Accounting in these statements as a result of a number of factors, including, but Principles (“Japanese GAAP”) and other information included in other not limited to, those described in “Major Risks of Businesses” (See sections of this annual report. This discussion and analysis contains Page 61).

Business Description and Acquisition of Outside Resources

Japan Tobacco Inc. (“JT”) is a joint stock corporation (kabushiki kaisha) foreign bonds by July 2004 and redeemed the domestic bonds in June incorporated under the corporate law of Japan (the “Corporate Law”) 2009. As a result of this acquisition, JT obtained increased access to pursuant to the Japan Tobacco Inc. Law (the “JT Law”). JT is primarily overseas markets, especially in Europe and Russia, and the rights in engaged in the manufacture and sale of tobacco products in the Japa- almost all countries outside the United States to internationally nese domestic and international markets, as one of the largest produc- recognized trademarks such as Winston, Camel and Salem. Since this ers of tobacco products in the world. Sales of cigarettes by JT and its acquisition, JT’s international tobacco business—of which JT consolidated subsidiaries (the “JT Group” or “Group”) in the Japanese International (“JTI”) constitutes the core—has consistently main- domestic market in the fiscal year ended March 31, 2010, amounted tained strong growth. Although sales and profits of the international to 151.9 billion cigarettes (Note 1), sales in the domestic duty-free market tobacco business for the fiscal year ended March 2010 declined due and in the markets in China, Hong Kong and Macau, which are covered to currency movements, sales and profits at the constant rates of by JT’s China Division, totaled 3.6 billion cigarettes and sales in other exchange improved. overseas markets stood at 434.9 billion cigarettes (Note 2). On April 18, 2007, JT completed the procedures for the acquisition (Note 1) Excluding tobacco products purchased from overseas tobacco manufacturers and of Gallaher Group Plc to make it a wholly owned subsidiary of JT. The sold to retail stores through its distribution subsidiary, TS Network Co., Ltd. (“TS Network”) acquisition price was about £7.5 billion (¥1,720 billion at the exchange (Note 2) Including cigars, pipe tobacco and snus, excluding private label and contract manu- rate effective at the time), and the total acquisition price including the facturing products. assumption of net interest-bearing debt was approximately £9.44 billion In the Japanese domestic tobacco market, JT manufactures and (¥2,180 billion at the exchange rate effective at the time). This acquisi- sells its tobacco products to retail stores all over the country in accor- tion resulted in goodwill of US$15.1 billion. Of the total value, ¥820 dance with the Tobacco Business Law. This law provides that (1) JT billion was covered by our own funds, ¥450 billion by a loan from Mizuho shall be the sole manufacturer of tobacco products in Japan and (2) the Bank, Ltd., and £1.9 billion (¥450 billion at the exchange rate effective maximum wholesale price of each tobacco product manufactured and at the time) by a syndicated loan arranged by Merrill Lynch. Of the funds sold and the retail price of each product sold in Japan, as well as any borrowed from Mizuho Bank, the JT Group repaid a total of ¥150 billion changes in these prices, shall be subject to approval by the Minister of in May and July 2007 out of its own funds and refinanced ¥300 billion Finance. The products are transported from its factories to its distribu- through new loans totaling ¥150 billion from other domestic banks and tion bases by its subsidiary, JT Logistics Co., Ltd. and then distributed through the issuance of domestic bonds totaling ¥150 billion. It repaid to retail stores by the subsidiary, TS Network. TS Network also acts as the syndicated loan of £1.9 billion with its own cash, and funds bor- the wholesaler of foreign tobacco manufacturers, purchasing and selling rowed under a new credit line established outside Japan. As for the their products to retail stores in the Japanese domestic market. domestic bonds, the JT Group is due to redeem ¥50 billion in July 2010, JT greatly expanded its international tobacco business through the ¥40 billion in July 2011 and ¥60 billion in July 2012. acquisition of the non-U.S. tobacco operations of RJR Nabisco, Inc. With the acquisition of Gallaher, we have further strengthened our (“RJR Nabisco”) on May 12, 1999. JT paid US$5.0 billion for the position as the world’s third largest tobacco company. In addition to non-U.S. tobacco operations of RJR Nabisco, which resulted in US$3.5 our strong business foundation in Asia, we now have an increasing billion of goodwill. JT also acquired non-U.S. tobacco-related trade- presence in Europe and the CIS region. We aim to maintain sustainable marks and intellectual properties for US$2.7 billion and other assets growth as a major tobacco company on the strength of our geographi- for US$0.1 billion. The acquisition, worth a total of US$7.8 billion (¥940 cally well-balanced operations and our ample growth potential. JT’s billion at the exchange rate effective at that time), was financed by a international tobacco business aims to enhance its role as the driver syndicated loan of US$5.0 billion (¥600 billion at the exchange rate of the JT Group’s profit growth by achieving top-line growth. We count effective at that time) and US$2.8 billion (¥340 billion at the exchange eight brands among our list of global flagship brands (“GFB”): Winston, rate effective at that time) in cash. The syndicated loan was later Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, Sobranie and refinanced through domestic and foreign bond issues and long-term Glamour. We intend to actively explore opportunities for top-line loans from banks and insurance companies. JT repaid in full the growth on the strength of these GFB, which form the core of our long-term loans from banks and insurance companies, redeemed the brand portfolio.

66 Feature & Management In addition to the tobacco business, the JT Group has been actively of all voting rights of Katokichi Co. on April 18, 2008, the JT Group engaged in its pharmaceutical and food businesses in order to diversify channeled its processed food operations, including frozen food opera- its source of future profits and cash flows. tions and seasonings operations, through the Katokichi Group beginning In its pharmaceutical business, the JT Group focuses on the research on July 1, 2008. Through this realignment, the Katokichi Group will and development of prescription drugs. In the Japanese domestic consolidate its foundation as a unique food manufacturer on the strength market, Torii Pharmaceutical Co., Ltd., in which JT acquired a stake of of its processed food business—including the frozen food business, 53.5% for approximately ¥42 billion in December 1998, manufactures which has the eminent scale in Japanese market—and its superior and sells prescription drugs through its extensive marketing network. technology for the production of seasonings. Katokichi Co. changed its Business & History In the overseas market, JT derives revenue principally from royalties corporate name to TableMark Co., Ltd. in January 2010. on the licensing of its successful anti-HIV drug. Under the JT Law, JT must obtain approval from the Minister of In its food business, the JT Group principally manufactures and sells Finance with regard to certain matters, such as (1) the issuance of new beverages, processed foods and seasonings in the Japanese domestic shares (as well as subscription rights for new shares and bonds with market. JT’s presence in the beverage market was substantially subscription rights for new shares) and (2) resolutions adopted at expanded through the acquisition of a majority stake in Unimat shareholder meetings for any amendments to the Articles of Incorpora-

Corporation, a nationwide operator of soft drink vending machines that tion and appropriation of retained earnings. Pursuant to the JT Law, the Responsibility was later renamed Japan Beverage Inc., for approximately ¥29 billion Japanese government is required to hold one-half or more of the JT in a two-stage deal implemented in April and September 1998. In shares that were issued upon the company’s establishment in 1985, addition, JT acquired the food business of Asahi Kasei Corporation for as adjusted for any subsequent stock split or consolidation of shares. approximately ¥24 billion in July 1999. In January 2008, the JT Group The amended JT Law allows JT to issue new shares to the extent that made Katokichi Co. a subsidiary by acquiring additional shares of the the number of shares held by the government remains at more than company for approximately ¥102 billion, increasing its equity stake in one-third of the outstanding shares. Katokichi Co. from 5% to approximately 94%. Following the acquisition Business Environment & Risk

Overview

Our net sales (Note 3) totaled ¥6,134.7 billion for the year ended in March 31, 2009. Up to the year ended March 31, 2008 our food business has 31, 2010 compared with ¥6,832.3 billion for the year ended March 31, generated operating income since the year ended March 31, 2005, it 2009. The Japanese domestic and international tobacco businesses posted an operating loss in the year ended March 31, 2009 and in the accounted for 49.6% and 42.9%, respectively, of our net sales in the year year ended March 31, 2010. Our pharmaceutical business has posted Financial Information ended March 31, 2010, compared with 46.8% and 45.6% in the year operating losses every year since the year ended March 31, 1998, when ended March 31, 2009. Sales for our international tobacco business have we started to disclose segment-by segment information, with the become an important component of our total net sales. exception of the year ended March 31, 2005 and the year ended March Our operating income totaled ¥296.5 billion for the year ended 31, 2009. As a result, we derive almost all of our operating income from March 31, 2010, compared with ¥363.8 billion for the year ended March our tobacco business. (Note 3) Including tobacco excise taxes. Fact Sheets Net Sales(Note 3) Operating Income (Billions of yen) (Billions of yen)

8,000 500

6,832.3 363.8 7,000 6,409.7 430.6 6,134.7 296.5 400 6,000

4,769.4 332.0 5,000 4,637.7 306.9 General Information 300

4,000

200 3,000

2,000 100 1,000

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 (Note 3) Including tobacco excise taxes.

67 JAPAN TOBACCO INC. Annual Report 2010 Management’s Discussion and Analysis of Financial Condition and Business Results

Overview of the Japanese Domestic and International Tobacco Businesses

Overall tobacco demand in the Japanese domestic market has been addition, in May 2010, JT released in limited regions Zerostyle Mint an declining due to such factors as the aging of Japanese society, growing all-new style of smokeless tobacco which does not require a flame. awareness about the health risks associated with smoking and the JT is committed to increasing customer satisfaction by meeting a tightening of smoking-related regulations, and we expect this trend to diverse range of consumer needs including the development of many continue. As for overseas markets, too, demand may decline depending new tobacco products not limited to cigarettes as well as improving on economic conditions and regional factors, although the situation will product taste and flavor so that people can enjoy their favorite tobacco vary from region to region. products more. Although the Japanese domestic tobacco business The total tobacco sales of the Japanese domestic tobacco business suffered a decline in cigarette sales volume, we kept our market share in the year ended March 31, 2010 fell 5.0% from the previous year to almost unchanged from the previous year through aggressive sales 151.9 billion cigarettes(Note 4) due to the impact of the recession as well promotion and product launches. Meanwhile, JT closed two domestic as the abovementioned structural factors. Meanwhile, the total tobacco tobacco factories at the end of March 2010 as part of our efforts to sales of the international tobacco business in the year ended March 31, build an optimum operating structure. 2010 declined 2.5% from the previous year to 434.9 billion cigarettes(Note 5), The international tobacco business is actively exploring opportuni- as an increase in sales in Turkey, the UK, Russia and Italy was offset ties for top-line growth by concentrating business resources on GFBs by a decrease in Iran, Ukraine and the Philippines. The table below and improving margins through appropriate pricing, so that it can shows the total tobacco sales of the Japanese domestic and interna- continue to act as the JT Group’s profit growth engine. In the year tional tobacco businesses for the past two fiscal years. ended March 31, 2010, the total sales volume and the GFB sales

Year ended March 31 2009 2010 volume declined due to such factors as an unstable business environ- Japanese domestic tobacco business (Note 4) 159.9 151.9 ment in Iran, a change in the operating model in the Philippines from International tobacco business (Note 5) 445.9 434.9 the licensing arrangement to contract manufacturing. Despite the Total 605.8 586.8 impact of those specific events, both the total sales volume and the (Billions of Cigarettes) GFB sales volume grew from the previous year. In the meantime, (Note 4) Excluding tobacco products purchased from overseas tobacco manufacturers and although the trend of down-trading accelerated in many key markets sold to retail stores through its distribution subsidiary, TS Network Co., Ltd. (“TS in the year ended March 31, 2010 due to the recession and sharp 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. tobacco tax increases, our international tobacco business achieved (Note 5) Including cigars, pipe tobacco and snus, excluding private label and contract manu- market share growth in almost all key markets, including Russia, facturing products. France, Italy, Spain, the UK and Turkey because of its well-balanced The JT Group regards the Japanese domestic tobacco business as brand portfolio, which is strong in the sub-premium and mid-price its core source of profits. The business environment is becoming increas- segments, and its efforts to enhance brand equity and strengthen sales ingly difficult due to a decline in overall demand in the Japanese domestic promotion activities. We also believe that our continued active invest- market and intensifying competition. To secure a competitive edge, JT ments in enhancing brand equity in each market made significant will strive to build a strong brand portfolio and also make continuous contributions to the increases in many market shares. efforts to enhance added value of its products and improve product Market shares in the Japanese domestic and overseas tobacco quality so as to maximize customer satisfaction and establish a highly markets may fluctuate in the short term due to temporary factors, such cost efficient business framework. In the year ended March 31, 2010, as the launch of new products by the JT Group and other tobacco JT strived to enhance the brand portfolio by introducing new products manufacturers, and special sales promotion activities. Local market as well as by developing the existing brands, particularly the Mild Seven shares may also be affected by a number of other factors, including family and the Seven Stars family, which are our core brands. Specifically, competition, pricing strategies, changes in consumer preferences, JT launched Mild Seven 100’s Box, Mild Seven Lights 100’s Box, Seven brand recognition and regional economic conditions. Stars Black Charcoal Menthol Box, Pianissimo Icene Menthol One and Such factors may lead to a decrease in the JT Group’s market share. Mild Seven Impact One Menthol Box nationwide and launched Camel In addition, there is a risk that the measures adopted by the JT Group Menthol Mini in limited areas. And Seven Stars Black Impact Box was to counter the decrease in market share may entail additional costs, released nationwide in April 2010, which was followed by the nationwide reducing its profits. The profitability of the Japanese domestic and release in June of Winston Lights 6 Box, Winston Extra 3 Box, and international tobacco businesses may fluctuate due to various factors, Winston Ultra One 100’s Box. JT integrated the Icene and Lucia brands including the following: into the Pianissimo brand and repackaged 15 major products of the Mild • Health concerns relating to the use of tobacco product; Seven family and renewed all of the 9 brands of the Caster family in • Legal or regulatory developments and changes, including, without April 2010, thereby enhancing the brand of the Pianissimo, Mild Seven limitation, tax increases and restrictions on the sale, marketing and Caster families with a view to achieving sustainable growth. In and usage of tobacco products, and governmental investigations

68 Feature & Management and privately imposed smoking restriction; • Local and global economic conditions; and • Litigation in Japan and elsewhere; • Fluctuations in foreign exchange rates and the cost of raw • Our ability to successfully expand internationally and make invest- materials. ments outside of Japan; Please refer to “Major Risks of Businesses” (Page 61) for the details. • Competition and changing consumer preferences; • The impact of any acquisitions; Business & History

Impact of Exchange Rate Fluctuations

The JT Group has become more prone than before to exchange rate world, some of which use foreign currencies other than the U.S. dollar. fluctuations as a result of an expansion of its international tobacco This means that the JT Group’s consolidated results are affected not business. While JT itself makes consolidated financial statements in only by exchange rate fluctuations between the Japanese yen and the terms of the Japanese yen, overseas subsidiaries and affiliates of the U.S. dollar but also by those between the U.S. dollar and other foreign

JT Group do so in terms of foreign currencies. Consequently, the currencies used by the consolidated subsidiaries and affiliates for their Responsibility business results, assets and liabilities of the overseas subsidiaries and financial accounting. However, the impact of such exchange rate fluctua- affiliates are converted into yen terms when they are reflected in JT’s tions does not significantly affect the business fundamentals. consolidated financial statements. Therefore, JT’s financial statements A substantial portion of the JT Group’s international transactions are affected by the fluctuations of the foreign currencies used by the is conducted in currencies other than the Japanese yen, and that overseas subsidiaries and affiliates against the Japanese yen. JT portion is affected by exchange rate fluctuations. Although JT partially International Holding B.V. (JT’s consolidated subsidiary in the Netherlands; hedges its exposure to foreign exchange risks related to transactions hereinafter referred to as “JTIH”), which is responsible for consolidating conducted in foreign currencies, the JT Group’s exchange risks cannot Business Environment & Risk the financial results of the JT Group’s international tobacco business, be fully offset. Therefore, the possibility cannot be ruled out that the uses the U.S. dollar for its financial accounting. However, JTIH does JT Group’s business performance will be negatively affected by business through consolidated subsidiaries and affiliates around the exchange rate fluctuations.

Consolidated Business Results and Results by Industry Segment

Consolidated Income Statement Financial Information

Millions of Millions of yen 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 Fact Sheets 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 General Information

Net income before goodwill amortization ¥ 242,585 ¥ 228,912 ¥ 235,875 $ 2,535

69 JAPAN TOBACCO INC. Annual Report 2010 Management’s Discussion and Analysis of Financial Condition and Business Results

Results by Industry Segment

Millions of Millions of yen U.S. dollars For years ended March 31 2008 2009 2010 2010 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

Millions of Millions of yen U.S. dollars For years ended March 31 2008 2009 2010 2010 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.

Millions of Millions of yen 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

Millions of Millions of yen 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 Feature & Management Year Ended March 31, 2010 Compared with sales declined as a result of the depreciation of the local currencies Year Ended March 31, 2009 against the U.S. dollar and the dollar’s depreciation against the yen. Net Sales The average exchange rates of the major local currencies converted Net sales for the year ended March 31, 2010 decreased by ¥697.6 into dollar terms were: $1=31.77 ruble, $1=0.65 pound, $1=0.73 euro billion, or 10.2% from the previous year to ¥6,134.7 billion. The net for the year ended March 31, 2010, compared with $1=24.84 ruble, sales amounts indicated below represent the amounts excluding $1=0.53 pound and $1=0.68 euro for the year ended March 31, 2009. inter-segment transactions. 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 Business & History • Japanese Domestic Tobacco Business ended March 31, 2010 was ¥93.65 to $1.00, compared with ¥103.48 to Net sales in our Japanese domestic tobacco business are comprised $1.00 for the year ended March 31, 2009. of domestic sales of tobacco products manufactured by the JT Group • Pharmaceutical Business within and outside Japan (including domestic duty-free sales and sales Net sales for our pharmaceutical business dropped by ¥12.7 billion, or of imported tobaccos) (Note 8), domestic sales of products manufactured 22.4%, from the previous year to ¥44.1 billion in the year ended March by foreign tobacco manufacturers and distributed by our subsidiaries 31, 2010. While net sales for Torii Pharmaceutical increased, the con-

as wholesalers and sales in the China, Hong Kong and Macau markets, solidated net sales declined after the previous year’s sales were boosted Responsibility which are covered by JT’s China Division. Net sales for our Japanese by the receipt of an upfront fee for the licensing of antiosteoporosis domestic tobacco business totaled ¥3,042.8 billion in the year ended oral compound JTT-305 to Merck of the United States in September March 31, 2010, a decrease of ¥157.7 billion, or 4.9%, from the previous 2008 and a milestone revenue associated with progress in the develop- year. Adjusted net sales excluding tax declined by ¥32.8 billion, or 5.1%, ment of the JTT-705 compound for the treatment of dyslipidemia, which from the previous year to ¥616.0 billion. The sales volume of JT’s was licensed to Roche in October 2004. tobacco products in Japan decreased by 8.1 billion cigarettes, or 5.0%, • Food business from the previous year to 151.9 billion cigarettes (Note 9). Net sales for our food business declined by ¥41.3 billion, or 9.5%, from Business Environment & Risk The sales volume declined due to the continued decrease in total the previous year to ¥394.7 billion. Sales of beverage products declined cigarette demand caused by factors such as: the aging Japanese popula- by ¥1.2 billion, or 0.6%, to ¥186.1 billion. Sales of processed foods fell tion, growing consciousness of health risks associated with smoking, by ¥40.1 billion, or 16.1%, from the previous year to ¥208.5 billion, as tightened smoking regulations and the economic recession. Our market a result of the withdrawal from the chilled processed food business share came to 64.9%, almost unchanged compared with the previous and the exclusion of some subsidiaries from the consolidated results year. Net sales excluding excise tax per 1,000 cigarettes remained due to the change in ownership. almost unchanged from the previous year for ¥4,056. (Note 8) The margin on the sales of imported tobacco products for the Japanese domestic Cost of Sales (Note 10) Financial Information tobacco business is substantially smaller than on the margin on the sales of JT Cost of sales in the year ended March 31, 2010 decreased by ¥531.8 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, billion, or 9.6%, from the previous year to ¥5,022.6 billion. Despite Hong Kong and Macau markets, which are covered by JT’s China Division accounted the increase of the production cost due to the price hike of foreign for domestic sales volume. leaf tobacco, the decrease in the sales volume of the Japanese • International Tobacco Business domestic tobacco business and the adverse currency movements in Net sales for our international tobacco business totaled ¥2,633.6 billion, the international tobacco business contributed to the decrease in the

a decline of ¥484.7 billion, or 15.5%, from the previous year, while cost of sales. Fact Sheets adjusted net sales excluding taxes decreased by ¥174.1 billion, or (Note 10) The cost of sales includes tobacco excise taxes 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- Selling, General and Administrative Expenses rettes, as robust sales growth of Winston in Italy, France and Turkey Selling, general and administrative expenses in the year ended March and of Camel in Italy and Ukraine were offset by the negative impact 31, 2010 decreased by ¥98.5 billion, or 10.8%, from the previous year of an unstable business environment in Iran and a shift in the operating to ¥815.6 billion. This was attributable to the effects of exchange rate model in the Philippines from the licensing arrangement to contract fluctuations on the conversion of the selling general and administrative General Information manufacturing. The GFB sales volume dropped 2.1 billion cigarettes, or expenses of the international tobacco business into yen terms and the 0.9%, from the previous year to 243.4 billion cigarettes. Sales denomi- completion of the amortization of some trademark rights in the Japa- nated in local currencies are first converted into the U.S. dollar terms nese domestic tobacco business. 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

71 JAPAN TOBACCO INC. Annual Report 2010 Management’s Discussion and Analysis of Financial Condition and Business Results

EBITDA (Note 11) and Operating Income • Others As a result of the above factors, EBITDA in the year ended March 31, EBITDA for our other businesses in the year ended March 31, 2010 2010 declined by ¥119.5 billion, or 18.5%, from the previous year to increased by ¥0.2 billion, or 1.4%, from the previous year to ¥13.3 ¥526.7 billion, while operating income dropped by ¥67.3 billion, or billion, while operating income increased by ¥0.9 billion, or 8.9%, to 18.5%, to ¥296.5 billion. EBITDA and operating income by business ¥10.6 billion. segment were as follows: (Note 11) In the mid-term management plan “JT-11,” we use EBITDA for the profit index that Other Expenses/Income (on a net basis) committed to our stakeholders and for the key performance indicators. EBITDA as We booked other expenses totaling ¥20.5 billion (on a net basis) in the 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, year ended March 31, 2010, a decrease of ¥81.2 billion from the previ- long-term prepaid expenses and goodwill). The cost of the amortization of some ous year. This was attributable to a decline in interest payments due to tangible assets is included in the cost of sales while that of other tangible assets is included in the general and administrative expenses. reduced borrowings, redemption of bonds and lower interest rates, a drop in exchange losses, the elimination of some expenses incurred in • Japanese Domestic Tobacco Business the previous year, including: expenses related to a change in the operat- EBITDA for our Japanese domestic tobacco business in the year ended ing model in the Philippines; expenses associated with the demolition March 31, 2010 decreased by ¥14.6 billion, or 5.4%, from the previous of company housing; and the cost of introducing vending machines year to ¥257.6 billion due to a decline in net sales caused by a fall in with the adult identification function, and a gain from the reversal of the sales volume. Operating income increased by ¥15.1 billion, or liability on a fine levied under the UK competition law, which outweighed 8.0%, to ¥203.3 billion. The reduced net sales was offset by a drop in a decrease in the profits from the sale of fixed assets. the depreciation cost following the completion of the amortization of some trademark rights. Income before Income Taxes and Minority Interests • International Tobacco Business As a result of the above factors, income before income taxes and EBITDA for our international tobacco business in the year ended March minority interests in the year ended March 31, 2010 increased by ¥13.9 31, 2010 declined by ¥88.1 billion, or 26.1%, from the previous year to billion, or 5.3%, from the previous year to ¥276.1 billion mainly due to ¥249.9 billion and operating income dropped by ¥65.6 billion, or 37.6%, changes in the business. 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. Income Taxes dollar, the dollar’s depreciation against the Japanese yen and a rise in Income taxes in the year ended March 31, 2010 declined by ¥3.7 the manufacturing cost due to increased leaf tobacco prices. billion, or 2.7%, from the previous year to ¥131.3 billion. The actual • Pharmaceutical Business effective tax rate in the year ended March 31, 2010 decreased by 3.9 Our pharmaceutical business recorded an negative EBITDA of ¥9.7 points to 47.6%. 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 Income before Minority Interests billion, a deterioration of ¥14.6 billion,, from the previous year. Although Income before minority interests in the year ended March 31, 2010 net sales and profits for Torii Pharmaceutical increased, the consolidated increased by ¥17.6 billion, or 13.8%, from the previous year to ¥144.8 EBITDA and operating loss deteriorated after the previous year’s results billion. Minority interests in the year ended March 31, 2010 increased that were boosted by the receipt of an upfront fee for the licensing of by ¥15 billion, or 12.2%, from the previous year to ¥138.4 billion mainly anti-osteoporosis oral compound JTT-305 to Merck in September 2008 due to changes in the business. and a milestone revenue associated with progress in the development of the JTT-705 compound for the treatment of dyslipidemia, which was Net Income licensed to Roche in October 2004. As a result of the above factors, net income in the year ended March • Food business 31, 2010 increased by ¥15 billion, or 12.2%, from the previous year to EBITDA for our food business in the year ended March 31, 2010 ¥138.4 billion. 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 amortization of goodwill related to TableMark Co. Ltd.’s acquisition of additional shares in Green Foods Co., Ltd., a subsidiary, in June 2009, as well as the reduced EBITDA.

72 Feature & Management Net Profit before Goodwill Amortization The sales volume of our international tobacco business increased Since April 2008, we have booked the cost of goodwill amortization of by 66.7 billion cigarettes, or 17.3%, to 452.3 billion cigarettes, thanks all segments in accordance with the “standard accounting treatments mainly to Winston’s sales growth in Russia, Turkey, Ukraine and Spain; to the accounting of overseas subsidiaries in the consolidated financial Camel’ sales growth in Italy, Russia and Spain; and Mild Seven’s sales statements” (a report by the Accounting Standards Board of Japan). In growth in Korea, Taiwan, Russia and Malaysia. The sales volume of the year ended March 31, 2010, the cost of goodwill amortization (Note 12) GFB grew 42.3 billion cigarettes, or 20.8%, to 245.5 billion cigarettes. came to ¥97.4 billion, and net income before goodwill amortization Sales denominated in foreign currencies are first converted into dollar increased by ¥7 billion, or 3.0%, to ¥235.9 billion. terms and then into yen terms based on the average exchange rate Business & History (Note 12) The cost of goodwill amortization is included in the selling, general and administra- for the relevant accounting period. Sales in dollar terms increased due tive expenses. 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 Year Ended March 31, 2009 Compared with increased despite negative effects from the yen’s appreciation against Year Ended March 31, 2008 the dollar. Net Sales The 12-month average exchange rate between the Japanese yen (Note 13) Net sales for the year ended March 31, 2009 increased by ¥422.6 and the U.S. dollar that was used for the conversion of sales for the Responsibility billion, or 6.6% from the previous year to ¥6,832.3 billion. The net year ended March 31, 2009 was ¥103.48 to $1.00, compared with sales amounts indicated below represent the amounts excluding ¥117.85 to $1.00 for the year ended March 31, 2008. inter-segment transactions. • Pharmaceutical Business (Note 13) Including tobacco excise taxes 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 • Japanese Domestic Tobacco Business 31, 2009. A decrease in net sales for Torii Pharmaceutical was more Net sales in our Japanese domestic tobacco business are comprised than offset by an upfront payment for the licensing of antiosteoporosis Business Environment & Risk of domestic sales (including duty-free sales) of tobacco products manu- oral compound JTT-305 to Merck in September 2008 and a milestone factured by the JT Group in and outside Japan, domestic sales of revenue associated with progress in the development of the JTT-705 products manufactured by foreign tobacco manufacturers and distrib- compound for the treatment of dyslipidemia, which was licensed to uted by our subsidiaries as wholesalers and sales in the China, Hong Roche in October 2004. Kong and Macau markets, which are covered by JT’s China Division. • Food business Net sales for our Japanese domestic tobacco business totaled ¥3,200.5 Net sales for our food business increased by ¥99.5 billion, or 29.6%, billion in the year ended March 31, 2009, a decrease of ¥161.9 billion, from the previous year to ¥436.0 billion. Sales of beverage products or 4.8%, from the previous year. The sales volume of JT’s tobacco declined by ¥7.6 billion, or 3.9%, to ¥187.4 billion. Sales of processed Financial Information products in Japan decreased by 7.8 billion cigarettes, or 4.7%, from the foods increased by ¥107.1 billion, or 75.7%, from the previous year to previous year to 159.9 billion cigarettes (Note 14). ¥248.6 billion, as the consolidation of the Katokichi Group outweighed The sales volume declined due to the continued decrease in total the impact of the frozen food products contamination, and negative cigarette demand caused by factors such as: the aging Japanese popula- effects of unfavorable weather conditions and increased competition tion, growing consciousness of health risks associated with smoking, in the beverages business as well as a slump in general consumption tightened smoking regulations, and revision of retail prices based on a caused by the recent severe economic downturn.

hike in the tobacco excise tax implemented in July 2006. Fact Sheets Our market share increased by 0.2 percentage points compared Cost of Sales (Note 15) with the previous year, to 65.1%, marking the second consecutive year Cost of sales in the year ended March 31, 2009 increased by ¥325.5 of market share increase. Net sales excluding excise tax per 1,000 billion, or 6.2%, from the previous year to ¥5,554.4 billion, mainly as a cigarettes remained unchanged from the previous year at ¥4,057. result of the inclusion of the full-year results of Gallaher and the Katokichi (Note 14) In addition, 3.6 billion cigarettes sold in domestic duty-free markets and in the Group. This and other favorable factors were partially offset by a decrease China, Hong Kong and Macau markets, which are covered by JT’s China Division in the sales volume of the Japanese domestic tobacco business. accounted for domestic sales volume. (Note 15) The cost of sales includes tobacco excise taxes. General Information • International Tobacco Business 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.

73 JAPAN TOBACCO INC. Annual Report 2010 Management’s Discussion and Analysis of Financial Condition and Business Results

Selling, General and Administrative Expenses A decrease in net sales for Torii Pharmaceutical was more than Selling, general and administrative expenses in the year ended March offset by an upfront payment for the licensing of anti-osteoporosis oral 31, 2009 increased by ¥163.9 billion, or 21.8%, from the previous year compound JTT-305 to Merck in September 2008 and a milestone rev- to ¥914.1 billion. This was attributable to the inclusion of the cost of enue associated with progress in the development of the JTT-705 the goodwill amortization related to the international tobacco business compound for the treatment of dyslipidemia, which was licensed to following a revision of the accounting standards and the inclusion of Roche in October 2004. the full-year cost of the amortization of the goodwill of the Katokichi • Food business Group as well as the inclusion of the full-year results of Gallaher and EBITDA for our food business increased by ¥8.7 billion, or 103.9%, the Katokichi Group. 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. EBITDA (Note 16) and Operating Income However, the food business posted an operating loss of ¥11.5 billion As a result of the above factors, EBITDA in the year ended March 31, in the year ended March 31, 2009, representing a deterioration of ¥12.1 2009 increased by ¥44.1 billion, or 7.3%, from the previous year to billion in the operating balance compared with the previous year. This ¥646.2 billion. However, operating income declined by ¥66.7 billion, or was attributable to a rise in general expenses, an increase in raw 15.5%, from the previous year to ¥363.8 billion, mainly as a result of materials costs and the inclusion of the full-year cost of the amortization the start of goodwill amortization following a revision of accounting of the goodwill of the Katokichi Group following the consolidation of standards applied to the international tobacco business. Operating the group. income by business segment was as follows: • Others (Note 16) In the mid-term management plan “JT-11,” we use EBITDA for the key performance EBITDA for our other businesses in the year ended March 31, 2009 indicators. EBITDA as defined by the JT Group is operating income plus the amortiza- declined by ¥8.9 billion, or 40.4%, from the previous year to ¥13.1 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 billion, while operating income decreased by ¥0.8 billion or 7.2% from amortization of some tangible assets is included in the cost of sales while that of the previous year to ¥9.7 billion. other tangible assets is included in the general and administrative expenses.

• Japanese Domestic Tobacco Business Other Expenses/Income (on a net basis) EBITDA for our Japanese domestic tobacco business in the year ended We booked other expenses totaling ¥101.7 billion (on a net basis) in March 31, 2009 declined by ¥34.4 billion, or 11.2%, from the previous the year ended March 31, 2009, an increase of ¥43.7 billion from the year, to ¥272.3 billion, while operating income decreased by ¥34.1 previous year. This reflected the inclusion of full-year interest pay- billion, or 15.3%, from the previous year to ¥188.3 billion. The decrease ments related to additional debts and corporate bonds associated was attributable mainly to a decline in the sales volume and an increase with the acquisition of Gallaher, a decline in profits from the sale of in sales promotion expenses. fixed assets, losses related to the demolition of company-owned • International Tobacco Business residences for employees, expenses incurred by the international EBITDA for our international tobacco business in the year ended March tobacco business in relation to a revision of the business model in 31, 2009 grew by ¥67.2 billion, or 24.8%, to ¥338.0 billion due to an the Philippines market and the cost of reorganizing the Katokichi increase in the sales volume, mainly of GFBs, and the inclusion of the Group’s business operations. 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 Income before Income Taxes and Minority Interests due to the start of the goodwill amortization following the revision of As a result of the above factors, income before income taxes and accounting standards. A rise in the exchange rate of the Japanese yen minority interests in the year ended March 31, 2009 decreased by against the U.S. dollar contributed to the decrease in operating income ¥110.5 billion, or 29.6%, from the previous year to ¥262.1 billion. in yen terms. • Pharmaceutical Business Income Taxes Our pharmaceutical business recorded an EBITDA of ¥4.9 billion, an Income taxes in the year ended March 31, 2009 increased by ¥6.6 improvement of ¥11.2 billion from the previous year, in the year ended billion, or 5.1%, from the previous year to ¥135.0 billion. The actual March 31, 2009, while it posted an operating income of ¥1.0 billion, effective tax rate in the year ended March 31, 2009 increased by 17.03 representing an improvement of ¥10.7 billion in the operating balance points to 51.49%, mainly due to the impact of the cost of the goodwill from the previous year. amortization that was not covered by the deferred tax accounting.

74 Feature & Management Income before Minority Interests Net Income before Goodwill Amortization Income before minority interests in the year ended March 31, 2009 Since April 2008, we have booked the cost of goodwill amortization declined by ¥117.1 billion, or 47.9%, from the previous year to ¥127.2 in accordance with the “standard accounting treatments to the billion. Minority interests in the year ended March 31, 2009 decreased accounting of overseas subsidiaries in the consolidated financial by ¥1.8 billion, or 31.8%, from the previous year to ¥3.8 billion. statements” (a report by the Accounting Standards Board of Japan). In the year ended March 31, 2009, the cost of goodwill amortiza- Net Income tion (Note 17) came to ¥105.5 billion, and net income before goodwill As a result of the above factors, net income in the year ended March amortization totaled ¥228.9 billion. Business & History 31, 2009 decreased by ¥115.3 billion, or 48.3%, from the previous year (Note 17) The cost of goodwill amortization is included in the selling, general and administrative expenses. to ¥123.4 billion.

Results by Geographic Segment

We divide our operations into three geographic segments based on the (excluding Japan but including China, Hong Kong and Macau), Canada, Responsibility business territories of the JT Group’s main business entities: Japan, Russia and the other Commonwealth of Independent States nations, Western Europe (including Switzerland, France and Germany) and other the Middle East and Africa. regions. Our “other regions” segment comprises primarily Asia

Table Results by Geographic Segment

Millions of Millions of yen U.S. dollars Business Environment & Risk For years ended March 31 2008 2009 2010 2010 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

Millions of Financial Information Millions of yen 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 Fact Sheets

Japan: Net sales in Japan in the year ended March 31, 2010 decreased billion because of the reduced sales volume for the Japanese domestic by ¥189.5 billion, or 5.2%, from the previous year to ¥3,482.5 billion, tobacco business and the inclusion of the full-year cost of the amortiza- due to a decline in the sales volume of the Japanese domestic tobacco tion of the goodwill of the Katokichi Group. 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 Western Europe: Net sales in Western Europe in the year ended was due to the reduced net sales, which was partially offset by a drop March 31, 2010 decreased by ¥360.3 billion, or 17.7%, from the previ- in the depreciation cost following the completion of the amortization of ous year to ¥1,677.8 billion, due to the negative forex impact of General Information some trademark rights. depreciation of local currency in the main markets like the UK in the Net sales in Japan in the year ended March 31, 2009 declined by international tobacco business. Operating losses in the year ended ¥39.8 billion, or 1.1%, from the previous year to ¥3,672.0 billion as a March 31, 2010 totaled ¥40.2 billion, a deterioration of ¥40.3 billion result of a decrease in the sales volume for the Japanese domestic from the previous year, because of the negative forex impact as well tobacco business. Operating income in the year ended March 31, 2009 as the cost of goodwill amortization. dropped by ¥35.9 billion, or 16.1%, from the previous year to ¥186.4

75 JAPAN TOBACCO INC. Annual Report 2010 Management’s Discussion and Analysis of Financial Condition and Business Results

Net sales in Western Europe in the year ended March 31, 2009 depreciation of local currency in the main markets like Russia in the grew by ¥359.3 billion, or 21.4% from the previous year to ¥2,038.0 international tobacco business. Operating income in the year ended billion as a result of the inclusion of the full-year results of Gallaher, March 31, 2010 decreased by ¥49.1 billion, or 24.6%, from the previ- which has a large market share in the United Kingdom and Ireland, ous year to ¥150.5 billion. where cigarette prices are high. Operating losses in the year ended Net sales in other regions in the year ended March 31, 2009 grew March 31, 2009 totaled ¥24.1 billion, a deterioration of ¥80.1 billion from by ¥103.1 billion, or 10.1%, from the previous year to ¥1,122.3 billion the previous year, because of the cost of goodwill amortization. as a result of an increase in international sales by JT International, particularly in countries such as Russia and Turkey. Operating income Other Regions: Net sales in other regions in the year ended March in the year ended March 31, 2009 increased by ¥48.2 billion, or 31.9% 31, 2010 declined by ¥147.9 billion, or 13.2%, from the previous year from the previous year to ¥199.6 billion. 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 by short-term fluctuations in revenues. We raise the necessary funds base that enables the implementation of capital expenditure, the principally from cash flows provided by operations, borrowing from acquisition of outside resources, and R&D activities in a cost-efficient financial institutions and the issuance of long-term bonds. manner, in order to achieve business expansion without being affected

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.

Millions of Millions of yen U.S. dollars For years ended March 31 2008 2009 2010 2010 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 Net cash used for financing activities in the year ended March 31, March 31, 2009 2010 was ¥250.4 billion compared with ¥217.5 billion in net cash used Net cash generated by operating activities in the year ended March 31, for such activities in the year ended March 31, 2009. This was mainly 2010 came to ¥320.0 billion compared with ¥275.3 billion in the year due to the payment of dividends and the redemption of corporate bonds ended March 31, 2009, as an increase in inventories due to a rise in leaf and the repayment of borrowings despite of the net cash provided from tobacco prices and increased procurement in the international tobacco issuance of commercial paper and corporate bonds. business was offset by stable cash flow from the tobacco business. Net cash used in investment activities in the year ended March 31, 2010 Year Ended March 31, 2009 Compared with Year Ended was ¥84.1 billion compared with ¥65.0 billion for the year ended March March 31, 2008 31, 2009. It was mainly due to the expenditures on the acquisition of Net cash generated by operating activities in the year ended March fixed assets. 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

76 Feature & Management business, including the cash flow generated by the inclusion of the the acquisition of additional shares in Katokichi Co. and shares in Fuji full-year results of Gallaher. In the year ended March 31, 2009, we paid Foods Corporation. 12 months’ worth of tobacco excise tax compared with the 13 months’ Net cash used for financing activities in the year ended March 31, worth paid in the previous year, when there was a onetime factor 2009 was ¥217.5 billion, compared with ¥519.0 billion in net cash gener- related to a bank holiday. Net cash used in investment activities in the ated from such activities in the year ended March 31, 2008. This was year ended March 31, 2009 was ¥65.0 billion compared with ¥1,668.6 mainly due to the payment of dividends and the redemption of corporate billion for the year ended March 31, 2008. Cash was used mainly for bonds and the repayment of borrowings by a foreign subsidiary. Business & History

Liquidity and Fund Needs We 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.

Millions of Responsibility Millions of yen U.S. dollars For years ended March 31 2008 2009 2010 2010 Capital expenditures ¥129,555 ¥134,273 ¥137,134 $1,474

In the year ended March 31, 2010, capital expenditure totaled develop new products and replace vending machines. In our interna- ¥137.1 billion. In our Japanese domestic tobacco business, we spent tional tobacco business, we invested ¥48.4 billion for the purpose of ¥45.8 billion, mainly on measures to streamline manufacturing pro- expanding our production capacity. In our pharmaceutical business, we Business Environment & Risk cesses, strengthen our ability to respond flexibly to supply and spent ¥4.3 billion on the construction of production and research facili- demand fluctuations with regard to an increasingly diverse range of ties, while we invested ¥6.0 billion in our food business, mainly for products and develop new products. In our international tobacco enhancing production facilities. In our other businesses, capital expen- business, we invested ¥64.6 billion for the purpose of expanding our diture was ¥14.8 billion, mainly for real estate development. production capacity. In our pharmaceutical business, we spent ¥3.0 For the year ending March 31, 2011, we are planning for capital billion on the construction of production and research facilities, while expenditure to total approximately ¥172.0 billion. In our Japanese we invested ¥23.4 billion in our food business, mainly for enhancing domestic tobacco business, we plan to invest approximately ¥62.0 production facilities. In our other businesses, capital expenditure was billion to improve productivity and reduce costs, while in our interna- Financial Information ¥0.3 billion. tional tobacco business, we plan to spend approximately ¥68.0 billion In the year ended March 31, 2009, capital expenditure totaled to increase production capacity. We have earmarked approximately ¥2.5 ¥134.3 billion. In our Japanese domestic tobacco business, we spent billion in investment for our pharmaceutical business to improve R&D, ¥46.5 billion, mainly on measures to streamline manufacturing pro- approximately ¥35.0 billion for our food business to enhance production cesses, strengthen our ability to respond flexibly to supply and demand facilities and approximately ¥4.5 billion for our other businesses. fluctuations with regard to an increasingly diverse range of products Our actual capital expenditure may differ significantly from the

and develop new products. In our international tobacco business, we planned figures as a result of a number of factors including, but not Fact Sheets invested ¥59.8 billion for the purpose of expanding our production limited to, those discussed in the “Major Risks of Businesses.” capacity. In our pharmaceutical business, we spent ¥3.4 billion on the • Working Capital construction of production and research facilities, while we invested We need working capital mainly for purchasing raw materials, including ¥23.2 billion in our food business, mainly for enhancing production leaf tobacco and other inventory items, the payment of salaries and facilities. In our other businesses, capital expenditure was ¥1.1 billion, wages, sales expenses, advertising and promotion expenses, tax mainly for real estate development. payments and R&D expenses. In the year ended March 31, 2008, capital expenditure totaled • Acquisition of Outside Resources General Information ¥129.6 billion. In our Japanese domestic tobacco business, we spent As necessary, we may invest in or acquire companies deemed to have ¥57.2 billion, mainly on measures to streamline manufacturing pro- the potential to help us diversify our cash flow sources and improve cesses, strengthen our ability to respond flexibly to supply and demand our profitability. fluctuations with regard to an increasingly diverse range of products,

77 JAPAN TOBACCO INC. Annual Report 2010 Management’s Discussion and Analysis of Financial Condition and Business Results

• Dividends Long and Short-term Debt We need sufficient liquidity to make our scheduled dividend pay- • Long-term Debt ments. As our basic dividend policy, we aim to achieve a consolidated Our long-term liabilities consist mainly of long-term debt and liabilities dividend payout ratio of 30% in the medium term under the Medium- for retirement benefits. As of March 31, 2010, long-term debt was Term Management Plan “JT-11,” with the impact of goodwill amor- ¥646.1 billion, of which bonds accounted for ¥459.4 billion. Our remain- tization excluded from the net income used as a basis for calculating ing long-term debt (including the current portion) consisted of ¥172.6 the payout ratio. We will continue to provide a competitive level of billion loans from banks and life insurance companies and ¥14.1 billion return to shareholders in light of the implementation status of our long-term lease obligations. Annual interest rates applicable to yen- mid- to long-term growth strategies and the outlook of our consoli- denominated long-term bank loans outstanding as of March 31, 2009 dated financial results, with a view to increasing our dividend pay- and 2010 ranged from 0.77% to 5.30% and from 0.90% to 5.30%, ments further. The dividend payout ratio based on consolidated net respectively. Annual interest rates for long-term loans denominated in income before goodwill amortization for the year ended March 31, other currencies ranged from 2.35% to 8.00% for those outstanding 2010 was 23.6%. as of March 31, 2009 and from 0.97% to 8.75% for those outstanding • Stock Repurchases as of March 31, 2010. A repurchase of our own shares requires cash outlays. In order to Maturities of long-term debt (including the current portion) as of repurchase our own shares in a flexible manner, we amended the March 31, 2010 were as follows:

Articles of Incorporation at the general shareholders’ meeting held on Millions of June 24, 2004 so that we could make repurchases based on a resolution For years ended March 31 Millions of yen U.S. dollars 2011 ¥306,525 $3,295 made by the Board of Directors. As of March 31, 2010, we held 419,903 2012 172,228 1,851 shares of common stock as treasury stock. We may continue to hold 2013 166,974 1,795 the repurchased shares as treasury stock or use them for share retire- 2014 59,149 636 ment or for other purposes. Stock repurchases provide our manage- 2015 168,558 1,812 ment with an additional option for increasing flexibility and speed in 2016 and thereafter 873 8 capital management in order to adapt to a rapidly changing business Total ¥874,307 $9,397 environment. We will determine the timing, scale and manner of any further repurchase in an appropriate manner in light of our business As of March 31, 2010, our long-term debt was rated Aa3 by Moody’s needs and market trends. Investors Service, Inc., A+ by Standard & Poor’s Ratings Services and AA by Rating and Investment Information, Inc. (R&I). These ratings are Capital Resources and Use among the highest ratings for international tobacco companies. By We have historically had, and expect to continue to have, significant maintaining high credit ratings, we can finance large sums of capital at cash flows from operating activities. Cash provided by operating activi- relatively low cost from third parties as needed. Our ability to maintain ties was ¥275.3 billion in the year ended March 31, 2009 and ¥320.0 high ratings is affected by a number of factors such as developments billion in the year ended March 31, 2010. We expect that cash generated in our major business markets, the quality of execution of our business by operating activities will continue to cover capital expenditures and strategies, and general economic trends that are beyond our control. debt repayments. The credit ratings are not recommendations for purchasing, selling or For substantial capital needs related to the acquisition of outside holding securities. resources, we may utilize debt financing, primarily borrowings from The ratings could be withdrawn or revised at any time. Each rating financial institutions or the issuance of bonds, as needed. (Please see should be evaluated separately from other ratings. Under the Japan “Long and Short-term Debt” below.) Tobacco Inc. Law, bonds issued by Japan Tobacco Inc. are secured by Equity financing, including warrants and bonds with warrants, statutory preferential rights to the property of Japan Tobacco Inc. These requires the approval of the Minister of Finance under the Japan rights give bondholders precedence over unsecured creditors in seeking Tobacco Inc. Law. Revisions to the Japan Tobacco Inc. Law that took repayment, with the exception of national and local taxes and other effect on April 19, 2002 provide us with the flexibility to issue new statutory obligations. shares upon the approval of the Minister of Finance to the extent that • Short-term Debt the Japanese government retains more than one-third of the outstand- We take in short-term loans from banks and other financial institu- ing shares in JT. In the future, we may choose to raise capital through tions. Short-term loans totaled ¥113.2 billion as of March 31, 2009, stock issuance, which would dilute the value of existing shareholders’ including ¥61.8 billion in foreign currency-denominated loans, and equity holdings. ¥228.3 billion as of March 31, 2010, including ¥60.3 billion in foreign

78 Feature & Management currency-denominated loans. Annual interest rates applicable to yen and the hedging instruments. The effectiveness of our hedging activities denominated short-term bank loans ranged from 0.216% to 2.750% is assessed in accordance with our risk management policies and as of March 31, 2009 and from 0.090% to 3.500% as of March 31, practice manual for hedging transactions. 2010. Annual interest rates applicable to short-term loans denomi- We are exposed to credit-related risk in the event of default by nated in other currencies ranged from 0.130% to 83.000% as of counterparties to derivative financial instruments. However, we strive March 31, 2009 and from 1.040% to 27.250% as of March 31, 2010. to mitigate this risk by limiting counterparties to international financial Annual interest rates applicable to commercial paper ranged from institutions with high credit ratings deemed to have no significant risk 0.106% to 0.145% as of March 31, 2010. of default. Business & History As a Japanese commercial custom, short-term and long-term bank We use interest rate swaps and interest rate cap option contracts loans are extended under general agreements stipulating that, under for the purpose of managing interest rate risk in relation to borrowings. certain circumstances, collateral or guarantees for present and future Interest rate swap agreements that qualify for hedge accounting under debts should be provided upon the request of the bank, and that the Japanese GAAP and meet specific matching criteria are not measured bank shall have the right, as the debt obligations become due or in the at market value, but the differential to be paid or received under the event of default, to offset cash deposits against debts due to it. We swap agreement is accrued and included in interest expenses.

have never been requested to provide such collateral or guarantees. We use foreign currency forward contracts, currency swaps and Responsibility currency option contracts for the purpose of managing the risk of Derivative Transactions fluctuations in foreign exchange rates on forecasted transactions in We are exposed to market risks principally from changes in interest foreign currencies. Gains or losses arising from changes in the value of rates, foreign exchange rates and equity and debt security prices. Our the contracts that qualify for hedge accounting are deferred and recog- interest rate risk exposures primarily relate to financing activities. nized in the period in which corresponding losses or gains from transac- Our foreign currency exposures relate to buying, selling and financ- tions being hedged by such contracts are recognized. ing in currencies other than the local currencies of our operations. In On the other hand, hedging contracts mainly related to our interna- Business Environment & Risk order to reduce foreign exchange rate risk and interest rate risk, we tional tobacco operations do not qualify for hedge accounting and use derivative financial instruments including interest rate swaps, therefore we recognize changes in the value of foreign currency deriva- interest rate cap option contracts, foreign currency forward contracts, tive instruments against earnings in the period in which they occur. This currency swaps and currency option contracts. We do not hedge against could result in gains or losses from fluctuations in exchange rates price fluctuations of debt and equity securities. related to a derivative contract being recognized in a different period We have risk management policies and procedures designed to miti- from the one in which the gains or losses expected from the underlying gate the risks arising from the use of derivative financial instruments. forecasted transactions are recognized. We utilize derivatives solely for risk management purposes, and no For information about the contract and notional amount of interest Financial Information derivatives are held or issued for trading purposes. As part of our risk rate swaps, interest rate cap option contracts, foreign currency forward management procedures, we identify the specific risks and transactions contracts and currency swaps outstanding as of March 31, 2009 and to be hedged and the appropriate hedging instruments to be used to 2010 see Note 17 to the audited consolidated financial statements reduce the risk, and assess the correlation between the hedged risks included in this annual report.

Outlook of Results for the Year Ending March 31, 2011 Fact Sheets

It is too early to forecast specific business results for the fiscal year to take effect on October 1, 2010. EBITDA and operating income are ending March 31, 2011. Based on current trends and other factors that projected to decrease. Net income is likely to decrease due to a decline we are aware of at this point, we expect a decline in both net sales and in profits from the sale of fixed assets, and an increase of other expenses profits. Although we expect the favorable pricing and currency benefits due to an agreement payment to the Canadian authorities, despite the in the international tobacco business, net sales are projected to absence of the exchange losses incurred in the previous year. decrease, affected by a decline in the sale volume due to a steep drop Our actual operating results may differ significantly from those General Information in overall demand that the Japanese domestic tobacco business will described above as a result of a number of factors including, but not face as a result of a sharp increase in the tobacco excise tax scheduled limited to, those discussed in the “Major Risks of Businesses.”

79 JAPAN TOBACCO INC. Annual Report 2010 Consolidated Balance Sheets Japan Tobacco Inc. and Consolidated Subsidiaries / March 31, 2009 and 2010

Millions of U.S. dollars Millions of yen (Note 2) Assets 2009 2010 2010 Current assets: Cash and cash equivalents ¥ 167,258 ¥ 154,369 $ 1,659 Short-term investments (Note 5) 2,610 13,026 140 Trade notes and accounts receivable 290,069 296,885 3,191 Merchandise & finished goods 122,970 151,063 1,624 Semi-finished goods 119,291 109,622 1,178 Work in process 6,562 5,523 59 Raw materials & supplies (Note 8) 215,335 288,893 3,105 Other current assets (Note 12) 174,749 180,086 1,936 Allowance 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 1,491 Buildings and structures 621,469 611,509 6,573 Machinery, equipment and vehicles 642,149 668,608 7,186 Tools 165,435 170,907 1,837 Construction in progress 35,254 41,905 450 Total 1,611,526 1,631,632 17,537 Accumulated 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 60,178 647 Investments in and advances to unconsolidated subsidiaries and associated companies 24,639 23,932 257 Trademarks 347,372 350,901 3,772 Goodwill 1,453,961 1,387,397 14,912 Deferred tax assets (Note 12) 128,787 85,376 918 Other assets 135,820 124,102 1,333 Allowance for doubtful accounts (41,696) (34,695) (373) Total investments and other assets 2,115,378 1,997,191 21,466 Total ¥3,879,803 ¥3,872,596 $ 41,623

See notes to consolidated financial statements.

80 Millions of Feature & Management U.S. dollars Millions of yen (Note 2) Liabilities and Equity 2009 2010 2010 Current liabilities: Short-term bank loans (Note 8) ¥ 113,231 ¥ 109,263 $ 1,174 Commercial paper (Note 8) — 119,000 1,279 Current portion of long-term debt (Note 8) 222,256 78,356 842

Tobacco excise taxes payable 268,999 307,795 3,308 Business & History Trade notes and accounts payable 158,544 149,462 1,606 Other payable (Note 9) 62,825 73,739 793 Income taxes payable (Note 12) 51,777 54,058 581 Consumption taxes payable 43,848 60,105 646 Other 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: Responsibility Long-term debt (Note 8) 660,592 567,710 6,102 Liabilities for retirement benefits (Note 9) 259,146 251,902 2,707 Deferred tax liabilities (Note 12) 110,390 94,578 1,017 Other 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) Business Environment & Risk

Equity (Note 10): Common stock—authorized, 40,000,000 shares; issued, 10,000,000 shares in 2009 and 2010 100,000 100,000 1,075 Capital surplus 736,400 736,407 7,915 Stock acquisition rights (Note 11) 365 565 6 Retained earnings 1,224,989 1,310,670 14,087 Unrealized gain on available-for-sale securities 8,438 12,044 129 Financial Information Deferred 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 17,731 Minority interests 71,110 73,599 791 Total Equity 1,624,288 1,723,279 18,522

Total ¥3,879,803 ¥3,872,596 $41,623 Fact Sheets General Information

81 JAPAN TOBACCO INC. Annual Report 2010 Consolidated Statements of Income Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31, 2008, 2009 and 2010

Millions of U.S. dollars Millions of yen (Note 2) 2008 2009 2010 2010 Net sales ¥6,409,727 ¥6,832,307 ¥6,134,695 $65,936 Cost 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 11,952 Selling, 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 75 Gain on disposition of property, plant and equipment—net 57,179 32,787 21,770 234 Loss 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 2,967 Income taxes (Note 12): Current 117,272 126,732 114,145 1,227 Deferred 11,107 8,241 17,159 184 Total 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

Yen U.S. dollars Amounts per share: Basic net income (Notes 3 (r) and 19) ¥ 24,917 ¥ 12,881 ¥ 14,452 $ 155 Diluted net income (Notes 3 (r) and 19) 24,916 12,880 14,449 155 Cash dividends applicable to the year (Note 3 (r)) 4,800 5,400 5,800 62

See notes to consolidated financial statements.

82 JAPAN TOBACCO INC. Annual Report 2010 Consolidated Statements of Changes in Equity Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31, 2008, 2009 and 2010

Thousands Millions of yen Feature & Management Pension Deferred liability Unrealized gain on adjustment Number of Stock gain on derivatives of foreign Foreign shares of Acquisition available- under consolidated currency common Common Capital Rights Retained for-sale hedge subsidiaries translation Treasury Minority stock issued stock surplus (Note 11) earnings securities accounting (Note 9) adjustments stock Total 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 Business & History 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 Responsibility 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 Business Environment & Risk 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) Pension Deferred liability Unrealized gain on adjustment Stock gain on derivatives of foreign Foreign Acquisition available- under consolidated currency Common Capital Rights Retained for-sale hedge subsidiaries translation Treasury Minority stock surplus (Note 11) earnings securities accounting (Note 9) adjustments stock Total interests Total equity Balance, March 31, 2009 $1,075 $7,915 $4 $13,166 $ 91 $ 1 $ (204) $(4,552) $ (802) $16,694 $764 $17,458 Net income — — — 1,488 — — — — — 1,488 — 1,488

Appropriations: Financial Information 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 — 0 Net changes in the year — — 2 — 38 (1) (78) 155 — 116 27 143 Balance, March 31, 2010 $1,075 $7,915 $6 $14,087 $129 $— $(282) $(4,397) $(802) $17,731 $791 $18,522

See notes to consolidated financial statements. Fact Sheets General Information

83 JAPAN TOBACCO INC. Annual Report 2010 Consolidated Statements of Cash Flows Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31, 2008, 2009 and 2010

Millions of U.S. dollars Millions of yen (Note 2) 2008 2009 2010 2010 Operating Activities: Income before income taxes and minority interests ¥ 372,614 ¥ 262,144 ¥ 276,055 $ 2,967 Adjustments 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 3,440 Investing 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 27 Purchases 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 44,058 474 Purchases 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 1,005 Proceeds from long-term debt 378,863 94,130 1,712 18 Repayments of long-term debt (90,199) (54,663) (191,041) (2,053) Proceeds from issuance of bonds 149,723 — 100,304 1,078 Payment 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 2 Dividends 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 15 Net 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 1,798 Decrease 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.

See notes to consolidated financial statements.

84 JAPAN TOBACCO INC. Annual Report 2010 Notes to Consolidated Financial Statements Japan Tobacco Inc. and Consolidated Subsidiaries Feature & Management 1. Business

Japan Tobacco Inc. (“JT”) is a joint stock corporation (kabushikikaisya) distributes, and sells tobacco products, primarily cigarettes. In the incorporated under the companies act of Japan (the “Companies Act”) Group’s pharmaceutical business, the Group develops, manufactures pursuant to the Japan Tobacco Inc. Law (the “JT Law”). JT and its and sells pharmaceutical products. In the Group’s food business, the consolidated subsidiaries (the “Group”) operate primarily in the Group develops, manufactures and sells processed food, and develops domestic and international tobacco businesses, the pharmaceutical and sells beverages. The Group’s other business segment includes its business and the food business. In the Group’s domestic and interna- commercial real estate and other operations. Business & History tional tobacco businesses, the Group develops, manufactures,

2. Basis of Presenting Consolidated Financial Statements

The accompanying consolidated financial statements have been pre- reclassifications and rearrangements have been made to the consolidated

pared in conformity with accounting principles generally accepted in financial statements issued domestically in order to present them in a Responsibility Japan (“Japanese GAAP”) and in accordance with the provisions set form which is more familiar to readers outside Japan. In addition, certain forth in the Japanese Financial Instruments and Exchange Act and its reclassifications have been made in the 2008 and 2009 financial state- related accounting regulations, which are different in certain respects ments to conform to the classifications used in 2010. from application, and disclosure requirements of accounting principles The consolidated financial statements are stated in Japanese yen, generally accepted in the United States of America (“U.S. GAAP”) and the currency of the country in which JT is incorporated and operates. International Financial Reporting Standards. The translations of Japanese yen amounts into U.S. dollar amounts In the case of most foreign consolidated subsidiaries, their financial are included solely for the convenience of readers outside Japan and Business Environment & Risk statements are prepared in conformity with U.S. GAAP (see Note 3 (q) have been made at the rate of ¥93.04 to $1, the approximate rate of Foreign Consolidated Subsidiaries) and are included in the consolidated exchange at March 31, 2010. Such translations should not be con- financial statements on that basis. strued as representations that the Japanese yen amounts could be In preparing these consolidated financial statements, certain converted into U.S. dollars at that or any other rate.

3. Summary of Significant Accounting Policies Financial Information a) Consolidation Investments in 17 material associated companies as of March 31, The consolidated financial statements as of March 31, 2010 include 2010 (25 as of March 31, 2008 and 22 as of March 31, 2009) are the accounts of JT and its 258 significant (299 as of March 31, 2008 accounted for by the equity method. The equity method is not applied and 274 as of March 31, 2009) subsidiaries. to account for the investments in unconsolidated subsidiaries and the Consolidation of the remaining unconsolidated subsidiaries would remaining associated companies, since the effect on the accompanying not have had a material effect on the accompanying consolidated consolidated financial statements would not have been material.

financial statements. Investments in the remaining unconsolidated subsidiaries and the Fact Sheets Most foreign consolidated subsidiaries have a December 31 fiscal associated companies are stated at cost (see (d) Securities). year-end, which differs from the March 31 fiscal year-end of JT. Any All significant inter-company balances and transactions have been necessary adjustments for the three-month period are made for con- eliminated in consolidation. All material unrealized gains resulting from solidation purposes. inter-company transactions have been eliminated. Under the control or influence concept, those companies in which The excess of the cost of the Group’s investments in consolidated JT, directly or indirectly, is able to exercise control over operations are subsidiaries over the fair value of the net assets purchased at the date fully consolidated, and those companies over which the Group has of acquisition is recorded as goodwill. Goodwill is amortized on a General Information the ability to exercise significant influence are accounted for by the straight-line basis over five to twenty years. Such amortization expense equity method. is included in selling, general and administrative expenses. However, insignificant goodwill is charged to income when incurred.

85 b) Unification of Accounting Policies Applied to Foreign d) Securities Subsidiaries for Consolidated Financial Statements The Group’s securities are classified as held-to-maturity debt securities In May 2006, the Accounting Standards Board of Japan (the “ASBJ”) or available-for-sale securities, depending on management’s holding issued ASBJ Practical Issues Task Force (PITF) No. 18, “Practical Solution intent. Held-to-maturity debt securities are reported at amortized cost. on Unification of Accounting Policies Applied to Foreign Subsidiaries for Available-for-sale marketable securities are reported at fair value, with the Consolidated Financial Statements.” PITF No. 18 prescribes: (1) the unrealized gains and losses, net of applicable taxes, reported in a sepa- accounting policies and procedures applied to a parent company and its rate component of equity. subsidiaries for similar transactions and events under similar circum- The cost of available-for-sale marketable securities sold is determined stances should in principle be unified for the preparation of the consoli- based on the moving-average method. Non-marketable available-for-sale dated financial statements, (2) financial statements prepared by foreign securities are stated at cost determined by the moving-average method. subsidiaries in accordance with either International Financial Reporting For significant impairment in value that is judged unrecoverable, carrying Standards or the generally accepted accounting principles in the United amounts of securities are reduced to fair value, with a resulting charge States of America tentatively may be used for the consolidation process, to income. An allowance for loss on investments is recorded to provide (3) however, the following items should be adjusted in the consolidation for the loss on investments in certain non-marketable equity accounted process so that net income is accounted for in accordance with Japanese for by the cost method and is determined based on the respective GAAP unless they are not material: financial condition of the investees. 1. Amortization of goodwill 2. Scheduled amortization of actuarial gain or loss of pensions that e) Allowance for Doubtful Accounts has been directly recorded in the equity The allowance for doubtful accounts is stated in amounts considered 3. Expensing capitalized development costs of R&D to be appropriate based on the companies’ past credit loss experience 4. Cancellation of the fair value model accounting for property, plant, and an evaluation of potential losses in the receivables outstanding. and equipment and investment properties and incorporation of the cost model accounting f) Inventories 5. Recording the prior years’ effects of changes in accounting poli- Inventories are generally stated at the lower of cost or net selling cies in the income statement where retrospective adjustments value, cost being determined by the average method. to financial statements have been incorporated In July 2006, the Accounting Standards Board of Japan (“ASBJ”) 6. Exclusion of minority interests from net income, if contained issued ASBJ Statement No. 9,” Accounting Standard for Measurement JT applied this accounting standard effective April 1, 2008. As a of Inventories,” and JT and its domestic subsidiaries adopted the result of this change, operating income and income before income standard from fiscal year beginning on April 1, 2007. This standard taxes and minority interests for the year ended March, 2009 decreased requires that inventories held for sale in the ordinary course of business by ¥94,235 million respectively, and as of April 1, 2008, retained be measured at the lower of cost or net selling value, which is defined earnings decreased by ¥193,658 million as JT amortized goodwill as the selling price less additional estimated manufacturing costs and posted at consolidated foreign subsidiaries. estimated direct selling expenses. The replacement cost may be used Also, income before income taxes and minority interests for the year in place of the net selling value, if appropriate. ended March 31, 2009 decreased by ¥912 million respectively, as JT In addition, leaf tobacco held by JT was subject to annual devalu- posted the retrospective adjustment in the Consolidated Statements ation prior to April 1, 2007. JT no longer applies annual devaluation of Income. The adjustment was caused by an accounting policy change for its leaf inventories from the year ended March 31, 2008 (see in foreign subsidiaries as a result of a change of U.S. GAAP. Note 6). c) Cash Equivalents g) Property, Plant and Equipment Cash equivalents are short-term investments that are readily convert- Property, plant and equipment are stated at cost. Depreciation is gener- ible into cash and that are exposed to insignificant risk of changes in ally computed using the declining-balance method while the straight-line value. All of cash equivalents mature or become due within three method is applied to buildings acquired after April 1, 1998. The useful months of the date of acquisition. lives of buildings and structures, and machinery, equipment and vehicles are principally from 38 to 50 years and 10 years, respectively.

86 Feature & Management For finance leases that do not transfer ownership of the leased l) Liabilities for Retirement Benefits property to the lessee, depreciation is mainly computed using straight- (1) Employees’ retirement benefits line method over the lease period as the useful life and assuming no JT has an unfunded severance indemnity plan and a cash balance residual value. pension plan (the ‘‘Pension Plans’’) as well as a defined contribution (Changes in useful life of property, plant and equipment) plan, which cover substantially all of its employees. Its consolidated The useful life of property, plant and equipment with respect to subsidiaries principally have unfunded severance indemnity plans and/ Domestic Group was changed as a result of the use review of these or non-contributory defined pension plans. assets in conjunction with the revision of the corporate tax act, princi- The Pension Plans and the subsidiaries’ plans are stated based on Business & History pally, the useful life of tobacco manufacturing was changed from 8 actuarially estimated retirement benefit obligations, considering the years to 10 years. estimated fair value of plan assets at each balance sheet date. Certain The effect of this change for the year ended March, 2009 is domestic subsidiaries apply a simplified method, under which retire- immaterial. ment benefit obligations are recorded based on the amount required if all employees terminated their employment as of the balance sheet h) Impairment of Long-Lived Assets date. Contributions to the defined contribution plan are charged to

The Domestic Group reviews its long-lived assets for impairment expenses when they are paid or accrued. Responsibility whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An impair- (2) Obligations under the Public Official Mutual Assistance ment loss would be recognized if the carrying amount of an asset or Association Law asset group exceeds the sum of the undiscounted future cash flows As a formerly wholly government-owned company, JT is obligated by expected to result from the continued use and eventual disposition of the Public Official Mutual Assistance Association Law to reimburse the asset or asset group. the Japanese government for pension expenses incurred each year by The impairment loss would be measured as the amount by the government for former employees of Japan Tobacco and Salt Business Environment & Risk which the carrying amount of the asset exceeds its recoverable Public Corporation (“JTSPC”), JT’s predecessor entity, and others for amount, which is the higher of the discounted cash flows from the their services during certain periods before July 1, 1956. Such obliga- continued use and eventual disposition of the asset or the net tions are recognized as liabilities at their present value using the selling price at disposition. actuarially determined computation method. i) Intangible Assets m) Leases Trademarks are carried at cost less accumulated amortization, which In March 2007, the ASBJ issued ASBJ Statement No. 13, “Accounting is calculated by the straight-line method principally over 10 years. Standard for Lease Transactions,” which revised the previous account- Financial Information ing standard for lease transactions issued in June 1993. The revised j) Income Taxes accounting standard for lease transactions is effective for fiscal years The provision for income taxes is computed based on the pretax beginning on or after April 1, 2008 with early adoption permitted for income or loss included in the consolidated statements of income. The fiscal years beginning on or after April 1, 2007. asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary –Lessee–

differences between the carrying amounts and the tax bases of assets Under the previous accounting standard, finance leases that deem to Fact Sheets and liabilities, and tax operating loss and other credit carry-forwards. transfer ownership of the leased property to the lessee are to be capi- Deferred taxes are measured by applying currently enacted tax laws talized. However, other finance leases were permitted to be accounted to the temporary differences, tax operating loss and other credit for as operating lease transactions if certain “as if capitalized” informa- carry-forwards. A valuation allowance is provided for any portion of the tion is disclosed in the note to the lessee’s financial statements. The deferred tax assets where it is considered more likely than not that revised accounting standard requires that all finance lease transactions they will not be realized. should be capitalized to recognize lease assets and lease obligations in the balance sheet. General Information k) Accrued bonuses In addition, the revised accounting standard permits leases which Bonuses to directors, cooperate auditors and employees are accrued existed at the transition date and do not transfer ownership of the at the year end to which such bonuses are attributable. 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.

87 –Lessor– The Group’s trade payables that are denominated in foreign curren- Under the previous accounting standard, finance leases that deem to cies and have been hedged by foreign exchange forward contracts are transfer ownership of the leased property to the lessee are to be translated at the foreign exchange rate stipulated in the contracts. treated as sales. However, other finance leases were permitted to be Interest rate swaps that qualify for hedge accounting and meet accounted for as operating lease transactions if certain “as if sold” specific matching criteria are not remeasured at market value, but the information is disclosed in the note to the lessor’s financial statements. differential to be paid or received under the swap agreements are The revised accounting standard requires that all finance leases that accrued and included in interest expense or income. deem to transfer ownership of the leased property to the lessee should be recognized as lease receivables, and all finance leases that q) Foreign Consolidated Subsidiaries deem not to transfer ownership of the leased property to the lessee JT International and other foreign consolidated subsidiaries principally should be recognized as investments in lease. maintain their accounting records in conformity with U.S. GAAP. JT and its domestic subsidiaries applied this accounting standard The significant accounting policies, which are different from JT’s effective April 1, 2008. In addition, the Company accounted for leases policies, are as follows: which existed at the transition date and do not transfer ownership of (1) Inventories the leased property to the lessee as acquisition cost of lease assets Inventories are generally stated at the lower of cost or market, cost measured at the obligations under finance leases less interest expense being determined by the first-in, first-out method or average cost. at the transition date. The effect of this change on operating income (2) Property, plant and equipment and income before income taxes and minority interests is immaterial. Depreciation of property, plant and equipment is generally computed using the straight-line method over the estimated useful lives of the n) Appropriations of Retained Earnings respective assets. Appropriations of retained earnings are reflected in the financial state- (3) Trademarks ments for the following year upon shareholders’ approval. Trademarks are principally amortized using straight-line method over 20 years. o) Foreign Currency Transactions (4) Retirement benefit pension plans Receivables and payables denominated in foreign currencies are According to FASB statement 158 “Employers’ Accounting for Defined translated into Japanese yen at the rates prevailing at each balance Benefit Pension and Other Postretirement Plans—an amendment of sheet date. The exchange gains or losses from translation are recog- FASB statements No. 87, 88, 106 and 132(R)” (”FASB 158”), the dif- nized in the consolidated statements of income to the extent that ference of retirement benefits obligation and fair value of plan assets hedging derivative financial instruments for foreign currency transac- is recognized on the consolidated balance sheets as of March 31, 2009 tions do not qualify for hedge accounting (see (p) Derivatives). and 2010 as assets/liabilities. All assets and liabilities of foreign consolidated subsidiaries are Unrecognized actuarial net loss and prior service cost, net of translated into Japanese yen at the exchange rate at each subsidiary’s applicable taxes, are recorded as a part of equity as pension liability respective fiscal year end. All revenue and expense accounts are adjustment of foreign consolidated subsidiaries. translated at average exchange rates during each subsidiary’s respec- (5) Derivatives tive fiscal year. All derivatives are used to hedge the exposure to foreign exchange Differences arising from such translation are shown as “Foreign risk and interest rate risk are recognized as either assets or liabilities currency translation adjustments” and “Minority interests” in a sepa- in the balance sheet and measured at fair value. rate component of equity. Changes in the fair value of derivatives are recorded in current earnings for each fiscal year. p) Derivatives (6) Income Taxes All derivatives, except for certain foreign exchange forward contracts, Foreign consolidated subsidiaries that apply in conformity with U.S. foreign currency option contracts, foreign currency swap contracts and GAAP adopt the provisions of FASB Interpretation (FIN) No. 48, interest rate swap contracts described below, are recognized as either Accounting for Uncertainty in Income Taxes. assets or liabilities and measured at fair value, and gains or losses on derivative transactions are recognized in the consolidated statements r) Per Share Information of income. Basic net income per share is computed by dividing net income avail- For derivatives which qualify for hedge accounting because of high able to common shareholders by the weighted-average number of correlation and effectiveness between the hedging instruments and common shares outstanding in each period, which were 9,580,080 the hedged items, gains or losses on derivatives are deferred until the shares for the years ended March 31, 2008 and 2009, and 9,580,092 corresponding hedged items are recognized in earnings. shares for the year ended March 31, 2010 (see Note 19).

88 Feature & Management Diluted net income per share for the year ended March 31, 2008, is incurred, the liability should be recognized when a reasonable estimate 2009 and 2010 reflects the potential dilution that could occur if stock of asset retirement obligation can be made. Upon initial recognition of acquisition rights were exercised. Diluted net income per share of a liability for an asset retirement obligation, an asset retirement cost is common stock assumes full exercise of the outstanding stock acquisi- capitalized by increasing the carrying amount of the related fixed asset tion rights at the beginning of the year or at the time of issuance. (see by the amount of the liability. The asset retirement cost is subsequently Note 19) allocated to expense through depreciation over the remaining useful life Cash dividends per share presented in the Consolidated State- of the asset. Over time, the liability is accreted to its present value each ments of Income are dividends applicable to the respective years period. Any subsequent revisions to the timing or the amount of the Business & History including dividends to be paid after the end of the year. original estimate of undiscounted cash flows are reflected as an increase or a decrease in the carrying amount of the liability and the capitalized s) Stock Option amount of the related asset retirement cost. This standard is effective The ASBJ Statement No. 8, ”Accounting Standard for Stock Options” for fiscal years beginning on or after April 1, 2010 with early adoption and related guidance are applicable to stock options granted on and permitted for fiscal years beginning on or before March 31, 2010. after May 1, 2006. This standard requires companies to recognize

compensation expense for employee stock options based on the fair Segment Information Disclosures— Responsibility value at the date of grant and over the vesting period as consideration In March 2008, the ASBJ revised ASBJ Statement No. 17 “Accounting for receiving goods or services. The standard also requires companies Standard for Segment Information Disclosures” and issued ASBJ to account for stock options granted to non-employees based on the Guidance No. 20 “Guidance on Accounting Standard for Segment fair value of either the stock option or the goods or services received. Information Disclosures.” Under the standard and guidance, an entity In the balance sheet, the stock option is presented as a stock acquisi- is required to report financial and descriptive information about its tion right as a separate component of equity until exercised. JT has reportable segments. Reportable segments are operating segments applied the accounting standard for stock options to those granted on or aggregations of operating segments that meet specified criteria. Business Environment & Risk and after May 1, 2006. Operating segments are components of an entity about which separate financial information is available and such information is evaluated t) Retirement Allowances for Directors and regularly by the chief operating decision maker in deciding how to Corporate Auditors allocate resources and in assessing performance. Generally, segment Retirement allowances for directors and corporate auditors are recorded information is required to be reported on the same basis as is used to state the liability at the amount that would be required if all directors internally for evaluating operating segment performance and deciding and corporate auditors retired at each balance sheet date. how to allocate resources to operating segments. This accounting standard and the guidance are applicable to segment information Financial Information u) Provision for Loss on Debt guarantees disclosures for the fiscal years beginning on or after April 1, 2010. Possible losses arose from debt guarantees are provided based on the financial position of guaranteed parties. Business Combinations— In December 2008, the ASBJ issued a revised accounting standard for v) New Accounting Pronouncements business combinations, ASBJ Statement No. 21, “Accounting Standard Asset Retirement Obligations— for Business Combinations.” Major accounting changes under the

In March 2008, the ASBJ published a new accounting standard for revised accounting standard are as follows; Fact Sheets asset retirement obligations, ASBJ Statement No. 18 “Accounting (1) The current accounting standard for business combinations allows Standard for Asset Retirement Obligations” and ASBJ Guidance No. 21 companies to apply the pooling of interests method of accounting “Guidance on Accounting Standard for Asset Retirement Obligations.” when certain specific criteria are met such that the business Under this accounting standard, an asset retirement obligation is combination is essentially regarded as a uniting-of-interests. The defined as a legal obligation imposed either by law or contract that revised standard requires to account for such business combination results from the acquisition, construction, development and the normal by the purchase method and the pooling of interests method of operation of a tangible fixed asset and is associated with the retirement accounting is no longer allowed. General Information of such tangible fixed asset. (2) The current accounting standard accounts for the research and The asset retirement obligation is recognized as the sum of the development costs to be charged to income as incurred. Under discounted cash flows required for the future asset retirement and is the revised standard, an in-process research and development recorded in the period in which the obligation is incurred if a reasonable (IPR&D) acquired by the business combination is capitalized as an estimate can be made. If a reasonable estimate of the asset retirement intangible asset. obligation cannot be made in the period the asset retirement obligation

89 (3) The current accounting standard accounts for a bargain purchase gain of the parent company when the associate’s financial statements are (negative goodwill) to be systematically amortized within 20 years. used in applying the equity method unless it is impracticable to Under the revised standard, the acquirer recognizes a bargain pur- determine adjustments. In addition, financial statements prepared by chase gain in profit or loss on the acquisition date after reassessing foreign associated companies in accordance with either International whether it has correctly identified all of the assets acquired and all Financial Reporting Standards or the generally accepted accounting of the liabilities assumed with a review of such procedures used. principles in the United States tentatively may be used in applying This standard is applicable to business combinations undertaken the equity method if the following items are adjusted so that net on or after April 1, 2010 with early adoption permitted for fiscal income is accounted for in accordance with Japanese GAAP unless years beginning on or after April 1, 2009. they are not material: (1) amortization of goodwill Unification of Accounting Policies Applied to Foreign Associated (2) scheduled amortization of actuarial gain or loss of pensions that has Companies for the Equity Method— been directly recorded in the equity The current accounting standard requires to unify accounting policies (3) expensing capitalized development costs of R&D within the consolidation group. However, the current guidance allows (4) cancellation of the fair value model accounting for property, plant, to apply the equity method for the financial statements of its foreign and equipment and investment properties and incorporation of the associated company which have been prepared in accordance with cost model accounting generally accepted accounting principles in their respective jurisdic- (5) recording the prior years’ effects of changes in accounting policies tions without unification of accounting policies. in the income statement where retrospective adjustments to the In December 2008, the ASBJ issued ASBJ Statement No. 16 financial statements have been incorporated (Revised 2008), “Revised Accounting Standard for Equity Method of (6) exclusion of minority interests from net income, if contained. Accounting for Investments.” The new standard requires adjust- This standard is applicable to equity method of accounting for ments to be made to conform the associate’s accounting policies for investments effective on or after April 1, 2010 with early adoption similar transactions and events under similar circumstances to those permitted for fiscal years beginning on or after April 1, 2009.

4. Business Combinations

I. Via consolidated subsidiary JTI (UK) MANAGEMENT LTD, on April (3) Main reasons for business combination 18, 2007, JT acquired the outstanding shares of the Gallaher Group Through the acquisition of the Gallaher Group Plc, JT could Plc (now known as “Gallaher Group Ltd.”) of the United Kingdom expand its business and enjoy economies of scale, build a through an acquisition method under English law known as a well-balanced and competitive brand portfolio in each market scheme of arrangement, converting Gallaher Group Plc into a and price segmentation, strengthen technology/distribution wholly owned subsidiary. infrastructures, and synergize business growth expected by the As the direct acquirer of the outstanding shares in Gallaher business combination through effective business operations. Group Plc was JTI (UK) MANAGEMENT LTD, which follows gener- (4) Date of business combination: April 18, 2007 ally accepted accounting principles and practices in the United (5) Legal form of the business combination: The issued shares States (“U.S. GAAP”), the business combination was accounted were acquired for cash. for under the purchase method, based on FASB Statement (6) Ratio of voting rights acquired: 100% No. 141. 2. Period of operating results included in the consolidated financial In August 2007, JT reorganized JTI (UK) MANAGEMENT LTD statements: into a subsidiary of JT International Holding B.V., a consolidated As the closing date of the accounting period of the acquired subsidiary of JT. company is set on December 31, operating results from April 1. The following were the name of the acquired company, business 18, 2007 to December 31, 2007 for this company have been contents, main reasons for business combination, the date of included in the current consolidated statement of income. business combination, the legal form of the business combina- 3. Acquisition costs tion, and ratio of voting rights acquired. The acquisition was conducted for 7.5 billion sterling pounds (1) The name of acquired company: Gallaher Group Plc in cash. (2) Business contents: Manufacturing and selling of tobacco products

90 Feature & Management 4. Amount of goodwill recognized, basis for recognition, and (1) The name of acquired company: Katokichi Co., Ltd. method and period for amortization of goodwill (2) Business contents: The main business contents are manu- (1) Amount of goodwill recognized: facturing and selling of frozen foods and frozen fishery ¥1,721,368 million ($17,181 million) products. The other business contents are a distribution (2) Basis for recognition: business incidental to the main business and a service busi- Goodwill was recognized because the acquisition cost of the ness such as a hotel and restaurant management. company exceeded the net value allocated to the assets (3) Main reasons for business combination acquired and liabilities assumed. JT anticipated that the Group could realize further expansion Business & History (3) Method and period for amortization of goodwill: of its business value because the Group would enjoy the In accordance with FASB Statement No. 142, “Goodwill and effect of mutual reinforcement and management resources Other Intangible Assets,” the amount of goodwill recognized synergy through the business combination. shall not be amortized. Rather, the decision of whether to (4) Date of business combination: January 8, 2008 recognize impairment shall be made once each year, or each (5) Legal form of the business combination: The issued shares time an event occurs indicating that the fair value of goodwill were acquired for cash.

has fallen below its book value. (6) Ratio of voting rights acquired: 93.89% Responsibility 5. Principal details of assets acquired and liabilities assumed on 2. Period of operating results included in the consolidated financial the day of the business combination were as follows: statements From January 1, 2008 to March 31, 2008 Current assets: ¥ 410,572 million ($ 4,098 million) 3. Acquisition costs Non-current assets: ¥2,531,125 million ($25,263 million) Total assets: ¥2,941,697 million ($29,361 million) The acquisition was conducted for ¥108.6 billion ($1,084 million) in cash. 4. Amount of goodwill recognized, basis for recognition, and

Current liabilities: ¥ 405,712 million ($ 4,049 million) Business Environment & Risk Non-current liabilities: ¥ 749,479 million ($ 7,481 million) method and period for amortization of goodwill Total liabilities: ¥1,155,191 million ($11,530 million) (1) Amount of goodwill recognized ¥41,885 million ($418 million) Regarding allocation of acquisition costs, the major intangible (2) Basis for recognition asset that was acquired in addition to goodwill was ¥523,263 Goodwill was recognized because the acquisition cost of the million ($5,223 million) in trademarks. This asset has an amortiza- company exceeded the net value allocated to the assets tion period of 20 years. acquired and liabilities assumed. Note: Amount of yen mentioned above is translated at the exchange rate as of (3) Method and period for amortization of goodwill Financial Information the business combination date. The amount of goodwill (¥1,791,189 Method for amortization: straight-line method million ($17,878 million)) included in non-current assets differs from the Period for amortization: five years amount of goodwill which is described in consolidated balance sheet. 5. Principal details of assets acquired and liabilities assumed on the II. On January 8, 2008, JT converted Katokichi Co., Ltd. (now known day of the business combination were as follows: as TableMark Co., Ltd.) into a subsidiary through tender offer for Current assets: ¥ 89,279 million ($ 891 million) Katokichi shares. Non-current assets: ¥136,995 million ($1,367 million)

In addition, JT acquired all of Katokichi’s voting rights on April Total assets: ¥226,274 million ($2,258 million) Fact Sheets 18, 2008. 1. The following were the name of the acquired company, business Current liabilities: ¥ 84,813 million ($ 847 million) contents, main reasons for business combination, the date of Non-current liabilities: ¥ 24,532 million ($ 244 million) business combination, the legal form of the business combina- Total liabilities: ¥109,345 million ($1,091 million) tion, and ratio of voting rights acquired. General Information

91 Millions of Millions of Yen 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 (5) Outline and purpose of the transactions: March 31, 2009 The business combination enables the group to integrate JT’s 1. Outline of the transactions food business head office function and affiliated companies (1) Transferred business: Processed food business (excluding which are engaged with processed food business and sea- chilled processed food business) and seasoning business soning business into Katokichi. After the combination, of JT Katokichi holds the processed food business including the (2) Description of transferred business: Mainly manufacturing largest scale of frozen food business in Japan and seasoning and sales of processed frozen foods and seasoning product business with leading manufacturing capability. Katokichi (3) Legal form of the business combination: Business transfer of keeps implementing a business restructuring and setting up JT’s processed food business and seasoning business, and further business fundamentals. stock transfer of affiliated companies including JT Foods, and 2. Overview of accounting methods used consolidated subsidiaries These business combinations are accounted as transactions (4) Name of the company after business combinations: under common control with “Accounting for Business Combina- Katokichi Co., Ltd. (now known as TableMark Co., Ltd.) 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: Millions of Millions of yen U.S. dollars 2009 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

92 Feature & Management The costs and aggregate fair values of marketable securities at March 31, 2009 and 2010 were as follows: Millions of yen 2009 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 Business & History Held-to-maturity Government bonds and municipal bonds 600 1 — 601

Millions of yen 2010 Cost Unrealized gain Unrealized loss Fair value Available-for-sale Equity securities ¥29,070 ¥19,755 ¥1,874 ¥46,951

Government and Corporate bonds 7,583 128 13 7,698 Responsibility Trust fund investments and other 4,641 1,048 108 5,581 Held-to-maturity Government bonds and municipal bonds 300 0 — 300

Millions of U.S. dollars 2010 Cost Unrealized gain Unrealized loss Fair value Available-for-sale Business Environment & Risk 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 Government bonds and municipal bonds 3 0 — 3

Available-for-sale securities whose fair value cannot be reliably determined at March 31, 2009 and 2010 were as follows: Financial Information Millions of Millions of yen U.S. dollars 2009 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 Fact Sheets

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: Millions of Millions of yen U.S. dollars 2008 2009 2010 2010 Amortized cost ¥300 ¥— ¥— $— Proceeds from sales ¥293 ¥— ¥— $—

Net realized loss ¥ (7) ¥— ¥— $— General Information

A domestic consolidated subsidiary sold held-to-maturity security reason consistent with Practical Guidelines on Accounting Standards for the year ended March 31, 2008 due to significant deterioration in for Financial Instruments No. 83-1. the issuer’s creditworthiness, which is considered to be a reasonable

93 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: Millions of Millions of yen U.S. dollars 2008 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

For the years ended March 31, 2008, 2009 and 2010, losses on “significant deterioration.” A security whose value has declined from write-downs of securities including investments in affiliated companies 30% to 50% and the effect of the decline on JT’s financial position is totaled ¥11,154 million, ¥7,062 million and ¥1,404 million ($15 million), material, is considered to have experienced “significant deterioration.” respectively. In evaluating security values, a security, whose value has If a security has a strong chance of regaining its value, the security is declined by more than 50% is considered to have experienced not written down.

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. dollars Time Held-to- Available Time Held-to- Available deposits Maturity for Sale deposits Maturity 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: Millions of Millions of yen U.S. dollars 2009 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 Annual devaluation was discontinued beginning in the year ended for Measurement of Inventories” JT leaf tobacco inventory in excess March 31, 2007. Effective from April 1, 2007, JT and its domestic of the minimum amount necessary for future production was subject subsidiaries applied the “Accounting Standard for Measurement of to annual devaluation. Inventories” (see Note 3 (f)).

94 Feature & Management 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 yen Carrying amount Fair value Increase/ Business & History Use application April 1, 2009 (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. dollars Carrying amount Fair value

Increase/ Responsibility Use application April 1, 2009 (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). Business Environment & Risk 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 Other income/ Use application Income Expense Net gain/(loss) (expense) Financial Information 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

Millions of U.S. dollars Other income/ Use application Income Expense Net gain/(loss) (expense)

Office buildings for rent $124 $56 $68 $ 0 Fact Sheets 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. General Information

95 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: Millions of Millions of yen U.S. dollars 2009 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: Millions of Millions of yen U.S. dollars 2009 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- In addition, certain domestic consolidated subsidiaries have entered tions outstanding at March 31, 2009 and 2010 were 12.97% and into interest rate swap agreements to fix variable rate interest pay- 6.77%, respectively, and those for current portion were 8.16% and ments of Japanese yen loans. 8.95%, respectively. Annual interest rates applicable to Japanese yen long-term JT entered into interest rate swap agreements in March 2004 to loans of JT and certain domestic consolidated subsidiaries at convert interest payments on 1.98% yen bonds due 2009 to floating March 31, 2009 and 2010 ranged from 0.77% to 5.30% and 0.90% rate payments on a LIBOR basis, which was at 1.24% at March 31 to 5.30%, respectively. 2005, in order to manage interest rate risks on these bonds. Taking Annual interest rates applicable to long-term loans denominated in changes in market conditions into consideration, JT unwound the foreign currencies outstanding at March 31, 2009 and 2010 ranged above interest swap agreements in May 2005. Consequently, JT paid from 2.35% to 8.00% and 0.97% to 8.75%, respectively. a fixed rate interest of 1.61%.

96 Feature & Management Annual maturities of short-term bank loans, commercial paper and long-term debt at March 31, 2010 were as follows: Millions of Years Ending March 31, Millions of yen 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 Business & History 2016 and thereafter 873 8 Total ¥874,307 $9,397

Under the JT Law, obligations created by the bonds issued by JT are preference to unsecured creditors (with the exception of national secured by a statutory preferential right over the property of JT. and local taxes and certain other statutory obligations). This right entitles the holders thereof to claim satisfaction in Responsibility Substantially all of the short-term bank loans, commercial paper and long-term debt are unsecured. Secured loans and debt of certain consolidated subsidiaries at March 31, 2010 were as follows: Millions of Millions of yen 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 Business Environment & Risk 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: Millions of Millions of yen U.S. dollars Buildings and structures ¥ 5,821 $ 63 Land 4,316 46

Machinery, equipment and vehicles 2,447 26 Financial Information Others 4,492 49 Total ¥17,076 $184

General agreements with respective banks provide, as is customary the right to offset cash deposited with them against any long-term or in Japan, that additional collateral must be provided under certain cir- short-term debt or other debt payable to the banks. JT has never been cumstances if requested by such banks and that certain banks have requested to provide additional collateral. Fact Sheets

9. Liabilities for Retirement Benefits

(1) Employees’ Retirement Benefit The cash balance pension plan provides retirement benefits in the JT has unfunded severance indemnity plan and a cash balance pension form of a lump-sum payment or annuity payments based on current plan as well as a defined contribution plan. and past principal credits earned and interest credits over time based

The unfunded severance indemnity plan provides lump-sum retire- on these principal credits. General Information ment benefits based on credits earned in each year of service. Domestic consolidated subsidiaries principally have unfunded Employees are entitled to receive larger payments in certain cir- severance indemnity plans and/or defined benefit pension plans cover- cumstances such as involuntary termination, retirement at the manda- ing substantially all of their employees, under which benefits are tory retirement age, voluntary termination at certain specific ages prior provided based on the rate of pay at the time of termination, years of to mandatory retirement age or death. service and certain other factors.

97 Foreign consolidated subsidiaries principally sponsor non-contributory and final average compensation before retirement. defined benefit pension plans covering most of their employees. Plans Certain foreign consolidated subsidiaries also provide certain covering regular full-time employees provide pension benefits based on health and life insurance benefits for retired employees and credits, determined by age, earned throughout an employee’s service their dependents.

The liabilities for employees’ retirement benefits at March 31, 2009 and 2010 consisted of the following: Millions of Millions of yen U.S. dollars 2009 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” to the defined contribution plan on April 1, 2006, and thereby recog- is the unfunded obligation recognized by foreign consolidated subsid- nized ¥3,097 million for the year ended March 31, 2006 as other iaries applying U.S. GAAP. “Other current liabilities” is the amount by expense which led to an increase of liabilities for retirement benefits which the actuarial present value of benefits included in the benefit by the same amount in accordance with “Accounting for the Transfer obligation payable in the next 12 months exceeds the fair value of plan between Retirement Benefits Plans (ASBJ Guideline No. 1)” and assets in foreign consolidated subsidiaries applying U.S. GAAP. “Practical Solution on Accounting for Transfer Between Retirement JT transferred a portion of the unfunded severance indemnity plan Benefit Plans (Practical Issues Task Forces Report No. 2).”

Millions of yen 2006 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: Millions of Millions of yen U.S. dollars 2008 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

98 Feature & Management 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

Year ended March 31, 2009 Japan Overseas Business & History 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% Amortization period of prior service cost principally 10 years principally between 7 years and 10 years Recognition period of actuarial gain/loss principally 10 years principally between 7 years and 15 years

Year ended March 31, 2010 Japan Overseas 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% Responsibility Amortization period of prior service cost principally 10 years principally between 6 years and 10 years Recognition period of actuarial gain/loss principally 10 years principally between 5 years and 19 years

Actuarial gains or losses that result from changes in plan experience for the years ended March 31, 2008, 2009 and 2010. and actuarial assumptions are principally amortized over the employ- These restructuring activities resulted in recognition of additional ees’ average remaining service period from the next fiscal year. The retirement benefits as business restructuring costs of ¥2,285 million, prior service cost that resulted from retroactive application of a plan ¥2,691 million and ¥7,288 million ($78 million) for the years ended Business Environment & Risk amendment is principally amortized over the employees’ average March 31, 2008, 2009 and 2010, respectively, and as other expenses remaining service period. The retirement benefit attributable to each of ¥1,122 million, ¥32 million and ¥1,235 million ($13 million) for the year is calculated by assigning the same amount of pension benefits years ended March 31, 2008, 2009 and 2010, respectively, which to each year of service. In determining service cost, certain foreign included a one-time charge for the unrecognized actuarial net loss and subsidiaries attribute benefits to periods of service under the plan’s unrecognized prior service cost attributable to the employees who benefit formula. retired earlier than expected. The Group’s contributions to the defined contribution plans which Certain domestic consolidated subsidiaries participate in multi- Financial Information were charged to expenses for the years ended March 31, 2008, 2009 employer contributory pension plans, the required contributions to and 2010 were ¥4,208 million, ¥ 3,948 million and ¥5,680 million ($61 which are recognized as a net pension cost for the year. Of these million), respectively. pension plans, information about Tokyo pharmaceutical industry Certain domestic and foreign subsidiaries provided additional employees’ pension funds for the years ended March 31, 2008 and retirement benefits for early-retired employees in connection with the 2009 were as follows: rationalization of the Domestic and International tobacco businesses Millions of Millions of yen U.S. dollars 2008 2009 2009 Fact Sheets 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% General Information

99 (2) Obligation Under the Public Official Mutual Assistance by the Law to reimburse the Japanese government for pension Association Law expenses incurred each year by the government in respect of former Employees of JT, including former employees of JTSPC and others are employees of JTSPC and others for their services during certain entitled to receive benefits under the government-sponsored pension periods before July 1, 1956, the enactment date of the Law. plan by the Public Official Mutual Assistance Association Law (the Such obligations were first recorded as liabilities at April 1, 2003 “Law”). The benefits, in the form of lifetime annuity payments by the based on the actuarially determined computation method. Any actuarial Social Insurance Agency, are determined based on the standard pay gain or loss arising subsequent to April 1, 2003 is deferred and rate, the length of service and other factors. amortized over 10 years. As a formerly wholly government-owned company, JT is obligated

The liabilities and costs recognized for such obligations as of and for the year ended March 31, 2008, 2009 and 2010 were as follows: Millions of Millions of yen U.S. dollars 2009 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)

Millions of Millions of yen U.S. dollars 2008 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- term of service of the directors is prescribed as one year rather than cant provisions in the Companies Act that affect financial and two years of normal term by its articles of incorporation, the Board of accounting matters are summarized below: Directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the company has prescribed so in its (a) Dividends articles of incorporation. Under the Companies Act, companies can pay dividends at any time Semiannual interim dividends may also be paid once a year upon during the fiscal year in addition to the year-end dividend upon resolu- resolution by the Board of Directors if the articles of incorporation of tion at the shareholders meeting. For companies that meet certain the company so stipulate. The Companies Act provides certain limita- criteria such as; (1) having the Board of Directors, (2) having indepen- tions on the amounts available for dividends or the purchase of trea- dent auditors, (3) having the Board of Corporate Auditors, and (4) the sury stock.

100 Feature & Management (b) Increases/decreases and transfer of common stock, reserve (c) Treasury stock and surplus The Companies Act also provides for companies to purchase treasury The Companies Act requires that an amount equal to 10% of divi- stock and dispose of such treasury stock by resolution of the Board of dends must be appropriated as a legal reserve (a component of Directors. The amount of treasury stock purchased cannot exceed the retained earnings) or as additional paid-in capital (a component of amount available for distribution to the shareholders which is deter- capital surplus) depending on the equity account charged upon the mined by specific formula. payment of such dividends until the total of aggregate amount of legal The Special Taxation Measures Law in Japan permits companies reserve and additional paid-in capital equals 25% of the common to take as tax deductions certain reserves if provided through year-end Business & History stock. Under the Companies Act, the total amount of additional paid-in book closing. Under Japanese tax laws, these reserves must be capital and legal reserve may be reversed without limitation. The reversed to income in future years. The deferred gain on sales of fixed Companies Act also provides that common stock, legal reserve, assets, net of tax, included in retained earnings provided under the additional paid-in capital, other capital surplus and retained earnings Special Taxation Measures Law at March 31, 2009 and 2010 was can be transferred among the accounts under certain conditions upon ¥47,969 million and ¥43,446 million ($467 million), respectively. resolution of the shareholders. Responsibility

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: Business Environment & Risk Number of Exercise Stock Option Persons Granted Options Granted Date of Grant Price Service Period Covered Exercise Period 2008 stock option 11 Directors 426 shares January 8, 2008 ¥1 From June 22, 2007 From January 9, 2008 to 16 Executive officers ($0.01) to June 24, 2008 January 8, 2038 2009 stock option 11 Directors 547 shares October 6, 2008 ¥1 From June 24, 2008 From October 7, 2008 to 14 Executive officers ($0.01) to June 23, 2009 October 6, 2038 2010 stock option 9 Directors 1,153 shares October 13, 2009 ¥1 From June 23, 2009 From October 14, 2009 to 14 Executive officers ($0.01) to June 24, 2010 October 13, 2039 Financial Information Fact Sheets General Information

101 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

102 Feature & Management 12. Income Taxes

The Domestic Group is subject to Japanese corporate tax, inhabitants 40.35% for the years ended March 31, 2008, 2009 and 2010. Foreign tax and enterprise tax based on income which, in the aggregate, consolidated subsidiaries are subject to income taxes of the countries resulted in a normal effective statutory tax rate of approximately in which they operate.

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: Business & History Millions of Millions of yen U.S. dollars 2009 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 Responsibility 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) Business Environment & Risk 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: Millions of Financial Information Millions of yen U.S. dollars 2009 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 Fact Sheets

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 General Information 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%

103 13. Research and Development Costs and Advertising Costs

Research and development costs charged to expenses as incurred for Advertising costs were charged to expenses as incurred and totaled the years ended March 31, 2008, 2009 and 2010 were ¥45,163 million, ¥186,607 million, ¥188,023 million and ¥165,684 million ($1,781 million) ¥47,296 million and ¥49,645 million ($534 million), respectively. 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 loss on leased property, which is included in current liabilities. other assets. Pro forma information of leased property, such as depreciation For the year ended March 31, 2008, the Group recorded an impair- expense and other information of finance lease that do not transfer ment loss of ¥14 million on certain leased property held under finance ownership of the leased property to the lessee on an “as if capitalized” leases that do not transfer ownership and an allowance for impairment basis at March 31, 2008 was as follows:

Millions of yen 2008 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: Millions of Millions of yen U.S. dollars 2009 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: Millions of Millions of yen U.S. dollars 2008 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.

104 Feature & Management (2) Loss on Impairment of Long-lived Assets ($65 million) respectively, which relates principally to land, and certain Asset grouping is based on the smallest identifiable unit that generates buildings and structures of company housing which are planned to be cash flows that are largely independent of the cash flows from other demolished. assets, except for idle property, which is grouped individually. The recoverable value of such assets was calculated mainly by its Loss on Impairment for the years ended March 31, 2008, 2009 and value in use, which was set at “nil.” 2010 amounted to ¥3,825 million, ¥16,365 million and ¥6,043 million

(3) Other—net Business & History “Other—net” included in “Other Income (Expenses)” for the years ended March 31, 2008, 2009 and 2010 consisted of the following: Millions of Millions of yen U.S. dollars 2008 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 Responsibility 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 Business Environment & Risk Total ¥(65,349) ¥(47,577) ¥ (5,744) $ (62)

“Introduction costs for vending machines with adult identification prior to JT’s acquisition of Gallaher. functions” is the cost to establish the system of vending machines Approximate 164 million sterling pound in total, based on the with functions to prevent minors from purchasing cigarettes from company’s assumption about the risk of fine being levied, had been vending machines and to dispense cigarettes only after scanning and booked as liabilities in the purchase price allocation related to JT’s verifying special IC cards that indicate whether the purchaser is an acquisition of Gallaher Group Plc (now Gallaher Group Ltd.) on April 18, Financial Information adult or not. 2007 and such liabilities had been included in Other current liabilities “Costs related to the recall of frozen foods products” is mainly the and Other non-current liabilities on the Consolidated Balance Sheets. cost to recall some frozen foods products which were imported and As the amount of fine decided by the OFT was lower than the liabili- sold by the Group. ties which had been originally booked, the liability has been reversed On April 16, 2010, Gallaher Group Ltd. (former Gallaher Group Plc) to the amount of fine sentenced in the decision by the OFT, and and Gallaher Ltd. (together, hereinafter, “Gallaher”), JT’s tobacco consequently, the relevant variance of approximate 114 million sterling business subsidiaries in the United Kingdom, received the decision pound has been recognized and disclosed in the Other income on the Fact Sheets from Office of Fair Trading (“OFT”), the UK competition authority, Consolidated Statements of Income, which is presented “Gain from concluding that a fine of approximate 50 million sterling pound was the reversal of liability on a fine levied under the UK competition law” levied to Gallaher for anti-competitive business practices relating to in “Other—net.” the retail pricing of tobacco products in the market during the period General Information

105 16. Financial Instruments and Related Disclosures

(1) Policy for Financial Instruments To control credit risk related to surplus investment and derivatives, JT and major subsidiaries effectively raise necessary funds (for busi- based on an internal guide line, JT and its major subsidiaries invest ness operations) with mainly bank loans and bonds considering their cash surplus into bonds and other financial instruments with a certain business environment. credit grade and have derivatives with counterparties which has high Cash surplus, if any, is invested in low risk and highly liquid financial credit grade. In addition, the Treasury Division of JT regularly monitors instruments. such transactions and reports them to it’s Executive Committee. Derivatives are used, not for speculative nor trading purposes, but to manage risk exposure arising from business operations. Foreign exchange risk management In accordance with the internal guidelines, JT and its major subsidiaries, (2) Nature and Extent of Risks Arising from Financial to reduce the market risk of fluctuation in foreign currency exchange Instruments rate mainly related to future cashflow in foreign currency, establishes Receivables such as trade notes and accounts receivable are exposed foreign exchange hedging strategy based on the environment and the to customer’s credit risk. Receivables in foreign currencies are exposed forecast of foreign exchange market. The foreign exchange hedging to the market risk of fluctuation in foreign currency exchange rates. strategy is reviewed and approved by the Financial Risk Management Short-term investments and investment securities are mainly bonds Committee of JT and, based on which, the derivative transactions are for surplus investment and equities of customers and suppliers of the originated. The Treasury Division of JT regularly reports such derivative Group and those are exposed to the issuer’s credit risk and market transactions to the JT’s Executive Committee. price fluctuation risk. Payables such as trade notes and accounts payable in foreign Interest rate risk management currencies are exposed to the market risk of fluctuation in foreign In accordance with the internal guidelines, JT and its major subsidiaries, currency exchange rates. to reduce the market risks of interest rate fluctuation related to bank Bank loans, commercial paper and bonds issued by the Group are loans and bonds, establishes interest rate hedging strategy based on exposed to the liquidity risk that the Group would not be able to prepare the environment and the forecast of interest market. The interest rate funding to repay such debts due to deterioration of financial market. hedging strategy is reviewed and approved by the Financial Risk Bank loans and bonds in variable interest rates are exposed to Management Committee of JT and, based on which, derivative transac- market risks of interest rate fluctuation and those in foreign currencies tions are originated. The Treasury Division of JT regularly reports such are exposed to the market risk of fluctuation in foreign currency derivative transactions to JT’s Executive Committee. exchange rates. Derivatives mainly include foreign currency forward contracts to Risk Management of market price fluctuation manage the market risk of fluctuation in foreign currency exchange With respect to short-term investments and investment securities, JT rate related to future cashflow in foreign currency and interest rate and its major subsidiaries regularly monitors prices and issuer’s swaps to manage the market risk of fluctuation interest rate related to financial status. Except for held-to-maturity bonds, responsible divi- interest payment for bank loans and bonds. These derivatives are sions revise investment strategy if necessary by taking relationship exposed to counterparty’s credit risk. with issuers into consideration. For hedging instruments, hedged items, hedging policies and assessment methods of effectiveness of hedging instruments, please Liquidity risk management (Liquidity risk comprises the risk that see Note 17. the Group cannot meet it’s contractual obligations in full on maturity dates) (3) Risk Management for Financial Instruments In accordance with the internal guidelines, JT and its major subsidiaries Credit Risk Management establishes finance plan based on the annual business plan and the With respect to receivables, in order to control customer’s credit risk, Treasury Division of JT regularly monitors the balance of liquidity-in- JT and its major subsidiaries set credit limits or payment terms to hand and interest-bearing debts and reports them to JT’s Executive major customers based on the Credit Management Guideline in prin- Committee. In addition, JT and its major subsidiaries keep necessary ciple. In addition, receivable balance of each customer is constantly credit facilities to manage liquidity risk, having commitment lines with checked to reduce risk of customer’s default. The Treasury Division of several financial institutions. JT regularly monitors status of occurrence and collections of bad debts, and reports them to JT’s Executive Committee.

106 Feature & Management (4) Fair Values of Financial Instruments among assumptions because the rational valuation techniques include Fair values of financial instruments are based on quoted price in active variable factors. Also please see Note 17 for the detail of fair value markets. If quoted price is not available, other rational valuation for derivatives. techniques are used instead. The results of valuation may differ

(a) Fair values of financial instruments Millions of yen

Unrecognized Business & History March 31, 2010 Carrying amount Fair value 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 Responsibility 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 — Business Environment & Risk 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 —

Millions of U.S. dollars Unrecognized Financial Information March 31, 2010 Carrying amount Fair value 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 Fact Sheets 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 — General Information 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.

107 Cash and cash equivalents and receivables Bonds The carrying values of cash and cash equivalents and receivable The fair value of bonds that JT and its subsidiaries issued is determined approximate fair value because of their short maturities. 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 Short-term investments and investment securities credit risk. The fair value of short-term investments and investment securities are measured at the quoted market price of the stock exchange for the Long-term bank loans equity instruments, and at the quoted price obtained from the financial The fair value of long-term bank loans is determined by discounting institution for certain debt instruments. the cash flows related to the loans at the rate assumed based on The information of the fair value for the short-term investments and debt’s maturity and credit risk. investment securities by classification is included in Note 5. Derivatives Payables, short-term bank loans, commercial paper, other The information of the fair value for derivatives is included in Note 17. 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 Millions of March 31, 2010 Millions of yen 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 maturities Millions of yen Millions of U.S. dollars Due in Due in one year Due after one year Due after March 31, 2010 or less one year or less 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.

108 Feature & Management 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 Business & History 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 Responsibility Interest rate swaption

Derivatives are subject to market risk and credit risk. Market risk is borrowings and bonds and forecasted foreign currency denominated the exposure created by potential fluctuations in market conditions, transactions. including interest or foreign exchange rates. Credit risk is the possibility The effectiveness of the hedging instruments is assessed in that a loss may result from a counterparty’s failure to perform accord- accordance with the Risk Management Policy and Practice Manual for ing to the terms and conditions of the contract. financial instruments of JT and certain consolidated subsidiaries by Business Environment & Risk The Group does not hold or issue derivatives for trading purposes. comparing the accumulated amount of changes in hedging instru- The main objective of using derivatives is to hedge the Group exposure ments with hedged items. Hedging instruments and hedged items to interest rate risks associated with certain interest payments on were summarized as follows:

2008 Hedging instruments Hedged items Foreign currency forward contracts Forecasted foreign currency transactions Currency swaps Forecasted foreign currency transactions Financial Information Currency options Forecasted foreign currency transactions

2009 Hedging instruments Hedged items Foreign currency forward contracts Forecasted foreign currency transactions Interest rate swaps Borrowings

2010

Hedging instruments Hedged items Fact Sheets Foreign currency forward contracts Forecasted foreign currency transactions Interest rate swaps Borrowings General Information

109 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 Contract/ Contract/ Contract/ Amount Notional Notional Notional due after Amount Fair Value Gain (Loss) Amount Fair Value Gain (Loss) Amount 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

Millions of U.S. dollars 2010 Contract Contract/ Amount Notional due after Amount 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

110 Feature & Management Derivative transactions to which hedge accounting is applied at March 31, 2010:

Millions of yen 2010 Contract Amount due Contract after Hedged item Amount One Year Fair Value Interest rate swaps (fixed rate payment, floating rate receipt) Long-term bank loans ¥1,137 437 *1 Business & History

Millions of U.S. dollars 2010 Contract Amount due Contract after Hedged item Amount One Year Fair Value Interest rate swaps (fixed rate payment, floating rate receipt) Long-term bank loans $12 5 *1 Responsibility *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 (3) Amount of the claim Business Environment & Risk lawsuit against 13 tobacco manufacturers including JT’s Canadian CAD50.0 billion (approximately ¥4,568 billion) consolidated subsidiary JTI-Macdonald Corp. (“JTI-Mac”) and 1 * The statement of claim in this case contains allegations of joint and several liabili- industry organization. The detail is as follows. ties among all the defendants but does not specify any individual amount or (1) Parties to the lawsuit percentages, within the total amount of the claim, which is claimed from any individual defendant. Plaintiff Government of Ontario (Canada) Defendants 13 tobacco manufacturers including JTI-Mac and 1 JTI-Mac has valid grounds to defend the action which it will pursue industry organization by all appropriate means with the full support of JT. There are similar (2) Content of the complaint pending lawsuits against JTI-Mac and others field in Canada by the Financial Information To seek compensation for damages for the cost of health care Government of British Columbia and the Government of New Brunswick benefits, resulting from the treatment of tobacco related disease or claiming the recovery of health care costs; however, the amounts of the risk of tobacco related disease, which have been paid or will be claims have not been specified in these lawsuits. paid by the government of Ontario to relevant insured persons. Fact Sheets General Information

111 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 Weighted Net Income 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 For the year ended March 31, 2009: Basic EPS Net income available to common shareholders ¥123,400 9,580,080 ¥12,881 $131 Effect of dilutive securities: Stock acquisition rights 846 Diluted EPS: Net income for computation ¥123,400 9,580,926 ¥12,880 $131 For the year ended March 31, 2008: Basic EPS Net income available to common shareholders ¥238,702 9,580,080 ¥24,917 $249 Effect of dilutive securities: Stock acquisition rights 97 Diluted EPS: Net income for computation ¥238,702 9,580,177 ¥24,916 $249

20. Segment Information

The Group’s business is divided into the domestic tobacco, interna- manufacturing and sale of cigarettes in other markets worldwide not tional tobacco, pharmaceutical, food and other industry segments. covered by the domestic tobacco segment. The pharmaceutical The domestic tobacco segment consists of manufacturing and sale segment is concerned with the development, manufacturing and sale of tobacco products, primarily cigarettes, in Japan, including tobacco of prescription drugs. The food segment involves manufacturing and products sold at duty free shops in Japan, as well as at markets in sale of beverages and processed foods. Other segments include the China, Hong Kong and Macau, which are covered by the China Division. real estate business and other operations. The domestic tobacco segment includes the sales by TS Network Co., With respect to the international tobacco business, the accounting Ltd., JT’s subsidiary. TS Network Co., Ltd. distributes the tobacco period of consolidated overseas subsidiaries, represented by JT products and conducts wholesale etc. of foreign brand tobacco International, ends December 31, 2009 and the results for the twelve products purchased from foreign tobacco manufacturers through months ended December 31, 2009 are consolidated for the year ended importers. The international tobacco segment consists of March 31, 2010.

112 Feature & Management (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 yen 2008 Domestic International Elimination/ Tobacco Tobacco Pharmaceutical Food Others Total 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 Business & History 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 Responsibility

Millions of yen 2009 Domestic International Elimination/ Tobacco Tobacco Pharmaceutical Food Others Total Corporate Consolidated Sales to customers ¥3,200,494 ¥3,118,319 ¥ 56,758 ¥435,966 ¥20,770 ¥6,832,307 ¥ — ¥6,832,307 Intersegment sales 48,390 40,631 — 133 12,044 101,198 (101,198) — Total sales 3,248,884 3,158,950 56,758 436,099 32,814 6,933,505 (101,198) 6,832,307 Business Environment & Risk Operating expenses 3,060,625 2,984,178 55,738 447,550 23,119 6,571,210 (102,709) 6,468,501 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 Financial Information

Millions of yen 2010 Domestic International Elimination/ Tobacco Tobacco Pharmaceutical Food Others Total Corporate Consolidated Sales to customers ¥3,042,836 ¥2,633,636 ¥ 44,069 ¥394,653 ¥19,501 ¥6,134,695 ¥ — ¥6,134,695 Intersegment sales 54,922 38,128 — 112 10,448 103,610 (103,610) — Total sales 3,097,758 2,671,764 44,069 394,765 29,949 6,238,305 (103,610) 6,134,695

Operating expenses 2,894,419 2,562,637 57,662 408,461 19,392 5,942,571 (104,381) 5,838,190 Fact Sheets 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 General Information

113 Millions of U.S. dollars 2010 Domestic International Elimination/ Tobacco Tobacco Pharmaceutical Food Others Total Corporate Consolidated 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 ¥1,193,178 million, ¥1,135,320 million and ¥1,084,321 million ($11,654 sales and selling, general and administrative expenses. million), respectively. Increase of long-term expenses is included in capital expenditures Effective from April 1, 2008, JT applied the “Practical Solution on and amortization expense of the long-term prepaid expenses is Unification of Accounting Policies Applied to Foreign Subsidiaries for included in depreciation and amortization other than goodwill. Consolidated Financial Statements” (see Note 3 (b)). As a result of this The domestic tobacco segment includes the sales by TS Network change, the operating income for the international tobacco segment Co., Ltd. Net sales of such imported tobacco products via TS Network for the year ended March 31, 2009 decreased by ¥94,235 million as Co., Ltd. for the year ended March 31, 2008, 2009 and 2010 were 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 yen 2008 Western Elimination/ Japan Europe Others Total 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 yen 2009 Western Elimination/ Japan Europe Others Total Corporate Consolidated Sales to customers ¥3,672,004 ¥2,038,028 ¥1,122,275 ¥6,832,307 ¥ — ¥6,832,307 Intersegment sales 53,334 223,872 39,186 316,392 (316,392) — Total sales 3,725,338 2,261,900 1,161,461 7,148,699 (316,392) 6,832,307 Operating expenses 3,538,899 2,286,088 961,828 6,786,815 (318,314) 6,468,501 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 yen Feature & Management 2010 Western Elimination/ Japan Europe Others Total Corporate Consolidated Sales to customers ¥3,482,548 ¥1,677,755 ¥ 974,392 ¥6,134,695 ¥ — ¥6,134,695 Intersegment sales 59,889 196,601 34,326 290,816 (290,816) — Total sales 3,542,437 1,874,356 1,008,718 6,425,511 (290,816) 6,134,695 Operating expenses 3,357,884 1,914,645 858,222 6,130,751 (292,561) 5,838,190 Operating income (loss) ¥ 184,553 ¥ (40,289) ¥ 150,496 ¥ 294,760 ¥ 1,745 ¥ 296,505 Business & History 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

Millions of U.S. dollars 2010 Western Elimination/ Japan Europe Others Total Corporate Consolidated Sales to customers $37,430 $18,033 $10,473 $65,936 $ — $65,936

Intersegment sales 644 2,113 369 3,126 (3,126) — Responsibility 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 the year ended March 31, 2009 decreased by ¥94,235 million as Business Environment & Risk Germany while “Others” includes Canada, Russia and Malaysia. compared to the case where the previous method was adopted. Operating expenses represent the aggregate amount of the cost of sales and selling, general and administrative expenses. (3) Sales to Foreign Customers Effective from April 1, 2008, JT applied the “Practical Solution on Sales to Foreign Customers, which consist of sales of JT and its Unification of Accounting Policies Applied to Foreign Subsidiaries for consolidated subsidiaries in countries or regions outside Japan, for the Consolidated Financial Statements” (see Note 3 (b)). As a result of this years ended March 31, 2008, 2009 and 2010 were as follows: change, the operating income for the Western Europe segment for Financial Information

Millions of Millions of yen U.S. dollars 2008 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 Fact Sheets

Percentage of 2008 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 General Information

“Western Europe” includes Switzerland, United Kingdom and Germany while “Others” includes Canada, Russia and Malaysia.

115 21. Subsequent Events

On April 13, 2010, JTI-Macdonald Corp. (“JTI-Mac”), JT’s Canadian At the same time, the RJR Group entered into another agreement consolidated subsidiary, entered into a comprehensive agreement with with the Canadian Governments and made payments totaling CAD400 the Government of Canada and all provinces and territories (the million (approximately ¥37.0 billion), resulting in total payments by the “Canadian Governments”) to establish a cooperation mechanism in JT Group and RJR Group to the Canadian Governments of CAD550 combating cigarette smuggling and contraband. In addition, JTI-Mac million (approximately ¥50.9 billion). As a result of indemnification pleaded to a regulatory offense for its involvement in the illicit trade rights under the purchase agreement in 1999 and subsequent negotia- of cigarettes prior to JT’s acquisition of non-US tobacco operations of tions with the RJR Group, the JT Group and the RJR Group entered RJR Nabisco Inc. and paid CAD150 million (approximately ¥13.8 into an agreement whereby the JT Group would incur CAD150 million billion). As a result, all of the contraband-related claims against JTI-Mac among the aforementioned CAD550 million total. 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.

116 Independent Auditors’ Report Feature & Management Business & History

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 Responsibility 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. Business Environment & Risk 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 Financial Information outside Japan.

June 24, 2010 Fact Sheets General Information

117 JAPAN TOBACCO INC. Annual Report 2010

Fact Sheets

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.

118 JAPAN TOBACCO INC. Annual Report 2010 Financial Data Feature & Management Net Sales Including (Billions of yen) Excise Taxes 8,000 6,000

4,000

2,000

0 (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 Business & History 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 Responsibility Net Sales Excluding (Billions of yen) Excise Taxes 3,000

2,000

1,000

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 uiesEvrnet&Rs Financial Information Business Environment & Risk Tobacco Business 1,635.2 1,675.8 1,649.7 1,631.5 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 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 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 (Billions of yen) 1,000 Fact Sheets 750

500

250

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 General Information 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

119 JAPAN TOBACCO INC. Annual Report 2010 Financial Data

R&D Expenses (Billions of yen) 60

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 Pharmaceutical Business 30.5 35.4 27.1 23.7 20.5 19.9 23.4 24.4 23.8 23.1 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 (Billions of yen) 750

500

250

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m EBITDA 312.0 334.1 337.2 373.4 400.1 433.3 464.6 602.0 646.2 526.7 Tobacco Business 296.3 320.9 321.4 343.1 Japanese Domestic 296.0 305.7 326.4 306.7 272.2 257.6 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 (Billions of yen) 500 400 300 200

100 0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Operating Income 139.9 163.8 188.9 234.0 273.3 306.9 331.9 430.5 363.8 296.5 Tobacco Business 165.9 192.1 213.3 238.4 Japanese Domestic 215.8 220.0 245.3 222.3 188.2 203.3 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

120 Feature & Management Non-Operating Income (Billions of yen) and Expenses 50 25 0 –25 –50 –75 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 Business & History 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. Responsibility

Recurring Profit (Billions of yen) 400

300

200

100 Financial Information Business Environment & Risk

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 (Billions of yen) and Loss 50 0 –50 –100 –150 Fact Sheets –200 –250 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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, General Information 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

121 JAPAN TOBACCO INC. Annual Report 2010 Financial Data

Net Income (Loss) (Billions of yen) 300

200

100

–100 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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) (Yen) 100,000

75,000 50,000 25,000

0 –25,000 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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

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

Return on Equity (ROE) (%) 15.0

10.0

5.0

–5.0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 mc ROE 2.9 2.4 4.7 (0.5) 4.2 12.4 11.3 11.8 6.8 8.6

122 Feature & Management Return on Assets (ROA) (%) 12

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 mc ROA 4.7 5.4 6.4 7.9 9.2 10.4 10.7 10.5 8.4 7.8 Business & History Note: ROA = (Operating Income + Financial Income) / Total Assets [average of beginning and ending figure for the period] Responsibility

Free Cash Flow (FCF) (Billions of yen) 300 200 100 0 500 uiesEvrnet&Rs Financial Information Business Environment & Risk 1,000 –1,500 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 (Billions of yen) 150

(CAPEX) Fact Sheets

100

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Capital Expenditure 114.8 96.5 109.1 90.8 85.1 98.9 102.1 129.5 134.2 137.1 Tobacco Business 77.3 70.0 60.9 60.5

Japanese Domestic 46.4 75.0 55.2 57.2 46.5 45.8 General Information International 18.7 24.9 32.0 48.4 59.7 64.5 Pharmaceutical Business 3.6 2.2 1.1 2.6 3.1 2.1 3.0 4.2 3.4 2.9 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

123 JAPAN TOBACCO INC. Annual Report 2010 Financial Data

Depreciation & (Billions of yen) Amortization 300

200

100

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Depreciation & Amortization 172.0 170.3 148.3 139.4 126.7 126.4 132.6 171.5 282.4 230.1 Tobacco Business 130.3 128.8 108.0 104.7 Japanese Domestic 80.1 85.6 81.0 84.3 84.0 54.3 International 21.0 23.0 31.5 65.3 163.1 140.7 Pharmaceutical Business 9.7 10.4 8.7 8.4 3.6 3.2 3.0 3.3 3.8 3.9 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 (Billions of yen) 5,000 4,000 3,000 2,000 1,000 0 (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 Tobacco Business 2,452.7 2,309.5 2,153.0 2,122.2 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 Pharmaceutical Business 129.9 125.2 114.7 114.3 117.8 117.9 106.1 111.4 111.5 114.0 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 (Billions of yen) (%) Equity Ratio 2,500 80 2,000 70 1,500 60 1,000 50 500 40 0 30 (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 1,723.2 mc 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

124 Feature & Management Book Value per Share (BPS) (Yen) 1,000,000 800,000 600,000 400,000 200,000 0 (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 Business & History Notes: 1. Total Equity in FY2000-2006 excludes Minority Interests 2. A 5 for 1 stock split went into effect on April 1, 2006 Responsibility

Liquidity and (Billions of yen) Interest-Bearing Debt 1,500 1,200 900 600

300 Financial Information Business Environment & Risk 0 (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 1,185.6 218.8 169.8 167.3 m 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 (Times) 0.8 Fact Sheets 0.6

0.4

0.2

0 (As of March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 mc Debt / Equity Ratio 0.40 0.32 0.26 0.25 0.15 0.12 0.11 0.67 0.64 0.53 General Information

125 JAPAN TOBACCO INC. Annual Report 2010 Financial Data

Interest Coverage Ratio (Times) 60

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 mc 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 (Yen) per Share 16,000 12,000

8,000

4,000

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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

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

Dividend Payout Ratio on (%) a Consolidated Basis 100 50

–150

–300 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 mc Dividend Payout Ratio 36.6 43.4 26.6 (252.1) 40.5 15.2 18.2 19.3 41.9 40.1 mc Goodwill amortization adjusted 18.0 19.0 22.6 23.6

Note: Payout Ratio before goodwill amortization

126 JAPAN TOBACCO INC. Annual Report 2010 Japanese Domestic Tobacco Business Feature & Management Total Domestic Market (Billions of cigarettes) 400

300

200

100

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Total Domestic Market 324.5 319.3 312.6 299.4 292.6 285.2 270.0 258.5 245.8 233.8 Business & History Source: Tobacco Institute of Japan Responsibility

JT Sales Volume and (Billions of cigarettes) (%) JT Share 250 100 200 90 150 80 100 70

50 60 Financial Information Business Environment & Risk 0 50 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m JT Sales Volume 243.1 237.2 229.0 218.3 213.2 189.4 174.9 167.7 159.9 151.8 mc 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 (Billions of cigarettes) 6

China Division and Fact Sheets Domestic Duty-Free 4

0 (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 General Information

127 JAPAN TOBACCO INC. Annual Report 2010 Japanese Domestic Tobacco Business

Market Share (%) by JT Brand Family 80

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Mild Seven 34.0 33.2 32.5 32.6 32.9 32.2 31.6 32.0 32.3 32.1 m Seven Stars 7.7 8.2 8.3 8.4 8.3 8.7 9.0 8.9 9.3 9.6 m Caster 8.0 7.8 7.5 7.1 6.6 6.3 6.0 5.9 5.9 5.7 m Cabin 5.0 4.7 4.4 4.1 4.2 4.0 4.0 4.0 3.8 3.9 m Peace 3.1 3.0 3.0 3.0 2.9 2.9 2.8 2.8 2.8 2.7 m Pianissimo (*) — — — — — 2.8 3.1 3.2 3.3 3.4 m Hope 2.1 2.1 2.0 2.0 2.1 2.1 2.0 2.0 2.0 2.0 m Frontier 2.9 2.8 2.6 2.2 1.9 1.7 1.5 1.4 1.2 1.1 m 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

Top 20 Selling Products in Japan by Market Share (FY ended March 31, 2010)

Product Brand Owner Share (%) 1 SEVEN STARS JT 5.0 2 MILD SEVEN SUPER LIGHTS JT 4.6 3 MILD SEVEN LIGHTS JT 3.8 4 MILD SEVEN ONE 100’s BOX JT 3.4 5 MILD SEVEN JT 3.2 6 MILD SEVEN EXTRA LIGHTS JT 2.7 7 MARLBORO LIGHTS MENTHOL BOX PMJ 2.6 8 CASTER MILD JT 2.3 9 SEVEN STARS BOX JT 1.9 10 MILD SEVEN ONE JT 1.7 11 CABIN MILD BOX JT 1.6 12 KENT ULTRA1 100’s BOX BATJ 1.5 13 CASTER ONE 100’s BOX JT 1.5 14 PIANISSIMO ONE JT 1.5 15 MILD SEVEN ONE BOX JT 1.4 16 MILD SEVEN SUPER LIGHTS 100’s BOX JT 1.4 17 MARLBORO KS BOX PMJ 1.3 18 MILD SEVEN EXTRA LIGHTS BOX JT 1.3 19 HOPE (10) JT 1.3 20 MILD SEVEN LIGHTS BOX JT 1.2 Source: Tobacco Institute of Japan

128 Feature & Management Market Share by Tar Level (%) 100 (Market Share in Top 100 Sales Products) 80 60 40

20 0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m 1 mg 12.9 14.0 14.6 16.1 18.4 19.9 21.2 22.7 24.0 24.3 m 2–3 mg 8.1 7.9 7.5 6.6 6.7 7.4 7.0 8.2 8.5 8.6 Business & History m 4–6 mg 24.8 24.0 23.8 23.5 23.1 23.2 23.4 23.0 22.4 21.0 m 7–13 mg 40.8 40.8 40.9 40.3 39.8 37.7 36.3 34.1 32.9 33.6 m 14 mg or Higher 13.4 13.4 13.3 13.4 12.1 11.9 12.1 12.1 12.2 12.5

Source: Tobacco Institute of Japan Responsibility

Market Share by Tar Level (%) 80 (JT Products) 60

20 Financial Information Business Environment & Risk

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m 1 mg 5.8 6.0 6.1 7.2 8.5 11.7 12.9 14.0 14.7 15.1 m 2–3 mg 5.8 5.8 5.9 5.4 5.9 6.6 6.7 6.7 6.9 7.0 m 4–6 mg 18.6 17.9 17.3 17.0 16.5 14.5 13.9 14.2 14.2 13.6 m 7–13 mg 32.2 32.0 31.6 30.9 30.0 22.0 19.7 18.5 17.8 17.7 m 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 (%) 20

Market Share Fact Sheets 15

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ( ) mc Menthol Products * 10.0 11.3 12.7 14.0 16.4 17.2 17.4 19.3 19.8 19.8 mc 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 products General Information Source: Tobacco Institute of Japan

129 JAPAN TOBACCO INC. Annual Report 2010 Japanese Domestic Tobacco Business

Products Priced at ¥320 or (%) more per pack and 12 D-spec Products 9

Market Share 6

0 (Years ended March 31) 2003 2004 2005 2006 2007 2008 2009 2010 mc JT Products Priced at ¥320 or more per pack (*1) 10.2 11.1 11.8 6.3 5.5 5.4 5.2 5.1 ( 2) mc D-spec Products * 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 (Yen) Excise Taxes per Thousand 4,100 Cigarettes 4,000

3,900

3,800 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 mc 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 100 80 60 40

20 0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 79.5 m 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

130 New Product Launches and Sales Area Expansion Feature & Management

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) Tar Nicotine Date Product D-spec Menthol Price Sales Region (mg) (mg) 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 Business & History 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 Responsibility

Number of New Products Launches 20 15

5 Financial Information Business Environment & Risk

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Number of New Products Launches 4 7 4 14 18 14 9 3 6 7

Number of JT 120

Cigarette Products Fact Sheets 90

0 (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 General Information

131 JAPAN TOBACCO INC. Annual Report 2010 Japanese Domestic Tobacco Business

Smoking Rate (by gender) (%) 60 50 40 30

20 10 (At the time of survey) 2000 2001 2002 2003 2004 2005 2006* 2007 2008 2009 mc All Adults 32.9 32.7 30.9 30.3 29.4 29.2 26.3 26.0 25.7 24.9 mc Male 53.5 52.0 49.1 48.3 46.9 45.8 41.3 40.2 39.5 38.9 mc 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

Smoking Rate (by age) (%) 50 40 30 20 10 0 (Survey in 2009) Total 20s 30s 40s 50s over-60s m Male 38.9 40.3 46.9 44.9 44.5 27.8 m Female 11.9 15.9 16.8 14.9 14.8 6.2

Source: JT “Japan Smoking Rate Survey”

132 Taxation Feature & Management All tobacco products sold in Japan are subject to the national tobacco a 5% consumption tax is imposed as with other goods and services. excise tax, the national tobacco special excise tax, and local tobacco All tobacco excise taxes and consumption tax are imposed not only for excise tax. The national tobacco excise tax is set at ¥3,552 per thou- tobacco products manufactured in Japan but also for imported tobacco sand cigarettes, the national tobacco special excise tax at ¥820 per products. From April 1987, no customs duties apply to imported thousand cigarettes, and the local tobacco excise tax is set at ¥4,372 tobacco products. per thousand cigarettes. In addition, under the Consumption Tax Law, Business & History

Changes of Tobacco Excise Taxes

Tobacco Consumption Tax Tobacco Excise Tax Apr-1985 May-1986 Apr-1989 Apr-1997 Dec-1998 May-1999 Jul-2003 Jul-2006 Item Ad valorem Specific Ad valorem(*) Specific Specific Specific Specific Specific Specific Specific (%) (¥/1,000 units) (%) (¥/1,000 units) (¥/1,000 units) (¥/1,000 units) (¥/1,000 units) (¥/1,000 units) (¥/1,000 units) (¥/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 Responsibility 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 • Tobacco Consumption *¥1,000 was deducted from tax • Consumption • Consumption • National • Review of • Tobacco Excise • Tobacco Excise Changes Tax was introduced base for Ad valorem Tax was Tax was Tobacco budget Tax was Tax was • Tobacco Consumption introduced increased Special Excise allocations in increased increased Tax was increased • Tobacco Tax was line with a Consumption introduced revision Tax was of laws renamed Financial Information Business Environment & Risk Tobacco Excise Tax

(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%

Breakdown of Price Levels per Cigarettes Package

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 Retail price Fact Sheets Excise Tax ¥ 71.04 24.50% ¥ 71.04 23.68% ¥ 71.04 22.20% Net sales sales Local Tobacco Excise Tax ¥ 87.44 30.15% ¥ 87.44 29.15% ¥ 87.44 27.33% including National Tobacco Special Net sales excise taxes Excise Tax ¥ 16.40 5.66% ¥ 16.40 5.47% ¥ 16.40 5.13% excluding JT’s Proceeds ¥ 72.31 24.93% ¥ 80.83 26.94% ¥ 97.88 30.59% excise taxes General Information

133 JAPAN TOBACCO INC. Annual Report 2010 Japanese Domestic Tobacco Business

Tobacco Manufacturing System

Leaf processing factory International leaf tobacco Domestic Packing Threshing Drying Storing leaf tobacco into a case

Decompose leaves into Dry leaves to adjust Pack dried-leaves in Ripen leaves for a mesophyll and vein. moisture content an appropriate portion certain period. appropriate for storing for storing and and ripening. transporting.

Cigarette manufacturing factory

Customer Retailer Packaging Rolling Flavoring Cutting Blending

Pack cigarettes into Roll cigarettes. Add aromatic Cut leaves into Blend several leaves. parcels or cartons and essences called top smaller pieces. cardboard boxes. dressing.

Number of Domestic Cigarette Manufacturing 25 Factories 20 15 10

5 0 (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

Tobacco Manufacturing-related Factory Location As of March 31, 2010

Morioka factory (closed on March 31, 2010) Cigarette manufacturing factories: 9 Other tobacco related factories: 4

Koriyama factory

Kita-Kanto factory Tomobe factory

Hiratsuka factory Yonago factory (closed on March 31, 2010) Odawara factory (to be closed on March 31, 2011) Hiratsuka factory Okayama printing factory

Hofu factory Hamamatsu factory Kansai factory Kyushu factory

134 Tobacco Sales System Feature & Management

Customers

sales

direct sales JT Retailers Wholesalers registration for the wholesale approval licensing requirement for selling by way of wholesalers or direct sales Business & History requirement for the approval of retail price approval The Minister of Registered Finance Importers approval requirement for the approval of retail price registration notification imports

registration requirement for registered importers Foreign Tobacco Companies Responsibility

Number of (Thousands of stores) Tobacco Retailers 300

200

100 uiesEvrnet&Rs Financial Information Business Environment & Risk

0 (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

Number of Tobacco (Thousands) 800

Vending Machines Fact Sheets 600

400

200

0 (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 General Information

135 JAPAN TOBACCO INC. Annual Report 2010 Japanese Domestic Tobacco Business

Number of Tobacco (Thousands) Vending Machines 300 (JT Tobacco Vending Machines) 200

100

0 (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 (Thousands of growers) (Thousands of hectares) Tobacco Growers and Area 25 25 under Domestic Leaf 20 20 Tobacco Cultivation 15 15 10 10 5 5 0 0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Number of Domestic Tobacco Growers 23 21 20 20 18 14 14 13 13 12 mc Area under Domestic Leaf Tobacco Cultivation 24 23 23 22 21 19 18 17 16 15

Volume of Domestic and (Thousands of tons) International Leaf Tobacco 100 Purchase 80 60 40 20 0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Domestic 60 60 58 50 52 46 37 37 38 36 m International 94 100 85 90 85 39 60 68 73 71

136 Feature & Management Value of Domestic Leaf (Billions of yen) (Yen) Tobacco Purchase 200 2,000 and Price per 1 kg 150 1,500

100 1,000

50 500

0 0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Amount 117.1 114.7 109.2 93.1 98.0 84.3 68.5 69.2 69.4 68.0 Business & History mc Price per 1 kg 1,926 1,895 1,878 1,839 1,862 1,801 1,818 1,833 1,803 1,859 Responsibility

Leaf Tobacco Reappraisal (Billions of yen) Profit / Loss 10 5

–5 Financial Information Business Environment & Risk

–10 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 Fact Sheets General Information

137 JAPAN TOBACCO INC. Annual Report 2010 International Tobacco Business

Tobacco Sales Volume (Billions of cigarettes) 500 (by Brand)

400

300

200

100

0 (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

Tobacco Sales Volume (Billions of cigarettes) 500 (by Region)

400

300

200

100

0 (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 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 240.1 385.6 452.3 434.9 m North & Central Europe 5.7 39.3 50.8 47.5 m CIS+ 108.6 195.1 219.7 214.6 m South & West Europe 40.1 55.2 64.0 64.5 m 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

138 Feature & Management Net Sales Excluding Taxes (U.S. dollars) per Thousand Cigarettes 25 20 15 10

5 0 (Years ended December 31) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 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 Business & History 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) Responsibility

Number of International Factories 40 30

10 Financial Information Business Environment & Risk

0 (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 Fact Sheets General Information

139 JAPAN TOBACCO INC. Annual Report 2010 Pharmaceutical Business

R&D Expense on a (Billions of yen) Non-consolidated Basis 40 30

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 Phase 2 Dyslipidemia CETP inhibitor Decreases LDL and increases HDL by inhibition of CETP Roche (Switzerland) (oral) (Japan) –CETP: Cholesteryl Ester Transfer Protein, facilitates obtained the rights to transfer of cholesteryl ester from HDL to LDL develop and commercialize –HDL: High-density lipoprotein (“good cholesterol”) the compound worldwide, –LDL: Low-density lipoprotein (“bad cholesterol”) with the exception of Japan. *Development stage by Roche: Phase 3 JTT-130 Phase 2 Dyslipidemia MTP inhibitor Treatment of dyslipidemia by reducing absorption of (oral) (Japan) cholesterol and triglycerides via inhibition of MTP Phase 2 –MTP: Microsomal Triglyceride Transfer Protein (Overseas)

JTK-303 Phase 1 HIV infection Integrase Integrase inhibitor which works by blocking integrase, Gilead Sciences (U.S.) (oral) (Japan) inhibitor an enzyme that is involved in the replication of HIV obtained the rights to –HIV: Human Immunodeficiency Virus develop and commercialize this compound worldwide, with the exception of Japan.

*Development stage by Gilead Sciences: Phase 3 JTT-302 Phase 2 Dyslipidemia CETP inhibitor Decreases LDL and increases HDL by inhibition of CETP (oral) (Overseas) –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 Phase 2 Osteoporosis CaSR antagonist Increases BMD and decreases new vertebral fractures Merck (U.S.) obtained the (oral) (Japan) by accelerating endogenous PTH secretion via antago- rights to develop and com- nism of circulating Ca on CaSR in parathyroid cells mercialize this compound –BMD: Bone Mineral Density worldwide, with the excep- –PTH: Parathyroid Hormone tion of Japan. –CaSR: Calcium-Sensing Receptor JTS-653 Phase 1 Pain TRPV1 Improves pain and overactive bladder via antagonism (oral) (Japan) Overactive bladder antagonist of TRPV1 on sensory neurons –TRPV1: Transient Receptor Potential Vanilloid subtype 1 JTT-654 Phase 1 Type 2 diabetes HSD-1 inhibitor Improves type 2 diabetes through reducing excessive (oral) (Japan) mellitus glucocorticoid action by inhibiting HSD-1 Phase 2 –HSD1: 11beta-hydroxysteroid dehydrogenase type 1 (Overseas) JTK-656 Phase 1 HIV infection Integrase Integrase inhibitor which works by blocking integrase, (oral) (Overseas) inhibitor an enzyme that is involved in the replication of HIV –HIV: Human Immunodeficiency Virus JTT-751 Phase 2 Hyperphosphatemia Phosphate binder Decreases serum phosphorous level by binding phos- JT obtained the rights to (oral) (Japan) phate derived from dietary in the gastrointestinal tract develop and commercialize this compound in Japan from Keryx Biopharmaceuticals (U.S.) (Developed jointly with Torii) JTK-853 Phase 1 Hepatitis C HCV Treatment of Hepatitis C by inhibiting HCV (oral) (Overseas) RNApolymerase RNA- polymerase which relates to viral proliferation inhibitor

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.

140 JAPAN TOBACCO INC. Annual Report 2010 Food Business Feature & Management Net Sales (Billions of yen) 500 400 300 200 100 0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 Business & History 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. Responsibility

Number of (Machines) Marking / Combined 120,000 Vending Machines 90,000

60,000

30,000 Financial Information Business Environment & Risk

0 (Years ended March 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Vending Machines — 190,000 201,000 211,000 226,000 237,000 250,500 257,000 254,000 257,000 m JT-Owned 31,000 36,500 45,500 45,000 44,500 40,500 38,000 35,500 32,000 33,000 m 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 Fact Sheets General Information

141 JAPAN TOBACCO INC. Annual Report 2010 Number of Employees

Number of Employees (Employees) 50,000 40,000 30,000 20,000 10,000 0 (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 1,171 661 370 394 408 449 503 Note: 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

142 JAPAN TOBACCO INC. Annual Report 2010 Shareholder Information (As of March 31, 2010)

Common Stock Results & Management Note: 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 Shareholders Business The Mitsubishi UFJ Trust and Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo

Stock Exchange Listings First Sections of Tokyo Stock Exchange Osaka Securities Exchange Responsibility Nagoya Stock Exchange Sapporo Securities Exchange Fukuoka Stock Exchange

Principal Shareholders Name Shares held The Minister of Finance 5,001,359 uiesEvrnet&Rs Financial Information Business Environment & Risk 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 Fact Sheets Composition of Shareholders (Years ended March 31)

(%) 100 8.0 7.4 7.1 7.4 7.2 27.4 29.0 28.9 26.1 26.5

80 0.7 0.9 0.9 0.8 0.8 0.5 0.6 1.0 0.9 0.6 60 12.7 11.8 12.7 15.2 15.0 General Information 50.0 50.0 50.0 50.0 50.0

40 Individuals and others Foreign institutions and others Other institutions 20 Securities companies Financial institutions Japanese government 0 2006 2007 2008 2009 2010

143 JAPAN TOBACCO INC. Annual Report 2010 Shareholder Information

Offering JT Shares by Government 1st Offering Method Offering by Bids Offering by non-Bids Offer Price Bid Price: From ¥1,362,000 to ¥2,110,000 ¥1,438,000 (Pricing Date) Weighted Average Price: ¥1,438,000 (August 31, 1994) (August 29, 1994) Number of Offering shares 229,920 shares 164,356 shares Offering Term From August 15 to 18, 1994 From September 2 to 8, 1994 Note: 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 Offering 2nd Offering 3rd Offering Method Offering by Book-Building formula Offering by Book-Building formula Offer Price Bid Price: ¥815,000 ¥843,000 (Pricing Date) (June 17, 1996) (June 7, 2004) Number of Offering shares Japan: 237,390 shares, International: 35,000 shares Japan:198,334 shares, International: 91,000 shares (Total: 272,390 shares) (Total: 289,334 shares) Offering Term From June 18 to 19, 1996 From June 8 to 10, 2004

Stock Price Range and Trading Volume

(Yen) (Points) 700,000 3,500 All Time High Dec. 21, 2007: ¥708,000

600,000 3,000

500,000 2,500

400,000 2,000

300,000 1,500

Reference TOPIX (right) 200,000 1,000

100,000 All Time Low 500 Apr. 7, 2003: ¥128,800 (Pre-split: ¥644,000)

’94/10’95/3 ’96/3 ’97/3 ’98/3 ’99/3 ’00/3 ’01/3 ’02/3 ’03/3 ’04/3 ’05/3 ’06/3 ’07/3 ’08/3 ’09/3 ’10/3

Note: Due to a 5 for 1 stock split on April 1, 2006, stock prices reflect post-split levels

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

144 JAPAN TOBACCO INC. Annual Report 2010 Members of the Board, Auditors, and Executive Officers (As of June 24, 2010)

Members of the Board Executive Officers Results & Management

Chairman of the Board President Senior Vice President Yoji Wakui Hiroshi Kimura Shinichi Murakami Chief Executive Officer Head of Domestic Leaf Tobacco General Division, Tobacco Business

Representative Directors Atsuhiro Kawamata Executive Deputy Presidents Head of China Division, Tobacco Business Hiroshi Kimura Business Munetaka Takeda Kazuhito Yamashita Munetaka Takeda Assistant to CEO in Compliance and Finance Chief Corporate, Scientific & Regulatory Affairs Officer, Masaaki Sumikawa Tobacco Business Masaaki Sumikawa Mitsuomi Koizumi Assistant to CEO in Strategy, HR, Legal, Operational Junichi Haruta Head of Central Pharmaceutical Research Institute, Masakazu Shimizu Review & Business Assurance and Food Business Pharmaceutical Business Mitsuomi Koizumi President, Tobacco Business Ryoko Nagata Head of Soft Drink Business Division Members of the Board Masakazu Shimizu Responsibility Assistant to CEO in CSR, Communications and Satoshi Matsumoto Noriaki Okubo General Administration Chief Human Resources Officer Mutsuo Iwai Ryoji Chijiiwa Yasushi Shingai Chief General Affairs Officer Senior Executive Vice Presidents Yasuyuki Tanaka Kenji Iijima Chief Communications Officer Head of Manufacturing General Division, Auditors Tobacco Business Noriaki Okubo Financial Information Business Environment & Risk Standing Auditors President, Pharmaceutical Business Hisao Tateishi* Ryuichi Shimomura Chief Legal Officer Gisuke Shiozawa

Executive Vice President Auditors Yoshihisa Fujisaki Takanobu Fujita* Chief Marketing & Sales Officer, Tobacco Business Koichi Ueda* Tadashi Iwanami Chief R&D Officer, Tobacco Business * Outside Corporate Auditors under the Companies Act of Japan Akira Saeki Head of Tobacco Business Planning Division, Tobacco Business Mutsuo Iwai Chief Strategy Officer and Executive Vice President in Fact Sheets charge of Food Business Hideki Miyazaki Chief Financial Officer General Information

145 JAPAN TOBACCO INC. Annual Report 2010 Corporate Data ( As of March 31, 2010)

Head Office JT International S.A.

2-1, Toranomon 2-chome, 1, Rue de la Gabelle CH-1211 Geneva 26, Switzerland Minato-ku, Tokyo 105-8422, Japan Tel: (41)-22-7030-777 Tel: (81)3-3582-3111 Fax: (41)-22-7030-789 Fax: (81)3-5572-1441 URL: http://www.jti.com/ URL: http://www.jti.co.jp/JTI_E/ Members of JT International Date of Establishment Executive Committee

April 1, 1985 Pierre de Labouchere President and Chief Executive Officer

Paid-in Capital Yasushi Shingai ¥100 billion Executive Vice President and Deputy CEO

Thomas A. McCoy Number of Employees Chief Operating Officer

49,665 (Consolidated) Paul Bourassa 8,961 (Parent Company) Senior Vice President Legal, Regulatory Affairs and Compliance Roland Kostantos Domestic Sales Offices Senior Vice President Finance, Information Technology and Chief Financial Officer Jörg Schappei Hokkaido (Hokkaido) Senior Vice President Human Resources Sendai (Miyagi) Frits Vranken Tokyo (Tokyo) Senior Vice President Business Development and Corporate Strategy Nagoya (Aichi) Roberto Zanni Senior Vice President Consumer and Trade Marketing Osaka (Osaka) Hiroshima (Hiroshima) Martin Braddock Shikoku (Kagawa) Regional President CIS+ Fukuoka (Fukuoka) Stefan Fitz Regional President Central Europe 17 other sales offices Hans-Gerd Hesse Regional President Asia Pacific Domestic Factories Paul Neumann Senior Vice President Global Leaf Kita-Kanto (Tochigi) Fadoul Pekhazis Tokai (Shizuoka) Regional President Middle East / Near East / Africa / Turkey and WWDF Kansai (Kyoto) Eddy Pirard Kyushu (Fukuoka) Regional President Western Europe 9 other factories Michel Poirier Regional President Americas Bill Schulz Domestic Laboratories Senior Vice President Global Supply Chain Leaf Tobacco Research Laboratory (Tochigi) Takehisa Shibayama Senior Vice President Research and Development Tobacco Science Research Institute (Kanagawa) Central Pharmaceutical Research Institute (Osaka)

146

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 ANNU AL RE POR T 2 010

This annual report is printed using ink that contains less than 1% of Volatile Organic Compounds (VOCs).

Printed in Japan