ANNUAL REPORT 2009 ANNUAL REPORT 2009 For the Year Ended March 31, 2009 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 ful- filling 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. 001 Annual Report 2009 JAPAN TOBACCO INC. JAPAN

Contents

002 Financial Highlights 034 Business Environment for the JT Group

004 JT in Retrospect 042 Corporate Governance

006 JT Today 049 Activities Contributing to the Environment and Society

008 To Our Stakeholders 055 Financial Information Message from Top Management Financial Results for FY 3/2009 and Medium-Term Management Plan "JT-11"

015 Special Feature 103 Fact Sheets Medium-Term Management Plan “JT-11”

018 Review of Operations 123 Corporate Information Domestic Tobacco Business Shareholder Information International Tobacco Business Members of the Board, Auditors, and Executive Officers Pharmaceutical Business Corporate Data Food Business

030 History of the JT Group

FORWARD-LOOKING AND CAUTIONARY STATEMENTS This report contains forward-looking statements about our industry, business, plans and objectives, financial condition and results of operations that are based on our current expectations, assumptions, estimates and projections. These statements discuss future expectations, identify strategies, discuss market trends, contain projections of results of operations or of our financial condition, or state other forward-looking information. These forward-looking statements are subject to various known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from those suggested by any forward-looking statement. We assume no duty or obligation to update any forward-looking statement or to advise of any change in the assumptions and factors on which they are based. Risks, uncertainties or other factors that could cause actual results to differ materially from those expressed in any forward-looking statement include, without limitation: 1. health concerns relating to the use of tobacco products; 2. legal or regulatory developments and changes, including, without limitation, tax increases and restrictions on the sale, marketing and usage of tobacco products, and governmental investigations and privately imposed smoking restrictions; 3. litigation in Japan and elsewhere; 4. our ability to further diversify our business beyond the tobacco industry; 5. our ability to successfully expand internationally and make investments outside of Japan; 6. competition and changing consumer preferences; 7. the impact of any acquisitions or similar transactions; 8. local and global economic conditions; and 9. fluctuations in foreign exchange rates and the costs of raw materials. Unless otherwise specified in this annual report, the information herein is as of June 23, 2009. Financial Highlights Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31

002 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Millions of U.S. dollars Millions of yen (Note 1) 2005 2006 2007 2008 2009 2009 Financial Financial Highlights For the year: Net Sales including excise taxes ¥4,664,514 ¥4,637,657 ¥4,769,387 ¥6,409,727 ¥6,832,307 $69,554 Domestic Tobacco 3,491,488 3,405,281 3,416,274 3,362,398 3,200,494 32,581 International Tobacco 792,705 881,188 999,658 2,639,969 3,118,319 31,745 Pharmaceutical 57,676 49,257 45,452 49,064 56,758 578 Food 265,380 278,378 286,554 336,420 435,966 4,439 Others 57,265 23,553 21,449 21,876 20,770 211 Net Sales excluding excise taxes (Note 2) 1,684,404 1,596,151 1,633,186 2,068,368 2,295,117 23,365 Domestic Tobacco 874,292 760,630 729,383 715,018 679,302 6,915 International Tobacco 429,791 484,333 550,347 945,989 1,102,320 11,222 Pharmaceutical 57,676 49,257 45,452 49,064 56,758 578 Food 265,380 278,378 286,554 336,420 435,966 4,439 Others 57,265 23,553 21,449 21,876 20,770 211 EBITDA (Note 3) 400,115 433,391 464,634 602,096 646,217 6,579 Domestic Tobacco 296,031 305,753 326,470 306,726 272,280 2,772 International Tobacco 65,462 94,093 112,668 270,757 337,968 3,441 Pharmaceutical 5,474 (1,803) (8,197) (6,269) 4,890 50 Food 7,931 11,869 12,018 8,353 17,030 173 Others 26,810 22,140 21,586 22,055 13,150 134 Elimination/Corporate (1,593) 1,339 89 474 899 9 Depreciation and Amortization (Note 3) 126,744 126,445 132,643 171,542 282,411 2,875 Operating Income 273,371 306,946 331,991 430,554 363,806 3,703 Domestic Tobacco 215,833 220,095 245,388 222,348 188,259 1,917 International Tobacco 44,458 71,031 81,085 205,360 174,772 1,779 Pharmaceutical 1,855 (5,057) (11,207) (9,644) 1,020 10 Food 1,948 6,325 6,705 667 (11,451) (117) Others 10,427 8,673 9,331 10,448 9,695 99 Elimination/Corporate (1,150) 5,879 689 1,375 1,511 15 Net Income 62,584 201,542 210,772 238,702 123,400 1,256 Free Cash Flow (FCF) (Note 4) 269,459 145,590 223,007 (1,493,717) 240,199 2,445 At year-end: Total Assets 2,982,056 3,037,379 3,364,663 5,087,214 3,879,803 39,497 Interest-bearing Debt (Note 5) 230,716 216,608 219,269 1,389,296 996,079 10,140 Liabilities 1,430,256 1,217,306 1,340,047 2,932,585 2,255,515 22,962 Total Equity 1,498,204 1,762,512 2,024,616 2,154,629 1,624,288 16,536 Ratios: Return on equity (ROE) 4.2% 12.4% 11.3% 11.8% 6.8% — Return on asset (ROA) 9.2% 10.4% 10.7% 10.5% 8.4% — Equity Ratio 50.2% 58.0% 58.3% 40.8% 40.0% — Amounts per share: (in yen) (Note 6) Net Income (Note 7) ¥ 6,418 ¥ 21,017 ¥ 22,001 ¥ 24,916 ¥ 12,880 — Total Equity 156,363 183,956 204,618 216,707 162,088 — Cash Dividends Applicable to the Year 2,600 3,200 4,000 4,800 5,400 —

Notes: 1. Figures stated in U.S. dollars in this report are translated at the rate of ¥98.23 per $1, as of March 31, 2009. 2. Net sales excluding taxes: Excluding imported tobacco in the domestic tobacco and distribution business in the international tobacco, respectively. 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 securi- ties item) 5. Interest-Bearing Debt includes lease obligation from FY 2009 6. On April 1, 2006, a 5 for 1 stock split went into effect. Amounts per share for the years ended March 2005 and 2006 are on the assumption that this stock split took place at the beginning of each fiscal year. 7. Diluted net income per share. 003 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Net Sales EBITDA Operating Income

(Billions of Yen) (Billions of Yen) (Billions of Yen) Financial Financial Highlights

6,832.3 646.2 430.6 6,409.7 602.1 363.8 332.0 4,769.4 464.6 306.9 4,664.5 4,637.7 433.4 400.1 273.4

’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09

Net Income Total Assets/ROA Total Equity/ROE

(Billions of Yen) (Billions of Yen/%) (Billions of Yen/%)

238.7 5,087.2 2,154.6 2,024.6 210.8 201.5 1,762.5 3,879.8 12.4 1,624.3 1,498.2 11.3 11.8 3,364.7 2,982.1 3,037.4 123.4 10.5 10.7 10.4 6.8 9.2 4.2 62.6 8.4

’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09

Total Assets Total Equity ROA ROE

Interest-bearing Debt/ Free Cash Flow Cash Dividends Applicable D/E Ratio to the Year

(Billions of Yen/Times) (Billions of Yen) (Yen)

1,389.3 269.5 5,400 223.0 240.2 145.6 4,800 0.67 0.64

4,000 996.1

3,200

2,600 0.15 0.12 0.11

–1,493.7

230.7 216.6 219.3 ’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09

Interest-bearing debt D/E Ratio JT in Retrospect

004 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Based on insight into the shifting operating climate, the JT Group has ­proactively achieved self-transformation

Financial Highlights throughout its history, with the aim of weathering changes in its business environment. Over the past decade, we have taken the initiative to

JT in Retrospect actively and promptly streamline our organization and make business investments.

Ten-year EBITDA Growth

Domestic International Pharmaceutical Food Tobacco Tobacco Business Business Business Business

September 1998 July 1999 September 2000 May 2002 March 2004 JT acquires a majority JT acquires the food JT starts to sell new JT enters bakery Four factories closed, stake in Unimat Corporation. business of Asahi Kasei canned coffee brand business on a full scale by 18 in operation. (Currently, Japan Beverage Corporation, including “Roots.” acquiring a 100% stake in Inc.) Asahi Foods and seven Saint-Germain Co., Ltd. other subsidiaries. December 1998 February 2003 JT acquires a October 1999 JT launches D-spec majority stake in Torii Under a business product LUCIA Citrus Fresh Pharmaceutical Co., Ltd. tie-up between JT and Menthol. through a tender offer. Torii Pharmaceutical Co., Ltd., the two companies’ March 2003 R&D operations related to Three factories closed, medical pharmaceuticals 22 in operation. are concentrated at JT, while their promotion operations are combined at Torii Pharmaceutical. 334.1 337.3 315.1 Developments 312.0 in JAPAN

270.1 (¥ Billion)

May 1999 FY 2000 FY2001 FY2002 Developments JT acquires the Two Factories closed, Two Factories closed, One factory closed, Overseas non-US, tobacco business 19 in operation. 17 in operation. 16 in operation. of RJR Nabisco Inc. with key brands such as Winston, Camel and Salem.

1998 1999 2000 2001 2002 October 2004 April 2005 2006 2007 April 2008 September 2008 JT licenses out JT terminates a JT redesigns the JT actively promotes JT acquires a majority JT licenses out JTT-705, an antidyslipidemia licensing contract under packages of 14 products in Mild Seven through the stake in Fuji Foods JTT-305 an osteoporosis compound to Roche which it had exclusive the Mild Seven family. campaign to celebrate the Corporation. drug candidate to Merck & (Switzerland). rights to produce and sell 30th anniversary. Co., Inc. (U.S.). Marlboro brand products in April 2008 Japan and use the Marl- January 2008 Roche (Switzerland) March 2005 March 2009 005 JT licenses out boro trademark in the JT acquires a major- decides to move JTT-705, One factory closed, 9 JTK-303, an anti-HIV country. ity stake in Katokichi Co., an antidyslipidemia in operation. compound to Gilead Ltd. through a tender compound, licensed from offer. JT, into Phase III clinical Annual Report 2009 Sciences (U.S.). March 2009 TOBACCO INC. JAPAN trials. March 2008 JT achieves share March 2005 to increase for two consecu- JT achieves the first July 2008 April 2005 tive years. increase in market share JT concentrates its Eight factories closed, 10 in since its privatization in processed foods opera- operation. 1985. tions, including frozen foods operations and seasonings operations, at Financial Highlights the Katokichi Group.

July 2008 Gilead Sciences (U.S.) decides to move JTK-303, an anti-HIV compound,

licensed from JT, into JT in Retrospect Phase III clinical trials.

646.2 602.1

464.6

433.4 April 2007 December 2008 JT acquires Gallaher JTI posts record high Group Plc. EBITDA.

400.1 August 2007 FY2008 JTI identifies eight One factory closed 30 brands which comprise the in operation. new portfolio of Global 373.4 June 2005 May 2006 Flagship Brands (GFB). Acquisition of CRES Acquisition of AD Neva Ltd. in Russia Duvanska Industrija Senta (Factory). in Serbia (Factory).

FY2006 One factory closed, 17 in operation. Winston Camel Mild Seven Benson & Hedges

Silk Cut LD Sobranie Glamour

FY2007 Two factories closed, 31 in operation (Including 14 from Gallaher).

2003 2004 2005 2006 2007 2008 (fiscal year) JT Group Share in global JT Today cigarette market (2007)

006 $ Annual Report 2009 JAPAN TOBACCO INC. JAPAN

Source: Euromonitor Statistics Note: Share based on the JT Group’s domestic sales volume and international sales volume

Net Sales

Financial Highlights See Page breakdown by P18 Business Domestic Tobacco Business (Years ended March 31) Segment Overwhelm the competition in the home country market as “the core source of profits.” "$&

JT in Retrospect Total Domestic Market Sales Volume Net Sales Including Taxes (Billions of Cigarettes) (Billions of Cigarettes) (Billions of Yen)

292.6 3,491.5 285.2 3,405.3 3,416.33,362.4 270.0 213.3 3,200.5 258.5 245.8 189.5

JT Today 174.9 167.8 159.9

’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09

Source: Tobacco Institute of Japan

Net Sales See Page breakdown by P22 Business (Years ended December 31) Segment International Tobacco Business 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)

452.3 3,118.3 245.5 385.6 2,640.0 203.2

240.1 149.1 212.4 220.3 131.4 133.8

999.7 792.7 881.2

’04 ’05 ’06 ’07 ’08 ’04 ’05 ’06 ’07 ’08 ’04 ’05 ’06 ’07 ’08

Note: GFB in FY2004-2006: Winston, Camel, Mild Seven, Salem. GFB in FY2007-2008: Winston, Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, Sobranie, Glamour

Net Sales See Page breakdown by P26 Business Pharmaceutical Business (Years ended March 31) Segment Pursuing high value-added business by developing world-class innovative drugs &

Net Sales EBITDA/Operating Income (Billions of Yen) (Billions of Yen)

57.7 56.8 5.5 4.9

49.3 49.1 1.9 45.5 1.0 –1.8

–5.1 –6.3 –8.2 –9.6 –11.2

’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09

EBITDA Operating Income 007 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Financial Highlights

Net Sales Excluding Taxes EBITDA/Operating Income JT Share (2009) JT in Retrospect (Billions of Yen) (Billions of Yen)

326.5 874.3 306.7 296.0 305.8 760.6 272.3 729.4 715.0 JT Today 679.3 245.4 $#  215.8 220.1 222.3 188.3

’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09

Note: Excluding imported Tobacco EBITDA Operating Income

Net Sales Excluding Taxes EBITDA/Operating Income (Billions of Yen) (Billions of Yen)

338.0 1,102.3

946.0 270.8

205.4 174.8 550.3 484.3 429.8 112.7 94.1 81.1 65.5 71.0 44.5 ’04 ’05 ’06 ’07 ’08 ’04 ’05 ’06 ’07 ’08

Note: Excluding distribution business EBITDA Operating Income

Net Sales breakdown by See Page P28 Business Food Business (Years ended March31) Segment Increasing profits by achieving sustainable growth based on the combined strength of $" group companies with world-class competitiveness

Net Sales EBITDA/Operating Income (Billions of Yen) (Billions of Yen)

436.0 17.0

11.9 12.0 336.4 7.9 8.4 286.6 6.3 6.7 265.4 278.4 1.9 0.7

–11.5 ’05 ’06 ’07 ’08 ’09 ’05 ’06 ’07 ’08 ’09

EBITDA Operating Income To Our Stakeholders Message from Top Management

008 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Since adopting the “JT Brand-ing Declaration” in 2002, which is a statement of the JT Group Mission, and the “Brand-ing Spirit,” which is a guideline for achieving the mission, JT has engaged in activities to dis- seminate them inside and outside the group in an effort to share the corporate philosophy on a group-wide

Financial Highlights basis and enhance the value of our corporate brand. We have adopted a new JT Group Mission and the JT Group WAY, which is an action plan for achieving this mission, to coincide with the start of “JT-11.” The new “JT Group Mission” is not different in concept to the previous one. Rather it expresses the existing concept in a more plain and concise statement. We have reaffirmed our belief that all our products,

JT in Retrospect services and activities constitute a brand, which enables us to form a strong bond with our customers. JT Today To OurTo Stakeholders

Yoji Wakui Hiroshi Kimura Chairman of the Board President and CEO and Representative Director 009 Annual Report 2009 JAPAN TOBACCO INC. JAPAN The JT Group has set itself a mission 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.” We aim to increase cash flow and enhance corporate value by fulfilling the expectations of our consumers,

behaving responsibly, striving for quality in everything we do through continuous improvement and leverag- Financial Highlights ing diversity across the JT Group so that we can gain the trust of all of our stakeholders.

June 2009 JT in Retrospect JT Today Yoji Wakui Hiroshi Kimura Chairman of the Board President and CEO and Representative Director To OurTo Stakeholders To Our Stakeholders Financial Results for FY 3/2009 and Medium-term Management Plan “JT-11”

010 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Financial Highlights JT in Retrospect JT Today To OurTo Stakeholders

Hiroshi Kimura President and CEO and Representative Director 011 Annual Report 2009 JAPAN TOBACCO INC. JAPAN A Look Back at FY 3/2009 The global economy in the later part of the fiscal year ending March 31, 2009, was marked by economic deterioration not only the in U.S. and Europe, but also in Asia, as the worldwide financial crisis moved into

the real economy. The Japanese economy was also impacted as characterized by drastic drops in corpo- Financial Highlights rate earnings and rapid deterioration of the employment situation. While this economic climate impacted our business mainly in the fourth quarter, the JT Group’s EBITDA achieved a new record high of ¥646.2 billion, far surpassing the companywide objective of increasing

EBITDA by ¥20 billion compared with FY 3/2006 under the Medium-Term Management Plan “JT2008,” as JT in Retrospect it did in the previous year. The JT Group steadfastly executed measures as contained in our mid-term management plan “JT2008,” working towards the realization of sustainable growth for the future. Under “JT2008,” the JT Group acquired JT Today Gallaher for its international tobacco business in April 2007 and, for its food business, the Katokichi Group in January 2008, in an effort to expand the business foundation by proactively obtaining external resources. In the domestic tobacco business, overall cigarette demand continued to decrease due to structural factors such as a contraction of the adult population, growing awareness about the health risks associated To OurTo

with smoking and tightening of smoking-related regulations. Competition also intensified, mainly in retail- Stakeholders store sales, following the introduction of the age verification cigarette vending machine. However, we achieved a second consecutive year of market share increase through wider presence of JT products at retail stores and launching new products in an effective manner. The international tobacco business posted new record highs in sales volume, net sales and EBITDA, through the consistent application of its strategy. Top-line growth remained as overriding priority with a focus on Global Flagship Brands (GFB) and we reaped the benefits of a rapid integration with Gallaher. This good result came in spite of a weaker fourth quarter, as a result of depreciation of the Russian Ruble and British Pound. In the pharmaceutical business, net sales increased sharply because of the receipt of an upfront pay- ment for the out-licensing of an anti-osteoporosis compound and a milestone revenue associated with progress in the development of a compound for the treatment of dyslipidemia that was licensed to a partner. These licensing-related revenues more than made up for a decline in net sales at Torii Pharmaceutical Co. Ltd. that was caused by an overhaul of the product lineup, a drug price revision and the promotion of the use of generic drugs. In the food business, net sales increased mainly due to the consolidation of the results of the Katokichi Group. The consolidation of this group more than offset the negative impact of the frozen foods products contamination on the processed food business and the negative effects of unfavorable weather conditions and increased competition on the beverages business as well as the impact of a slump in general consump- tion caused by the recent severe economic downturn. Meanwhile, regarding the management of food safety, we are steadily implementing measures to establish the highest standard of safety management.

Hiroshi Kimura President and CEO and Representative Director 012 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Financial Results for FY 3/2009: Both Net Sales and EBITDA Hit New Record Highs Net Sales

Financial Highlights Net sales excluding excise taxes increased by ¥226.7 billion (up 11.0%) from the previous year to ¥2,295.1 billion, as an increase in the sales volume in the international tobacco business, including the first time full-year results of Gallaher, and the Katokichi Group more than offset a decline in overall cigarette demand in the domestic tobacco business and the impact of the yen’s appreciation on the calculation of the

JT in Retrospect financial results of overseas subsidiaries.

EBITDA and Operating Income EBITDA increased by ¥44.1 billion (up 7.3%) from the previous year to a ¥646.2 billion as a result of contin- JT Today ued strong top-line growth of the international tobacco business and the full-year inclusion of Gallaher. This more than offset a decline in profits in the domestic tobacco business, mainly caused by decreased sales volume and increased sales promotion expenses. Operating income declined by ¥66.7 billion (down 15.5%) from the previous year to ¥363.8 billion due to the inclusion of goodwill amortization in the international To OurTo

Stakeholders tobacco business following a revision of accounting standards as well as the inclusion of the full-year cost of goodwill amortization of the Katokichi Group. However, excluding the impact of these goodwill amortiza- tion costs, operating income increased by ¥34.9 billion (up 8.0%).

Recurring Profit The non-operating profit-loss balance improved by ¥11.7 billion, as a decrease in exchange losses more than offset the impact of the inclusion of full-year interest payments due to the acquisition of Gallaher. However, recurring profit declined by ¥55.1 billion (down 15.2%) from the previous year to ¥307.6 billion due to a decrease in operating income. Excluding the impact of the goodwill amortization cost, recurring profit also increased by ¥46.5billion (up 12.7%).

Net Income Income before income taxes and minority interest decreased by ¥110.5 billion (down 29.6 %) from the previ- ous year to ¥262.1 billion as a result of a decline in profits from the sale of fixed assets, losses related to the demolition of company-owned residences for employees, expenses incurred by the international tobacco business in relation to a revision of the business model in the Philippines and the cost of reorganizing the Katokichi Group’s business operations. Net income declined by ¥115.3 billion (down 48.3%) to ¥123.4 billion because of the impact of the goodwill amortization costs, which are not included in the calculation of tax expenses. Excluding the impact of the goodwill amortization, net income decreased slightly. 013 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Dividends We have announced an annual dividend of ¥5,400 per share for the fiscal year ended March 2009, including an interim dividend.

We have been continuously raising the level of our dividend so that we can achieve a consolidated Financial Highlights dividend payout ratio of 20% (excluding the impact of goodwill amortization). The dividend payout ratio for the fiscal year ended March 2009 exceeded the 20% target.

Highlights of Consolidated Financial Results JT in Retrospect (Billions of Yen) FY 3/2008 Results FY 3/2009 Results Change Net Sales including 422.6 6,409.7 6,832.3 excise taxes (+6.6%)

Net Sales JT Today 226.7 excluding 2,068.4 2,295.1 (+11.0%) excise taxes* 44.1 EBITDA 602.1 646.2 (+7.3%)

–66.7 OurTo Operating Income 430.6 363.8 (–15.5%) Stakeholders –55.1 Recurring Profit 362.7 307.6 (–15.2%) –115.3 Net Income 238.7 123.4 (–48.3%)

* Net sales excluding excise taxes does not account for sales of imported tobacco in the domestic business and revenue from the distribution business in the international tobacco business.

[Reference: Figures for major profit items before goodwill amortization] 34.9 Operating Income 434.4 469.3 (+8.0%) 46.5 Recurring Profit 366.6 413.1 (+12.7%) –13.7 Net Income 242.6 228.9 (–5.6%) –1,427.31 EPS (yen) 25,321.86 23,894.55 (–5.6%) 600 Per-share dividend (yen) 4,800 5,400 (+12.5%) Dividend payout 19.0% 22.6% +3.6%pt ratio (%) 014 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Medium-Term Management Plan “JT-11” In an effort to realize our objective of becoming a “company committed to global growth that provides consumers diversified value uniquely available from JT,” we have developed Medium-Term Management

Financial Highlights Plan “JT-11,” which covers the three years through the fiscal year ending March 2012 and which builds on the strategies we have pursued until now. During the period of “JT2008,” we succeeded in earning profits that far exceeded our targets by expand- ing our business foundation through acquisitions including the Gallaher Group and the Katokichi Group.

JT in Retrospect “JT-11” covers a period during which the JT Group will aim to secure strong business momentum through investment for the future and continuous improvement in business operations in anticipation of possible changes in the business environment. As a company-wide objective, we aim to achieve a com- pound annual growth rate of at least 5% for EBITDA through growth momentum, with the forecasts for the JT Today fiscal year ending March 2010 used as the basis. To this end, we will make efforts to achieve sustainable growth in all of the domestic tobacco, international tobacco, pharmaceutical, and food businesses. The JT Group has set itself a mission 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.” To OurTo

Stakeholders We aim to increase cash flow and enhance corporate value by fulfilling the expectations of our consumers, behaving responsibly, striving for quality in everything we do through continuous improvement and leverag- ing diversity across the JT Group so that we can gain the trust of all of our stakeholders. The company-wide objective and business segment objectives during the period of “JT-11” are as follows:

Company-wide Through growth momentum across the Group’s business, achieve a CAGR of 5% for consolidated EBITDA, based on objective the forecasted figure for FY3/2010

Business segment objective Domestic Tobacco Maintain the EBITDA forecasted for FY 3/2010 business

International Tobacco Continue to achieve EBITDA growth of at least 10% at constant rates of exchange, based on the forecasted figure business for FY 3/2010 Pharmaceutical Increase and advance compounds in a late phase of clinical business trial and enhance the R&D pipeline

Food business Generate an additional ¥10 billion in EBITDA based on the forecasted figure for FY 3/2010

The EBITDA, the basis of JT-11, are following forecasted EBITDA for FY 3/2010, which was announced on April 30, 2009.

Consolidated EBITDA ¥475.0 billion

Domestic Tobacco ¥246.0 billion EBITDA International Tobacco USD2,500 million EBITDA(*)

Food EBITDA ¥18.0 billion

* EBITDA before royalty payment In the international tobacco business the assumed exchange rates for key currencies are 36 Russian Ruble per 1 USD, 0.73 British Pound per 1 USD and 0.81 Euro per 1 USD. The assumed exchange rate for Japanese Yen is ¥95 per 1 USD. Our actual operating results may differ significantly from those described above as a result of a number of factors including, but not limited to discussed in the “Major Risks of Businesses.” June 2009 Special Feature Medium-Term Management Plan “JT-11”

015 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Aiming to become a company committed to global growth that provides consumers diversified value uniquely available from JT. Financial Highlights

Despite those difficult circumstances such as global recession and the aging of the Japanese population, we are committed to our basic principles and maintaining the long-term vision of becoming “A company commit- JT in Retrospect ted to global growth that provides consumers diversified value uniquely available from JT.”

JT Group Long-Term Vision

“A company committed to global growth that provides consumers diversified value uniquely JT Today available from JT”

Domestic Tobacco business International Tobacco business Overwhelm the competition in the home country market as “the core source Attain a sustainable leadership position in profitability and or market-share of profits.” within a growing number of markets, and continue to be “the driving force for profit growth.” To Our Stakeholders To Pharmaceutical business Food business Pursuing high-value added business by developing world-class innova- Increasing profits by achieving sustainable growth based on the com- tive drugs bined strength of group companies with world-class competitiveness

We expect that the business environment surrounding us will become more and more difficult at an Special Feature increasing speed. The theme of “JT-11” is to “secure strong business momentum through investment for the future and continuous improvement in business operations in anticipation of various changes in the business environment so that we can maintain sustainable growth in the long term.” As a medium-term company-wide goal, we aim to achieve a compound annual growth rate of 5% for EBITDA through growth momentum, with the forecasts for the fiscal year ending March 2010 used as the basis.

The business environment will become increasingly more challenging

Position of “JT-11” “JT-11” covers a period during which the JT Group will secure strong business momentum through investment for the future and continuous improvement in business operations in anticipation of pos- sible changes in the business environment Continue to enhance personnel strength and performance capability

“A company committed to global growth that provides consumers diversified value uniquely available from JT” Company-Wide Objective Through growth momentum across the Group’s businesses, achieve a CAGR of 5% for consolidated EBITDA, based on the forecasted figure for FY 3/2010 016 Annual Report 2009 JAPAN TOBACCO INC. JAPAN Regarding the allocation of resources during the period of “JT-11,” we continue to make active business investment to enhance corporate value. And we will strive to increase dividend payment and to reduce interest-bearing debts. Financial Highlights “JT-11” Allocation of Resources Business investment Return of profits to shareholders Reduce interest-bearing debts while • Capital expenditures, R&D investment and Aim to ensure a competitive level of return of securing liquidity investment for the enhancement of the brand profits to shareholders in the capital market equity with due consideration of the implementation JT in Retrospect • Acquisition of external resources status of the medium- to long-term growth strategies and forecasts for consolidated financial results • Dividends: Strive to increase dividend payments in a steady and sustainable manner, aiming for a consolidated dividend JT Today payout ratio of 30% (excluding the impact of goodwill amortization) in the medium term • Stock repurchases: Expand the scope of management options

The domestic tobacco business aims to maintain the EBITDA forecasted for the fiscal year ending March

To Our Stakeholders To 2010 as a stable profit base for the JT Group despite a decline in overall demand due to the increasingly difficult social environment surrounding smoking and the tightening of various regulations.

“JT-11” Domestic Tobacco Business—Strategic Framework

Special Feature Serve as a stable profit base for the JT Group amid a decline in overall demand due to the increasingly difficult social environment surrounding smoking and tightening of various regulations

Develop strong brand portfolio Secure superior market position • Active implementation of various measures to enhance the brand equity • Securing superior market position through increased product presence in over-the-counter sales channels, primarily convenience stores

Improve product quality and added value to maximize consumer Optimize operating structure to ensure adaptability, efficiency and satisfaction competitiveness in the changing business environment • Continue to pursue improvement in quality and enhance the shipment • Establish a competitive business structure assurance system The Morioka factory and the Yonago factory will be closed at the end of March, 2010 The Odawara factory will be closed at the end of March, 2011

Maintain the EBITDA forecasted for FY 3/2010

The international tobacco business aims to achieve a compound annual average growth rate of at least 10% for EBITDA at constant rates of exchange, based on the forecasts for the fiscal year ending March 2010.

“JT-11” International Tobacco Business—Strategic Framework Continue role as the profit growth engine of the JT Group, in an increasingly challenging operating environment

Sustain quality top-line growth Broaden earnings base for growth Strengthen the business fundamentals • Build and nurture outstanding brands • Increase the profitability of key markets • Continue to enhance productivity • Maintain primary focus on GFBs • Invest, with disciplined return on investment, • Sharpen focus on responsibility and credibility • Drive GFB volume and margin improvement in markets with future earnings potential • Develop people as a cornerstone of growth

Continue to achieve EBITDA CAGR of at least 10% at constant rates of exchange, based on the forecasted figure for FY 3/2010 017 Annual Report 2009 JAPAN TOBACCO INC. JAPAN In the pharmaceutical business, we will continue to build a globally successful, R&D-driven business with unique features and strive to secure a market presence with original new drugs by increasing and advancing compounds in a late phase of clinical trial and enhancing the R&D pipeline. Financial Highlights “JT-11” Pharmaceutical Business – Strategic Framework Working toward building world-class R&D capabilities and increased market presence through the develop- ment of innovative drugs

Enhance clinical development capabilities, Further strengthen R&D pipeline Enhance licensing activities and JT in Retrospect particularly for compounds in late-stage • Focus on four areas: glucose and lipid metabo- strengthen relationships with partners clinical trials lism, virus research, immune disorders and • Continue to explore opportunities for out- • Adapt to the need for more advanced inflammation and bone metabolism licensing development • Engaging in in-licensing activity with empha- sis on early market launch JT Today

Increase and advance compounds in late phase of clinical trials and enhance R&D pipeline

In the food business, we will focus on three areas, beverages, processed foods and seasonings, pro- mote efforts to achieve the highest level of safety control, and further strengthen the business foundation To Our Stakeholders To for significant future growth. Through these measures, we aim to generate an additional 10 billion yen in EBITDA in the fiscal year ending March 2012 compared with the fiscal year ending March 2010.

“JT-11” Food Business – Strategic Framework Special Feature Focus on three areas, beverages, processed foods and seasonings, move toward the world’s highest level of safety control, and further strengthen the business foundation for significant future growth

Beverages business Processed food business and seasoning Implementation of food safety controls at • Further enhance the company’s flagship coffee business (The Katokichi Group) the highest level brand “Roots” • Generate integration synergies • Actions for reducing risks • Strengthen operating base through improved • Concentrate on core business fields • Improving consumer response efficiency • Establish unified corporate identity • Creating stronger organization and operating base A new corporate name will be introduced during FY 3/2010

Generate an additional JPY 10 billion in EBITDA based on the forecasted figure for FY 3/2010 Review of Operations

018 JT Annual Report 2009

Financial Highlights Domestic Tobacco Business

In the fiscal year ending March 2009, the proportion of sales at retail stores,

JT in Retrospect mainly convenience stores, increased because of the introduction of the age verification cigarette vending machines. By implementing vigorous sales promotion and introducing new products, JT’s domestic tobacco

JT Today business overcame this change in the market environment and achieved the second consecutive year of market share increase. The 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 Mitsuomi Koizumi President, To Our Stakeholders To the aging of Japanese society, growing awareness about the health risks Tobacco Business associated with smoking and the tightening of smoking-related regulations. In this business environment, JT is resolved to boost the value of its domestic tobacco business by pursuing a strategy for sales growth and Special Feature enhancing productivity simultaneously.

FY 3/2009 Business Performance Summary Business Performance • Total sales volume 159.9 billion The domestic tobacco business faces an increasingly tough down 4.7% Review of Operations of JT products: cigarettes, business environment as total tobacco demand in Japan • Net sales including ¥3,200.5 billion, down 4.8% continues to decline and competition with other tobacco manu- excise taxes: facturers intensifies. In an effort to achieve top-line growth, we • Net sales excluding ¥ 679.3 billion, down 5.0% excise taxes(*) have been making constant efforts to enhance our productivity while refreshing and enhancing existing brands as necessary • EBITDA: ¥ 272.3 billion, down 11.2% and introducing new products in an effective manner. The • Operating income: ¥ 188.3 billion, down 15.3% introduction of the age verification cigarette vending machines, * Excluding imported tobacco which JT promoted with industry organizations, started in March 2008 on a region-by-region basis, with a nationwide-

JT Products Share* introduction completed in July. In FY 3/2009, we endeavored to enhance the value of our （%） brands by introducing new products mainly in the Mild Seven family, which is our core brand, as well as by strengthening existing brands. Specifically, we are continuing vigorous sale 65.5 promotion activity, including a sales campaign for the Mild Seven family, which has been under way since FY 3/2008, and a 65.1 campaign for Seven Stars, for which the 40th anniversary of the 64.9 first market launch came in February. As for new products, we 64.8 launched Pianissimo Fram Menthol One (D-spec product), ’06 ’07 ’08 ’09

* New basis=JT original brands + JTI brands sold in Japan (Years Ended March 31) Salem Alaska Menthol and Seven Stars Black Impact. In addi- (Camel, Winston, Salem, etc.) tion, we started nationwide sales of Mild Seven Impact One 100’s Box, which had been gradually introduced on a region- * Excluding imported tobacco 019 JT Annual Report 2009 Financial Highlights

by-region basis, and Seven Stars Light Menthol, which had been July 2003 and July 2006 had an additional impact on the

available in limited regions. Also, the package designs and market, with the Japanese smoking rate dropping to 25.7%, JT in Retrospect names of some products in the Seven Stars family were modi- according to a May 2008 survey. Meanwhile, as tobacco- fied and the “Aqua Menthol” designation was added to the related regulations are being strengthened in various ways, names of two menthol products of the Mild Seven family, whose market share competition with foreign brands is intensifying. JT Today package designs were redesigned accordingly. JT will overcome the impact of a future decline in sales volume The volume of cigarette sales in FY 3/2009 decreased by by optimizing our marketing mix through our product, distribu- 7.8 billion cigarettes (down 4.7%) from the previous year to tion and sales strategies. 159.9 billion cigarettes.* However, our market share rose to 65.1% (up 0.2 point), representing the second consecutive Product Strategy To Our Stakeholders To year of market share increase, thanks to active sales promotion Our product strategy focuses on boosting the value of our main activity and the introduction of new products. Net sales exclud- brands and introducing new products in an effective manner. ing excise taxes per 1,000 cigarettes increased to ¥4,057. After redesigning the packages of 14 products in the Mild Seven

Consequently, net sales excluding excise taxes of the family in 2006 and the packages of all nine products in the Special Feature domestic tobacco business in FY 3/2009 declined by ¥35.7 Caster brand family in December 2007, we renewed the pack- billion from the previous year (down 5.0%) to ¥679.3 billion age designs and names of some products in the Seven Stars due to a drop in sales volume. Operating income fell by ¥34.1 family in November 2008 as part of our efforts to boost the value billion from the previous year (down 15.3%) to ¥188.3 billion, of our main brands. Moreover, we are seeking to raise unit depressed by an increase in sales promotion expenses as prices by developing and introducing products with high value Review of Operations well as the reduced sales volume. added, represented by the D-spec brand family. We aim to

* In addition to the figure stated above, we also sold 3.6 billion cigarettes at duty-free shops expand our market share by pursuing a brand portfolio that in Japan as well as those in China, Hong Kong and Macau, markets that are under the control of our China Division. suits the excellent value of our brands.

Strategies and Specific Measures Optimizing our Marketing Mix toward Sustainable Growth • Product strategy • Distribution strategy • Marketing strategy • Improving quality and productivity • Fulfilling our responsibility as the market leader

Optimizing Our Marketing Mix to Gain Maximum Results In the domestic tobacco market, total demand for cigarettes has continued to decline due to the aging of the Japanese population, growing awareness about the health risks associ- ated with smoking and tightening of smoking-related regula- tions. Increases in the tobacco excise tax that took effect in 020 JT Annual Report 2009 Financial Highlights

Distribution Strategy needs of our customers and to respond appropriately to any

JT in Retrospect In FY 3/2009, we stepped up efforts to promote sales at retail change in the supply-demand balance. As part of such efforts, stores, mainly convenience stores, whose proportion has JT discontinued production at its Kanazawa factory at the end increased following the introduction of the age verification ciga- of March 2009 and closed the factory so as to optimize our rette vending machines. Such efforts included the introduction tobacco production capacity and restructure the domestic JT Today of product display cases for the purpose of increasing the tobacco business in ways to make it more competitive. In exposure of JT products at retail stores and sales promotion addition, we will discontinue production at the Morioka and intended to strengthen the appeal of our products to custom- Yonago factories at the end of March 2010 and at the Odawara ers, and we intend to further enhance sales promotion in the factory at the end of March 2011. We will continue to pursue future. Meanwhile, sales through vending machines are now improvement in productivity in the future. To Our Stakeholders To recovering in line with the increasing use of the taspo card compared with the period immediately after the introduction of Fulfilling Our Responsibility as The Market Leader the age verification cigarette vending machines. JT will maintain We will continue to fulfill our responsibilities as the leading

Special Feature the competitiveness in sales through vending machines. tobacco company in the Japanese market by endeavoring to achieve a harmonious co-existence between smokers and Marketing Strategy non-smokers. We will also engage in initiatives to improve Our marketing force, the vast size of which eclipses the market- smoking manners and strive to secure and create space and ing teams of our competitors, satisfies the multitude and variety opportunity for smoking, for example by helping to provide

Review of Operations of needs of retailers scattered across the country. We will comfortable smoking areas. Meanwhile, the tobacco industry, continue to engage in efficient and effective marketing activities including JT, will continue to promote initiatives to prevent youth in ways linked to our product and distribution strategies, while smoking, including those aimed at increasing the use of the complying with regulations and rules such as restrictions on taspo card, in cooperation with local governments and other tobacco advertising and prevention of youth smoking. organizations concerned.

Improving Quality and Productivity As a Core Source of Profits We will implement measures to maximize customer satisfaction, for the JT Group including constantly improving product quality and strengthen- We will ensure that the domestic tobacco business continues ing the shipment assurance system. Productivity improvement to serve as the JT Group’s “core source of profits” by overcom- is a critical challenge for any manufacturing company. At JT, we ing challenges in the domestic market, such as the continuing will never cease our efforts to satisfy the increasingly diverse decline in total tobacco demand and intensifying competition. 021 JT Annual Report 2009 Topics Financial Highlights

The ‘taspo’ Initiative

The initiative is implemented by the entire tobacco industry to prevent JT in Retrospect youth smoking.

Purpose of the ‘taspo’ Initiative JT Today Prevention of youth smoking is not only a social demand but also a top priority matter for the tobacco industry. Therefore, starting in March 2008, we gradually introduced the IC-card-based age verification cigarette vending machines that accept the ‘taspo’ card, with the nationwide introduction completed in July 2008. For customers to purchase cigarettes from these vending machines, they need to tap the ‘taspo’ card on the sensor of the machine for adult identification. The ‘taspo’ card is issued to people To Our Stakeholders To identified as adults through rigorous verification procedures. The ‘taspo’ initiative has been led by the Tobacco Institute of Japan (TIOJ), the Japan Tobacconist Federation and the Japan Vending Machine Manufacturers Association. Special Feature Outline of ‘taspo’ System Only people who have the ‘taspo’ card, which is issued by the Tobacco Institute of Japan, can purchase cigarettes from the IC-card-based age verification cigarette vending machines. The ‘taspo’ card is issued after the applicant for the card is identified as an adult through rigorous verification and screening procedures. When a customer taps the ‘taspo’ card on the sensor of a vending machine with the adult identification Review of Operations function, information contained on the IC integrated in the card is read instantly for adult identification. The indication of the name and member number on the card and the facial photo attached to it clarify the ownership of the card, preventing the card from being sold or lent to a non-legitimate owner and helping to enhance the rigorousness of the adult identification. Because of the enhanced rigorousness of the adult identification, the ‘taspo’ card is highly effective in preventing youth smoking. The ‘taspo’ card can be used to make payment with electronic money “Pidel.” If the card is charged with electronic money, it enables the user to purchase cigarettes from a vending machine without using cash. The card can be recharged through a vending machine.

An age verification IC card ‘taspo’

Number of ‘taspo’ cards issued (As of June 13, 2009) 9,211,025

An age verification cigarette vending machine using IC cards 022 JT Annual Report 2009

Financial Highlights International Tobacco Business

Japan Tobacco International (JTI), JT Group's international tobacco busi-

JT in Retrospect ness, is the profit growth engine of the group by taking advantage of its geographic profile and competitive edge in brands and people. Although the current state of the global economy poses an unprecedented chal-

JT Today lenge, JTI will strive to mitigate the negative impacts on its businesses. JTI remains committed to the development of its people and brands so as to further enhance its competitiveness.

Pierre de Labouchere President & CEO,

To Our Stakeholders To Japan Tobacco International Special Feature

FY 3/2009 Business Performance Summary Business Performance 452.3billion • Total sales volume: up 17.3% JTI delivered another year of strong results in 2008, maintaining cigarettes, its solid top-line growth momentum through brand equity

Review of Operations 245.5 billion • GFB sales volume: up 20.8% advancement. cigarettes, Thanks to continued business momentum, the realization of • Net Sales including ¥3,118.3 billion, up 18.1% excise taxes: integration synergies and foreign exchange gains, JTI far • Net Sales excluding exceeded its EBITDA targets. ¥1,102.3 billion, up 16.5% excise taxes (*：) In 2008, JTI’s total sales volume increased by 66.7 billion • EBITDA: ¥ 338.0 billion, up 24.8% cigarettes (up 17.3%) from the previous fiscal year, to 452.3 • Operating income: ¥ 174.8 billion, down 14.9% billion cigarettes. This was mainly due to Winston’s sales

* Excluding distribution business growth in Russia, Turkey, Ukraine, Spain, France and Italy; Camel’s sales growth in Italy, Russia and Spain; and Mild Seven’s sales growth in Korea, Taiwan, Russia and Malaysia. GFB Sales Volume(*) The sales volume of Global Flagship Brands (GFB) totaled

(Billions of Cigarettes) 245.5 billion cigarettes. 245.5 Consequently, net sales excluding excise taxes of the 203.2 international tobacco business increased by ¥156.3 billion from the previous year (up 16.5%) to ¥1,102.3 billion, and 149.1 131.4 133.8 EBITDA increased by ¥67.2 billion (up 24.8%) to ¥338.0 bil- lion. The strong results were attributed to increased sales, and the inclusion of the full-year results of Gallaher. Meanwhile, operating income dropped by ¥30.6 billion (down 14.9%) to ’04 ’05 ’06 ’07 ’08 ¥174.8 billion, due to the amortization of goodwill. (*) GFB in FY2004-2006: Winston, Camel, Mild Seven, Salem Note: Average foreign exchange in 2008 of ¥103.48 per dollar, compared to ¥117.85 in the GFB in FY2007-2008: Winston, Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, previous fiscal year. Sobranie, Glamour 023 JT Annual Report 2009 Financial Highlights

Outline of Cluster Sales Volume Shares in Key Markets in CIS+ 2007 2008 Market Position

Performance JT in Retrospect Russia 35% 36% No. 1 South & West Europe Kazakhstan 42% 42% No. 2 • Sales volume grew 7%, with GFB (85% of total sales) posting Ukraine 30% 29% No. 2 a 9% increase. Romania 29% 27% No. 3 JT Today • Camel and Winston posted sales volume growth of 6% and 17% respectively, as a result of successful marketing initiatives. Rest of the World • Sales volume in FY 2008: 64.0 billion cigarettes • Sales volume grew 11%, with GFB posting a 13% increase. • Sales volume in FY 2008: 117.7 billion cigarettes

Shares in Key Markets in South & West Europe Our Stakeholders To

2007 2008 Market Position Shares in Key Markets in the Rest of the World

Spain 20% 21% No. 3 2007 2008 Market Position France 13% 14% No. 4 Taiwan 36% 39% No. 1 Italy 16% 17% No. 3 Malaysia 18% 19% No. 2 Special Feature Greece 14% 15% No. 3 Turkey 14% 17% No. 3 Canada 12% 13% No. 3 * Growth and market share on a like-for-like basis (includes proforma Gallaher 2007). ** As the market segmentation data shown above are for reference only, they do not repre- North & Central Europe sent the segmentation of JTI’s management structure.

• Although sales volume declined 2%, the GFB mix improved *** Share of market as annual average, obtained from external sources (Trade Exchange, Review of Operations ACNielsen, EPOS), excluding Austria and Canada (JTI estimate). as a result of increased brand investment. • Excluding sales of private-label products, sales volume increased 1.7%. Strong GFB Portfolio • Sales volume in FY 2008: 50.8 billion cigarettes 2008 Performance On a like-for-like basis, GFB sales volume grew 13.3% in 2008, Shares in Key Markets in North & Central Europe compared with a 5.1% growth in total sales volume. GFB is the 2007 2008 Market Position main driver of JTI’s strong top-line growth and accounted for UK 39% 39% No. 2 54% of the total sales volume in 2008. Of the eight GFB, six Ireland 49% 49% No. 1 posted double-digit growth in 2008. Winston registered a 14% Austria 38% 37% No. 1 Sweden 34% 36% No. 1 growth in sales volume in 2008, solidifying its leadership in the sub-premium segment. This was due in part to improved pack design and the introduction of super slims mainly in CIS+. CIS+ Camel posted 10% sales volume growth, following a successful • Sales volume grew 3%, with GFB sales volume increas- pack upgrade in 2007 and innovative programs to enhance its ing 17%. premium stature. Glamour, JTI’s leading super slims brand in • Winston posted a 15% increase in sales volume, solidifying the sub-premium segment, recorded remarkable growth of its position as the No. 1 brand in the CIS+ region. 40%, mainly due to growth in Russia. • Sales volume in FY 2008: 219.7 billion cigarettes 024 JT Annual Report 2009 Financial Highlights

GFB Portfolio JTI’s GFB portfolio is strongly represented across most price

JT in Retrospect JTI’s focus on innovation has solidified its position and contrib- segments, providing good balance during the economic uted to the growth of the GFB portfolio. Innovation remains a downturn. key priority for future growth, and JTI will continue to make aggressive investments in this area in order to enhance its JT Today brand equity.

Global Flagship Brand Portfolio The eight Global Flagship Brands (GFB) constitute the core of JTI’s brand portfolio, to drive quality top-line growth. To Our Stakeholders To 2008 Volume YoY %* Brand Portfolio (Billions of cigarettes) Growth

Engines Winston and Camel are “Engine” brands driving JTI’s growth.

Special Feature First introduced in 1954, Winston has proven its status as JTI’s key growth driver by becoming the 2nd largest cigarette brand in the world in 2006, demonstrating excellent results in CIS+, South & West Europe and the Rest of the World. Winston has experienced double-digit growth 126.4 13.8 over the last eight years and its strong momentum continues through brand extensions and ongoing product innovation. First introduced in 1913, Camel is the originator of American Blend. Sold in over 100 countries, Camel currently is the 5th largest cigarette brand in the world. In 2008, Camel further accelerated

Review of Operations its sales volume in all regions. Camel Natural Flavor and other line extensions contributed to 42.3 10.3 Camel’s success.

Strongholds Four stronghold brands have a significant presence in their respective regions increasing the competitive power of JTI’s portfolio. Originating in Japan and launched in 1977, Mild Seven is the top-selling premium charcoal brand worldwide and is the 4th largest cigarette brand. Its key markets outside Japan are Taiwan, Korea, 18.8 11.4 Russia and Malaysia. Originally created for the Prince of Wales in 1873, Benson & Hedges has a proud British heritage. Today, JTI owns the Benson & Hedges trademark in EU markets (excl. Baltics) where it is a leading Virginia premium brand. Benson & Hedges evolves continuously to reflect the needs of 11.2 –2.4 premium consumers. Launched in 1963, Silk Cut established itself as one of the leading brands in the Virginia segment, both in the UK and Ireland. JTI owns the Silk Cut trademark throughout the EU with the core markets being the UK, Ireland 5.2 –3.0 and Greece, where the brand enjoys a significant market share in the premium segment. LD was launched in 1999 as a mid-price proposition in the Russian market. The brand achieved immediate success and is accepted as a credible international proposition. Now available in more than 30 countries, LD is synonymous with innovation and responding to 29.0 20.7 consumer aspirations, including the successful extension of Round Corner packs, Slims and Super Slims formats.

Future The market presence of these brands is still small, but they have growth potential. potential Sobranie is one of the world’s oldest tobacco brands and has been synonymous with luxury ciga- rettes since 1879. This heritage, exquisite style and the best selected tobaccos have made Sobranie one of the 2.3 18.7 most prestigious brands in the world. Glamour is JTI’s leading Super Slims brand. Since its introduction in 2005, Glamour has achieved remarkable growth in CIS+, consolidating its No. 1 position as a Super Slims brand in Russia, Ukraine and Belarus. Glamour was launched 10.3 40.1 in Western Europe (Italy) in 2009.

* Growth on a like-for-like basis (includes proforma Gallaher 2007). 025 JT Annual Report 2009 Financial Highlights

Strategies and Specific Measures Toward Sustainable Growth

• Build and nurture outstanding brands JTI has delivered yet another year of remarkable performance JT in Retrospect • Continue to enhance productivity through the execution of consistent business strategies. Since • Sharpen focus on responsibility and credibility 2000, JTI has grown its EBITDA by a compound annual average • Develop people as a cornerstone of growth rate of 34%. Although the current state of the global economy JT Today Quality top-line growth continues to be JTI’s overriding priority poses an unprecedented challenge, JTI will strive to mitigate the and it remains committed to deploying its key strategies under negative impacts on its businesses. JTI is also resolved to the guiding principle of continuous improvement. continue dedicating resources to its people and brands so as to maintain and enhance its competitiveness. While making the most of its strong business foundation supported by its geo- To Our Stakeholders To graphic profile, brands and people, JTI remains committed to maintaining an annual EBITDA growth rate of at least 10% at constant exchange rates, so as to secure its role as the growth

engine of the JT Group. Special Feature

EBITDA and EBITDA Margin Growth

(Millions of US Dollars)

32% Review of Operations

EBITDA Margin 3,452

2,830

2,452

EBITDA

10% 1,090 925 551 712 400 441 338

2000 2001 2002 2003 2004 2005 2006 2007 2007 2008 Like for Like* * includes proforma Gallaher 026 JT Annual Report 2009

Financial Highlights Pharmaceutical Business

In the pharmaceutical business, JT will continue to build world-class,

JT in Retrospect unique R&D capabilities and reinforce its market presence through inno- vative 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

JT Today can pursue a high-value added business based on the development of world-class innovative drugs.

FY 3/2009 Business Performance Summary • Net sales: ¥56.8 billion, up 15.7% Noriaki Okubo President,

To Our Stakeholders To • EBITDA: ¥ 4.9 billion, up ¥ 11.2 billion Pharmaceutical Business • Operating income: ¥ 1.0 billion, up ¥10.7 billion Special Feature

Business Performance topical adrenocortical hormone. However, as sales of the In the pharmaceutical business, JT is striving to steadily advance Stronger Neo-minophagen C agent for the treatment of liver the development of compounds in the clinical development stage and allergic diseases were terminated at the end of March 2008 Review of Operations and enhance the R&D pipeline so as to increase the value of this and sales of the Futhan protease inhibitor declined due to a business at an early date. While we have abandoned the devel- price revision that took effect in April 2008 and the promotion opment of anti-obesity compound JTT-553, anti-Hepatitis C of the use of generic drugs, Torii Pharmaceutical’s net sales compound JTK-652, anti-­hyperuricemia compound JTT-552 decreased. and anti-diabetes compound JTT-651, the development of In March 2009, Torii Pharmaceutical started selling the anti-HIV compound JTK-656 and anti-hyperphosphatemia com- Remitch Capsule, an antipruritus drug for hemodialysis patients pound JTT-751 proceeded to the clinical trial stage, bringing the which was codeveloped by Toray Industries Inc., JT and Torii number of compounds currently in this stage to nine. Pharmaceutical and for which Toray obtained approval for Moreover, we are exploring strategic opportunities to con- domestic production and sales in January 2009. clude licensing agreements to acquire rights to drugs developed To sum up the financial results of the JT Group’s pharma- by other companies, or give others rights to our drugs. ceutical business, net sales increased by ¥7.7 billion (up 15.7%) In September 2008, JT concluded a licensing agreement from the previous year to ¥56.8 billion as a decline in Torii with Merck & Co. of the United States concerning anti-osteo- Pharmaceutical’s sales was offset by the receipt of an upfront porosis compound JTT-305, which gives Merck the exclusive payment for the licensing of anti-osteoporosis compound JTT- rights to develop and commercialize this compound worldwide 305 and a milestone revenue associated with progress in the excluding Japan. development of the JTT-705 compound for the treatment of Meanwhile, Torii Pharmaceutical Co. Ltd., a JT Group dyslipidemia, which was licensed to Roche (Switzerland) in company, posted growth in sales of anti-HIV drug Truvada, the October 2004. Operating income came to ¥1.0 billion (an Dovonex ointment for the treatment of psoriasis vulgaris, the improvement from a loss of ¥9.6 billion in the previous year). Zefnart antifungal agent for external use and the Antebate 027 JT Annual Report 2009 Financial Highlights

Strategies and Specific Measures JTT-305 anti-osteoporosis oral compound to Merck. By tapping

• To strengthen the capability for clinical development, including external R&D resources through these out-licensing deals, we JT in Retrospect late-stage development, and the capability for drug discovery have sped up the development of our drugs. research. Regarding in-licensing, meanwhile, we concluded a licens- • To enhance in-licensing and out-licensing activities and ing agreement in fiscal 2003 to acquire rights to commercialize JT Today strengthen cooperation with foreign partners. in Japan three anti-HIV drugs developed by Gilead Sciences. These drugs are now sold by Torii Pharmaceutical. JTT-751, Strengthening of Capability for Clinical Development, regarding which the JT-Torii group signed a licensing agreement including Late-Stage Development, and Capability for with Keryx Biopharmaceuticals Inc. of the United States in fiscal Drug Discovery Research 2007 and acquired the exclusive rights for development and To Our Stakeholders To In the pharmaceutical business, JT will strengthen the capability commercialization in Japan, is now in the clinical trial stage. for clinical development in order to keep up with progress in the clinical development and will enhance the capability for drug Pursuit of Innovative Drugs

discovery research in order to reinforce the R&D pipeline. We are engaged in an unceasing quest to develop innovative Special Feature While making use of our accumulated knowledge, we have and globally competitive drugs, which we regard as the most narrowed our R&D focus, allocating our resources mainly to four critical mission for our pharmaceutical business. The develop- areas: (1) glucose and lipid metabolism, (2) virus research, ment of new drugs is a tough challenge, which we are tackling (3) immune disorders and inflammation and (4) bone with a sense of pride and high motivation. We are endeavoring metabolism. to make the kind of achievements that we alone can realize and Review of Operations make available drugs that we alone can offer, so that we may Enhancement of In-Licensing and Out-Licensing deserve the respect and appreciation of patients and medical Activities and Strengthening of Cooperation with staff around the world. Foreign Partners In the face of intensifying global R&D competition, it is becoming increasingly important to speed up R&D activity and bring new products to market quickly. Therefore, JT is exploring strategic opportunities for licensing agreements to acquire rights to drugs developed by other companies (in-licensing) or give others rights to its own drugs (out-licensing) so that we can rapidly increase the value of the business. As for out-licensing, we concluded licensing agreements with Roche (Switzerland) with regard to anti-dyslipidemia agent JTT-705 and with Gilead Sciences (U.S.) with regard to anti-HIV agent JTK-303 in fiscal 2004. In fiscal 2006, we licensed a new pre-clinical trial stage compound to GlaxoSmithKline (U.K.) and licensed a pre-clinical trial stage antibody drug candidate to MedImmune (U.S.). In addition, JT concluded a licensing agree- ment with Merck & Co. of the United States to license the 028 JT Annual Report 2009

Financial Highlights Food Business

In the food business, we are striving to provide delicious foods that

JT in Retrospect people can consume safely while wishing to “provide products with that your loved ones want to eat.” We will continue to devote our efforts to the three business areas of beverages, processed foods and season-

JT Today ings, aiming to retain the trust of customers by serving the people’s daily lives through our offering of food products.

FY 3/2009 Business Performance Summary • Net sales: ¥436.0 billion, up 29.6% Sadao Furuya President,

To Our Stakeholders To • EBITDA: ¥ 17.0 billion, up 103.9% Food Business • Operating income: –¥ 11.5 billion, down ¥12.1 billion Special Feature

Business Performance our business foundation by sharing business resources related We have devoted efforts to three areas—­beverages, processed materials procurement, production and sales with Fuji Foods foods and seasonings—and promoting efforts to achieve the Corporation, which became a JT subsidiary in April 2008, to

Review of Operations world’s highest standard of safety management. At the same complement the operations of each other. time, we are striving to strengthen the business foundation for In addition, the JT Group reorganized the processed foods future growth. and seasonings businesses so as to consolidate and integrate In the beverages business, we have steadily expanded our the group’s functions such as quality control, R&D, procurement vending machine sales channels, mainly through Japan Beverage and sales, with Katokichi Co. Ltd., a JT Group company, as the Inc., a JT subsidiary, and actively launched new products core of the reorganized operations. In addition, we are striving developed for the purpose of achieving differentiation from to strengthen the business foundation by implementing mea- competitors, focusing mainly on the flagship Roots brand. sures necessary for pouring increased efforts into core areas. While sales of frozen food products slumped in the pro- To sum up the financial results of the food business, net cessed food business due to the impact of the frozen foods sales increased by ¥99.5 billion (up 29.6%) from the previous products contamination, the JT Group as a whole has been year to ¥436.0 billion as the integration of the Katokichi Group engaging in efforts to ensure thorough safety management and in the consolidated results offset a decline in sales of processed make further improvements, including conducting checks for foods due to the impact of the frozen foods products contami- agrochemicals in imported frozen foods at inspection centers nation and a drop in sales of beverage products attributable to in Japan and China, actively disclosing information concerning unfavorable weather conditions and increased competition as food materials and seeking advice from outside experts well as a slump in general consumption caused by the severe appointed as its food safety advisers, so that we can better economic downturn. Meanwhile, the JT Group posted an assure food safety and gain the trust of customers. operating loss of ¥11.5 billion (against an operating profit of In the seasonings business, we have been focusing on the ¥0.7 billion in the previous year), because of increased general development of natural seasonings, such as high-value yeast expenses, higher materials prices and the goodwill amortization products, based on our in-house technology, and expanding related to the integration of the Katokichi Group. sales of such products, and we are striving to further strengthen 029 JT Annual Report 2009 Financial Highlights

Strategies and Specific Measures Western and Chinese foods. As for natural seasonings, we will

Aiming to increase profits by achieving sustainable growth devote our efforts to producing and expanding sales of high JT in Retrospect based on the combined strength of group companies with value-added yeast products based on our in-house technology world-class competitiveness, we will: and extract products using superior materials.

• Devote our efforts to the three business areas of beverages, Processed Foods Seasonings processed foods and seasonings. JT Today • Further strengthen our business foundation for remarkable growth in the future. • Implement measures to establish the highest standard of safety management. To Our Stakeholders To

Beverages Business: In the beverages business, we will aim to increase our presence in the market for coffee drinks, mainly canned coffee, by strengthening our flagship brand “Roots,” Special Feature which is renewed for its rich taste realized by our unique tech- Measures to Strengthen Safety Management nology. At the same time, we will develop and launch products The JT Group is implementing measures to drastically strengthen developed with a focus on differentiation and high quality based the management of food safety in order to develop the highest on our superior technology and development capability. standard of safety management, with the three pillars of “Actions Furthermore, we will aim to enhance our sales networks led by for reducing risks,” “Improving consumer response” and Review of Operations Japan Beverage Inc., a JT subsidiary responsible for operating “Creating stronger organization and operating base.” vending machines nation- wide, and to provide conscientious services I Actions for reducing risks and will strive to establish The JT Group has been conducting strict audits on factories, a solid profit base by promoting the acquisition of the ISO 22000 certification for food pursuing efficiency. safety management systems and devoting increased efforts to food defense. Processed Foods and Seasonings Businesses: In the processed food business and II Improving consumer response the seasoning business, we will strive to further strengthen our The JT Group is striving to enhance a system that enables business foundation by pursuing synergy effects from the busi- collection of customer feedback on a 365-day-per-year basis ness integration, concentrating business resources on priority and quick and appropriate group-wide sharing of the feedback areas and fostering a sense of unity at the Katokichi Group. In and to actively disseminate information useful for customers. the frozen food business, we will strive to offer delicious frozen products of various sorts that customers can eat safely by using Katokichi Co. Ltd. as the core of the business, with a view to III Creating stronger organization and operating base ensuring food safety from the point of production through to the The JT Group is strengthening the safety management system delivery to consumers. Thus, we will aim to become the leading by promoting coordination between the R&D functions and the company in the frozen foods industry. In the seasonings busi- quality control functions and is actively incorporating diverse ness, Fuji Foods Corporation, a JT Group company that has knowledge and viewpoints into its operations by seeking been leading the market with pioneering products, will play the assessment and advice from outside experts appointed as its central role in the development of a broad range of seasonings food safety advisers. products for a diverse range of foods, including Japanese, History of the JT Group

030

JT Annual Report 2009 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.

Financial Highlights 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. On the other hand, 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 JT in Retrospect foundations for Gallaher Group. Meanwhile, R.J Reynolds Tobacco Co. (RJR), which would subse- quently create the Camel and Winston brands, was established in 1874 in the U.S. In this manner, the current JT Group can trace its origins to many different countries and regions

JT Today like Austria, Northern Ireland, the U.S. 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. To Our Stakeholders To 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.

Special Feature This corporation helped to ensure the stable supply of tobacco and secure fiscal revenues for the government.

1784 1857 1874

●● Austria Tabak is founded by Emperor ●● Tom Gallaher sets up his business (Lon- ●● RJR is founded by Richard Joshua Reynolds

Review of Operations Joseph II. donderry, Northern Ireland). in Winston, North Carolina.

JT Group History of the History of the

1913 1931 1949

●● Camel launched. ●● Cellophane is introduced by RJR in order to ●● The Monopoly Bureau becomes the Japan preserve the freshness of tobacco. Tobacco and Salt Public Corporation.

1957 1964 1968

●● JT launches HOPE (10), Japan’s first domes- ●● Silk Cut Launched. ●● Gallaher acquired by the American tically produced filter cigarettes. Tobacco Company. 031 JT Annual Report 2009

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 virtually opened to foreign tobacco suppliers, triggering Financial Highlights competition between domestic and foreign tobacco products in Japan, and foreign countries stepped up pressure on Japan to take further market-opening measures that were difficult to implement within the framework of the monopoly tobacco sales system. Amid such pressure as well as moves toward the reform of government-run public corporations, a government panel was established in March 1981 to conduct research on the public corporation system. In its third report (July 30, 1982), the panel JT in Retrospect 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: *Abolish the tobacco monopoly law in order to liberalize tobacco imports and establish a tobacco business law in order to JT Today make necessary adjustments related to the tobacco business. *Abolish the JTS law, reorganize JTS as a joint stock corporation so as to enable it to pursue rational corporate management as much as possible and establish the Japan Tobacco Inc. Law, which provides for a necessary minimum level of regulation in light of the corporation’s need to compete with foreign tobacco companies on an equal footing in the domestic market following the liberalization of tobacco imports. To Our Stakeholders To 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. Special Feature

1879 1891 1898

●● Sobranie is registered in London, to ●● The Moscow-based Ducat factory is founded. ●● The Japanese Monopoly Bureau is estab-

become one of the oldest cigarette brands lished for the sale of domestic leaf tobacco. Review of Operations in the world.

JT Group History of the History of the

1954 1955 1956

●● Winston Launched. ●● Benson & Hedges is acquired by Gallaher. ●● Salem launched.

1977 1981 1984

●● Mild Seven Launched (Japan). ●● Mild Seven Launched internationally. ●● Japan Tobacco Inc. Law enacted. 032

JT Annual Report 2009 In and after 1985

The corporate history of JT is as shown in the table below. As for for imported cigarettes attributable to the tariff abolition eliminated the international tobacco business, the history before JT’s acquisi- the price advantage of JT products over imported products,

Financial Highlights tions of RJR Nabisco’s non-U.S. tobacco operations and Gallaher which had stood at around ¥60 to ¥80 when JT was founded in is included. 1985. As a result, competition between JT and foreign tobacco The operating environment for JT changed drastically in just makers intensified in the Japanese market, leading to a decline two years after the foundation of the company, as represented in JT’s market share from 97.6% in fiscal 1985 to 90.2% in fiscal

JT in Retrospect by the yen’s upsurge following the Plaza Accord in 1985, a 1987. To cope with the rapid deterioration of the operating tobacco tax hike in 1986 and the abolition of tariffs on imported environment, JT carried out rationalization measures to enhance cigarettes in 1987. Amid the yen’s upsurge, a price increase for its cost-competitiveness and pursued diversification while imple- JT products due to the tobacco tax hike coupled with price cuts menting measures to strengthen its marketing capability in order JT Today

1985 1986 1987 April March April ●● Japan Tobacco Inc. established. ●● Fukuoka and Tosu factories closed and Kita ●● Import tariffs on imported cigarettes (Japanese tobacco market opened to foreign Kyushu factory built to modernize and abolished.

To Our Stakeholders To tobacco manufacturers.) rationalize tobacco production. ●● The Business Development Division ●● Nine more tobacco factories closed by June ­established to promote new businesses. 1996 to further rationalize production. ●● The Business Development Division is later reorganized into operational divisions engaged in the foods and pharmaceuticals businesses, finishing in July 1990. Special Feature 1993 1994 1995 September October May ●● The Central Pharmaceutical Research Insti- ●● Government releases first tranche of outstand- ●● Head office moved back to Minato-ku from tute established to enhance in-house ing JT shares for initial public offering (394,276 Shinagawa-ku following completion of new research capabilities. shares offered at 1,438,000 yen apiece). head office building. ●● JT stock listed on the first sections of stock

Review of Operations exchanges in Tokyo, Osaka and Nagoya. ●●Peter I launched (Russia). November

●● JT stock listed on stock exchanges in Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo.

●●Acquisition of Yelets (Russia). JT Group History of the History of the 1999 2000 2001 May December December ●● JT acquires the non-U.S. tobacco business of ●● Factory in Manchester, UK closed. ●● Factory in Warsaw, Poland closed. RJR Nabisco Inc. July ●● Acquisition of Liggett-Ducat (Russia). ●● Acquisition of Austria Tabak. ●● JT acquires the food business of Asahi Kasei Corporation, including Asahi Foods and seven other subsidiaries. October ●● Under a business tie-up between JT and Torii Pharmaceutical Co., Ltd., the two companies’ R&D operations related to medical pharmaceuti- cals are concentrated at JT, while their promotion operations are combined at Torii Pharmaceutical.

●● LD launched (Russia).

2005 2006 2007 March April April ●● Ueda, Hakodate, Takasaki, Takamatsu, Tokushima, ●● JT implements a five-for-one stock split in ●● JT acquires all outstanding shares of Gallaher Usuki, Kagoshima and ­Miyakonojo factories closed order to expand the investor base, effective Group Plc. as a rationalization measure to ensure long-term April 1, 2006. July profitability for the domestic tobacco business. May ●● Factory in Menemen, Turkey closed. April ●● Acquisition of AD Duvanska Industrija Senta October ●● JT terminates a licensing contract under which in Serbia. ●● One of Factory in Bucharest, Romania closed. it had exclusive rights to produce and sell June Marlboro brand products in Japan and use the ●● Factory in Czech Republic closed. Marlboro trademark in the country. June ●● Acquisition of CRES Neva Ltd. (Russia).

●● Glamour launched (Russia, Ukraine, Kazakhstan). 033 JT Annual Report 2009 to maintain the domestic sales volume. In the 1990s, JT’s strengthening its business foundation. JT significantly competition with foreign rivals in the Japanese market heated strengthened the international tobacco business by acquiring

up further. Furthermore, overall cigarette demand in Japan RJR Nabisco’s non-U.S. tobacco operations in 1999 and Financial Highlights peaked out in the latter half of the 1990s due to a contraction Gallaher in 2007. With its international sales volume exceed- of the adult population and growing concern about health ing its domestic sales volume, the JT Group continues to grow problems associated with smoking. Amid the increasingly as a global tobacco company. The international tobacco

difficult operating environment for the domestic tobacco business is the engine of the JT Group’s profit growth through JT in Retrospect business, JT took additional rationalization steps, pursued the comprehensive brand portfolio which includes Winston, consolidation of operations in its areas of business diversifica- Camel and Mild Seven as well as Benson & Hedges, Silk Cut, tion and expanded the international tobacco business, thereby LD, Sobranie and Glamour. JT Today

1988 1991 1992

October July ●● Acquisition of Manchester Tobacco ●● “JT” communication name introduced. ●● Head office temporarily relocated from Company Ltd. Minato-ku to Shinagawa-ku during construc-

tion of new head office building. ●●Acquisition of AS-Petro (Russia). Our Stakeholders To Special Feature 1996 1997 1998 June April April ●● Government releases second tranche of ●● JT ends its salt monopoly business in line ●● JT signs an agreement with Unimat outstanding JT shares (272,390 shares with abolition of the salt monopoly system. Corporation (Currently, Japan Bevarage Inc.) offered at 815,000 yen apiece). ●● The Tobacco Mutual Aid Pension scheme on a tie-up regarding soft drink business. integrated into the Employees’ Pension ●● JT later acquires a majority stake in Unimat.

●●Acquisition of Tanzanian tobacco production scheme. December Review of Operations facility. ●● JT acquires a majority stake in Torii

●● American Brands spins off Gallaher which ­Pharmaceutical Co., Ltd. through a tender becomes Gallaher Group Plc and are listed on offer. the London and New York stock exchanges. JT Group History of the History of the 2002 2003 2004 March March March ●● Factory in Puerto Rico closed. ●● Sendai, Nagoya and Hashimoto factories ●● Hiroshima, Fuchu, Matsuyama and Naha closed as a rationalization measure to ensure factories closed as a rationalization measure long-term profitability for the domestic to ensure long-term profitability for the tobacco business. domestic tobacco business. October June ●● JT repurchases 45,800 own shares to ●● Government releases third tranche of out- increase its management options. standing 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 ●● JT repurchases 38,184 own shares to increase its management options.

2008 2009 January March ●● JT acquires a majority stake in Katokichi Co., ●● Kanazawa factory closed as a rationalization Ltd. through a tender offer. measure to ensure long-term profitability for April the domestic tobacco business. ●● JT acquires a majority stake in Fuji Foods Corporation ●● JTI celebrates its 10th anniversary. July ●● JT concentrates its processed foods opera- tions, including frozen foods operations and seasonings operations, at the Katokichi Group. Note: ● ●●Main topics of RJR Nabisco’s non-U.S. November operations before participating in the JT ●● Factory in Singapore closed. Group. l Main topic of Gallaher before participating in the JT Group. Business Environment for the JT Group

034 JT Annual Report 2009 The JT Group has long been committed to many of the FCTC’s Framework Convention on Tobacco Control was held in February provisions, including the prevention of youth smoking and the 2006 following the convention’s entry into force. At this confer- elimination of illicit trade, and has engaged in active efforts to ence, discussions were held on matters such as the procedural

Financial Highlights address those issues on a voluntary basis. rules for subsequent conferences, reports to be presented at the Meanwhile, JT believes that tobacco should be regulated by next conference and the development of draft guidelines and individual countries in light of their own circumstances, such as draft protocols. In June 2007, the second session of the conven- the state of legislation and cultural and social conditions. tion was held. This time, guidelines for the implementation of

JT in Retrospect Article 8 (protection from exposure to tobacco smoke) were Major Elements of Regulation on adopted. In addition, resolutions were adopted with regard to Global Tobacco Business establishing an intergovernmental negotiating body for the pur- WHO: “Framework Convention on Tobacco Control” pose of developing a protocol on Article 15 (illicit trade in tobacco JT Today Following six rounds of intergovernmental negotiations, the products) and with regard to the timetable for developing guide- Framework Convention on Tobacco Control (FCTC) was adopted lines concerning other major provisions. At the third session of by World Health Assembly of the WHO in May 2003 and came the convention, which was held in November 2008, guidelines into force on February 27, 2005, 90 days after its ratification by for Paragraph 3, Article 5 (protection against the tobacco indus- 40 signatory nations. As of March 31, 2009, a total of 164 try), Article 11 (packaging and labeling) and Article 13 (tobacco To Our Stakeholders To countries (including the EC) were party to the FCTC. Japan advertising and promotion) were adopted, a report was made on signed the FCTC on March 9, 2004 and accepted it on June 8, the progress in intergovernmental negotiations concerning the 2004. The FCTC contains a number of provisions, some of which adoption of a protocol regarding Article 15, and resolutions were

Special Feature are legally binding for the signatory nations, while others allow for adopted with regard to how to proceed with work concerning discretion by each nation with regard to interpretation and other major matters. implementation. The JT Group has long been committed to many of the Key provisions of the FCTC include: FCTC’s provisions, including the prevention of youth smoking — Price and tax measures (implementation of tax policies and and the elimination of illicit trade, and engaged in active efforts to Review of Operations price policies and imposition of restrictions on duty-free address those issues on a voluntary basis. Meanwhile, JT sales, etc. as appropriate, without prejudice to the sover- believes that tobacco should be regulated by individual countries eign right of signatory nations to determine and establish in light of their own circumstances, such as the state of legislation JT Group

History of the their tax policies) and cultural and social conditions. The JT Group is ready to have — Packaging and labeling (adoption of effective measures to dialogue with the governments of individual signatory nations of ensure (1) that tobacco product packaging and labeling do the FCTC as necessary, in order to ensure that they take appro- not promote tobacco products by using terms that could priate and reasonable measures suited to their own circum- create an erroneous impression, for example, that a par- stances when they implement the provisions of the convention. for the JT Group

Business Environment Business Environment ticular tobacco product is less harmful than others; and (2) that health warnings on tobacco packaging cover not less International Tobacco Product Marketing Standards than 30% of the principal display area) In September 2001, JT decided to commit itself to comply with — Advertising (introduction of a comprehensive ban on the International Tobacco Product Marketing Standards. The tobacco advertising, sales promotion and sponsorship, or standards set principles for responsible tobacco product market- imposition of appropriate restrictions if a country is not in ing worldwide. They represent a minimum set of standards for a position to implement a comprehensive ban because of ensuring that brand marketing is never aimed at youth, but its constitution or constitutional principles) exclusively at adults who choose to smoke based on their rec- — Sales to minors (adoption and implementation of effective ognition of the health risks associated with smoking. measures to ban sales of tobacco products to minors) The key provisions of the international standards include: — Support for alternative activities (promotion of alterna- — Unified definitions of key words such as “advertisement/ tive activities for tobacco workers, growers and sellers advertising,” “promotional event” and “sponsorship.” as appropriate) The first session of the Conference of the Parties to the WHO 035 JT Annual Report 2009 — Tough guidelines applicable to advertising of tobacco Agreement with EU and EU Member States to products: Combat Cigarette Smuggling and Counterfeiting • Print advertising is to be limited to publications with at least On December 14, 2007, JT International S.A. and JT International

75% adult readership. Holding B.V., both of which are consolidated subsidiaries of JT, Financial Highlights • Billboard advertising must not exceed 35 square meters signed an agreement with the European Commission, the execu- in size. tive branch of the European Union (EU), and twenty-six member • Ads on TV, radio and the Internet are prohibited unless and states of the EU on cooperation in combating cigarette smug-

until 100% adult verification is achieved. gling and counterfeiting. We believe that this agreement, which JT in Retrospect • Ads cannot run in cinemas unless there is a reasonable builds upon initiatives implemented by the JT Group over the past basis to believe that at least 75% of the audience is adult. years, will help to jointly establish an efficient and constructive • Ads cannot feature celebrities, show individuals that appear framework for combating cigarette smuggling and counterfeiting JT Today younger than 25, or suggest that smoking enhances ath- with the EU and EU member states, and protect the brand value letic, professional, personal or sexual success. of our products against the threat of such illegal activities. The — Indication of health warnings in ads and other media: 27th member state, the United Kingdom joined the agreement • Health warnings must appear in almost all advertising, on April 21, 2009. promotional and merchandising materials, except in rare The agreement calls for the JT Group to pay US$50 million in To Our Stakeholders To instances such as point-of-sale materials smaller than 250 each of the five years from signing and US$15 million in each of square centimeters. the following 10 years to support anti-smuggling and anti- — Restrictions on sponsorship: counterfeiting initiatives for the European territory.

• For events or activities that bear a tobacco product brand Special Feature name, all participants who compete or otherwise take an Major Elements of Regulation of active part must be adults. Tobacco Business in Japan • From December 1, 2006, attendance at an event or The Japan Tobacco, Inc. Law activity sponsored for the purpose of tobacco product JT was established under the Japan Tobacco, Inc. Law (“the JT brand promotion must be comprised of at least 75% Law”) for the purpose of developing businesses related to the Review of Operations adults, and these events can only generate incidental manufacture, sale, and importation of tobacco products. The JT coverage in electronic media. Law provides that the Japanese government must continue to JT Group

— All promotional activities are to be limited to verified hold at least one-half of all of the shares that the government History of the adult smokers. acquired by voluntary conveyance upon JT’s establishment, as adjusted for any subsequent stock split or consolidation of shares Prevention of Youth Smoking (the number of such shares following the share split carried out The prevention of youth smoking is an issue to be addressed on April 1, 2006 is 5 million shares), and that even if JT issues new for the JT Group by society at large. From the viewpoint of fulfilling its corporate shares in the future, the government must continue to hold more Business Environment social responsibility, the JT Group has been conducting busi- than one-third of all of the issued shares. The JT Law also states ness operations in an appropriate manner and working with that the flotation of new shares, options to subscribe for new governments and other relevant organizations to take various shares, or in the case of a share-for-share exchange, issuance of steps toward dealing with this issue in the countries in which it new shares, issuance of options for new shares, or issuance of operates, in accordance with voluntary standards and the bonds with options or warrants to subscribe for new shares, International Marketing Standards as well as relevant local laws requires the approval of the Minister of Finance. and regulations. The JT Law grants JT the freedom to enter other non- For detailed information on JT’s efforts to prevent youth tobacco-related business areas in line with its overall objectives smoking, please refer to the following websites. as a corporation, dependent upon ministerial permission, in http://www.jti.co.jp/sstyle/think/underage/index.html addition to the manufacture, distribution, and importation of (for efforts in Japan) tobacco products and tobacco-related businesses. JT must also http://www.jti.com/cr/positions/cr_positions_youth_smoking obtain authorization from the Minister of Finance for certain (for efforts overseas) matters, including the appointment or dismissal of directors, 036 JT Annual Report 2009 executive officers, and auditors, amendments to JT’s Articles of specified by the Ordinance for Enforcement of the Tobacco Incorporation, appropriations of capital surplus (except disposal Business Law. of losses), and any merger, corporate split, or dissolution of JT. The ordinance requires the indication of warning labels

Financial Highlights Within three months after the close of each business year, JT regarding risks related to eight items. Four of the eight are dis- must issue its balance sheets, statements of income or loss, and eases associated with direct smoking (lung cancer, heart attack, business report to the Minister of Finance. stroke and emphysema), while the other four are smoking by pregnant women, passive smoking, addiction to smoking and

JT in Retrospect The Tobacco Business Law youth smoking. Each tobacco product package must indicate, The Tobacco Business Law was enacted in August 1984 for on its main surface, a warning regarding at least one of the four the purpose of achieving sound growth for Japan’s tobacco items associated with direct smoking and at least one of the other industry, securing stable government revenues, and contribut- four items. The ordinance stipulates (1) that these warnings must JT Today ing to the healthy expansion of the Japanese economy. The be rotated throughout the year in ways to ensure that they receive Tobacco Business Law governs the cultivation and purchase of equal exposure on each product item and each type of package leaf tobacco and the manufacture and distribution of tobacco and (2) that the display area must occupy 30% or more of the products. JT is obliged to negotiate contracts with domestic main surface of the package. leaf tobacco growers to determine the total area used for In addition, the ordinance stipulates that when terms like “mild” To Our Stakeholders To tobacco cultivation and tobacco leaf prices based on type and and “light” are used on the package, they must be accompanied quality. JT is also required to purchase the entire usable domes- by a warning that prevents consumers from misunderstanding the tic tobacco crop. relationship between the consumption of tobacco and health. JT

Special Feature Contracts stipulate the area to be cultivated and the prices of ensures appropriate indications of the required health warnings leaf tobacco for the subsequent year, and in this regard JT with regard to all products intended for shipment in the Japanese respects the opinion of the Leaf Tobacco Deliberative Council.* market, as prescribed by the relevant laws and regulations. As the sole manufacturer of tobacco products in Japan as Meanwhile, JT plans to continue using such terms as “mild” established by law, JT must obtain the approval of the Minister and “light” in the Japanese market in ways that maintain compli- Review of Operations of Finance on the maximum wholesale price of each class of ance with the provisions of the laws and regulations. tobacco released to the market. Tobacco product importers and wholesalers must register with the Minister of Finance, and Guideline on Tobacco Advertising JT Group

History of the retailers of tobacco products are required to obtain approval from In line with the purpose of a guideline for advertising of tobacco the Minister of Finance. In addition, list prices for JT’s tobacco products promulgated by the Japanese Minister of Finance products and imported tobacco products must be approved by under Article 40 of the Tobacco Business Law, the Tobacco the Minister of Finance, although in general, manufacturers’ list Institute of Japan (TIOJ)* has established voluntary standards. All prices are approved unless the Minister of Finance deems them TIOJ member companies, including JT, comply with these for the JT Group

Business Environment Business Environment unfair to consumers. Tobacco retailers are only permitted to sell standards. The guideline stipulates that outdoor advertising of tobacco products at list prices that have been approved by the tobacco products (posters, billboards, etc.) must not be dis- Minister of Finance. played except where tobacco products are sold and in desig-

* The Leaf Tobacco Deliberative Council is a council which confers on important matters nated smoking areas. It also stipulates that special care must be concerning the cultivation and purchase of domestically grown leaf tobacco in response to taken to ensure the use of appropriate advertising methods in inquiries by JT representatives. The council consists of no more than 11 members, appointed by JT with the approval of the Minister of Finance from among representatives of domestic daily newspapers (excluding sports tabloids, evening newspa- leaf tobacco growers and academic appointees. pers and the like) and specifies matters concerning the indication Health Warnings, etc. and content of the health warnings that accompany tobacco In Japan, the packages of tobacco products are required under advertising. In accordance with the TIOJ’s voluntary standards Article 39 of the Tobacco Business Law to indicate “statements based on the guideline, the TIOJ member companies, including that urge caution over the relationship between the consumption JT, have been implementing necessary measures, such as of tobacco products and health” (health warnings) as specified banning outdoor billboard advertising and brand-specific adver- in Article 36 of the Ordinance for Enforcement of the Tobacco tising on public transportation, limiting the volume of advertising Business Law. Details concerning the health warnings are 037 JT Annual Report 2009 in newspapers, and limiting the scope of news sections in which In the other case, a taxi driver who alleging that he has ads may appear. developed laryngeal cancer and has suffered from aggravation

* Tobacco Institute of Japan: The TIOJ is a public interest corporation established for the of arteriosclerosis as a result of passive smoking in his car filed a purpose of contributing to the promotion of a fair and objective social understanding of

lawsuit with the Tokyo District Court on February 25, 2008, Financial Highlights tobacco through collecting and disseminating information regarding tobacco and supporting the sound development of Japan’s tobacco industry and the national economy as a whole, asking for ¥10 million in compensation for damages and the by engaging in various activities in a manner suited to the social environment for tobacco consumption. suspension of the production and sale of tobacco products. The The TIOJ was established in 1987 as a voluntary organization based on the Association of first hearing in this case took place on May 19, 2008, and the Tobacco Manufacturers, which was established in 1985, and reorganized as an incorporated

body in 1990. case is still pending in the district court. JT in Retrospect Among the lawsuits filed overseas in relation to smoking and Prevention of Youth Smoking health in which JT subsidiaries are defendants are damages suits Age verification vending machines filed by individuals or classes of individuals and medical expense JT Today The Tobacco Institute of Japan (TIOJ), the Japan Tobacconist recovery suits filed by governments and insurers. As of the end of Federation and the Japan Vending Machine Manufacturers May 2009, there were a total of 21 such lawsuits pending in which Association announced co-developed an age verification vend- JT subsidiaries are named as defendants or for which JT or a ing machine and started introducing the machine in March 2008, subsidiary may owe certain indemnity obligations pursuant to the aiming for a nationwide introduction. relevant contracts, including the agreement for JT’s acquisition of To Our Stakeholders To This machine is intended to prevent minors from purchasing RJR Nabisco Inc.’s overseas (non-U.S.) tobacco operations. cigarettes from vending machines, as it only allows cigarettes to These lawsuits include health care cost recovery actions be dispensed when the customer is identified as an adult as a brought by the provinces of British Columbia and New Brunswick

result of IC card scanning. Based on the results of the first-stage against major cigarette companies—including R.J.Reynolds Special Feature trial use program in Yokaichiba City, Chiba Prefecture, and the Tobacco Co. (“RJR”) and the Canadian subsidiary of JT, JTI- second trial use program in Tanegashima island, Kagoshima Macdonald Corp. (“JTI-Macdonald”)—and two class actions in Prefecture, the nationwide introduction of the machine was Quebec brought against major Canadian cigarette companies, completed in July 2008. We are actively involved in efforts to including JTI-Macdonald. ensure the smooth introduction and operation of such machines, The British Columbia action has been brought under a Review of Operations as we respect the purpose of the cooperative initiative to prevent provincial statute, the “Tobacco Damages and Health Care youth smoking. Costs Recovery Act”, which was enacted exclusively for the JT Group

purpose of this action. Several defendants challenged the History of the Tobacco-Related Legal Proceedings statute’s constitutionality. This challenge was ultimately rejected Litigation Related to Health Risks Associated by the Supreme Court of Canada in September 2005. In March with Smoking 2008, the province of New Brunswick filed a similar action under JT and its subsidiaries are defendants in lawsuits filed by plaintiffs its own Tobacco Damages and Health Care Costs Recovery for the JT Group seeking damages for harm allegedly caused by smoking, the Act. For the time being, these actions remain in pre-trial pro- Business Environment marketing of tobacco products, or exposure to tobacco smoke. ceedings with no decision yet made as to JTI-Macdonald’s or To date, JT and its subsidiaries have never lost a case or paid RJR’s liability. any money to settle a case out of court. In Quebec, a first-instance court authorized the two class In Japan, JT is currently involved in two lawsuits related to actions to proceed in February 2005. The claims were filed in smoking and health as described below. September 2005, and the actions remain in pre-trial proceedings In one case, three smokers who alleged that they developed with no decision yet made as to JTI-Macdonald’s liability. diseases as a result of smoking filed a lawsuit on January 19, JT believes that it is possible that other similar smoking and 2005 with the Yokohama District Court against JT, the Government health-related lawsuits will be filed in the future. of Japan, et al., asking for a total of ¥30 million in compensation JT is unable to predict the outcome of currently pending or for damages and a strengthening of the wording of health warn- future lawsuits. However, if one or more actions result in a ings indicated on tobacco products, etc. The first hearing in this decision unfavorable to JT or its subsidiaries, its business case took place on April 20, 2005, and the case is still pending could be materially affected by, for example, the payment of in the district court. monetary compensation. Moreover, regardless of the results of 038 JT Annual Report 2009 individual lawsuits, critical media coverage of such lawsuits challenge the tax notice issued by the Quebec Ministry of may reduce social tolerance of smoking, increase interest in Revenue through all appropriate means. the relationship between smoking and health, strengthen At the invitation of the court presiding over the CCAA pro-

Financial Highlights public regulations concerning smoking and prompt the filing of ceedings, six other provinces have filed claims similar to Quebec’s, a number of similar lawsuits against JT or its subsidiaries, seeking taxes, interest, and penalties. No procedure has yet been forcing JT or its subsidiaries to bear litigation costs and materi- established for adjudicating these claims. ally affecting JT’s business performance. Meanwhile, JT believes that if JTI-Macdonald incurs financial

JT in Retrospect damage or bears costs associated with these cases, it will be Other Tobacco-Related Legal Proceedings entitled to seek indemnification from RJR Nabisco Inc. or its Various kinds of smuggling and counterfeiting of tobacco prod- successors, based on the contract entered into between JT, RJR ucts have posed a major challenge to the tobacco industry as a Nabisco Inc. and RJR at the time of JT’s acquisition of JTI- JT Today whole. JT and its subsidiaries are involved in certain proceedings Macdonald in 1999.

overseas relating to the alleged smuggling of tobacco products. * Companies’ Creditors Arrangement Act (CCAA): Companies doing business in Canada are In addition, apart from the alleged smuggling of tobacco prod- eligible to seek protection under the CCAA if they encounter a financial situation that creates noticeable difficulties in their business operations. The CCAA is intended to enable these ucts, JT subsidiaries are also involved in certain proceedings, companies to continue their operations while restructuring. Many Canadian companies have undergone restructuring processes under the CCAA. Unlike bankruptcy proceedings, CCAA including those relating to tax assessment and possible violation proceedings are not undertaken for liquidation. The fundamental characteristics of the CCAA To Our Stakeholders To of competition law. are as follows: • The company continues to manage and control its business and property; In August 2003, the Canadian federal government filed a civil • The CCAA is a very flexible law that can be tailored to fit the circumstances of each case; action in the Canadian province of Ontario against RJR and its • The company may seek to restructure its businesses or deal with contingent and other claims under court protection with the assistance of a court-appointed monitor; • All lawsuits against the companies and other procedures are stayed, and companies are Special Feature subsidiaries, as well as JT and its subsidiaries, including JTI- able to continue their businesses and carry out their restructuring; Macdonald, which was acquired by JT when it took over the • After the claims against the company are determined, the company may put a Plan of former non-U.S. tobacco operations of RJR Nabisco Inc. in Arrangement before some or all of its creditors; • If creditors have agreed to the aforementioned plan and the court approves it, it will be 1999. The suit mainly claims as damages taxes allegedly lost by binding on the company and all affected creditors. the Canadian government due to the smuggling of tobacco In May 2007, after a preliminary hearing on various charges Review of Operations products into Canada in the 1990s. arising from the alleged smuggling of tobacco products into In August 2004, JTI-Macdonald received a Notice of Canada from 1991 to 1996, a preliminary inquiry judge in an Assessment from the Quebec Ministry of Revenue requiring an Ontario court committed JTI-Macdonald and one former JT Group

History of the immediate payment of approximately 1.36 billion Canadian dol- employee to stand trial. The judge at the same time dismissed lars (approximately ¥101.4 billion at the exchange rate as of the charges against another six former and current employees March 31, 2009, the end of the fiscal year 2008), claiming that involved in the preliminary hearing. This latter ruling was reversed JTI-Macdonald had allegedly contributed to tobacco smuggling in February 2008 by the court hearing the review application and from 1990 to 1998. This amount corresponded to the alleged returned to the preliminary inquiry judge for reconsideration. A for the JT Group

Business Environment Business Environment loss of tobacco taxes plus penalties and interest. hearing on reconsideration was held in May 2008, and at the time JTI-Macdonald’s failure to make the payment could have of this writing judgment is reserved. These rulings determined prompted the Quebec Ministry of Revenue to confiscate the neither the guilt nor innocence of the defendants, which is to be company’s business assets, making it difficult for the company determined at trial. to continue its normal business operations. Therefore, in order to In July 2004, ZAO JTI Marketing & Sales (“M&S Corp.”), a continue its operations, JTI Macdonald filed an application with Russian subsidiary of JT that oversees distribution-related busi- the Ontario Superior Court of Justice for protection under the ness in the Russian market, received an assessment from the Companies’ Creditors Arrangement Act (“CCAA”)*, and the Moscow tax authorities in which it was ordered to pay approxi- application was granted. JTI-Macdonald has since been continu- mately 2.4 billion rubles (approximately ¥6.9 billion at the ing its business under CCAA protection, which is due to remain exchange rate as of March 31, 2009, the end of the fiscal year in effect at least through July 2, 2009. 2008) as VAT, etc. for the period of January to December 2000. The filing for CCAA protection is in no way an admission that The taxed amount includes unpaid taxes (VAT, etc.), interest and JTI-Macdonald contributed to smuggling as alleged by the additional taxes. Believing that the assessment by the Moscow Quebec Ministry of Revenue. JTI-Macdonald intends to tax authorities is based upon a misinterpretation of facts, M&S 039 JT Annual Report 2009 Corp. filed a lawsuit with the Moscow Arbitration Court seeking will be recorded as extraordinary income. to invalidate the assessment. Although the Court of First Instance, While the agreement reached with the OFT relates only to the Court of Appeals and the Court of Cassation dismissed M&S Gallaher’s past business activities prior to JT’s acquisition of the Corp.’s argument, the Russian Federation Higher Arbitration

Gallaher group of companies, JT takes it seriously. JT and its Financial Highlights Court reversed the lower courts’ judgments and remanded the subsidiaries will continue to strive to ensure that they are in case to the Court of First Instance in April 2006. In October 2007, compliance with all laws and regulations applicable to them. the Court of First Instance rendered judgment upholding M&S The possibilities cannot be ruled out that JT’s performance,

Corp.’s argument and invalidated the tax assessment, and both cash flows or financial condition could be materially affected by JT in Retrospect the Court of Appeals and the Court of Cassation dismissed the the ultimate outcome of certain pending litigation matters, among appeal by the tax authorities and upheld M&S Corp.’s argument other factors. There also remains a possibility that other similar in February and May 2008, respectively. Then the tax authorities lawsuits could be filed in the future. JT Today filed a petition for appeal to the Russian Federation Higher Arbitration Court. In October 2008, the Court decided not to Major Risks of Businesses accept the appeal. As a result, the judgment in favor of M&S The major risks to which the JT Group’s businesses are exposed Corp. became final and binding. and factors that may materially affect investors’ judgment, are On July 11, 2008, the Office of Fair Trading (OFT), the UK described below. This section contains forward-looking state- To Our Stakeholders To competition authority, announced that Gallaher Group Ltd, (former ments based on judgments made as of the end of the fiscal year Gallaher Group Plc) and Gallaher Ltd.(together, hereinafter, ended March 2009. Future potential risks include, but are not “Gallaher”), JT’s tobacco subsidiaries in the United Kingdom, have limited to, the risks listed below.

concluded an early resolution agreement with the OFT. Gallaher Special Feature has agreed to pay a fine for anti-competitive business practices Risks Relating to the JT Group’s Businesses, relating to the retail pricing of tobacco products in the UK market Earnings Structure and Management Policies during the period prior to JT’s acquisition of Gallaher. • Any negative impact on our domestic and international tobacco In August 2003, the OFT notified Gallaher of an inquiry into businesses, both of which are major contributors to the JT vertical agreements between manufacturers and retailers in the Group’s sales and operating income, may adversely affect the Review of Operations UK cigarette, tobacco and tobacco-related markets. Since that group’s overall business performance. time Gallaher has been fully cooperating with OFT regarding the • Although the JT Group plans to invest in our pharmaceutical JT Group investigation. Regarding this matter, the OFT issued a statement and food businesses, as it expects them to contribute to its History of the of objections on April 25, 2008. Following a careful and compre- business performance in the future, such investment may not hensive review of the document, the JT Group decided to con- generate the anticipated benefits. clude an early resolution agreement with the OFT, which JT • The JT Group may acquire, invest in, form alliances or build believes best serves the interest of all parties involved. cooperative business frameworks with other companies, as it for the JT Group

A certain amount, based on the company’s assumptions expects such measures to contribute to its future business Business Environment about the fine, has been booked as noncurrent liabilities in the performance. However, its future business performance may purchase price allocation related to JT’s acquisition of Gallaher be negatively affected if results fall short of its expectations. Group Plc (now Gallaher Group Ltd.). In the Balance Sheet • On The JT Group’s consolidated balance sheet, there is a large ending March 2009, the amount is included in noncurrent liabili- amount of goodwill related to the past acquisitions. We con- ties. This agreement requires us to cooperate with the OFT sider the goodwill to appropriately reflect profits which could be regarding the investigation. The fine of approximately £93 million earned from the business values and synergy effects of those (approximately ￥13 billion as of March 31, 2009, the end of the acquisitions. However, if those acquisitions fail to generate the fiscal year 2008) to payable by Gallaher is scheduled to be finally anticipated benefits due to factors such as changes in the decided after such investigation has been completed. If the business environment or the competitive situation, we may be payment amount is set as the fine amount specified in the early obliged to post an impairment loss, which may adversely affect resolution agreement, the difference between the actual fine and the group’s overall business performance. the liability already posted, approximately £71 million (approxi- mately 10 billion as of March 31, 2009, the end of fiscal 2008), 040 JT Annual Report 2009 • The JT Group’s overseas operations may be negatively affected • Tobacco demand may decrease due to the introduction of by exchange rate fluctuations, changes in laws and regulations, tighter tobacco regulations. There is also a risk that efforts to political unrest, uncertainty over economic developments, local comply with new regulations may entail additional costs.

Financial Highlights labor-management relations, tax and tariff revisions, differences • If a country enacts legislation to ban the use of such terms as in business practices, etc. “mild” and “light” in product names, the JT Group may have to • JT’s consolidated financial statements may be affected by invest a large amount of time and funds into efforts to develop fluctuations in the exchange rates of the foreign currencies a new brand comparable to Mild Seven in that country, and the

JT in Retrospect used by overseas subsidiaries for calculating their financial new brand thus developed may fail to achieve the same level statements relative to the Japanese yen. There is also a risk of brand value and appeal. that, if an overseas affiliate whose shares JT acquired by • The JT Group has been sued in Japan and overseas for alleg- making payment in a foreign currency is liquidated or sold or if edly causing smoking-related health problems, and it may be JT Today the value of such a subsidiary is significantly reduced, the gains/ held liable for such health problems in these lawsuits. There is losses on investment in the affiliate recorded in JT’s consoli- also a risk that, regardless of the outcome of the lawsuits, dated financial statements may be affected by fluctuations in negative publicity from the litigation and other factors may make the exchange rate between the foreign currency and the smoking less acceptable to the public, lead to the introduction Japanese yen. of tighter restrictions on smoking and prompt many similar To Our Stakeholders To • Although JT partially hedges its exposure to foreign exchange lawsuits against the JT Group, thereby forcing it to become risks related to transactions conducted in foreign currencies, entangled in legal procedures and bear litigation costs. the possibility cannot be ruled out that the JT Group’s • In addition to cases relating to smoking and health issues, the

Special Feature ­business performance will be negatively affected by exchange JT Group is a defendant in lawsuits filed by several Canadian rate fluctuations. governmental entities alleging that the group contributed to tobacco smuggling and seeking compensation for damages. Risks Relating to the JT Group’s Domestic and Meanwhile, the JT Group has challenged what it regards as International Tobacco Businesses unreasonable notices of tax assessment that JT subsidiaries Review of Operations • The JT Group’s business performance may be negatively received from the Quebec Ministry of Revenue and from the affected by a decline in demand, as it expects overall cigarette Russian tax authorities. These claims may have a negative demand in Japan to continue to decline mainly due to structural impact on the JT Group’s business performance or on the JT Group

History of the factors such as a contraction of the adult population, growing manufacture, sale, importation/exportation of tobacco prod- awareness about the health risks associated with smoking and ucts if an unfavorable ruling is issued in the respective cases. tightening of smoking-related regulations, while demand over- seas could also decrease depending on the economic condi- Risks Relating to Non-Tobacco Businesses tions and other circumstances of the regions concerned, Risks Relating to Pharmaceutical Business for the JT Group

Business Environment Business Environment although the trends in demand will vary from region to region. • The JT Group may fail to develop and launch commercially • Market shares in the domestic and overseas tobacco markets valuable pharmaceutical products. To this date, JT has never may fluctuate in the short term due to temporary factors, such brought a pharmaceutical product to market that it has devel- as the launch of new products by JT and other tobacco manu- oped on its own. facturers, and special sales promotion activities. Local market • The JT Group may have to invest an enormous amount of shares may also be affected by a number of other factors, time and funds in R&D before it successfully develops phar- including competition, pricing strategies, changes in consumer maceutical products. preferences, brand recognition and regional economic condi- • The JT Group may be forced to abandon the clinical develop- tions. Such factors may lead to a decrease in the JT Group’s ment of a pharmaceutical product that involves another com- market share. In addition, there is a risk that the measures pany as a co-developer or a licensee on the basis of its or its adopted by the JT Group to counter the decrease in market partner company’s judgment or due to some internal or share may entail additional costs, reducing its profits. external factors. • Fluctuations in the prices of foreign leaf tobacco may have a • Even if the JT Group succeeds in developing and launching a direct impact on the JT Group’s operating income. commercially valuable pharmaceutical product, the R&D cost • The tobacco tax rate may be raised in Japan or overseas. may exceed the revenue generated from it. 041 JT Annual Report 2009 • The JT Group may become dependent on a certain pharma- capabilities and more experience. ceutical product. • The JT Group may be unable to engage in efficient market- • The JT Group may fail to achieve efficient mass-production of ing activities.

pharmaceutical products. • The JT Group may be unable to produce, or outsource the Financial Highlights • Even if a pharmaceutical product developed by the JT Group production of, food products in an efficient, stable and effec- proves to be commercially successful, the success may be tive manner. offset by competition with rival products developed by other • The JT Group may outsource the production of a large part of

companies in Japan or overseas, a government-mandated beverage products to other domestic manufacturers, thus JT in Retrospect price reduction and other factors. becoming dependant on outside sources. • The JT Group may become dependent on the license of • If any problem arises regarding the quality of the JT Group’s pharmaceutical products developed by other companies and foods products, the group may become the target of lawsuits JT Today on revenues from such products. seeking product liability and making other claims, or the reputa- • The JT Group may become dependent on a certain outside tion of the group and its products may be undermined. source for the supply of critical raw materials. • If any problem arises regarding the quality of a pharmaceutical Other Factors which May Materially Affect product of the JT Group or regarding information provided by Investment Decisions To Our Stakeholders To the group about such product, the group may become the • The Japan Tobacco Inc. Law (the “JT Law”) obligates the target of lawsuits seeking product liability or making other government to hold at least one half of all JT shares it acquired claims, or may be forced to suspend sales of such product. upon JT’s establishment, as adjusted for any subsequent stock

• JT’s business performance may be affected by lawsuits con- split or consolidation of shares, and the government must Special Feature cerning patents and other intellectual property rights. continue to hold more than one third of all outstanding JT • Regulation may be applied broadly, covering a full range of shares. As of the end of the fiscal year ended in March 2009, activities from the R&D stage to the post-launch stage of a the government held 50.01% of all outstanding JT shares. new drug. • The Minister of Finance has the authority to supervise JT under • The JT Group may become dependent on a certain business the JT Law and Tobacco Business Law. Review of Operations partner in the R&D or sales of a pharmaceutical product. • Under the JT Law, the scope of JT’s businesses includes the • In relation to the JT Group’s use and management of radioac- “manufacture, distribution and importation of tobacco products JT Group

tive or other hazardous substances, social or legal problem and ancillary businesses, as well as businesses required for History of the may arise, such as damage to the environment caused by attaining the objective of JT,” while “businesses required for such substances. attaining the objective of JT” are subject to the Minister of Finance’s approval. Accordingly, the Minister of Finance’s Risks Relating to Food Business approval is required in order for JT to engage in new businesses for the JT Group

• Food products developed by the JT Group may fail to meet outside the scope of currently-approved businesses. Business Environment consumer preferences and their product lives may prove to • The Tobacco Business Law requires us to annually enter into be short. purchase contracts with tobacco growers regarding the aggre- • The JT Group’s profit/loss may fluctuate due to fluctuations in gate cultivation area for specific varieties of leaf tobacco and the prices of raw materials for food products (including those the prices for leaf tobacco by variety and grade. JT must pur- due to changes in the exchange rate). chase all leaf tobacco produced pursuant to such contracts, • The sales of JT’s food products may be affected by weather except for any not suited for the manufacture of tobacco conditions. products. When JT decides the aggregate cultivation area and • The regulation of the procurement, manufacture and sale of the prices of leaf tobacco for its contracts with tobacco grow- food products in Japan or overseas may influence the JT ers, it is required to respect the opinion of the Leaf Tobacco Group’s business performance, including the possibility that Deliberative Council (hatabako shingi kai), which consists of additional costs may arise due to compliance with such members appointed by JT with the approval of the Ministry of regulation. Finance from among the representatives of domestic leaf • The JT Group may be unable to compete with major compa- tobacco growers and academic appointees. nies with larger distribution networks, stronger development Corporate Governance

042 JT Annual Report 2009 I Basic Concept of Corporate Governance and Basic Information Including Capital Structure and Corporate Attributes 1. Basic Concept as the business and social environment change. Based on this JT recognizes that prompt and proper decision-making and recognition, JT has been striving hard to enhance corporate Financial Highlights business execution are vital to increasing our corporate value and governance as a top management priority. responding appropriately to new challenges to come in the future,

2. Capital Structure

JT in Retrospect Combined equity stakes of foreign shareholders: between 20% and 30% Major Shareholders As of March 31, 2009 Name No. of shares held Equity stake (%) Minister of Finance 5,001,390 50.01

JT Today Japan Trustee Services Bank, Ltd. (Trust Account) 266,683 2.67 Japan Trustee Services Bank, Ltd. (Trust Account 4G) 258,891 2.59 The Master Trust Bank of Japan, Ltd. (Trust Account) 212,913 2.13 State Street Bank and Trust Company 505223 171,774 1.72 (Standing Agent: Mizuho Corporate Bank, Ltd., Kabutocho Settlement and Clearing Services Division) Mizuho Trust and Banking Co., Ltd., re-trusted to Trust & Custody Services Bank, Ltd., as To Our Stakeholders To 169,000 1.69 retirement benefit trust assets State Street Bank and Trust Company 130,567 1.31 (Standing Agent: Mizuho Corporate Bank, Ltd., Kabutocho Settlement and Clearing Services Division) Deutsche Bank AG, London PB Non-Treaty Clients 613 124,737 1.25 Special Feature (Standing Agent: Deutsche Securities Inc.) The Chase Manhattan Bank N.A. London Secs Lending Omnibus Account 123,711 1.24 (Standing Agent: Mizuho Corporate Bank, Ltd., Kabutocho Settlement and Clearing Services Division) The Chase Manhattan Bank 385036 72,215 0.72 (Standing Agent: Mizuho Corporate Bank, Ltd., Kabutocho Settlement and Clearing Services Division) Review of Operations 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 JT Group

History of the 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 for the JT Group

Business Environment Presence or absence of the parent company None Number of consolidated subsidiaries Between 100 and 300

4. Other Factors which May Materially Affect undertakes production and sales. In order to perform these dif- Corporate Governance Corporate Governance ferent functions efficiently, the two companies maintain a coopera- The Japan Tobacco Inc. Law (the “JT Law”) obligates the govern- tive relationship. JT respects the need to ensure a certain degree ment to hold JT shares. As of the end of March 2009, the govern- of independence for Torii Pharmaceutical by refraining from ment held 50.01% of all outstanding JT shares. undermining the company’s business judgment. The Minister of Finance has the authority to supervise JT under KS Frozen Foods Co., Ltd. (hereinafter referred to as “KS the JT Law and Tobacco Business Law. Frozen Foods”), which engages in the food business, is a consoli- Torii Pharmaceutical Co., Ltd. (hereinafter referred to as “Torii dated subsidiary of JT and is listed on the Nagoya Stock Exchange. Pharmaceutical), which engages in the pharmaceutical business, Katokichi Co., Ltd. (hereinafter referred to as “Katokichi”) and is a consolidated subsidiary of JT and is listed on the Tokyo Stock Katokichi Suisan Co. Ltd. (hereinafter referred to as “Katokichi Exchange. While JT is responsible for R&D, Torii Pharmaceutical Suisan”), both of which are consolidated subsidiaries of JT, hold 043 JT Annual Report 2009 shares in KS Frozen Foods. While KS Frozen Foods has personnel Katokichi, which is a consolidated subsidiary of JT, holds shares and transactional relationships with Katokichi, JT, Katokichi and in Green Foods. While Green Foods has personnel and transac- Katokichi Suisan respect the need to ensure a certain degree of tional relationships with Katokichi, JT and Katokichi respect the independence for KS Frozen Foods by refraining from undermin- need to ensure a certain degree of independence for Green Foods ing the company’s business judgment. by refraining from undermining the company’s business judgment. Financial Highlights Green Foods Co., Ltd. (hereinafter referred to as “Green Katokichi had acquired shares in Green Foods through a tender Foods”), which engages in the food business, is a consolidated offer, with the number of shares totaling 55,930 (equivalent to an subsidiary of JT and is listed on the JASDAQ Securities Exchange. equity stake of 94.22%) after the closure of the tender offer. JT in Retrospect Our Corporate Governance System

General Meeting of Shareholders

Selection or dismissal of members Selection or dismissal of members Selection or dismissal of members JT Today 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 Independent Advisory Supervision rule relating to compensation Compliance outside members) of the Auditors Committee Advice for board members and Committee Accounting performance executive officers audit five members seven members (outside members) Auditor’s Office President and Compensation (including two outside Our Stakeholders To members) Advisory Panel Operational Chief Executive Officer Review and five members Business Report/ Executive (including two outside Compliance Assurance Proposal members ) Committee Office Division Special Feature Lawyers Executive Internal audit Officers Advice Departments Accounting audit/Operating audit

Group audit Group Companies Review of Operations II Status of Business Management Organization broad perspective with regard to how the company should Concerning Business Decision-Making, operate in the medium to long term, and other issues of similar ­Execution and Supervision and Other importance. There are also the Compensation Advisory Panel JT Group ­Corporate Governance Systems and the Compliance Committee, both of which include outside History of the 1. Matters concerning the organizational structure and members, too. organizational management Although JT does not have any specific plan to appoint an outside director at the moment, it will continually consider the Form of organization A company with auditors usefulness of an outside director and the qualifications of a

candidate. for the JT Group Business Environment Matters concerning directors Chairman of the Board of Chairman Matters concerning auditors Directors Presence or absence of The Audit Board is in place. Corporate

No. of directors 9 the Audit Board Governance Number of sitting outside None Number of auditors 4 directors Cooperation between auditors and The reason for the adoption of the current organizational system: an independent auditor: While there is no sitting outside director, JT selects persons While auditors and the independent auditor (Deloitte Touche suitable for the post of director in light of the candidates’ personal- Tohmatsu) conduct audits individually, they endeavor to enhance ity, judgment and career backgrounds and believes that the cur- their cooperation in order to ensure appropriate audits, for rent organizational system is adequately functioning. example by sharing information on the results of their respective JT has established the Advisory Committee, which comprises audits and, as necessary, exchange information and opinions with five outside experts and advises the management team from a each other. 044 JT Annual Report 2009 Cooperation between auditors and the internal audit audits and, as necessary, exchange information and opinions with division: each other. Auditors and the Operational Review and Business Assurance Appointment of outside There are sitting outside Division conduct audits individually, they endeavor to enhance auditors auditors. Financial Highlights their cooperation in order to ensure appropriate audits, for No. of outside auditors 3 example by sharing information on the results of their respective

Information concerning outside auditors JT in Retrospect Name Supplementary information Reason for appointment Hisao Tateishi Mr. Tateishi is a former official of the Ministry of Mr. Tateishi’s appointment is based on the Finance. judgment that he is qualified to serve as an outside auditor of JT because of the

JT Today experiences and broad perspective acquired through his many years of service for the government and on the board of the Federation of National Public Service Personnel Mutual Aid Associations. Takanobu Fujita Mr. Fujita formerly worked for Japan Broadcasting Mr. Fujita’s appointment is based on the judgment Corp. (NHK) and is now a visiting professor at that he is qualified to serve as an outside audi- To Our Stakeholders To Kansei Gakuin University, School of Policy Studies. tor of JT because of the experiences and broad perspective concerning political and economic affairs that were acquired through his tenures as a news commentator at NHK and a

Special Feature university professor. Koichi Ueda Mr. Ueda is a former superintendent prosecutor Mr. Ueda’s appointment is based on the at the Tokyo High Public Prosecutors Office. He judgment that he is qualified to serve as an serves as Representative Director & President at outside auditor of JT because of the the Resolution and Collection Corporation experiences and broad perspective acquired and Member of the Board (Outside Director) at through his service in the judicial field.

Review of Operations Pioneer Corporation as of June 23 2009.

Other matters concerning major activities of outside auditors: for directors who do not concurrently serve as executive officers In FY 3/2009, the outside auditors attended almost all of the 24 comprises basic monthly compensation and stock options, as JT Group History of the meetings of the Board of Directors and the 19 meetings of the they are required to participate in decision-making regarding Audit Board and adequately performed their duties as auditors by companywide business strategies aimed at increasing the corpo- asking questions and making statements as necessary. rate value of JT and to perform their audit-related duties. As part of remuneration for directors and executive officers, JT Matters concerning incentives introduced a stock option scheme in fiscal 2007 in order to

for the JT Group enhance the motivation to contribute to an increase in the corpo-

Business Environment Provision of incentives for Introduction of a performance- directors linked remuneration system and a rate value and boost the corporate morale. stock option scheme Officers eligible for stock Directors: others Matters concerning remuneration for directors

Corporate option grants Governance Means of disclosure Annual securities report, Supplementary information concerning incentives: business operation report Remuneration for directors is linked to JT’s business perfor- (business report), etc. mance for each year and the company’s medium- and long-term Disclosure status The total amount of corporate value. remuneration payments to all directors is disclosed. Specifically, remuneration for directors who concurrently serve as executive officers comprises basic monthly compensation and Supplementary information concerning remuneration for directors: an annual bonus linked to the company’s business performance The total amount of remuneration payments to directors came to in the relevant year, and stock options, the value of which is linked ¥602 million in FY 3/2009.

to the medium to long term corporate value of JT. Remuneration * The above remuneration payments, which were made to the directors who were in office in FY 3/2009, include stock option grants and executive bonuses in addition to the basic remuneration. 045 JT Annual Report 2009 Support for outside auditors policy and basic plans regarding overall business operations—in JT is striving to develop an appropriate environment for audits by addition to matters to be referred to the Board of Directors. allocating sufficient staff to the Auditor’s Office as an organization JT has adopted the Audit Board System, under which auditors, supporting the auditors in performing their duties and establishing in their capacity as independent agents with a mandate from an adequate information communication system so that auditors, shareholders, examine the performance of duties by directors and Financial Highlights in their capacity as independent agents with a mandate from executive officers in order to ensure sound business management shareholders, can adequately audit the execution of business by and maintain and enhance public trust in the company. directors and executive officers in order to ensure sound business The Operational Review and Business Assurance Division,

management and maintain and enhance public trust in the which is responsible for overseeing internal audits, examines and JT in Retrospect company. assesses the system for internal management, including the When directors and executive officers detect any matter that management of group companies, from its objective standpoint as may cause substantial damage to the company, they are due to an organization independent from the organizations involved in

report it to the Audit Board. Moreover, when directors and employ- business execution with due consideration of such viewpoints as JT Today ees detect any evidence of malfeasance in financial documents or relevance, legal compliance, and risk and submits reports and serious breaches of laws or the company’s articles of incorporation, proposals to the President. The division also reports to the Board they are due to report them to the Audit Board, along with other of Directors. Furthermore, the division is promoting efforts to relevant matters that could affect the company’s management. enhance the audit system for the entire JT Group by cooperating Auditors are allowed to attend not only meetings of the Board with groups companies both in Japan and abroad. of Directors but also other important meetings. When directors and JT has employed Deloitte Touche Tohmatsu (DTT) as its inde- Our Stakeholders To employees are asked by auditors to compile important documents pendent auditor, and DTT has conducted audits based on the available for their perusal, to accept field audits and to submit Company Act and the Financial Instruments and Exchange Act. reports, they are due to respond in a prompt and appropriate The certified public accountants who audited JT’s financial state-

manner. Directors are due to cooperate with audits and ensure the ments for FY 3/2009 and the persons who assisted the auditing Special Feature provision of funds necessary for covering audit-related expenses work are as follows: so as to secure their effectiveness. The Operational Review and (Certified public accountants) Business Assurance Division and the Compliance Office maintain Tatsuo Igarashi (four years), Shuichi Momoki (four years), Satoshi cooperation with auditors by exchanging information. Iizuka (two years)

* Figures in parentheses represent the number of consecutive years in which the certified Review of Operations 2. Matters concerning functions such as the execution of public accountants have engaged in the accounting audit of JT. business, audit and supervision, nomination, ­determination of remuneration, etc. (Assistants for the audit work)

The Board of Directors meets once a month in principle and on Certified public accountants: 7 persons, JT Group History of the more occasions if necessary, in order to make decisions with regard Junior accountants: 14 persons, Others: 7 persons to the matters specified by laws and regulations and other impor- While auditors, internal audit organizations including the Operational tant matters, to supervise business execution and to receive reports Review and Business Assurance Division, and independent auditors from the directors on the status of business execution. conduct audits individually, they endeavor to enhance their coopera- In order to maintain a high quality of business execution, JT has tion in order to ensure appropriate audits, for example by sharing for the JT Group adopted the Executive Officer System, under which executive information on the results of their respective audits. Business Environment officers appointed by the Board of Directors execute business in As for the nomination of candidates for the posts of director and their respective areas of responsibility, in accordance with a com- auditor, the Board of Directors makes a decision by taking into panywide business strategy decided by the Board, by exercising consideration the personality, judgment and career backgrounds Corporate the authority delegated to them. In addition, the Chairman of the of the candidates, and then the nominated candidates are pro- Governance Board has been positioned as a non-executive director in order to posed at a General Meeting of Shareholders. concentrate on the function of supervising management. The amount of remuneration for directors is based on a deter- Moreover, as part of its efforts to enhance corporate gover- mination made by the Board of Directors and the amount for nance, JT has established the Advisory Committee, which com- auditors is based on the results of consultations among the audi- prises five outside experts and advises the management team from tors, with both amounts confined within the limits approved by a a broad perspective with regard to how the company should General Meeting of Shareholders. operate in the medium to long term, and other issues of similar In light of the results of deliberations conducted by the importance. Compensation Advisory Panel, which comprises the President, Meanwhile, the Executive Committee, comprising the company’s Chairman, and the director in charge of personnel affairs manage- President and other members appointed by the President, dis- ment and two outside committee members, JT decided at a cusses important management issues—particularly management meeting of the Board of Directors on April 27, 2007 to review the 046 JT Annual Report 2009 system of remuneration for directors and auditors based on the value of JT, so as to provide them with an incentive to maximize the principle that such remuneration should be paid in a manner suited shareholder value. to their respective duties of office and roles. Unlike remuneration for directors, a large portion of which is Based on this, JT decided to introduce a remuneration system linked to the business performance of the company, remuneration Financial Highlights for directors in which pay is linked to the company’s business for auditors comprises only basic monthly compensation in light of performance so as to motivate them to endeavor to enhance the the main role of auditors, which is to audit the status of compliance performance, and also linked to the medium to long term corporate with laws and regulations. JT in Retrospect 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

JT Today Sending the notice of a General Meet- The notice of a General Meeting of Shareholders for 2008 was sent on June 2 of the year ing of Shareholders at an early date and that for 2009 was sent on June 1 of the year. Avoiding scheduling a General Meet- A General Meeting of Shareholders for 2008 was held on June 24 of the year and that for ing of Shareholders for a date on 2009 on June 23 of the year. which many other companies’ share- holders’ meetings are concentrated

To Our Stakeholders To Allowing the exercise of the voting JT not only allows the exercise of the voting right via the website designated by the right through electromagnetic means company (E-voting) but also participates in an electronic platform for the exercise of the voting right for institutional investors that is operated by ICJ, Inc.

2. IR-related activities Special Feature 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 Not provided by securities exchanges and other organizations several times every year.

Review of Operations Periodic briefings for analysts and JT holds briefing sessions after the announcement of Provided institutional investors earnings at its offices or neighboring facilities. Periodic briefings for overseas investors JT holds teleconferences for overseas investors after the Provided announcement of earnings, and JT officials visit overseas

JT Group investors several times every year to provide briefings. History of the Publication of IR materials on the website JT publishes information concerning earnings, other timely Provided disclosure materials, materials used at earnings briefings, annual securities reports or quarterly securities reports, notices of invitation to General Meetings of Shareholders. Establishment of a division JT has appointed an officer dedicated to IR at the Media for the JT Group (appointment of an officer) in charge of IR & Investor Relations Division who reports to the executive Business Environment in charge of communications.

3. Status of efforts to respect the standpoint of stakeholders Corporate Governance Supplementary information Establishment of internal rules, etc. The JT Group has set itself the mission of “creating, developing and nurturing its unique concerning the respect of the brands to win customer trust, while understanding and respecting the environment and the standpoint of stakeholders diversity of societies and individuals,” and there is a group-wide consensus on the mission. Implementation of environment From the viewpoint of achieving the JT Group Mission, JT engages in such activities as protection activity, CSR activity, etc. reducing the 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 In order to clarify the authorities and responsibilities concerning the handling of various concerning the provision of corporate information, JT has established rules concerning information disclosure and information to stakeholders strives to ensure timely and appropriate information disclosure. 047 JT Annual Report 2009 IV Basic Concept of the Internal Control 2. Procedures and arrangements for storage and System and Development of the System ­management of information on the performance of JT has been endeavoring to ensure appropriate business opera- duties by the Directors tions through efforts to enhance compliance, internal audits and JT makes sure to properly store and manage the minutes of Annual risk management, and implementing measures to ensure the General Meetings of Shareholders, meetings of the Board of Financial Highlights effectiveness of audits, such as improving arrangements and pro- Directors, and meetings of the Executive Committee, in line with cedures for reporting the necessary matters to auditors, as is laws, regulations and internal rules. required of a company adopting the Audit Board System. Information on other important matters relating to business

We will continue these efforts while reviewing and revising the execution and decision-making are stored and managed by the JT in Retrospect current system as necessary, and ensure appropriate business relevant departments and divisions as specified by internal rules on execution by taking the following steps: the allocation of responsibilities and authorities (hereinafter referred to as the “Responsibilities/Authorities Allocation Rules”), in accor-

1. System to ensure that directors and employees per- dance with rules on the supervision of the processes of decision- JT Today form their duties in accordance with laws, regulations making, procurement and accounting. and the company’s articles of incorporation With regard to the compliance system, JT has established the 3. Rules on management of risk of loss and procedures/ Guidelines for Conduct based on internal rules concerning compli- arrangements for other matters ance in order to ensure that directors and employees comply with JT has established internal rules on the management of risk of loss laws, regulations, the company’s articles of incorporation, the social relating to monetary and financial affairs, and ensures that relevant Our Stakeholders To norms, etc., and set up the Compliance Committee as an organiza- reports are made to the Executive Committee on a quarterly tion responsible for ensuring thorough compliance. This committee, basis. headed by the company’s Chairman, includes outside experts With regard to risk of loss relating to other affairs, the relevant departments and divisions specified by the Responsibilities/ among its members and reports directly to the Board of Directors. Special Feature Meanwhile, the Compliance Office is charged with overseeing Authorities Allocation Rules conduct proper management, identify- efforts to improve the company-wide compliance system, identify ing risk and reporting it to the Executive Committee or referring it compliance problems and enhance the effectiveness of the compli- to the Committee for deliberation, depending on the importance of ance system by enlightening directors and employees about the identified risk. compliance through various compliance education programs. JT has assigned sufficient staff to the Operational Review and Review of Operations Regarding the internal reporting system (whistle-blower system), Business Assurance Division, which functions as the company’s JT has a counter through which employees may report any mis- internal audit organization. This division examines and evaluates the conduct they have detected. The Compliance Office is charged internal control systems of JT and JT Group companies—in light of with investigating reported cases and implementing company-wide the importance of internal control procedures and arrangements JT Group History of the measures to prevent the recurrence of misconduct after holding and the risks involved—from an objective viewpoint, in its capacity consultations with the departments and divisions concerned. as an entity independent of the organizations responsible for busi- Matters of particular importance shall be referred to the Compliance ness execution, and reports its findings and present proposals to Committee for deliberation. the President, as well as reporting to the Board of Directors. In order to ensure the reliability of its financial reporting, JT is To prepare for possible emergencies, JT has produced a manual for the JT Group operating a relevant internal control system that it has established for crisis management and disaster response. In the event of an Business Environment in accordance with the Financial Instruments and Exchange Act. emergency or a disaster, JT is ready to establish an emergency By allocating a sufficient level of staff to the task of evaluating project system under the supervision of the Corporate Strategy financial results and reporting them, the company is striving to Division, and make prompt and proper responses under the leader- Corporate maintain and improve the reliability of its financial reporting. ship of senior management and through close cooperation between Governance The internal audit system is overseen by the Operational Review the relevant departments and divisions. and Business Assurance Division, which examines and evaluates systems for supervising and managing the overall operations of the company and the status of business execution from the viewpoints of legality and rationality, in order to protect the company’s assets and improve management efficiency. 048 JT Annual Report 2009 4. System to ensure that directors perform When directors and executive officers detect any matter that their duties efficiently may cause substantial damage to the company, they are due to The Board of Directors meets once a month in principle and on report it to the Audit Board. Moreover, when directors and employ- more occasions as necessary, in order to make a decision with ees detect any evidence of malfeasance in financial documents or Financial Highlights regard to the matters specified by laws and regulations and other serious breaches of laws or the company’s articles of incorporation, important matters and to supervise business execution. Meanwhile, they are due to report them to the Audit Board, along with other the Executive Committee, comprising the company’s President and relevant matters that could affect the company’s management. other members appointed by the President, discusses important As auditors are allowed to attend not only meetings of the Board

JT in Retrospect management issues, particularly management policy and basic of Directors but also other important meetings, they usually attend plans regarding overall business operations of the company, in meetings of the Executive Committee. When directors, executive addition to matters to be referred to the Board of Directors. officers and or employees are asked by auditors to compile impor- JT has adopted the Executive Officer System, under which tant documents available for their perusal, to accept field audits and

JT Today executive officers appointed by the Board of Directors execute to submit reports, they are due to respond to the request in a business in their respective areas of responsibility, in accordance prompt and appropriate manner. with a company-wide business strategy decided by the board, by Furthermore, directors are due to cooperate with audits and exercising the authority delegated to them. ensure the provision of funds necessary for covering audit-related Moreover, in order to ensure that business operations are man- expenses so as to secure their effectiveness. The Operational aged in ways that contribute to the business efficiency and flexibility Review and Business Assurance Division and the Compliance

To Our Stakeholders To of the company as a whole, basic matters concerning the com- Office maintain cooperation with auditors by exchanging pany’s organization, allocation of duties to officers and staff and the information. roles of individual divisions are specified by the relevant internal Meanwhile, JT’s basic concept on the exclusion of anti-social rules. Meanwhile, in order to enable prompt decision-making, the elements and its efforts to exclude such elements are as follows:

Special Feature departments and divisions responsible for business execution are 1) Basic concept on the exclusion of anti-social elements specified by the “Responsibilities/Authorities Allocation Rules.” JT is resolved not to have any relations with, and to fight against, anti-social groups and organizations that pose a threat to the 5. System to ensure the appropriateness of business order and safety of civil society, and organizations involved in operations within the JT Group tobacco smuggling or counterfeiting. The JT Group has set itself the mission of creating, developing and The company will also never engage in practices that would Review of Operations nurturing its unique brands to win customer trust, while under- promote the activities of antisocial elements. If it faces a problem standing and respecting the environment and the diversity of involving such elements, JT will devote company-wide efforts to societies and individuals, and there is a group-wide consensus on dealing with it.

JT Group the mission. We have specified the functions and rules necessary 2) Efforts to exclude anti-social elements History of the for group management based on a group management policy, in The concept on the exclusion of anti-social elements described order to optimize the operations of the JT Group as a whole. above is specified and fully communicated to all employees as Moreover, we have been enhancing our systems for compliance part of the company’s code of conduct. With the General (including the internal reporting system), internal audits, financial Administration Division at JT’s headquarters assuming the affairs management, etc. in cooperation with JT Group responsibility for supervising efforts to exclude anti-social ele- for the JT Group

Business Environment companies. ments, the officers in charge of those efforts have been assigned to branch offices across Japan, and are cooperating with police, 6. System for assisting auditors and reporting to audi- lawyers and other relevant organizations and parties to gather tors, and other systems to ensure effective auditing and share information in order to deal with such elements in an Corporate Governance JT has allocated sufficient staff to the Auditor’s Office as an orga- organized way. nization supporting the auditors in performing their duties. In The measures to be taken by JT in response to unjust and addition, the company makes sure to review and reform the staffing unreasonable demands from anti-social elements are specified structure as necessary based on consultations with the Audit in the company’s manual for corporate defense, which is avail- Board. The Audit Board is involved in the selection of personnel of able for reference at all offices and plants. JT also consistently the Auditor’s Office in order to ensure the office’s independence educates employees, including those working for its affiliates, from directors. about the importance of excluding antisocial elements by provid- ing relevant training as necessary. Activities Contributing to the Environment and Society

049 JT Annual Report 2009 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. Financial Highlights

Our Approach to Protecting the established and operates a simplified environmental manage-

Global Environment ment system at small-scale facilities whose activities impose a JT in Retrospect Protecting the global environment is critical to our efforts to fulfill relatively small burden on the environment. our social responsibility and is one of the top priority matters for At JT Group companies, JT has worked to establish envi- our corporate management. In accordance with the JT Group ronmental management systems at 24 subsidiaries and affiliates JT Today Environmental Charter, the JT Group has acted as a good cor- in Japan, centered on manufacturing companies with a large porate citizen in all of the countries and regions in which it environmental impact, and 16 plants of JTI. This process was operates and promoted company-wide initiatives to achieve completed in FY 3/2009. harmony between its corporate activities and the environment. Going forward, we will work to establish environmental Moreover, we established the JT Group Environmental Action management systems at all consolidated subsidiaries according To Our Stakeholders To Plan as a medium-term plan for concrete environmental protec- to the type of operation and degree of environmental impact. tion activities, with the aim of realizing the philosophy enshrined in the JT Group Environmental Charter. The operational divisions Fight Against Global Warming

of JT, as well as subsidiaries and affiliates, have been striving to Following the start of the First Commitment Period of the Kyoto Special Feature achieve the targets set forth under this medium-term plan. Protocol on measures to prevent global warming, the JT Group (For details, please refer to the CSR Report 2009.) has been working hard to reduce greenhouse gas emissions and conserve energy.

Group Environmental Management In FY3/2009, JT achieved a 37.9% reduction in CO2 emis-

The JT Group is seeking to establish an environmental manage- sions compared with FY3/1996, while the JT Group in Japan Review of Operations ment system based on the ISO 14001 international standard. cut its emissions by 26.7% compared with FY3/2004. These The JT Group determines the extent to which environmental cuts were achieved by reducing electricity usage through efforts JT Group management systems have been established according to the to make air conditioning management at plants more efficient History of the type of operation of each facility and degree of environmental and shifting to more environmentally friendly fuels at plants. impact. The JT Group works to obtain the ISO 14001 certifica- tion at manufacturing facilities. The JT Group has introduced an Reduction in Water Usage environmental management system based on an in-house The JT Group uses water in the process of producing tobacco for the JT Group standard similar to the ISO 14001 at branches, research centers and food products. Business Environment and other non-manufacturing facilities. The JT Group has also

Trends in CO2 Emission Trends in CO2 Emission per Million Cigarettes Corporate Governance JT JT Group in Japan JTI

(1,000t-CO2) (1,000t-CO2) (t-million cigarettes) 449 520 0.70 0.62 428 0.59 Society 399 Activities 391 381 0.52

315 0.49 Environment and 297 0.46 Contributing to the 288 279

’96 ’06 ’07 ’08 ’09 ’04 ’06 ’07 ’08 ’09 ’03 ’04 ’05 ’06 ’07 ’08

(Years ended March 31) (Years ended March 31) (Years ended December 31) 050 JT Annual Report 2009 The JT Group’s manufacturing facilities strive to contribute Toward Better Smoking Manners and a to preserving water quality through the management of waste More Favorable Smoking Environment water, and to reduce the amount of water they use through (This section describes activities only in Japan.)

Financial Highlights improving production processes based on a resource conser- We aim to help create a society in which smokers and non- vation project, recycling used water and taking other measures smokers can co-exist in harmony. Enshrined in this goal is at tobacco plants. our wish to see our valued customers fully enjoy smoking at As a result of these efforts, the amount of water used by JT their own discretion and, at the same time, to make sure they

JT in Retrospect in FY3/2009 was down 63.5% compared with FY3/1996, and avoid causing discomfort to nonsmokers. By engaging in the amount used by the JT Group was down 62.8% compared various initiatives, we will fulfill our social responsibility as a with FY3/2004. tobacco company. JT Today Effective Use of Resources Examples of the Various Initiatives In order to preserve the limited natural resources available, Setting Up Smoking Areas both manufacturing plants and non-manufacturing offices We work closely with local governments and facility managers and facilities of the JT Group engage in efforts to curb the in setting up smoking areas in public facilities such as railway amount of waste generated from its business activities and stations and airports, in order to promote harmonious co- To Our Stakeholders To to recycle used materials. In FY3/2009, the amount of waste existence between smokers and nonsmokers. generated by the JT Group in Japan was down approximately 12.2% compared with FY3/2004. A total of 24 factories

Special Feature achieved zero emissions, while the recycling rate for the JT Group was 99.99%. As for JT alone, 16 factories achieved zero emissions, while the recycling rate came to 99.99% for plants, 98.8% for headquarters, and 92.1% for other non- manufacturing facilities. Public Smoking Area in Tokyo’s Chiyodaku Manaitabashi Park Review of Operations

Approach to Protecting the Global Advice on Separation of Smoking and Environment Overseas Nonsmoking Areas JT Group

History of the As a result of the acquisition of Gallaher, JT International (JTI) We provide consultation on how to separate smoking and now has a total of more than 30 manufacturing bases in 25 nonsmoking areas within public facilities, commercial facilities countries. Having obtained ISO 14001 certification for 16 plants and business offices in a manner suited to the characteristics before the acquisition of Gallaher, JTI plans to do so for all of its of the facilities and the needs of users. In our consulting service, plants by 2010. which is free of charge, we offer our know-how and put forward for the JT Group Business Environment For the fifth consecutive year, specific CO2 emissions per 1 proposals so as to achieve the kind of separation that would million cigarettes and energy and water consumption per 1 satisfy smokers while giving due consideration to the concerns million cigarettes, all of which are key environmental bench- of nonsmokers. Corporate Governance marks, showed improvement. In 2008, these benchmarks decreased 6%, 4% and 13%, respectively, from 2007. “Smoking Manners” Campaign Advertising Production waste per 1 million cigarettes declined 12% and the Since JT believes that improving the “smoking manners” of indi- recycling rate rose by 1 percentage point. viduals is essential to improving those of society as a whole, we Society Activities JTI factories continued to implement efficiency programs are constantly engaged in a campaign to raise awareness about Environment and Contributing to the Contributing to the including energy-usage reductions and measures to improve the need for appropriate smoking manners, under the slogan “Pay the precision of energy-usage measurement, which provide attention, and you can change your manners.” The advertisements basic source information for facility climate control and used in this campaign describe specific everyday situations in other operations. which smokers are supposed to show good manners, in order to prompt them to pay attention, think, and act appropriately. 051 JT Annual Report 2009 Community Clean-up Event The JT Group will contribute to the development of the local As part of our efforts to raise awareness about the need for communities in which we operate by selecting the most critical appropriate smoking manners, JT has been engaged in the of these four priority areas for each and providing support.

“Pick Up and You will Love Your City” initiative since May 2004. Based on this policy, the JT Group will engage in a variety Financial Highlights This initiative is aimed at occasions such as community festi- of activities that contribute to society, so that we can build and vals and other public events and conducted in cooperation maintain harmonious relations with local communities while with local governments, schools, companies, and volunteers. encouraging employees to be involved in such activities

Since these activities began in May 2004, community clean-up themselves. JT in Retrospect events have been held a total of 737 times in all of Japan’s prefectures, bringing the number of participating parties to 2. Contributions to Japanese Society 1,367 and the number of participants to approximately 800,000 Social Welfare JT Today (as of March 31, 2009). As part of our efforts to contribute to the regeneration and revitalization of local communities as a good neighbor, the JT Group is implementing a variety of social welfare programs, including the NPO Support Projects for Youth Development, Scholarships for Students from Asia and JT Shogi Japan Series To Our Stakeholders To Tournament for Kids. JT’s business offices and facilities across Japan contribute

Community Clean-up Event “Pick Up and You will Love Your City” to local communities in a variety of ways while maintaining

intimate relations with residents, for instance by supporting local Special Feature For further information about JT’s efforts to improve the festivals and sports events and providing company-owned smoking environment, please access our website. sports grounds for use by local residents. URL: http://www.jti.co.jp/sstyle/index.html

JT Group’s Social Contributions Review of Operations 1. JT Group’s Social Contributions The JT Group has strived to make contributions to society in all JT Group the countries and regions in which we operate, in the hope of History of the maintaining harmonious relations with local communities by JT Shogi Japan Series Tournament Volleyball Workshop acting as a good corporate citizen. We have established various for Kids key areas for social contribution activities in the JT Group Social Arts and Culture Contribution Policy. The JT Group engages in activities that contribute to the for the JT Group development and advancement of arts and culture. Business Environment JT Group Social Contribution Policy At the JT Art Hall Affinis, located in Toranomon in Tokyo’s As a good corporate citizen maintaining harmonious relations Minato Ward, cultural events—mainly classical chamber Corporate with society, the JT Group will fulfill its corporate responsibility music performances—are held on an ongoing basis, provid- Governance through making sustained contributions to the communities in ing players with opportunities to develop their talents and which it operates. offering an ideal venue for music lovers to enjoy creative and As a good neighbor, the JT Group will support the regenera- inspiring performances. Society tion and revitalization of local communities, focusing on: Moreover, the JT Group has established the Affinis Arts Activities Environment and Social Welfare Foundation to support professional Japanese orchestras, in an Contributing to the Arts and Culture effort to foster talents and promote cultural development by Environmental Protection offering assistance for orchestra players to study abroad and Disaster Relief providing financial aid for orchestras to hold concerts. In addition, the JT Group operates the Tobacco & Salt Museum in Tokyo’s Shibuya Ward, which teaches people about 052 JT Annual Report 2009 the historical and cultural aspects of tobacco and salt, the Disaster Relief business roots of JT, through activities such as gathering Through group-wide cooperation among JT Group companies materials and data, conducting research and surveys and in Japan and overseas, the JT Group conducts disaster relief

Financial Highlights holding exhibitions and other events. Meanwhile, the JT activities by providing assistance to affected areas. This assis- Biohistory Research Hall, located in the western prefecture of tance includes donating emergency supplies and raising disaster Osaka, studies biodiversity and provides people with a variety relief funds. In FY3/2009, JT made donations and sent supplies of opportunities to become familiar with the wonders of natural of drinking water to areas affected by the Sichuan Earthquake in

JT in Retrospect life, for instance by holding exhibitions and by opening its labo- China and the Iwate-Miyagi Nairiku Earthquake in Japan. ratory to the public. 3. Social Contributions Abroad The JT Group engages in a variety of philanthropic activities JT Today around the world, contributing to the development of the local communities in which it operates. JTI, the international arm of the JT Group that controls the group’s tobacco production, marketing and sales in more than 120 countries, plays the

JT Art Hall Chamber Music Series central role in our worldwide philanthropic activities. In addition To Our Stakeholders To to its own philanthropic activities, JTI helps to tackle critical Environmental Protection challenges faced by local communities as part of group-wide In appreciation of the benefits Mother Nature brings to our busi- initiatives such as the afforestation and forest preservation

Special Feature ness and out of consideration for preserving the environment, the programs that are underway in Africa. JT Group engages in environmental protection activities such as afforestation, forest preservation and street cleanup campaigns. The “JT Forest” initiative for afforestation and forest preser- vation began in Nakahechi, Wakayama Prefecture in 2005 and Review of Operations now encompasses forest regeneration activities in a total of eight locations in Yamanashi, Kochi, Tottori, Gifu, Kagoshima,

Kumamoto and Yamagata prefectures. Afforestation and Forest Preservation Program in Africa (planting of tree seedlings) JT Group History of the JT Forest Locations in Japan JTI’s Corporate Philanthropy JTI not only aims to be an excellent employer, but is also commit- Yunomae, Kumamoto “JT Forest Yunomae” ted to supporting Corporate Philanthropy programs in the com- Chizu, Tottori Tsuruoka, Yamagata munities in which it operates. JTI’s Corporate Philanthropy Policy for the JT Group “JT Forest Chizu” “JT Forest Tsuruoka” Business Environment and Guidelines are aligned with the JT Group’s Social Contribution Policy, and have been shared with employees throughout the Kosuge, Yamanashi Company. JTI focuses its activities in three key areas: social “JT Forest Kosuge” Corporate Governance Nakatsugawa, Gifu welfare (charity), arts & culture, and disaster relief. “JT Forest Nakatsugawa” Nakahechi, Wakayama “JT Forest Nakahechi”

Nahari, Kochi “JT Forest Nahari” Society Activities Shigetomi, Kagoshima Environment and Contributing to the Contributing to the “JT Forest Shigetomi ”

JT Forest (afforestation activities) 053 JT Annual Report 2009 Social Welfare (Charity) Following the theme of adult literacy, JTI has implemented In the area of social welfare, JTI supports numerous projects a similar project relating to computer training in the Gostkow focusing on the care of senior citizens and supporting adults region of Poland—close to the JTI factory. In a region that has

with literacy difficulties. The following examples highlight just traditionally suffered from high unemployment, the project has Financial Highlights some of the activities the Company has supported in 2008. allowed participants to improve their employment opportunities In Canada, JTI has funded the distribution of refurbished thanks to enhanced computer skills. computers as well as training to allow senior citizens to access

the internet and use e-mail. In an age when there is increasing JT in Retrospect distance between families and friends, this technology has allowed the elderly community to stay in touch with their loved-ones. JT Today JTI has a long history of supporting senior citizen projects in Romania to improve their daily quality of life. In 2008, we JTI Poland computer course participants continued our work of actively engaging our employees to support the provision of meals, clothing donations and transport Arts and Culture assistance to those in need. JTI continues to play an active role on the culture & arts scene, To Our Stakeholders To supporting numerous cultural projects and exhibitions across the globe. In France, the world-renowned ‘Louvre’ museum has tradition-

ally had strong bonds with the Japanese community, most notably Special Feature through the ‘Grand Louvre au Japon’ program created in 2001. JTI has become a founding member of the ‘Louvre Corporate

JTI Romania supports the elderly citizens Circle’ and sits on its ‘Sponsorship Direction Committee’.

In Ireland, a group of professional actors and musicians, with Review of Operations JTI’s support, performed live theatrical entertainment to enrich the lives of those living in residential care. The Company also JT Group funded a program of year-round literacy education and com- History of the puter skills, targeted at disadvantaged adults to improve social inclusion and employment opportunities. The Louvre Museum supported by JTI France

Japanese tourists are one of the largest national contingents for the JT Group visiting the Prado Museum in Spain. Since 1993, JTI has sup- Business Environment ported the museum to allow visitors to experience its great masterpieces. As part of this longstanding commitment, in Corporate 2008 we funded additional translations of the Prado’s Gallery Governance

JTI Ireland Serendipity JTI Ireland Open Learning Centre Guides into Japanese, giving visitors in-depth information in Theatre Group their native language. Society Activities Environment and Contributing to the Contributing to the

JTI Iberia Prado Museum Gallery Guides 054 JT Annual Report 2009 JTI in the UK entered into a five year partnership with the London Philharmonic Orchestra. Founded in 1932, and recog- nized as one of the world’s great orchestras, its residencies

Financial Highlights include the Royal Festival Hall in London, the Glyndebourne Festival Opera, as well as performing over fifty concerts inter- nationally each year. Our support has safeguarded the future of the ‘Friday Series’ set of concerts, enabling the orchestra to

JT in Retrospect maintain affordable ticket prices and ensure accessibility to a wide audience. JT Today The Mariinsky Theatre supported by JTI Russia

Disaster Relief In 2001, JTI established the ‘JTI Foundation’. Based in Switzerland, the Foundation supports underprivileged people

To Our Stakeholders To JTI UK London Philharmonic Orchestra supported by JTI UK (© Benjamin Ealovega) around the world, with a particular focus on providing relief aid to victims of earthquakes and other natural disasters. The In Russia, JTI has renewed for a further three-year term its work of the foundation is conducted in cooperation with major

Special Feature partnership with the ‘Mariinsky Theatre’. As the oldest music relief organizations as well as governments and non-­ theater in the country, it has been a national opera and ballet governmental agencies. academy for more than two centuries. JTI’s sponsorship follows In 2008, the Foundation continued its support to develop a a several year association with the Theatre during which we computerized modeling technique to estimate rapidly and have contributed financially to the construction of a new concert precisely human and infrastructure damage caused by earth- Review of Operations hall. As part of the new commitment, JTI will be the principal quakes. This ongoing work will significantly enhance the capa- sponsor of the Theatre’s two major performances in 2009; the bility of international rescue missions. In tandem, the Foundation ‘Moscow Easter festival’ and the ‘Stars of the White Nights continues to support a specialist Turkish organization spear- JT Group

History of the festival’. Our partnership will also enable the orchestra of the heading search and rescue missions across the globe, and theater to hold over 100 concerts with the goal of « bringing most recently made a donation to the Vietnamese Red Cross music to everybody », including charitable concerts for the to build houses for underprivileged and homeless people in the elderly and the socially disadvantaged groups. disaster stricken areas of Vietnam. Following the successful partnership in Russia, the for the JT Group Business Environment ‘Mariinsky Theatre Trust’ has also received funding in the UK. The Trust’s main aim is to promote public understanding and awareness of the Mariinsky Theatre’s artistic activities. Corporate Governance Our financial commitment has enabled the complete orchestra, and soloists from the Opera Company, to travel to the UK to perform concerts at the Barbican Theatre, enabling the world- renowned performances to reach an international audience JTI Foundation Vietnam Red Cross houses Society Activities outside of Russia. Environment and Contributing to the Contributing to the Financial Information

55 055 JT Annual Report 2009 Contents

056 Consolidated Eleven-Year Financial Summary

058 Management’s Discussion and Analysis of Financial Condition and Business Results

070 Consolidated Balance Sheets 072 Consolidated Statements of Income 073 Consolidated Statements of Changes in Equity 074 Consolidated Statements of Cash Flows 075 Notes to Consolidated Financial Statements

102 Independent Auditors’ Report Consolidated Eleven-Year Financial Summary Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31

056 JT Annual Report 2009 Millions of U.S. dollars Millions of yen (Note 1) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009 Eleven-Year

Consolidated For the year:

Financial Summary Net sales ¥3,876,528 ¥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 $69,554 Tobacco 3,616,706 4,024,487 4,140,270 4,178,034 4,134,466 4,236,920 — — — — — — Domestic — — — — — — 3,491,488 3,405,281 3,416,274 3,362,398 3,200,494 32,581 International — — — — — — 792,705 881,188 999,658 2,639,969 3,118,319 31,745 Pharmaceutical 23,751 67,790 66,414 61,868 53,927 51,242 57,676 49,257 45,452 49,064 56,758 578 Food 150,742 195,026 210,332 221,197 232,404 250,138 265,380 278,378 286,554 336,420 435,966 4,439 Others 85,329 83,947 84,685 83,076 71,467 86,851 57,265 23,553 21,449 21,876 20,770 211 Taxation — — — — — 2,605,343 2,650,586 2,628,878 2,718,358 3,822,331 4,005,123 40,773 Net sales excluding excise taxes — — — — — 2,019,807 2,013,927 2,008,780 2,051,029 2,587,396 2,827,184 28,781 Net sales excluding excise taxes, distribution business — — — — — — 1,684,404 1,596,151 1,633,186 2,068,368 2,295,117 23,365 EBITDA (Note 2) ¥ — ¥ 315,132 ¥ 312,045 ¥ 334,119 ¥ 337,296 ¥ 373,435 ¥ 400,115 ¥ 433,391 ¥ 464,634 ¥ 602,096 ¥ 646,217 $ 6,579 Tobacco — 299,477 296,318 320,969 321,419 343,163 — — — — — — Domestic — — — — — — 296,031 305,753 326,470 306,726 272,280 2,772 International — — — — — — 65,462 94,093 112,668 270,757 337,968 3,441 Pharmaceutical — (790) (3,105) (8,519) (5,110) (4,426) 5,474 (1,803) (8,197) (6,269) 4,890 50 Food — (490) (2,660) 2,259 546 3,300 7,931 11,869 12,018 8,353 17,030 173 Others — 16,093 20,033 19,617 19,674 30,674 26,810 22,140 21,586 22,055 13,150 134 Elimination/Corporate — 842 1,459 (207) 767 724 (1,593) 1,339 89 474 899 9 Depreciation and Amortization (Note 2) — 161,160 172,080 170,314 148,333 139,401 126,744 126,445 132,643 171,542 282,411 2,875 Operating income ¥ 168,899 ¥ 153,972 ¥ 139,965 ¥ 163,805 ¥ 188,963 ¥ 234,034 ¥ 273,371 ¥ 306,946 ¥ 331,991 ¥ 430,554 ¥ 363,806 $ 3,703 Tobacco 193,855 181,520 165,923 192,114 213,342 238,409 — — — — — — Domestic — — — — — — 215,833 220,095 245,388 222,348 188,259 1,917 International — — — — — — 44,458 71,031 81,085 205,360 174,772 1,779 Pharmaceutical (12,631) (11,482) (12,827) (18,985) (13,855) (12,840) 1,855 (5,057) (11,207) (9,644) 1,020 10 Food (8,663) (14,582) (17,362) (11,860) (13,168) (4,851) 1,948 6,325 6,705 667 (11,451) (117) Others (2,619) (1,764) 3,428 1,797 932 11,976 10,427 8,673 9,331 10,448 9,695 99 Elimination/Corporate (1,043) 280 803 739 1,712 1,340 (1,150) 5,879 689 1,375 1,511 15 Net income (loss) 74,633 50,792 43,687 36,850 75,302 (7,603) 62,584 201,542 210,772 238,702 123,400 1,256 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 $ 2,802 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) (662) Net cash used in financing activities — 472,593 (76,990) (124,838) (111,968) (109,335) (202,196) (48,135) (32,635) 519,001 (217,470) (2,214) Free cash flow (Note 3) — (786,499) 307,311 31,413 170,372 269,174 269,459 145,590 223,007 (1,493,717) 240,199 2,445 At year-end: Net property, plant and equipment ¥ 675,883 ¥ 770,639 ¥ 757,311 ¥ 743,712 ¥ 733,314 ¥ 708,221 ¥ 639,655 ¥ 596,544 ¥ 600,436 ¥ 763,332 ¥ 668,743 $ 6,808 Total assets 2,228,566 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 39,497 Interest bearing debt (Note 4) 123,345 660,525 606,089 511,738 424,499 381,203 230,716 216,608 219,269 1,389,296 996,079 10,140 Liabilities 781,463 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 22,962 Total equity 1,415,996 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 16,536 Ratios: Return on equity (ROE) 5.4% 3.5% 2.9% 2.4% 4.7% (0.5%) 4.2% 12.4% 11.3% 11.8% 6.8% Return on asset (ROA) — — — 5.4% 6.4% 7.9% 9.2% 10.4% 10.7% 10.5% 8.4% Operating income margin 4.4% 3.5% 3.1% 3.6% 4.2% 5.1% 5.9% 6.6% 7.0% 6.7% 5.3% Total assets turnover 1.81 1.64 1.43 1.45 1.49 1.55 1.55 1.54 1.49 1.52 1.52 Equity ratio 63.5% 49.3% 47.5% 52.7% 54.9% 49.8% 50.2% 58.0% 58.3% 40.8% 40.0% Debt/Equity ratio (times) 0.09 0.43 0.40 0.32 0.26 0.25 0.15 0.12 0.11 0.67 0.64 Current ratio 275.0% 198.2% 169.7% 196.3% 226.4% 195.3% 202.7% 256.7% 226.4% 96.1% 100.2% Fixed assets/Long-term capital ratio 49.5% 72.5% 78.1% 74.9% 69.7% 69.9% 67.6% 60.7% 61.3% 103.4% 102.5% Notes: 1. Figures stated in U.S. dollars in this report are translated solely for convenience at the rate of ¥98.23 per $1, the rate of exchange as of March 31, 2009. 2. 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 3. 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) 4. Interest-Bearing Debt includes lease obligation from FY 2009 057 JT Annual Report 2009 Millions of U.S. dollars Millions of yen (Note 1) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009 Eleven-Year

For the year: Consolidated

Net sales ¥3,876,528 ¥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 $69,554 Financial Summary Tobacco 3,616,706 4,024,487 4,140,270 4,178,034 4,134,466 4,236,920 — — — — — — Domestic — — — — — — 3,491,488 3,405,281 3,416,274 3,362,398 3,200,494 32,581 International — — — — — — 792,705 881,188 999,658 2,639,969 3,118,319 31,745 Pharmaceutical 23,751 67,790 66,414 61,868 53,927 51,242 57,676 49,257 45,452 49,064 56,758 578 Food 150,742 195,026 210,332 221,197 232,404 250,138 265,380 278,378 286,554 336,420 435,966 4,439 Others 85,329 83,947 84,685 83,076 71,467 86,851 57,265 23,553 21,449 21,876 20,770 211 Taxation — — — — — 2,605,343 2,650,586 2,628,878 2,718,358 3,822,331 4,005,123 40,773 Net sales excluding excise taxes — — — — — 2,019,807 2,013,927 2,008,780 2,051,029 2,587,396 2,827,184 28,781 Net sales excluding excise taxes, distribution business — — — — — — 1,684,404 1,596,151 1,633,186 2,068,368 2,295,117 23,365 EBITDA (Note 2) ¥ — ¥ 315,132 ¥ 312,045 ¥ 334,119 ¥ 337,296 ¥ 373,435 ¥ 400,115 ¥ 433,391 ¥ 464,634 ¥ 602,096 ¥ 646,217 $ 6,579 Tobacco — 299,477 296,318 320,969 321,419 343,163 — — — — — — Domestic — — — — — — 296,031 305,753 326,470 306,726 272,280 2,772 International — — — — — — 65,462 94,093 112,668 270,757 337,968 3,441 Pharmaceutical — (790) (3,105) (8,519) (5,110) (4,426) 5,474 (1,803) (8,197) (6,269) 4,890 50 Food — (490) (2,660) 2,259 546 3,300 7,931 11,869 12,018 8,353 17,030 173 Others — 16,093 20,033 19,617 19,674 30,674 26,810 22,140 21,586 22,055 13,150 134 Elimination/Corporate — 842 1,459 (207) 767 724 (1,593) 1,339 89 474 899 9 Depreciation and Amortization (Note 2) — 161,160 172,080 170,314 148,333 139,401 126,744 126,445 132,643 171,542 282,411 2,875 Operating income ¥ 168,899 ¥ 153,972 ¥ 139,965 ¥ 163,805 ¥ 188,963 ¥ 234,034 ¥ 273,371 ¥ 306,946 ¥ 331,991 ¥ 430,554 ¥ 363,806 $ 3,703 Tobacco 193,855 181,520 165,923 192,114 213,342 238,409 — — — — — — Domestic — — — — — — 215,833 220,095 245,388 222,348 188,259 1,917 International — — — — — — 44,458 71,031 81,085 205,360 174,772 1,779 Pharmaceutical (12,631) (11,482) (12,827) (18,985) (13,855) (12,840) 1,855 (5,057) (11,207) (9,644) 1,020 10 Food (8,663) (14,582) (17,362) (11,860) (13,168) (4,851) 1,948 6,325 6,705 667 (11,451) (117) Others (2,619) (1,764) 3,428 1,797 932 11,976 10,427 8,673 9,331 10,448 9,695 99 Elimination/Corporate (1,043) 280 803 739 1,712 1,340 (1,150) 5,879 689 1,375 1,511 15 Net income (loss) 74,633 50,792 43,687 36,850 75,302 (7,603) 62,584 201,542 210,772 238,702 123,400 1,256 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 $ 2,802 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) (662) Net cash used in financing activities — 472,593 (76,990) (124,838) (111,968) (109,335) (202,196) (48,135) (32,635) 519,001 (217,470) (2,214) Free cash flow (Note 3) — (786,499) 307,311 31,413 170,372 269,174 269,459 145,590 223,007 (1,493,717) 240,199 2,445 At year-end: Net property, plant and equipment ¥ 675,883 ¥ 770,639 ¥ 757,311 ¥ 743,712 ¥ 733,314 ¥ 708,221 ¥ 639,655 ¥ 596,544 ¥ 600,436 ¥ 763,332 ¥ 668,743 $ 6,808 Total assets 2,228,566 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 39,497 Interest bearing debt (Note 4) 123,345 660,525 606,089 511,738 424,499 381,203 230,716 216,608 219,269 1,389,296 996,079 10,140 Liabilities 781,463 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 22,962 Total equity 1,415,996 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 16,536 Ratios: Return on equity (ROE) 5.4% 3.5% 2.9% 2.4% 4.7% (0.5%) 4.2% 12.4% 11.3% 11.8% 6.8% Return on asset (ROA) — — — 5.4% 6.4% 7.9% 9.2% 10.4% 10.7% 10.5% 8.4% Operating income margin 4.4% 3.5% 3.1% 3.6% 4.2% 5.1% 5.9% 6.6% 7.0% 6.7% 5.3% Total assets turnover 1.81 1.64 1.43 1.45 1.49 1.55 1.55 1.54 1.49 1.52 1.52 Equity ratio 63.5% 49.3% 47.5% 52.7% 54.9% 49.8% 50.2% 58.0% 58.3% 40.8% 40.0% Debt/Equity ratio (times) 0.09 0.43 0.40 0.32 0.26 0.25 0.15 0.12 0.11 0.67 0.64 Current ratio 275.0% 198.2% 169.7% 196.3% 226.4% 195.3% 202.7% 256.7% 226.4% 96.1% 100.2% Fixed assets/Long-term capital ratio 49.5% 72.5% 78.1% 74.9% 69.7% 69.9% 67.6% 60.7% 61.3% 103.4% 102.5% Notes: 1. Figures stated in U.S. dollars in this report are translated solely for convenience at the rate of ¥98.23 per $1, the rate of exchange as of March 31, 2009. 2. 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 3. 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) 4. Interest-Bearing Debt includes lease obligation from FY 2009 Management’s Discussion and Analysis of Financial Condition and Business Results

058 JT Annual Report 2009 The following discussion of our financial conditions and business discussion and analysis contains forward-looking statements that results should be read in reference to our consolidated financial involve risks, uncertainties and assumptions. Actual results may differ statements prepared in accordance with Japanese Generally materially from those estimated in these statements as a result of a Eleven-Year Consolidated Accepted Accounting Principles (“Japanese GAAP”) and other number of factors, including, but not limited to, those described in Financial Summary information included in other sections of this annual report. This “Major Risks of Businesses” (See Page 39).

Business Description and Acquisition of Outside Resources and Analysis of Business Results Financial Condition and Management’s Discussion Management’s Japan Tobacco Inc. (“JT”) is a joint stock corporation (kabushiki 2009. As a result of this acquisition, JT obtained increased access kaisha) incorporated under the corporate law of Japan (the “Corpo- to overseas markets, especially in Europe and Russia, and the rights rate Law”) pursuant to the Japan Tobacco Inc. Law (the “JT Law”). in almost all countries outside the United States to internationally JT is primarily engaged in the manufacture and sale of tobacco recognized trademarks such as Winston, Camel and Salem. Since products in the domestic and international markets, as one of the this acquisition, JT’s international tobacco business—of which JT largest producers of tobacco products in the world. The total sales International (JTI) constitutes the core—has consistently maintained of cigarettes of JT and its consolidated subsidiaries (the “JT Group” strong growth. or “Group”) in the fiscal year ended March 31, 2009, excluding On April 18, 2007 we completed the procedures for the acquisition tobacco products purchased from overseas tobacco manufacturers of Gallaher Group Plc to make it a wholly owned subsidiary of JT. The and sold to retail stores through its subsidiary, TS Network Co., Ltd. acquisition price was approximately £7.50 billion (approximately (“TS Network”), was 615.8 billion cigarettes (159.9 billion cigarettes ¥1,720 billion at the exchange rate effective at the time), and the total in the domestic market; 3.6 billion cigarettes in the domestic duty-free acquisition price including the assumption of net interest-bearing debt market and the markets in China, Hong Kong and Macau, which are was approximately £9.44 billion (approximately ¥2,180 billion at the covered by JT’s China Division; and 452.3 billion cigarettes in other exchange rate effective at the time). This acquisition resulted in overseas markets). goodwill of US$15.1 billion. Of the total value, approximately ¥820 In the domestic tobacco market, JT manufactures and sells its billion was covered by our own funds, ¥450 billion by a loan from tobacco products to retail stores all over the country in accordance Mizuho Bank, Ltd, and £1.9 billion (approximately ¥450 billion at the with the Tobacco Business Law. This law provides that (1) JT shall exchange rate effective at the time) by a syndicated loan arranged by be the sole manufacturer of tobacco products in Japan and (2) the Merrill Lynch. Of the funds borrowed from Mizuho Bank, the JT Group maximum wholesale price of each tobacco product manufactured repaid a total of ¥150 billion in May and July 2007 out of its own funds and sold and the retail price of each product sold in Japan, as well and refinanced ¥300 billion through new loans totaling ¥150 billion as any changes in these prices, shall be subject to approval by the from other domestic banks and through the issuance of domestic Minister of Finance. The products are transported from its factories bonds totaling ¥150 billion. It repaid the syndicated loan of £1.9 billion to its distribution bases by its subsidiary, JT Logistics Co., Ltd., and with its own cash, and funds borrowed under a new credit line then distributed to retail stores through TS Network. TS Network also established abroad. As for the domestic bonds, the JT Group is due acts as the wholesaler of foreign tobacco manufacturers, purchasing to redeem ¥50 billion in July 2010, ¥40 billion in July 2011 and ¥60 and selling their products to retail stores in the domestic market. billion in July 2012. JT greatly expanded its international tobacco business through With the acquisition of Gallaher, we have further strengthened our the acquisition of the non-U.S. tobacco operations of RJR Nabisco, position as the world’s third largest tobacco company. In addition to Inc. (“RJR Nabisco”) on May 12, 1999. JT paid $5.0 billion for the our strong business foundation in Asia, JT now has an increasing non-U.S. tobacco operations of RJR Nabisco, which resulted in presence in Europe and the CIS region. We aim to maintain sustain- $3.5 billion of goodwill. JT also acquired non-U.S. tobacco-related able growth as a major tobacco company on the strength of our trademarks and intellectual properties for $2.7 billion and other geographically well-balanced operations and our ample growth assets for $0.1 billion. The acquisition, worth a total of $7.8 billion, potential. JT’s international tobacco business aims to enhance its role was financed by a syndicated loan of $5.0 billion and $2.8 billion in as the driver of the JT Group’s profit growth by achieving top-line cash. The syndicated loan was later refinanced through domestic growth. As we proceed with the integration with Gallaher, we continue and foreign bond issues and long-term loans from banks and to gain both top-line synergies and cost saving synergies. We count insurance companies. JT repaid in full the long-term loans from eight brands among our list of global flagship brands (“GFB”): banks and insurance companies, and redeemed the foreign bonds ­Winston, Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, by July 2004. We are due to redeem the domestic bonds in June Sobranie and Glamour. We intend to actively explore opportunities 059 JT Annual Report 2009 for top-line growth on the strength of these GFB, which form the core in the company for approximately ¥102 billion, increasing its equity of our brand portfolio. stake in Katokichi Co. from 5% to approximately 94%. Following the In addition to the tobacco business, the JT Group has been acquisition of all voting rights of Katokichi Co. on April 18, 2008, the Eleven-Year actively engaged in its food and pharmaceutical businesses in order JT Group concentrated its processed food operations, including Consolidated Financial Summary to diversify its source of future profits and cash flow. frozen food operations and seasonings operations, at the Katokichi In its pharmaceutical business, the JT Group focuses on the Group beginning on July 1, 2008. Through this realignment, the research and development of prescription drugs. In the domestic Katokichi Group will consolidate its foundation as a unique food market, Torii Pharmaceutical Co., Ltd., in which JT acquired a stake manufacturer on the strength of its processed food business— and Analysis of Business Results Financial Condition and of 53.5% for approximately ¥42 billion in December 1998, manufac- including the frozen food business, which boasts Japan’s leading Discussion Management’s tures and sells prescription drugs through its extensive marketing scale—and its superior technology for the production of seasonings. network. In the overseas market, JT derives revenue principally from Under the JT Law, JT must obtain approval from the Minister of royalties on the licensing of its successful anti-HIV drug. Finance with regard to certain matters, such as (1) the issuance of In its food business, the JT Group principally manufactures and new shares (as well as subscription rights for new shares and bonds sells beverages, processed foods and seasonings in the domestic with subscription rights for new shares) and (2) resolutions adopted market. JT’s presence in the beverage market was substantially at shareholder meetings for any amendments to the Articles of expanded through the acquisition of a majority stake in Unimat Cor- Incorporation and appropriation of retained earnings. Pursuant to the poration, a nationwide operator of soft drink vending machines that JT Law, the Japanese government is required to hold one-half or was later renamed Japan Beverage Inc., for approximately ¥29 billion more of the JT shares that were issued upon the company’s establish- in a two-stage deal implemented in April and September 1998. In ment in 1985, as adjusted for any subsequent stock split or consoli- addition, JT acquired the food business of Asahi Kasei Corporation dation of shares. The amended JT Law allows JT to issue new shares for approximately ¥24 billion in July 1999. In January 2008 the JT to the extent that the number of shares held by the government Group made Katokichi Co. a subsidiary by acquiring additional shares remains at more than one-third of the outstanding shares.

Overview

Our net sales totaled ¥6,832.3 billion for the year ended March 31, Our operating income totaled ¥363.8 billion for the year ended 2009, compared with ¥6,409.7 billion for the year ended March 31, March 31, 2009, compared with ¥430.6 billion for the year ended 2008. The domestic and international tobacco businesses accounted March 31, 2008. Although our food business has generated operat- for 46.8% and 45.6%, respectively, of our net sales in the year ended ing income since the year ended March 31, 2005, it posted an March 31, 2009, compared with 52.5% and 41.2% in the year ended operating loss in the year ended March 31, 2009. Our pharmaceuti- March 31, 2008. In recent years, net sales for our international cal business has posted operating losses every year since the year tobacco business have become an increasingly important component ended March 31, 1998, when we started to disclose segment-by- of our total net sales. segment information, with the exception of the year ended March 31, 2005 and the year ended March 31, 2009. As a result, we derive almost all of our operating income from our tobacco business. 060 JT Annual Report 2009 Results by Industry Segment

Table of Results by Industry Segment Eleven-Year Consolidated Millions of Financial Summary Millions of yen U.S. dollars For years ended March 31 2007 2008 2009 2009 Net sales ¥4,769,387 ¥6,409,727 ¥6,832,307 $69,554 Tobacco Business and Analysis of

Business Results Domestic 3,416,274 3,362,398 3,200,494 32,581 Financial Condition and Management’s Discussion Management’s International 999,658 2,639,969 3,118,319 31,745 Pharmaceutical Business 45,452 49,064 56,758 578 Food Business 286,554 336,420 435,966 4,439 Other Business 21,449 21,876 20,770 211

Millions of Millions of yen U.S. dollars 2007 2008 2009 2008 Operating income ¥331,991 ¥430,554 ¥363,806 $3,703 Tobacco Business Domestic 245,388 222,348 188,259 1,917 International 81,085 205,360 174,772 1,779 Pharmaceutical Business (11,207) (9,644) 1,020 10 Food Business 6,705 667 (11,451) (117) Other Business 9,331 10,448 9,695 99 Elimination/Corporate 689 1,375 1,511 15

Domestic Tobacco: Net sales for our domestic tobacco business for the licensing of anti-osteoporosis compound JTT-305, and a totaled ¥3,200.5 billion in the year ended March 31, 2009, com- milestone revenue associated with progress in the development of the pared with ¥3,362.4 billion in the year ended March 31, 2008. JTT-705 compound for the treatment of dyslipidemia. We expect the Although these sales figures include sales of tobacco products pharmaceutical business to remain unprofitable for at least the next manufactured by foreign tobacco companies and sold by us in few years. Japan, our profit margins on such products are significantly lower than those on our own products, since our role in their sales is Food: Our food business accounted for approximately 6.4% of our limited to distribution. net sales in the year ended March 31, 2009, compared with 5.2% in the year ended March 31, 2008. It posted an operating loss of ¥11.5 International Tobacco: Net sales for our international tobacco billion in the year ended March 31, 2009, compared with an operating business totaled ¥3,118.3 billion in the year ended March 31, 2009, income of ¥0.7 billion in the year ended March 31, 2008. compared with ¥2,640.0 billion in the year ended March 31, 2008. International tobacco sales include overseas sales of products manu- Other: Our “other business” segment accounted for approximately factured by our overseas subsidiaries and sales of tobacco products 0.3% of our net sales in the year ended March 31, 2009, unchanged manufactured in Japan and exported to foreign countries. from the year ended March 31, 2008. Net sales in this segment have been gradually decreasing in recent years. Operating income gener- Pharmaceutical: Our pharmaceutical business accounted for approxi- ated by this segment totaled ¥9.7 billion in the year ended March 31, mately 0.8% of our net sales in the year ended March 31, 2009, 2009, compared with ¥10.4 billion in the year ended March 31, 2008. unchanged from the year ended March 31, 2008. The pharmaceutical Currently, we have no plans to expand our “other business” segment. business recorded an operating profit of ¥1.0 billion in the business Therefore, we expect sales in this segment to decrease gradually as year ended March 31, 2009, compared with an operating loss of ¥9.6 we review operations. billion in the year ended March 31, 2008, due to an upfront payment 061 JT Annual Report 2009 Results by Geographic Segment

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

Table of Results by Geographic Segment and Analysis of Business Results Financial Condition and

Millions of Discussion Management’s Millions of yen U.S. dollars For years ended March 31 2007 2008 2009 2009 Net sales ¥4,769,387 ¥6,409,727 ¥6,832,307 $69,554 Japan 3,718,450 3,711,763 3,672,004 37,381 Western Europe 353,831 1,678,770 2,038,028 20,748 Other 697,106 1,019,194 1,122,275 11,425

Millions of Millions of yen U.S. dollars 2007 2008 2009 2008 Operating income (loss) ¥331,991 ¥430,554 ¥363,806 $3,703 Japan 248,482 222,340 186,439 1,898 Western Europe (18,810) 55,936 (24,188) (246) Other 101,552 151,398 199,633 2,032 Elimination/Corporate 767 880 1,922 19

Japan: Net sales in Japan in the year ended March 31, 2009 declined losses in the year ended March 31, 2009 totaled ¥24.1 billion, a by ¥39.8 billion, or 1.1%, from the previous year to ¥3,672.0 billion deterioration of ¥80.1 billion from the previous year, because of the as a result of a decrease in the sales volume for the domestic tobacco cost of goodwill amortization. business. Operating income in the year ended March 31, 2009 Net sales in Western Europe in the year ended March 31, 2008 dropped by ¥35.9 billion, or 16.1%, from the previous year to ¥186.4 increased by ¥1,324.9 billion, or 374.5%, from the previous year billion because of the reduced sales volume for the domestic tobacco to ¥1,678.8 billion, mainly due to the acquisition of Gallaher, which business and the inclusion of the full-year cost of the amortization of has a large market share in the United Kingdom, Ireland, etc. the goodwill of the Katokichi Group. Operating income in the year ended March 31, 2008 totaled ¥55.9 Net sales in Japan in the year ended March 31, 2008 decreased billion, an improvement of ¥74.7 billion from the previous year’s loss by ¥6.7 billion, or 0.2%, from the previous year to ¥3,711.8 billion, of ¥18.8 billion. as a decline in the sales volume outweighed the positive effects of a rise in unit sales prices based on the revision of retail prices. Operating Other Regions: Net sales in other regions in the year ended March income in the year ended March 31, 2008 dropped by ¥26.1 billion, 31, 2009 grew by ¥103.1 billion, or 10.1%, from the previous year to or 10.5%, from the previous year to ¥222.3 billion. This was primarily ¥1,122.3 billion as a result of an increase in international sales by JT due to increases in sales promotion expenses and raw materials International, particularly in countries such as Russia and Turkey. costs, as well as the decline in the sales volume. Operating income in the year ended March 31, 2009 increased by ¥48.2 billion, or 31.9% from the previous year to ¥199.6 billion. Western Europe: Net sales in Western Europe in the year ended Net sales in other regions in the year ended March 31, 2008 March 31, 2009 grew by ¥359.3 billion, or 21.4% from the previous increased by ¥322.1 billion, or 46.2%, from the previous year to year to ¥2,038.0 billion as a result of the inclusion of the full-year ¥1,019.2 billion. This was primarily due to the acquisition of Gallaher. results of Gallaher, which has a large market share in the United Operating income in the year ended March 31, 2008 increased Kingdom and Ireland, where cigarette prices are high. Operating by ¥49.8 billion, or 49.1%, from the previous year to ¥151.4 billion. 062 JT Annual Report 2009 Outlook of Results for the Year Ending March 31, 2010

It is too early to forecast business results for the fiscal year ending Although we expect our bottom line to benefit from a decrease Eleven-Year Consolidated March 31, 2010. Based on current trends and other factors that we in interest payments following the repayments of interest-bearing Financial Summary are aware of at this point, we expect a decline in both net sales and debts and the absence of the burden of introducing age verification profits. We expect that net sales will drop because a decline in the cigarette vending machines, which hurt the bottom line until the sales volume for the domestic tobacco business due to overall ciga- previous year, our net income is projected to decline due to factors rette demand in Japan and a negative foreign exchange impact will such as a drop in profit from the sale of fixed assets, the cost of and Analysis of Business Results Financial Condition and

Management’s Discussion Management’s outweigh a sales increase for the international tobacco business rationalization related to the closure of domestic factories and the resulting mainly from strong demand for GFB. decrease in operating income. Our actual operating results may differ Meanwhile, we expect our operating income to decline as an significantly from those described above as a result of a number of increase in raw materials costs due to a rise in leaf tobacco prices factors including, but not limited to, those discussed in the “Major and other negative factors more than offset a decrease in the Risks of Businesses.” amortization cost following the completion of the amortization of some trademark rights.

Consolidated Business Results

Consolidated Income Statement

Millions of Millions of yen U.S. dollars For years ended March 31 2007 2008 2009 2009 Net sales ¥4,769,387 ¥6,409,727 ¥6,832,307 $69,554 Cost of sales 3,844,768 5,228,926 5,554,399 56,545 Gross profit 924,619 1,180,801 1,277,908 13,009 Selling, general and administrative expenses 592,628 750,247 914,102 9,306 Operating income 331,991 430,554 363,806 3,703 Other income (expenses), net 5,205 (57,940) (101,662) (1,035) Income before income taxes and minority interest 337,196 372,614 262,144 2,668 Income taxes 121,405 128,379 134,973 1,374 Income before minority interest 215,791 244,235 127,171 1,294 Minority interest 5,019 5,533 3,771 38 Net income ¥ 210,772 ¥ 238,702 ¥ 123,400 $ 1,256

Year Ended March 31, 2009 Compared with Year Ended ¥3,200.5 billion in the year ended March 31, 2009, a decrease of March 31, 2008 ¥161.9 billion, or 4.8%, from the previous year. The sales volume of Net Sales JT’s tobacco products in Japan decreased by 7.8 billion cigarettes, Net sales for the year ended March 31, 2009 increased by ¥422.6 or 4.7%, from the previous year to 159.9 billion cigarettes (see note). billion, or 6.6% from the previous year to ¥6,832.3 billion. The net The sales volume declined due to the continued decrease in total sales amounts indicated below represent the amounts excluding cigarette demand caused by factors such as: the aging Japanese inter-segment transactions. population, growing consciousness of health risks associated with • Domestic Tobacco Business smoking, tightened smoking regulations, and revision of retail prices Net sales in our domestic tobacco business are comprised of based on a hike in the tobacco excise tax implemented in July 2006. domestic sales (including duty-free sales) of tobacco products manu- Our market share increased by 0.2 percentage points compared with factured by the JT Group in and outside Japan, domestic sales of the previous year, to 65.1%, marking the second consecutive year of products manufactured by foreign tobacco manufacturers and dis- market share increase. Net sales (excluding excise tax) per 1,000 tributed by our subsidiaries as wholesalers and sales in the China, cigarettes remained unchanged from the previous year at ¥4,057.

Hong Kong and Macau markets, which are covered by JT’s China Note: Our domestic sales volume includes 3.6 billion cigarettes sold in domestic Division. Net sales for our domestic tobacco business totaled duty-free markets and in the China, Hong Kong and Macau markets, which are covered by JT’s China Division. 063 JT Annual Report 2009 • International Tobacco Business Selling, General and Administrative Expenses Net sales for our international tobacco business totaled ¥3,118.3 Selling, general and administrative expenses in the year ended March billion, an increase of ¥478.4 billion, or 18.1%, from the previous year. 31, 2009 increased by ¥163.9 billion, or 21.8%, from the previous Eleven-Year The sales volume of our international tobacco business increased by year to ¥914.1 billion. This was attributable to the inclusion of the Consolidated Financial Summary 66.7 billion cigarettes, or 17.3%, to 452.3 billion cigarettes, thanks cost of the goodwill amortization related to the international tobacco mainly to Winston’s sales growth in Russia, Turkey, Ukraine and business following a revision of the accounting standards and the Spain; Camel’ sales growth in Italy, Russia and Spain; Mild Seven’s inclusion of the full-year cost of the amortization of the goodwill of sales growth in Korea, Taiwan, Russia and Malaysia. The sales the Katokichi Group as well as the inclusion of the full-year results of and Analysis of Business Results Financial Condition and volume of GFB grew 42.3 billion cigarettes, or 20.8%, to 245.5 billion Gallaher and the Katokichi Group. Discussion Management’s cigarettes. Sales denominated in foreign currencies are first converted into dollar terms and then into yen terms based on the average Operating Income exchange rate for the relevant accounting period. Sales in dollar As a result of the above factors, operating income in the year ended terms increased due to an expansion in the sales volume of GFB as March 31, 2009 declined by ¥66.7, or 15.5%, from the previous well as the inclusion of the full-year results of Gallaher. However, sales year to ¥363.8 billion. Operating income by business segment was in yen terms increased despite negative effects from the yen’s as follows: appreciation against the dollar. • Domestic Tobacco Business The 12-month average exchange rate between the Japanese yen Operating income for our domestic tobacco business in the year and the U.S. dollar that was used for the conversion of sales for the ended March 31, 2009 decreased by ¥34.1 billion, or 15.3%, from year ended March 31, 2009 was ¥103.48 to $1.00, compared with the previous year to ¥188.3 billion. The decrease was attributable ¥117.85 to $1.00 for the year ended March 31, 2008. mainly to a decline in the sales volume and an increase in sales • Pharmaceutical Business promotion expenses. Net sales for our pharmaceutical business increased by ¥7.7 billion, • International Tobacco Business or 15.7%, from the previous year to ¥56.8 billion in the year ended Operating income for our international tobacco business in the year March 31, 2009. A decrease in net sales for Torii Pharmaceutical was ended March 31, 2009 declined by ¥30.6 billion, or 14.9%, from the more than offset by an upfront payment for the licensing of anti- previous year to ¥174.8 billion, mainly due to the start of the goodwill osteoporosis oral compound JTT-305 to Merck in September 2008 amortization following a revision of accounting standards. A rise in and a milestone revenue associated with progress in the develop- the exchange rate of the Japanese yen against the U.S. dollar con- ment of the JTT-705 compound for the treatment of dyslipidemia, tributed to the decrease in operating income in yen terms. which was licensed to Roche in October 2004. • Pharmaceutical Business • Food Business Our pharmaceutical business recorded an operating income of ¥1.0 Net sales for our food business increased by ¥99.5 billion, or 29.6%, billion in the year ended March 31, 2009, representing an improve- from the previous year to ¥436.0 billion. Sales of beverage products ment of ¥10.7 billion in the operating balance from the previous year. declined by ¥7.6 billion, or 3.9%, to ¥187.4 billion. Sales of processed A decrease in net sales for Torii Pharmaceutical was more than offset foods increased by ¥107.1 billion, or 75.7%, from the previous year by an upfront payment for the licensing of anti-osteoporosis oral to ¥248.6 billion, as the consolidation of the Katokichi Group out- compound JTT-305 to Merck in September 2008 and a milestone weighed the impact of the frozen food products contamination, and revenue associated with progress in the development of the JTT-705 negative effects of unfavorable weather conditions and increased compound for the treatment of dyslipidemia, which was licensed to competition in the beverages business as well as a slump in general Roche in October 2004. consumption caused by the recent severe economic downturn. • Food Business Our food business posted an operating loss of ¥11.5 billion in the Cost of Sales year ended March 31, 2009, representing a deterioration of ¥12.1 Cost of sales in the year ended March 31, 2009 increased by billion in the operating balance compared with the previous year. This ¥325.5 billion, or 6.2%, from the previous year to ¥5,554.4 billion, was attributable to a rise in general expenses, an increase in raw mainly as a result of the inclusion of the full-year results of Gallaher materials costs and the inclusion of the full-year cost of the amortiza- and the ­Katokichi Group, This and other favorable factors were tion of the goodwill of the Katokichi Group following the consolidation partially offset by a decrease in the sales volume of the domestic of the group. tobacco business. 064 JT Annual Report 2009 • Others • Domestic Tobacco Business Operating income for our other businesses in the year ended March Net sales in our domestic tobacco business are comprised of 31, 2009 decreased by ¥0.8 billion or 7.2% from the previous year domestic sales (including duty-free sales) of tobacco products manu- Eleven-Year Consolidated to ¥9.7 billion. factured by the JT Group in and outside Japan, domestic sales of Financial Summary products manufactured by foreign tobacco manufacturers and dis- Other Expenses/Income (on a net basis) tributed by our subsidiaries as wholesalers and sales in the China, We booked other expenses totaling ¥101.7 billion (on a net basis) in Hong Kong and Macau markets, which are covered by JT’s China the year ended March 31, 2009, an increase of ¥43.7 billion from the Division. Net sales for our domestic tobacco business totaled and Analysis of Business Results Financial Condition and

Management’s Discussion Management’s previous year. This reflected the inclusion of full-year interest pay- ¥3,362.4 billion in the year ended March 31, 2008, a decrease of ments related to additional debts and corporate bonds associated ¥53.9 billion, or 1.6%, from the previous year. The sales volume of with the acquisition of Gallaher, a decline in profits from the sale of JT’s tobacco products in Japan decreased by 7.2 billion cigarettes, fixed assets, losses related to the demolition of company-owned or 4.1%, from the previous year to 167.8 billion cigarettes (see note). residences for employees, expenses incurred by the international The sales volume declined due to the continued decrease in total tobacco business in relation to a revision of the business model in cigarette demand caused by factors such as: the aging Japanese the Philippines market and the cost of reorganizing the Katokichi population, growing consciousness of health risks associated with Group’s business operations. smoking, tightened smoking regulations, and revision of retail prices based on a hike in the tobacco excise tax implemented in July 2006. Income before Income Taxes and Minority Interests Our market share increased by 0.1 percentage points compared with As a result of the above factors, income before income taxes and the previous year, to 64.9%. Net sales (excluding excise tax) per minority interests in the year ended March 31, 2009 decreased by 1,000 cigarettes increased by ¥67, or 1.7%, from the previous year ¥110.5 billion, or 29.6%, from the previous year to ¥262.1 billion. to ¥4,057, mainly due to a hike in unit sales prices caused by the revision of retail prices.

Income Taxes Note: Our domestic sales volume includes 3.5 billion cigarettes sold in domestic Income taxes in the year ended March 31, 2009 increased by ¥6.6 duty-free markets and in the China, Hong Kong and Macau markets, which billion, or 5.1%, from the previous year to ¥135.0 billion. The actual are covered by JT’s China Division. effective tax rate in the year ended March 31, 2009 increased by 17.03 points to 51.49%, mainly due to the impact of the cost of the goodwill • International Tobacco Business amortization that was not covered by the deferred tax accounting. Net sales for our international tobacco business totaled ¥2,640 billion, an increase of ¥1,640.3 billion, or 164.1%, from the previous year. The Income before Minority Interests sales volume of our international tobacco business increased by 145.5 Income before minority interests in the year ended March 31, billion cigarettes, or 60.6%, to 385.6 billion cigarettes, thanks mainly 2009 declined by ¥117.1 billion, or 47.9%, from the previous year to the acquisition of Gallaher and strong demand for GFB, which we to ¥127.2 billion. Minority interests in the year ended March 31, are prioritizing as the driver of our profit growth. The sales volume of 2009 decreased by ¥1.8 billion, or 31.8%, from the previous year GFB increased by 58 billion cigarettes, or 40%, to 203.2 billion ciga- to ¥3.8 billion. rettes. The increase was attributable to brisk sales of Winston in Russia, Ukraine, Turkey and Spain and of Camel in Spain, France, Italy Net Income and Russia, as well as the addition to our collection of GFB of Benson As a result of the above factors, net income in the year ended March & Hedges and Silk Cut, sold mainly in the United Kingdom and Ireland, 31, 2009 decreased by ¥115.3 billion, or 48.3%, from the previous and LD, Sobranie and Glamour, sold mainly in Russia, Ukraine and year to ¥123.4 billion. Kazakhstan. Sales denominated in foreign currencies are first con- verted into dollar terms and then into yen terms based on the average Year Ended March 31, 2008 Compared with Year Ended exchange rate for the relevant accounting period. Sales in dollar terms March 31, 2007 increased due to an expansion in the sales volume of GFB as well as Net Sales the acquisition of Gallaher. Sales in yen terms increased due in part Net sales for the year ended March 31, 2008 increased by ¥1,640.3 to the yen’s depreciation against the dollar. billion, or 34.4% from the previous year to ¥6,409.7 billion. The net The 12-month average exchange rate between the Japanese yen sales amounts indicated below represent the amounts excluding and the U.S. dollar that was used for the conversion of sales for the inter-segment transactions. year ended March 31, 2008 was ¥117.85 to $1.00, compared with ¥116.38 to $1.00 for the year ended March 31, 2007. 065 JT Annual Report 2009 • Pharmaceutical Business • International Tobacco Business Net sales for our pharmaceutical business increased by ¥3.6 billion, Operating income for our international tobacco business in the year or 7.9%, from the previous fiscal year to ¥49.1 billion in the year ended ended March 31, 2008 increased by ¥124.3 billion, or 153.3%, from Eleven-Year March 31, 2008. A decrease in royalty revenue from Viracept, an the previous year to ¥205.4 billion, mainly due to the acquisition of Consolidated Financial Summary anti-HIV drug, was more than offset by the milestone revenue related Gallaher. A decline in the exchange rate of the Japanese yen against to the progress made in the development of the anti-­dyslipidemia the U.S. dollar contributed to the increase in profit in yen terms. agent JTT-705, licensed to the Roche Group in October 2004, and • Pharmaceutical Business an increase in Torii Pharmaceutical’s sales. Our pharmaceutical business recorded an operating loss of ¥9.6 and Analysis of Business Results Financial Condition and

• Food Business billion in the year ended March 31, 2008, representing an improve- Discussion Management’s Net sales for our food business increased by ¥49.9 billion, or 17.4%, ment of ¥1.6 billion in the operating balance from the previous year. from the previous year to ¥336.4 billion. Sales of beverage products An increase in R&D expenses, including a down payment made for increased by ¥4.2 billion, or 2.2%, to ¥194.9 billion. We have steadily Keryx’s hyperphosphatemia drug, was more than offset by the mile- expanded our beverage business, mainly through the vending stone revenue related to the progress made in the development of the machine operations of Japan Beverage Inc., a JT subsidiary. Sales anti-dyslipidemia agent JTT-705, licensed to the Roche Group. of processed foods increased by ¥45.7 billion, or 47.7%, from the • Food Business previous year to ¥141.5 billion. The impact of the frozen foods Operating income for our food business in the year ended March 31, products contamination on the processed food business was more 2008 decreased by ¥6.0 billion, or 90.1%, from the previous year to than offset by the integration of the Katokichi Group. ¥0.7 billion. The decrease was attributable to an increase in raw materials costs and goodwill amortization related to the acquisition Cost of Sales of the Katokichi Group. Cost of sales in the year ended March 31, 2008 increased by • Others ¥1,384.2 billion, or 36.0%, from the previous year to ¥5,228.9 Operating income for our other businesses in the year ended billion, mainly due to the inclusion of Gallaher’s results in those of March 31, 2008 increased by ¥1.1 billion, or 12.0%, from the our international tobacco business and an increase in raw materials previous year to ¥10.4 billion mainly due to an increase in real costs in our domestic tobacco business. These factors were par- estate rental revenue. tially offset by a decrease in the sales volume of the domestic tobacco business. Other Expenses/Income (on a net basis) We booked other expenses totaling ¥57.9 billion (on a net basis) in the Selling, General and Administrative Expenses year ended March 31, 2008, a deterioration of ¥63.1 billion from the Selling, general and administrative expenses in the year ended March previous year’s net income of ¥5.2 billion. This reflected increases in 31, 2008 increased by ¥157.6 billion, or 26.6%, from the previous interest payments on borrowings and bonds related to the acquisition year to ¥750.2 billion. The increase was attributable to the acquisition of Gallaher, exchange losses, losses on securities holdings of a con- of Gallaher and an increase in sales promotion expenses in our solidated subsidiary, an increase in costs related to the introduction of domestic tobacco business. age-verifying cigarette vending machines, rationalization costs resulting from progress in the integration of our international tobacco business, Operating Income an improvement in the balance of profits and losses on the sale of fixed As a result of the above factors, operating income in the year ended assets, and costs related to the withdrawal of some frozen food March 31, 2008 increased by ¥98.6 billion, or 29.7%, from the previ- products in response to the frozen foods products contamination. ous year to ¥430.6 billion. Operating income by business segment was as follows: Income before Income Taxes and Minority Interests • Domestic Tobacco Business As a result of the above factors, income before income taxes and Operating income for our domestic tobacco business in the year minority interests in the year ended March 31, 2008 increased by ended March 31, 2008 decreased by ¥23.0 billion, or 9.4%, from the ¥35.4 billion, or 10.5%, from the previous year to ¥372.6 billion. previous year to ¥222.3 billion. The decrease was attributable mainly to a decline in the sales volume and increases in sales promotion expenses and raw materials costs. 066 JT Annual Report 2009 Income Taxes 2008 increased by ¥28.4 billion, or 13.2%, from the previous year Income taxes in the year ended March 31, 2008 increased by ¥7.0 to ¥244.2 billion. Minority interests in the year ended March 31, billion, or 5.7%, from the previous year to ¥128.4 billion. The actual 2008 increased by ¥0.5 billion, or 10.2%, from the previous year Eleven-Year Consolidated effective tax rate in the year ended March 31, 2008 decreased by to ¥5.5 billion. Financial Summary 1.55 points to 34.45%, mainly due to a rise in the proportion of profits earned in overseas markets, where the effective tax rates are Net Income relatively low. As a result of the above factors, net income in the year ended March 31, 2008 increased by ¥27.9 billion, or 13.3%, from the previous year and Analysis of Business Results Financial Condition and

Management’s Discussion Management’s Income before Minority Interests to ¥238.7 billion. Income before minority interests in the year ended March 31,

Liquidity and Capital Resources

In our financial management, we strive to maintain a stable without being affected by short-term fluctuations in revenues. We financial base that enables the implementation of capital expendi- raise the necessary funds principally from cash flows provided by tures, the acquisition of outside resources, and R&D activities in a operations, borrowing from financial institutions and the issuance cost-efficient manner, in order to achieve business expansion of long-term bonds.

Cash Flows • Overview As of March 31, 2008 and March 31, 2009, cash and cash equivalents totaled ¥215.0 billion and ¥167.3 billion, respectively. Millions of Millions of yen U.S. dollars For years ended March 31 2007 2008 2009 2009 Net cash provided by operating activities ¥ 435,958 ¥ 145,030 ¥ 275,271 $ 2,802 Net cash provided by (used in) investing activities (149,692) (1,668,635) (65,008) (662) Net cash used in financing activities (32,635) 519,001 (217,470) (2,214) Effect of exchange rate changes and other 5,749 40,091 (39,591) (402) Net increase (decrease) in cash and cash equivalents 259,380 (964,513) (46,798) (476) Cash and cash equivalents at beginning of the period 920,142 1,179,522 215,009 2,189 Decrease in cash and cash equivalents resulting from exclusion of subsidiaries from consolidation — — (953) (10) Cash and cash equivalents at end of the period ¥1,179,522 ¥ 215,009 ¥ 167,258 $ 1,703

Year Ended March 31, 2009 Compared with Year Ended Net cash used for financing activities in the year ended March March ended March 31, 2008. 31, 2009 was ¥217.5 billion, compared with ¥519.0 billion in net Net cash generated by operating activities in the year ended March cash generated from such activities in the year ended March 31, 31, 2009 came to ¥275.3 billion compared with ¥145.0 billion in the 2008. This was mainly due to the payment of dividends and the year ended March 31, 2008, as an increase in the working capital redemption of corporate bonds and the repayment of borrowings by was more than offset by the creation of stable cash flow by the a foreign subsidiary. tobacco business, including the cash flow generated by the inclusion of the full-year results of Gallaher. In the year ended March 31, 2009, Year Ended March 31, 2008 Compared with Year Ended we paid 12 months’ worth of tobacco excise tax compared with the March ended March 31, 2007. 13 months’ worth paid in the previous year, when there was a one- Net cash generated by operating activities was ¥145.0 billion in the time factor related to a bank holiday. Net cash used in investment year ended March 31, 2008, down from ¥436.0 billion in the year activities in the year ended March 31, 2009 was ¥65.0 billion com- ended March 31, 2007. The acquisition of Gallaher has enhanced the pared with ¥1,668.6 billion for the year ended March 31, 2008. Cash ability of our tobacco business to generate cash flows in a stable was used mainly for the acquisition of additional shares in Katokichi manner. However, this was more than offset by the one-time factor Co. and shares in Fuji Foods Corporation. 067 JT Annual Report 2009 of an increase in the payment of tobacco excise tax. In the year year ended March 31, 2007. The increase mainly reflected the ended March 31, 2008, we paid 13 months’ worth of tobacco excise acquisition of shares in Gallaher Plc and Katokichi Co. tax compared with the 11 months’ worth paid in the previous year, Net cash generated by financing activities was ¥519.0 billion, Eleven-Year because the tax payment for the last month of the previous year was compared with ¥32.6 billion in net cash used in such activities in the Consolidated Financial Summary carried over to the following year as a result of the last day of that year ended March 31, 2007. This was mainly due to the issuance of month falling on a bank holiday. bonds and borrowings from banks made for the purpose of raising Net cash used in investment activities in the year ended March funds for the acquisition of Gallaher. 31, 2008 was ¥1,668.6 billion compared with ¥149.7 billion for the and Analysis of Business Results Financial Condition and Management’s Discussion Management’s Liquidity and Fund Needs We need liquidity mainly for capital expenditures, working capital, acquisition of outside resources and debt repayments, as well as payments of interest, dividends and income taxes. • Capital Expenditures Capital expenditures include 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 Millions of yen U.S. dollars For years ended March 31 2007 2008 2009 2009 Capital expenditures ¥102,147 ¥129,555 ¥134,273 $1,367

In the year ended March 31, 2009, we made capital expenditures For the year ended March 31, 2007, we made capital expenditures totaling ¥134.3 billion. In our domestic tobacco business, we spent totaling ¥102.1 billion. In our domestic tobacco business, we invested ¥46.5 billion, mainly on measures to streamline manufacturing pro- ¥55.2 billion, principally to streamline manufacturing processes, cesses, strengthen our ability to respond flexibly to supply and strengthen our ability to respond flexibly to supply and demand demand fluctuations with regard to an increasingly diverse range of fluctuations with regard to an increasingly diverse range of products, products and develop new products. In our international tobacco enhance development of new products and install new vending business, we invested ¥59.8 billion for the purpose of expanding our machines. In our international tobacco business, we invested ¥32.0 production capacity. In our pharmaceutical business, we spent ¥3.4 billion, mainly to increase our production capacity. In our pharmaceuti- billion on the construction of production and research facilities, while cal business, we invested ¥3.0 billion to improve production and R&D we invested ¥23.2 billion in our food business, mainly for enhancing facilities. In our food business, we invested ¥4.9 billion, primarily to production facilities. In our other businesses, we made capital strengthen production facilities. In our other businesses, we invested expenditures of ¥1.1 billion, mainly for real estate development. ¥8.1 billion, principally to improve sales facilities. In the year ended March 31, 2008, we made capital expenditures For the year ending March 31, 2010, we plan to make capital totaling ¥129.6 billion. In our domestic tobacco business, we spent expenditures totaling approximately ¥166.0 billion. In our domestic ¥57.2 billion, mainly on measures to streamline manufacturing pro- tobacco business, we plan to invest approximately ¥65.0 billion to cesses, strengthen our ability to respond flexibly to supply and improve productivity and reduce costs, while in our international demand fluctuations with regard to an increasingly diverse range of tobacco business, we plan to spend approximately ¥64.0 billion to products, develop new products and replace vending machines. In increase production capacity. We have earmarked approximately ¥3.0 our international tobacco business, we invested ¥48.4 billion for the billion in investment for our pharmaceutical business to improve the purpose of expanding our production capacity. In our pharmaceutical R&D, approximately ¥32.0 billion for our food business to enhance business, we spent ¥4.3 billion on the construction of production and production facilities and approximately ¥1.0 billion for our other research facilities, while we invested ¥6.0 billion in our food business, businesses to carry out real estate development. mainly for enhancing production facilities. In our other businesses, we Our actual capital expenditures may differ significantly from the made capital expenditures of ¥14.8 billion, mainly for real estate planned figures as a result of a number of factors including, but not development. limited to, those discussed in the “Major Risks of Businesses.” 068 JT Annual Report 2009 • Working Capital new shares upon the approval of the Minister of Finance to the extent We need working capital mainly for purchasing raw materials, includ- that the Japanese government retains more than one-third of the ing leaf tobacco and other inventory items, the payment of salaries outstanding shares in JT. In the future, we may choose to raise Eleven-Year Consolidated and wages, sales expenses, advertising and promotion expenses, capital through stock issuance, which would dilute the value of Financial Summary tax payments and R&D expenses. existing shareholders’ equity holdings. • Acquisition of Outside Resources As necessary, we may invest in or acquire companies deemed to Long and Short-term Debt have the potential to help us diversify our cash flow sources and • Long-term Debt and Analysis of Business Results Financial Condition and

Management’s Discussion Management’s improve our profitability. Our long-term liabilities consist mainly of long-term debt and liabilities • Dividends for retirement benefits. As of March 31, 2009, long-term debt was We need sufficient liquidity to make our scheduled dividend pay- ¥882.8 billion, of which bonds accounted for ¥540.2 billion. Our ments. As our basic dividend policy, we aim to achieve a consolidated remaining long-term debt (including the current portion) consisted of dividend payout ratio of 30% under the Medium-Term Management ¥325.9 billion loans from banks and life insurance companies and Plan “JT-11,” with the impact of goodwill amortization excluded from ¥16.7 billion long-term lease obligation. Annual interest rates appli- the net income used as a basis for calculating the payout ratio. We cable to yen-denominated long-term bank loans outstanding as of will continue to provide a competitive level of return to shareholders March 31, 2008 and 2009 ranged from 0.65% to 6.17% and 0.77% in light of the implementation status of our mid- to long-term growth to 5.30%, respectively. Annual interest rates for long-term loans strategies and the outlook of our consolidated financial results, with denominated in other currencies ranged from 2.35% to 9.20% for a view to increasing our dividend payments further. those outstanding as of March 31, 2008 and from 2.35% to 8.00% • Stock Repurchases for those outstanding as of March 31, 2009. 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, 2009 were as follows: Articles of Incorporation at the general shareholders’ meeting held on Millions of For years ended March 31 Millions of yen U.S. dollars June 24, 2004 so that we could make repurchases based on a reso- 2010 ¥222,080 $2,261 lution made by the Board of Directors. As of March 31, 2009, we held 2011 77,567 790 419,920 shares of common stock as treasury stock. We may con- 2012 167,555 1,706 tinue to hold the repurchased shares as treasury stock or use them 2013 63,010 641 for share retirement or for other purposes. Stock repurchases provide 2014 287,289 2,925 our management with an additional option for increasing flexibility and 2015 and thereafter 65,171 663 speed in capital management in order to adapt to a rapidly changing Total ¥888,672 $8,986 business environment. We will determine the timing, scale and manner of any further repurchase in an appropriate manner in light As of March 31, 2009, our long-term debt was rated Aa3 by of our business needs and market trends. Moody’s Investors Service, Inc. and A+ by Standard & Poor’s Ratings Services. These ratings are among the highest ratings for international Capital Resources and Use tobacco companies. By maintaining high credit ratings, we can We have historically had, and expect to continue to have, significant finance large sums of capital at relatively low cost from third parties cash flows from operating activities. Cash provided by operating as needed. Our ability to maintain high ratings is affected by a number activities was ¥145.0 billion in the year ended March 31, 2008 and of factors such as developments in our major business markets, the ¥275.3 billion in the year ended March 31, 2009. We expect that cash quality of execution of our business strategies, and general economic generated by operating activities will continue to cover capital trends in Japan that are beyond our control. The credit ratings are expenditures and debt repayments. not recommendations for purchasing, selling or holding securities. For substantial capital needs related to the acquisition of outside The ratings could be withdrawn or revised at any time. Each rating resources, we may utilize debt financing, primarily borrowings from should be evaluated separately from other ratings. Under the Japan financial institutions or the issuance of bonds, as needed. (Please see Tobacco Inc. Law, bonds issued by Japan Tobacco Inc. are secured “Long and Short-term Debt” below.) by statutory preferential rights to the property of Japan Tobacco Inc. Equity financing, including warrants and bonds with warrants, These rights give bondholders precedence over unsecured creditors requires the approval of the Minister of Finance under the Japan in seeking repayment, with the exception of national and local taxes Tobacco Inc. Law. Revisions to the Japan Tobacco Inc. Law that and other statutory obligations. took effect on April 19, 2002 provide us with the flexibility to issue 069 JT Annual Report 2009 • Short-term Debt accounting under Japanese GAAP and meet specific matching We take in short-term loans from banks and other financial institu- criteria are not measured at market value, but the differential to be tions. Short-term loans totaled ¥269.0 billion as of March 31, 2008, paid or received under the swap agreement is accrued and included Eleven-Year including ¥162.4 billion in foreign currency-denominated loans, and in interest expenses. Consolidated Financial Summary ¥113.2 billion as of March 31, 2009, including ¥61.8 billion in foreign We use foreign currency forward contracts, currency swaps and currency-denominated loans. Annual interest rates applicable to yen currency option contracts for the purpose of managing the risk of denominated short-term bank loans ranged from 0.01% to 7.047% fluctuations in foreign exchange rates on forecasted transactions in as of March 31, 2008 and from 0.216% to 2.750% as of March 31, foreign currencies. Gains or losses arising from changes in the value and Analysis of Business Results Financial Condition and

2009. Annual interest rates applicable to short-term loans denomi- of the contracts that qualify for hedge accounting are deferred and Discussion Management’s nated in other currencies ranged from 3.69% to 12.70% as of March recognized in the period in which corresponding losses or gains 31, 2008 and from 0.130% to 83.000% as of March 31, 2009. from transactions being hedged by such contracts are recognized. As a Japanese commercial custom, short-term and long-term On the other hand, hedging contracts mainly related to our interna- bank loans are extended under general agreements stipulating that, tional tobacco operations do not qualify for hedge accounting and under certain circumstances, collateral or guarantees for present and therefore we recognize changes in the value of foreign currency future debts should be provided upon the request of the bank, and derivative instruments against earnings in the period in which they that the bank shall have the right, as the debt obligations become occur. This could result in gains or losses from fluctuations in due or in the event of default, to offset cash deposits against debts exchange rates related to a derivative contract being recognized in due to it. We have never been requested to provide such collateral a different period from the one in which the gains or losses expected or guarantee. from the underlying forecasted transactions are recognized. For information about the contract and notional amount of Derivative Transactions interest rate swaps, interest rate cap option contracts, foreign We are exposed to market risks principally from changes in interest currency forward contracts and currency swaps outstanding as of rates, foreign exchange rates and equity and debt security prices. March 31, 2008 and 2009 that did not qualify for hedge accounting, Our interest rate risk exposures primarily relate to financing activities. see Note 17 to the audited consolidated financial statements Our foreign currency exposures relate to buying, selling and financing included in this annual report. in currencies other than the local currencies of our operations. In order to reduce foreign exchange rate risk and interest rate risk, we use derivative financial instruments including interest rate swaps, interest rate cap option contracts, foreign currency forward con- tracts, currency swaps and currency option contracts. We do not hedge against price fluctuations of debt and equity securities. We have risk management policies and procedures designed to mitigate the risks arising from the use of derivative financial instru- ments. We utilize derivatives solely for risk management purposes, and no derivatives are held or issued for trading purposes. As part of our risk management procedures, we identify the specific risks and transactions to be hedged and the appropriate hedging instruments to be used to reduce the risk, and assess the correlation between the hedged risks and the hedging instruments. The effectiveness of our hedging activities is assessed in accordance with our risk man- agement policies and practice manual for hedging transactions. We are exposed to credit-related risk in the event of default by counterparties to derivative financial instruments. However, we strive to mitigate this risk by limiting counterparties to international financial institutions with high credit ratings deemed to have no significant risk of default. We use interest rate swaps and interest rate cap option contracts for the purpose of managing interest rate risk in relation to borrow- ings. Interest rate swap agreements that qualify for hedge Consolidated Balance Sheets Japan Tobacco Inc. and Consolidated Subsidiaries / March 31, 2008 and 2009

070 JT Annual Report 2009

Millions of U.S. dollars Millions of yen (Note 2) Assets 2008 2009 2009 Eleven-Year Consolidated Current assets: Financial Summary Cash and cash equivalents ¥ 215,009 ¥ 167,258 $ 1,703 Short-term investments (Note 5) 3,830 2,610 27 Trade notes and accounts receivable 325,076 290,069 2,953 and Analysis of Business Results Merchandise & finished goods 138,871 122,970 1,252 Financial Condition and Management’s Discussion Discussion Management’s Semi-finished goods 120,528 119,291 1,214 Work in process 7,938 6,562 67 Raw materials & supplies 226,736 215,335 2,192

Consolidated Other current assets (Notes 7 and 8) 201,212 174,749 1,778 Balance Sheets Allowance for doubtful accounts (4,504) (3,162) (32) Total current assets 1,234,696 1,095,682 11,154

Property, plant and equipment (Note 7): Land 157,381 147,219 1,499 Buildings and structures 679,900 621,469 6,327 Machinery, equipment and vehicles 704,664 642,149 6,537 Tools 220,932 165,435 1,684 Construction in progress 32,120 35,254 359 Total 1,794,997 1,611,526 16,406 Accumulated depreciation (1,031,665) (942,783) (9,598) Net property, plant and equipment 763,332 668,743 6,808

Investments and other assets: Investment securities (Note 5) 97,534 66,495 677 Investments in and advances to unconsolidated subsidiaries and associated companies 35,577 24,639 251 Trademarks 613,497 347,372 3,536 Goodwill 2,106,887 1,453,961 14,802 Deferred tax assets (Note 8) 110,709 128,787 1,311 Other assets 155,238 135,820 1,382 Allowance for doubtful accounts (30,076) (41,696) (424) Allowance for loss on investments (180) — — Total investments and other assets 3,089,186 2,115,378 21,535 Total ¥ 5,087,214 ¥3,879,803 $39,497

See notes to consolidated financial statements. 071 JT Annual Report 2009

Millions of U.S. dollars Millions of yen (Note 2) Liabilities and Equity 2008 2009 2009 Eleven-Year Current liabilities: Consolidated Financial Summary Short-term bank loans (Note 7) ¥ 269,034 ¥ 113,231 $ 1,153 Current portion of long-term debt (Note 7) 81,062 222,256 2,263 Tobacco excise taxes payable 300,614 268,999 2,738 and Analysis of Trade notes and accounts payable 175,370 158,544 1,614 Business Results Financial Condition and Other payable (Note 10) 79,015 62,825 640 Discussion Management’s Income taxes payable (Note 8) 71,694 51,777 527 Consumption taxes payable 62,654 43,848 446

Other current liabilities (Notes 7, 8 and 10) 244,953 Consolidated 171,923 1,749 Balance Sheets Total current liabilities 1,284,396 1,093,403 11,130

Non-current liabilities: Long-term debt (Note 7) 1,041,651 660,592 6,725 Liabilities for retirement benefits (Note 10) 283,387 259,146 2,638 Deferred tax liabilities (Note 8) 174,395 110,390 1,124 Other non-current liabilities (Notes 7 and 10) 148,756 131,984 1,344 Total non-current liabilities 1,648,189 1,162,112 11,831

Commitments and contingent liabilities (Note 14)

Equity (Note 11): Common stock—authorized, 40,000,000 shares; issued, 10,000,000 shares in 2008 and 2009 100,000 100,000 1,018 Capital surplus 736,400 736,400 7,497 Stock acquisition rights (Note 9) 186 365 4 Retained earnings 1,344,490 1,224,989 12,471 Unrealized gain on available-for-sale securities 21,339 8,438 86 Deferred gain on derivatives under hedge accounting 220 92 1 Pension liability adjustment of foreign consolidated subsidiaries (Note 10) (10,712) (18,966) (193) Foreign currency translation adjustments (41,086) (423,562) (4,313) Treasury stock, at cost—419,920 shares in 2008 and 2009 (74,578) (74,578) (759) Total 2,076,259 1,553,178 15,812 Minority interests 78,370 71,110 724 Total Equity 2,154,629 1,624,288 16,536 Total ¥5,087,214 ¥3,879,803 $39,497 Consolidated Statements of Income Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31, 2007, 2008 and 2009

072 JT Annual Report 2009

Millions of U.S. dollars Millions of yen (Note 2) 2007 2008 2009 2009 Eleven-Year Consolidated Net sales Financial Summary ¥4,769,387 ¥6,409,727 ¥6,832,307 $69,554 Cost of sales (Note 3 (f)) 3,844,768 5,228,926 5,554,399 56,545 Gross profit 924,619 1,180,801 1,277,908 13,009 Selling, general and administrative expenses and Analysis of Business Results (Notes 9 and 12) 592,628 750,247 914,102 9,306 Financial Condition and Management’s Discussion Discussion Management’s Operating income 331,991 430,554 363,806 3,703

Other income (expenses):

Consolidated Interest and dividend income 12,103 13,410 12,276 125 Statements of Income Gain on disposition of property, plant and equipment—net 33,952 57,179 32,787 334 Loss on impairment of long-lived assets (Note 15) (2,712) (3,825) (16,365) (167) Interest expense (Note 7) (6,940) (41,759) (51,356) (523) Write-down of investment securities — (11,154) (7,063) (72) Business restructuring costs (Notes 10 and 15) — (6,442) (24,364) (248) Other—net (Note 15) (31,198) (65,349) (47,577) (484) Other income (expenses)—net 5,205 (57,940) (101,662) (1,035) Income Before Income Taxes and Minority Interests 337,196 372,614 262,144 2,668 Income taxes (Note 8): Current 84,481 117,272 126,732 1,290 Deferred 36,924 11,107 8,241 84 Total income taxes 121,405 128,379 134,973 1,374 Income Before Minority Interests 215,791 244,235 127,171 1,294 Minority interests 5,019 5,533 3,771 38 Net income ¥ 210,772 ¥ 238,702 ¥ 123,400 $ 1,256

Yen U.S. dollars 2007 2008 2009 2009 Amounts per share: Basic net income (Notes 3 (r) and 18) ¥ 22,001 ¥ 24,917 ¥ 12,881 $ 131 Diluted net income (Notes 3 (r) and 18) — 24,916 12,880 131 Cash dividends applicable to the year (Note 3 (r)) 4,000 4,800 5,400 55

See notes to consolidated financial statements. Consolidated Statements of Changes in Equity Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31, 2007, 2008 and 2009

073 JT Annual Report 2009

Thousands Millions of yen Pension Deferred liability gain on ­adjustment Number of Stock Unrealized derivatives of foreign Foreign shares of Acquisition gain (loss) on under consolidated currency

common Common Capital Rights Retained available-for- hedge subsidiaries translation Treasury Minority Total Eleven-Year stock stock surplus (Note 9) earnings sale securities accounting (Note 10) adjustments stock Total interests equity Consolidated Financial Summary Balance, March 31, 2006 2,000 ¥100,000 ¥736,400 ¥ — ¥ 972,512 ¥ 35,532 ¥ — ¥ — ¥ (7,354) ¥(74,578) ¥1,762,512 ¥ — ¥1,762,512 Reclassified balance as of March 31, 2006 — — — — — — — — — — — 57,561 57,561 Stock split (Note 11) 8,000 — — — — — — — — — — — Net income — — — — 210,772 — — — — — 210,772 — 210,772

Minimum pension liability adjustment of and Analysis of Business Results

foreign consolidated subsidiaries — — — — 9,818 — — — — — 9,818 — 9,818 Financial Condition and Management’s Discussion Management’s Appropriations: Cash dividends paid (¥9,000 per share) for year ended 2006 — — — — (17,244) — — — — — (17,244) — (17,244) Cash dividends paid (¥1,800 per share)

for interim of year ended 2007 — — — — (17,244) — — — — — (17,244) — (17,244) in Equity Consolidated Bonuses to directors and corporate auditors — — — — (197) — — — — — (197) — (197) Statements of Changes Adjustment to retained earnings for change in the number of equity method affiliates — — — — (80) — — — — — (80) — (80) Net changes in the year — — — — — (2,202) 14,580 (15,560) 15,099 — 11,917 6,801 18,718 Balance, March 31, 2007 10,000 100,000 736,400 — 1,158,337 33,330 14,580 (15,560) 7,745 (74,578) 1,960,254 64,362 2,024,616 Adoption of FIN 48 (Note 3 (q)) — — — — (10,548) — — — — — (10,548) — (10,548) Net income — — — — 238,702 — — — — — 238,702 — 238,702 Appropriations: Cash dividends paid (¥4,400 per share) — — — — (42,152) — — — — — (42,152) — (42,152) Adjustment to retained earnings for change in the number of equity method affiliates — — — — 151 — — — — — 151 — 151 Net changes in the year — — — 186 — (11,991) (14,360) 4,848 (48,831) — (70,148) 14,008 (56,140) Balance, March 31, 2008 10,000 100,000 736,400 186 1,344,490 21,339 220 (10,712) (41,086) (74,578) 2,076,259 78,370 2,154,629 Adjustment of retained earnings due to an adoption of PITF No. 18 (Note 3 (b)) — — — — (193,658) — — — — — (193,658) — (193,658) Net Income — — — — 123,400 — — — — — 123,400 — 123,400 Appropriations: Cash dividends paid (¥5,200 per share) — — — — (49,816) — — — — — (49,816) — (49,816) Adjustment to retained earnings for change in the number of consolidated subsidiaries — — — — 47 — — — — — 47 — 47 Adjustment to retained earnings for change in the number of equity method affiliates — — — — 526 — — — — — 526 — 526 Net changes in the year — — — 179 — (12,901) (128) (8,254) (382,476) — (403,580) (7,260) (410,840) Balance, March 31, 2009 10,000 ¥100,000 ¥736,400 ¥365 ¥1,224,989 ¥ 8,438 ¥ 92 ¥(18,966) ¥(423,562) ¥(74,578) ¥1,553,178 ¥71,110 ¥1,624,288

Millions of U.S. dollars (Note 2) Pension Deferred liability gain on adjustment Stock Unrealized derivatives of foreign Foreign Acquisition gain (loss) on under consolidated currency Common Capital Rights Retained available-for- hedge subsidiaries translation Treasury Minority Total stock surplus (Note 9) earnings sale securities accounting (Note 10) adjustments stock Total interests equity Balance, March 31, 2008 $1,018 $7,497 $2 $13,687 $ 217 $ 2 $(109) $ (418) $(759) $21,137 $798 $21,935 Adjustment of retained earnings due to an adoption of PITF No. 18 (Note 3 (b)) — — — (1,971) — — — — — (1,971) — (1,971) Net Income — — — 1,256 — — — — — 1,256 — 1,256 Appropriations: Cash dividends paid ($53 per share) — — — (507) — — — — — (507) — (507) Adjustment to retained earnings for change in the number of consolidated subsidiaries — — — 0 — — — — — 0 — 0 Adjustment to retained earnings for change in the number of equity method affiliates — — — 6 — — — — — 6 — 6 Net changes in the year — — 2 — (131) (1) (84) (3,895) — (4,109) (74) (4,183) Balance, March 31, 2009 $1,018 $7,497 $4 $12,471 $ 86 $ 1 $(193) $(4,313) $(759) $15,812 $724 $16,536

See notes to consolidated financial statements. Consolidated Statements of Cash Flows Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31, 2007, 2008 and 2009

074 JT Annual Report 2009

Millions of U.S. dollars Millions of yen (Note 2) 2007 2008 2009 2009 Eleven-Year Consolidated Operating Activities: Financial Summary Income before income taxes and minority interests ¥ 337,196 ¥ 372,614 ¥ 262,144 $ 2,669 Adjustments for: Income taxes paid (57,185) (132,725) (114,414) (1,165) Depreciation and amortization other than goodwill 130,106 167,658 176,900 1,801 and Analysis of Business Results Amortization of goodwill 2,537 3,883 105,512 1,074 Financial Condition and Management’s Discussion Discussion Management’s Gain on disposition of property, plant and equipment (33,952) (57,179) (32,787) (334) Loss on impairment of long-lived assets 2,712 3,825 16,365 167 Write-down of investment securities — 11,154 7,063 72 Change in assets and liabilities: Cash Flows

Consolidated Decrease (increase) in trade notes and accounts receivable (9,476) 47,485 (43,141) (439) Statements of Decrease (increase) in inventories (6,171) 27,115 (47,632) (485) Increase (decrease) in tobacco excise taxes payable 160,020 (213,134) 28,981 295 Increase (decrease) in trade notes and accounts payable (12,878) (16,650) 2,699 27 Decrease in other payable (22,088) (39,956) (7,940) (81) Decrease in liabilities for retirement benefits (21,164) (4,932) (13,159) (134) Decrease in non-current other payable (43,142) (5,778) (3,707) (38) Other—net 9,443 (18,350) (61,613) (627) Total adjustments 98,762 (227,584) 13,127 133 Net cash provided by operating activities 435,958 145,030 275,271 2,802 Investing Activities: Purchases of short-term investments (332,975) (2,443) (1,643) (17) Proceeds from sale and redemption of short-term investments 386,816 6,846 3,272 33 Purchases of investment securities (158,385) (22,563) (404) (4) Proceeds from sale and redemption of investment securities 5,345 2,153 3,058 31 Purchases of property, plant and equipment (96,717) (124,832) (112,408) (1,144) Proceeds from sale of property, plant and equipment 57,094 83,336 55,256 563 Purchases of trademarks and other assets (7,928) (6,831) (6,949) (71) Purchases of shares of newly consolidated subsidiaries, net of cash acquired (Note 4) (4,085) (1,608,081) (3,061) (31) Other—net 1,143 3,780 (2,129) (22) Net cash used in investing activities (149,692) (1,668,635) (65,008) (662) Financing Activities: Net increase (decrease) in short-term bank loans 18,571 136,063 (125,182) (1,274) Proceeds from long-term debt — 378,863 94,130 958 Repayments of long-term debt (19,840) (90,199) (54,663) (556) Proceeds from issuance of common stock to minority shareholders 4,928 — — — Proceeds from issuance of bonds — 149,723 — — Payment for redemption of bonds — (10,000) (70,810) (721) Dividends paid (34,488) (42,152) (49,752) (506) Dividends paid to minority shareholders (1,474) (2,890) (3,540) (36) Repayments of finance lease obligations — — (6,606) (67) Other—net (332) (407) (1,047) (12) Net cash provided by (used in) financing activities (32,635) 519,001 (217,470) (2,214) Foreign Currency Translation Adjustments on Cash and Cash Equivalents 5,749 40,091 (39,591) (402) Net Increase (decrease) in Cash and Cash Equivalents 259,380 (964,513) (46,798) (476) Cash and Cash Equivalents, Beginning of Year 920,142 1,179,522 215,009 2,189 Decrease in cash and cash equivalents resulting from exclusion of subsidiaries from consolidation — — (953) (10) Cash and Cash Equivalents, End of Year ¥1,179,522 ¥ 215,009 ¥ 167,258 $ 1,703

Finance lease obligations regarded as non-cash transactions incurred for the year ended March, 2009 amounted to ¥6,176 million ($63 million). See notes to consolidated financial statements. Notes to Consolidated Financial Statements Japan Tobacco Inc. and Consolidated Subsidiaries

075 JT Annual Report 2009 1. Business

Japan Tobacco Inc. (“JT”) is a joint stock corporation ­(kabushikikaisya) distributes, and sells tobacco products, primarily cigarettes. In the Eleven-Year incorporated under the companies act of Japan (the “Companies Act”) Group’s pharmaceutical business, the Group develops, manufactures Consolidated Financial Summary 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 domestic and international tobacco businesses, the pharmaceutical develops and sells beverages. The Group’s other business segment business and the food business. In the Group’s domestic and inter- includes its commercial real estate and other operations. and Analysis of Business Results Financial Condition and national tobacco businesses, the Group develops, manufactures, Discussion Management’s

2. Basis of Presenting Consolidated Financial Statements Financial Statements Notes to Consolidated The accompanying consolidated financial statements have been consolidated financial statements issued domestically in order to prepared in conformity with accounting principles generally accepted present them in a form which is more familiar to readers outside in Japan (“Japanese GAAP”) and in accordance with the provisions Japan. In addition, the notes to the consolidated financial statements set forth in the Japanese Financial Instruments and Exchange Act include information which is not required under Japanese GAAP but and its related accounting regulations, which are different in certain is presented herein as additional information. Certain reclassifications respects from application, and disclosure requirements of account- of previously reported amounts have been made to conform with ing principles generally accepted in the United States of America classifications for the year ended March 31, 2009. (“U.S. GAAP”) and International Financial Reporting Standards. The consolidated financial statements are stated in Japanese In the case of most foreign consolidated subsidiaries, their financial yen, the currency of the country in which JT is incorporated and statements are prepared in conformity with U.S. GAAP (see Note 3 operates. The translations of Japanese yen amounts into U.S. dollar “Summary of Significant Accounting Policies” (q) Foreign Consoli- amounts are included solely for the convenience of readers outside dated Subsidiaries) and are included in the consolidated financial Japan and have been made at the rate of ¥98.23 to $1, the rate of statements on that basis. exchange at March 31, 2009. Such translations should not be In preparing these consolidated financial statements, certain construed as representations that the Japanese yen amounts could reclassifications and rearrangements have been made to the be converted into U.S. dollars at that or any other rate.

3. Summary of Significant Accounting Policies a) Consolidation Investments in 22 material associated companies as of March 31, The consolidated financial statements as of March 31, 2009 include 2009 (11 as of March 31, 2007 and 25 as of March 31, 2008) are the accounts of JT and its 274 significant (153 as of March 31, 2007 accounted for by the equity method. The equity method is not applied and 299 as of March 31, 2008) subsidiaries. Consolidation of the to account for the investments in unconsolidated subsidiaries and the remaining unconsolidated subsidiaries would not have had a material remaining associated companies, since the effect on the accompany- effect on the accompanying consolidated financial statements. Most ing consolidated financial statements would not have been material. foreign consolidated subsidiaries have a December 31 fiscal year- Investments in the unconsolidated subsidiaries and the remaining end, which differs from the March 31 fiscal year-end of JT. Any associated companies are stated at cost (see (d) Securities). necessary adjustments for the three-month period are made for All significant inter-company balances and transactions have been consolidation purposes. eliminated in consolidation. All material unrealized gains resulting from Under the control or influence concept, those companies in which inter-company transactions have been eliminated. JT, directly or indirectly, is able to exercise control over operations are The excess of the cost of the Group’s investments in consolidated fully consolidated, and those companies over which the Group has subsidiaries over its equity in (prior to April 1, 1999) or the fair value the ability to exercise significant influence are accounted for by the of (from April 1, 1999) the net assets purchased at the date of acquisi- equity method. tion is recorded as goodwill. Goodwill is amortized on a straight-line 076 JT Annual Report 2009 basis over five to twenty years. Such amortization expense is included c) Cash Equivalents in selling, general and administrative expenses. However, insignificant Cash equivalents are all short-term, highly liquid investments that are goodwill is charged to income when incurred. convertible to known amounts of cash and that have original maturi- Eleven-Year Consolidated ties of three months or less. Financial Summary b) Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements d) Securities In May 2006, the Accounting Standards Board of Japan (the “ASBJ”) The Group’s securities are classified as held-to-maturity debt securi- issued ASBJ Practical Issues Task Force (PITF) No. 18, “Practical ties or available-for-sale securities, depending on management’s and Analysis of Business Results Financial Condition and

Management’s Discussion Discussion Management’s Solution on Unification of Accounting Policies Applied to Foreign holding intent. Held-to-maturity debt securities are reported at Subsidiaries for the Consolidated Financial Statements.” PITF No. 18 amortized cost. Available-for-sale marketable securities are reported prescribes: (1) the accounting policies and procedures applied to a at fair value, with unrealized gains and losses, net of applicable taxes, parent company and its subsidiaries for similar transactions and reported in a separate component of equity. events under similar circumstances should in principle be unified for The cost of available-for-sale marketable securities sold is deter- Financial Statements Notes to Consolidated the preparation of the consolidated financial statements, (2) financial mined based on the moving-average method. In addition, compound statements prepared by foreign subsidiaries in accordance with either financial instruments, including embedded derivatives which cannot International Financial Reporting Standards or the generally accepted be measured separately, are reported at fair value in aggregate, with accounting principles in the United States of America tentatively may these gains and losses reported in the consolidated statements of be used for the consolidation process, (3) however, the following income. Non-marketable available-for-sale securities are stated at items should be adjusted in the consolidation process so that net cost determined by the moving-average method. For significant income is accounted for in accordance with Japanese GAAP unless impairment in value that is judged unrecoverable, carrying amounts they are not material: of securities are reduced to fair value, with a resulting charge to 1. Amortization of goodwill income. An allowance for loss on investments is recorded to provide 2. Scheduled amortization of actuarial gain or loss of pensions for the loss on investments in certain non-marketable equity accounted that has been directly recorded in the equity for by the cost method and is determined based on the respective 3. Expensing capitalized development costs of R&D financial condition of the investees. 4. Cancellation of the fair value model accounting for property, plant, and equipment and investment properties and incorpora- e) Allowance for Doubtful Accounts tion of the cost model accounting The allowance for doubtful accounts is stated in amounts considered 5. Recording the prior years’ effects of changes in accounting to be appropriate based on the companies’ past credit loss experi- policies in the income statement where retrospective adjust- ence and an evaluation of potential losses in the receivables ments to financial statements have been incorporated outstanding. 6. Exclusion of minority interests from net income, if contained JT applied this accounting standard effective April 1, 2008. As a f) Inventories result of this change, operating income and income before income Inventories are stated at cost determined principally by the average taxes and minority interests for the year ended March, 2009 cost method. In July 2006, the ASBJ issued ASBJ Statement No. 9, decreased by ¥94,235 million ($959 million) respectively, and as of “Accounting Standard for Measurement of Inventories,” and JT and April 1, 2008, retained earnings decreased by ¥193,658 million its domestic subsidiaries adopted the standard from fiscal year ($1,971 million) as JT amortized goodwill posted at consolidated beginning on April 1, 2007. This standard requires that inventories foreign subsidiaries. held for sale in the ordinary course of business be measured at the Also, income before income taxes and minority interests for the lower of cost or net selling value, which is defined as the selling price year ended March 31, 2009 decreased by ¥912 million ($9 million) less additional estimated manufacturing costs and estimated direct respectively, as JT posted the retrospective adjustment in the selling expenses. The replacement cost may be used in place of the ­Consolidated Statements of Income. The adjustment was caused by net selling value, if appropriate. In addition, leaf tobacco held by JT an accounting policy change in foreign subsidiaries as a result of a was subject to annual devaluation prior to April 1, 2008. JT no longer change of U.S. GAAP. applies annual devaluation for its leaf inventories beginning in the year ended March 31, 2008 (see Note 6 “Inventories”). 077 JT Annual Report 2009 g) Property, Plant and Equipment portion of the deferred tax assets where it is considered more likely Property, plant and equipment are stated at cost. Depreciation is than not that they will not be realized. generally computed using the declining-balance method while the Eleven-Year straight-line method is applied to buildings acquired after April 1, k) Accrued bonuses Consolidated Financial Summary 1998. The useful lives of buildings and structures, and machinery, Bonuses to directors, cooperate auditors and employees are accrued equipment and vehicles are principally from 38 to 50 years and 10 at the year end to which such bonuses are attributable. years, respectively. For finance leases that do not transfer ownership of the leased l) Liabilities for Retirement Benefits and Analysis of Business Results Financial Condition and property to the lessee, depreciation expense is mainly computed on (1) Employees’ retirement benefits Discussion Management’s the straight-line method over the lease period as the useful life and JT has an unfunded severance indemnity plan and a cash balance assuming no 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 Financial Statements Notes to Consolidated Domestic Group was changed as a result of the review of useful life and/or non-contributory defined pension plans. of these assets in conjunction with the revision of the corporate tax The Pension Plans and the subsidiaries’ plans are stated based on act, principally, the useful life of tobacco manufacturing was changed actuarially estimated retirement benefit obligations, considering the 8 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 retirement immaterial. benefit obligations are recorded based on the amount required if all employees terminated their employment as of the balance sheet date. h) Impairment of Long-Lived Assets Contributions to the defined contribution plan are charged to expenses The Domestic Group reviews its long-lived assets for impairment when they are paid or accrued. whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An (2) Obligations under the Public Official Mutual Assistance impairment loss would be recognized if the carrying amount of an Association Law asset or asset group exceeds the sum of the undiscounted future As a formerly wholly government-owned company, JT is obligated by cash flows expected to result from the continued use and eventual the Public Official Mutual Assistance Association Law to reimburse disposition of the asset or asset group. the Japanese government for pension expenses incurred each year The impairment loss would be measured as the amount by by the government for former employees of Japan Tobacco and Salt 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, In March 2007, the ASBJ issued ASBJ Statement No. 13, “Account- which is calculated by the straight-line method principally over ing Standard for Lease Transactions,” which revised the previous 10 years. accounting standard for lease transactions issued in June 1993. The revised accounting standard for lease transactions is effective for j) Income Taxes fiscal years beginning on or after April 1, 2008 with early adoption The provision for income taxes is computed based on the pretax permitted for fiscal years beginning on or after April 1, 2007. income or loss included in the consolidated statements of income. The asset and liability approach is used to recognize deferred tax –Lessee – assets and liabilities for the expected future tax consequences of Under the previous accounting standard, finance leases that deem to temporary differences between the carrying amounts and the tax transfer ownership of the leased property to the lessee are to be bases of assets and liabilities, and tax operating loss and other credit capitalized. However, other finance leases were permitted to be carry-forwards. Deferred taxes are measured by applying currently accounted for as operating lease transactions if certain “as if capital- enacted tax laws to the temporary differences, tax operating loss and ized” information is disclosed in the note to the lessee’s financial other credit carryforwards. A valuation allowance is provided for any statements. The revised accounting standard requires that all finance 078 JT Annual Report 2009 lease transactions should be capitalized to recognize lease assets and p) Derivatives lease obligations in the balance sheet. All derivatives, except for certain foreign exchange forward contracts, In addition, the revised accounting standard permits leases which foreign currency option contracts, foreign currency swap contracts Eleven-Year Consolidated existed at the transition date and do not transfer ownership of the and interest rate swap contracts described below, are recognized as Financial Summary leased property to the lessee to be measured at the obligations under either assets or liabilities and measured at fair value, and gains or finance leases less interest expense at the transition date and losses on derivative transactions are recognized in the consolidated recorded as acquisition cost of lease assets. statements of income. For derivatives which qualify for hedge accounting because of high and Analysis of Business Results Financial Condition and

Management’s Discussion Discussion Management’s –Lessor– correlation and effectiveness between the hedging instruments and Under the previous accounting standard, finance leases that deem the hedged items, gains or losses on derivatives are deferred until the to transfer ownership of the leased property to the lessee are to be corresponding hedged items are recognized in earnings. treated as sales. However, other finance leases were permitted to be The Group’s trade payable that are denominated in foreign accounted for as operating lease transactions if certain “as if sold” currencies and have been hedged by foreign exchange forward Financial Statements Notes to Consolidated information is disclosed in the note to the lessor’s financial state- contracts are translated at the foreign exchange rate stipulated in ments. The revised accounting standard requires that all finance the contracts. leases that deem to transfer ownership of the leased property to the Interest rate swaps that qualify for hedge accounting and meet lessee should be recognized as lease receivables, and all finance specific matching criteria are not remeasured at market value, but the leases that deem not to transfer ownership of the leased property to differential to be paid or received under the swap agreements are the lessee should be recognized as investments in lease. accrued and included in interest expense or income. JT and its domestic subsidiaries applied this accounting standard effective April 1, 2008. q) Foreign Consolidated Subsidiaries In addition, the Company accounted for leases which existed at the JT International and other foreign consolidated subsidiaries principally transition date and do not transfer ownership of the leased property to maintain their accounting records in conformity with U.S. GAAP. The the lessee as acquisition cost of lease assets measured at the obliga- significant accounting policies, which are different from JT’s policies, tions under finance leases less interest expense at the transition date. are as follows: The effect of this change on operating income, and income before (1) Inventories income taxes and minority interests is immaterial. Inventories are generally stated at the lower of cost or market, cost being determined by the first-in, first-out method or average cost. n) Appropriations of Retained Earnings (2) Property, plant and equipment Appropriation of retained earnings are reflected in the financial state- Depreciation of property, plant and equipment is generally computed ments for the following year upon shareholders’ approval. using the straight-line method over the estimated useful lives of the respective assets. o) Foreign Currency Transactions (3) Trademarks Receivables and payables denominated in foreign currencies are Trademarks are principally amortized using straight-line method over translated into Japanese yen at the rates prevailing at each balance 20 years. sheet date. The exchange gains or losses from translation are recog- (4) Retirement benefit pension plans nized in the consolidated statements of income to the extent that According to FASB statement 158 “Employers’ Accounting for hedging derivative financial instruments for foreign currency transac- Defined Benefit Pension and Other Postretirement Plans—an amend- tions do not qualify for hedge accounting (see (p) “Derivatives”). ment of FASB statements No. 87, 88, 106 and 132(R)” (“FASB 158”), All assets and liabilities of foreign consolidated subsidiaries are the difference of retirement benefits obligation and fair value of plan translated into Japanese yen at the exchange rate at each subsid- assets is recognized on the consolidated balance sheets as of March iary’s respective fiscal year end. All revenue and expense accounts 31, 2008 and 2009 as assets/liabilities. are translated at average exchange rates during each subsidiary’s Unrecognized net actuarial loss and prior service cost, net of respective fiscal year. applicable taxes, is recorded as a part of equity as pension liability Differences arising from such translation are shown as “Foreign adjustment of foreign consolidated subsidiaries. currency translation adjustments” and “Minority interests” in a sepa- Prior to the adoption of FASB 158, if the liability for retirement rate component of equity. benefits already recognized was less than the unfunded accumulated benefit obligation, an additional minimum liability was recognized. 079 JT Annual Report 2009 The additional minimum liability was charged directly to retained t) Retirement allowances for directors and corporate auditors earnings, if such amount exceeded unrecognized prior service cost, Retirement allowances for directors and corporate auditors are net of any tax benefits. recorded to state the liability at the amount that would be required if all Eleven-Year (5) Derivatives directors and corporate auditors retired at each balance sheet date. Consolidated Financial Summary All derivatives are used to hedge the exposure to foreign exchange risk and interest rate risk are recognized as either assets or liabilities u) Provision for loss on debt guarantees in the balance sheet and measured at fair value. Possible losses arose from debt guarantees are provided based on Changes in the fair value of derivatives are recorded in current the financial position of guaranteed parties. and Analysis of Business Results Financial Condition and earnings for each fiscal year. Discussion Management’s (6) Income Taxes v) New Accounting Pronouncements Foreign consolidated subsidiaries that applied in conformity with U.S. Construction Contracts— GAAP adopted the provisions of FASB Interpretation (FIN) No. 48, Under the current Japanese GAAP, either the completed-contract Accounting for Uncertainty in Income Taxes. method or the percentage-of-completion method is permitted to Financial Statements Notes to Consolidated account for construction contracts and software development r) Per Share Information contracts. Each share of common stock was split into five shares on April On December 27, 2007, the ASBJ published a new accounting 1, 2006. standard for construction contracts. Under this accounting standard, Basic net income per share is computed by dividing net income the construction revenue and construction costs should be recog- available to common shareholders, by the weighted-average number nized by the percentage-of-completion method, if the outcome of a of common shares outstanding in each period, which were 9,580,080 construction contract can be estimated reliably. When total construc- shares for the years ended March 31, 2008 and 2009 (see Note 18 tion revenue, total construction costs and the stage of completion of “Net Income Per Share”). the contract at the balance sheet date can be reliably measured, the Diluted net income per share was not disclosed for the year ended outcome of a construction contract can be estimated reliably. If the March 31, 2007 because there was no potentially dilutive common outcome of a construction contract cannot be reliably estimated, the shares that were outstanding for each period. completed-contract method shall be applied. When it is probable that Diluted net income per share for the years ended March 31, 2008 total construction costs will exceed total construction revenue, an and 2009 reflects the potential dilution that could occur if stock acquisi- estimated loss on the contract should be immediately recognized by tion rights were exercised (see Note 18 “Net Income Per Share”). providing for loss on construction contracts. This standard is appli- Cash dividends per share presented in the Consolidated State- cable to construction contracts and software development contracts ments of Income are dividends applicable to the respective years and effective for fiscal years beginning on or after April 1, 2009 with including dividends to be paid after the end of the year, not retroac- early adoption permitted for fiscal years beginning on or before March tively adjusted for stock split. 31, 2009 but after December 27, 2007. s) Stock Option The ASBJ Statement No. 8, “Accounting Standard for Stock Options” and related guidance are applicable to stock options granted on and after May 1, 2006. This standard requires companies to recognize compensation expense for employee stock options based on the fair value at the date of grant and over the vesting period as consideration for receiv- ing goods or services. The standard also requires companies to account for stock options granted to non-employees based on the fair value of either the stock option or the goods or services received. In the balance sheet, the stock option is presented as a stock acquisition right as a separate component of equity until exercised. JT has applied the accounting standard for stock options to those granted on and after May 1, 2006. 080 JT Annual Report 2009 4. Business Combinations

I. Via consolidated subsidiary JTI (UK) MANAGEMENT LTD, on April (2) Basis for recognition: Eleven-Year Consolidated 18, 2007, JT acquired the outstanding shares of the Gallaher Goodwill was recognized because the acquisition cost of the Financial Summary Group Plc (now known as “Gallaher Group Ltd.”) of the United company exceeded the net value allocated to the assets Kingdom through an acquisition method under English law known acquired and liabilities assumed. as a scheme of arrangement, converting Gallaher Group Plc into (3) Method and period for amortization of goodwill: a wholly owned subsidiary. In accordance with FASB Statement No. 142, “Goodwill and and Analysis of Business Results Financial Condition and

Management’s Discussion Discussion Management’s As the direct acquirer of the outstanding shares in Gallaher Group Other Intangible Assets,” the amount of goodwill recognized Plc was JTI (UK) MANAGEMENT LTD, which follows generally shall not be amortized. Rather, the decision of whether to accepted accounting principles and practices in the United States recognize impairment shall be made once each year, or each (“U.S. GAAP”), the business combination was accounted for under time an event occurs indicating that the fair value of goodwill the purchase method, based on FASB Statement No. 141. has fallen below its book value. Financial Statements Notes to Consolidated In August 2007, JT reorganized JTI (UK) MANAGEMENT LTD 5. Principal details of assets acquired and liabilities assumed on into a subsidiary of JT International Holding B.V., a consolidated the day of the business combination are as follows: subsidiary of JT. Current assets: ¥ 410,572 million ($ 4,098 million) 1. The following are the name of the acquired company, business Non-current assets: ¥2,531,125 million ($25,263 million) contents, main reasons for business combination, the date of Total assets: ¥2,941,697 million ($29,361 million) business combination, the legal form of the business combina- tion, and ratio of voting rights acquired. Current liabilities: ¥ 405,712 million ($ 4,049 million) (1) The name of acquired company: Gallaher Group Plc Non-current liabilities: ¥ 749,479 million ($ 7,481 million) (2) Business contents: Manufacturing and selling of tobacco Total liabilities: ¥1,155,191 million ($11,530 million) products (3) Main reasons for business combination Regarding allocation of acquisition costs, the major intan- Through the acquisition of the Gallaher Group Plc, JT could gible asset that was acquired in addition to goodwill was expand its business and enjoy economies of scale, build a ¥523,263 million ($5,223 million) in trademarks. This asset has well-balanced and competitive brand portfolio in each an amortization period of 20 years. market and price segmentation, strengthen technology/ Note: Amount of yen mentioned above is translated at the exchange rate as distribution infrastructures, and synergize business growth of the business combination date. The amount of goodwill (¥1,791,189 expected by the business combination through effective million ($17,878 million)) included in non-current assets differs from the business operations. amount of goodwill which is described in consolidated balance sheet. (4) Date of business combination: April 18, 2007 (5) Legal form of the business combination: The issued shares II. On January 8, 2008, JT converted Katokichi Co., Ltd. into a were acquired for cash. subsidiary through tender offer for Katokichi shares. (6) Ratio of voting rights acquired: 100% In addition, JT acquired all of Katokichi’s voting rights on April 2. Period of operating results included in the consolidated financial 18, 2008. statements: 1. The following are the name of the acquired company, business As the closing date of the accounting period of the acquired contents, main reasons for business combination, the date of company is set on December 31, operating results from April business combination, the legal form of the business combina- 18, 2007 to December 31, 2007 for this company have been tion, and ratio of voting rights acquired. included in the current consolidated statement of income. (1) The name of acquired company: Katokichi Co., Ltd. 3. Acquisition costs (2) Business contents: The main business contents are manu- The acquisition was conducted for 7.5 billion sterling pounds facturing and selling of frozen foods and frozen fishery in cash. products. The other business contents are a distribution 4. Amount of goodwill recognized, basis for recognition, and business incidental to the main business and a service method and period for amortization of goodwill business such as a hotel and restaurant management. (1) Amount of goodwill recognized: (3) Main reasons for business combination ¥1,721,368 million ($17,181 million) JT anticipated that the Group could realize further expansion of its business value because the Group would enjoy the 081 JT Annual Report 2009 effect of mutual reinforcement and management resources (2) Basis for recognition synergy through the business combination. Goodwill was recognized because the acquisition cost of the (4) Date of business combination: January 8, 2008 company exceeded the net value allocated to the assets Eleven-Year (5) Legal form of the business combination: The issued shares acquired and liabilities assumed. Consolidated Financial Summary were acquired for cash. (3) Method and period for amortization of goodwill (6) Ratio of voting rights acquired: 93.89% Method for amortization: straight-line method 2. Period of operating results included in the consolidated financial Period for amortization: five years statements 5. Principal details of assets acquired and liabilities assumed on and Analysis of Business Results Financial Condition and

From January 1, 2008 to March 31, 2008 the day of the business combination are as follows: Discussion Management’s 3. Acquisition costs Current assets: ¥ 89,279 million ($ 891 million) The acquisition was conducted for ¥108.6 billion ($1,084 mil- Non-current assets: ¥136,995 million ($1,367 million) lion) in cash. Total assets: ¥226,274 million ($2,258 million) 4. Amount of goodwill recognized, basis for recognition, and Financial Statements Notes to Consolidated method and period for amortization of goodwill Current liabilities: ¥ 84,813 million ($ 847 million) (1) Amount of goodwill recognized Non-current liabilities: ¥ 24,532 million ($ 244 million) ¥41,885 million ($418 million) Total liabilities: ¥109,345 million ($1,091 million)

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 March JT’s food business head office function and affiliated com- 31, 2009 panies which are engaged with processed food business 1. Outline of the transactions and seasoning business into Katokichi. After the combina- (1) Transferred business: Processed food business (excluding tion, Katokichi holds the processed food business including chilled processed food business) and seasoning business the largest scale of frozen food business in Japan and of JT seasoning business with leading manufacturing capability. (2) Description of transferred business: Mainly manufacturing and Katokichi keeps implementing a business restructuring and sales of processed frozen foods and seasoning product setting up further business fundamentals. (3) Legal form of the business combination: Business transfer of 2. Overview of accounting methods used JT’s processed food business and seasoning business, and These business combinations are accounted as transactions stock transfer of affiliated companies including JT Foods, and under common control with “Accounting for Business Combi- consolidated subsidiaries nations” issued by the Business Accounting Council (“BAC”) on (4) Name of the company after business combinations: October 31, 2003, and “Guidance for Accounting Standard for Katokichi Co., Ltd. Business Combinations and Business Divestitures” (ASBJ (5) Outline and purpose of the transactions: Guidance No.10 updated on November 15, 2007). The business combination enables the group to integrate 082 JT Annual Report 2009 5. Short-Term Investments and Investment Securities

Short-term investments and investment securities at March 31, 2008 and 2009 consisted of the following: Eleven-Year Consolidated Millions of Financial Summary Millions of yen U.S. dollars 2008 2009 2009 Short-term investments: Time deposits ¥ 1,392 ¥ 713 $ 7

and Analysis of Government and Corporate bonds 2,438

Business Results 1,700 18 Financial Condition and Management’s Discussion Discussion Management’s Trust fund investments and other — 197 2 Total ¥ 3,830 ¥ 2,610 $ 27 Investment securities: Equity securities ¥74,974 ¥54,217 $552

Financial Statements Government and Corporate bonds 4,366 4,137 42 Notes to Consolidated Trust fund investments and other 18,194 8,141 83 Total ¥97,534 ¥66,495 $677

The costs and aggregate fair values of marketable securities at March 31, 2008 and 2009 were as follows: Millions of yen 2008 Cost Unrealized gain Unrealized loss Fair value Available-for-sale Equity securities ¥36,728 ¥36,238 ¥3,674 ¥69,292 Government and Corporate bonds 3,537 91 0 3,628 Trust fund investments and other 14,503 2,454 44 16,913 Held-to-maturity Government bonds and municipal bonds 900 1 1 900 Others 1,268 — 0 1,268

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 Held-to-maturity Government bonds and municipal bonds 600 1 — 601

Millions of U.S. dollars 2009 Cost Unrealized gain Unrealized loss Fair value Available-for-sale Equity securities $360 $196 $52 $504 Government and Corporate bonds 42 1 0 43 Trust fund investments and other 82 — 5 77 Held-to-maturity Government bonds and municipal bonds 6 0 — 6 083 JT Annual Report 2009 The carrying amounts of non-marketable securities at March 31, 2008 and 2009 were as follows: Millions of Millions of yen U.S. dollars 2008 2009 2009 Eleven-Year Consolidated

Available-for-sale Financial Summary Equity securities ¥5,682 ¥4,702 $48 Corporate bonds 1,008 1,007 10 Trust fund investments and other 1,281 791 8

Total ¥7,971 ¥6,500 $66 and Analysis of Business Results Financial Condition and Management’s Discussion Management’s

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, 2007, 2008 and 2009, were as follows: Millions of Millions of yen U.S. dollars Financial Statements Notes to Consolidated 2007 2008 2009 2009 Amortized cost ¥ — ¥300 ¥ — $ — Proceeds from sales ¥ — ¥293 ¥ — $ — Net realized loss ¥ — ¥ (7) ¥ — $ —

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

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, 2007, 2008 and 2009, were as follows: Millions of Millions of yen U.S. dollars 2007 2008 2009 2009 Proceeds from sales ¥9,229 ¥1,902 ¥2,719 $28 Gross realized gains ¥2,125 ¥ 566 ¥ 220 $ 2 Gross realized losses (3) (43) (48) (0) Net realized gain ¥2,122 ¥ 523 ¥ 172 $ 2

The amounts of securities classified as available-for-sale and held-to-maturity at March 31, 2009, based on their contractual maturity dates, were as follows: Millions of yen Millions of U.S. dollars Available for Sale Held-to-Maturity Available for Sale Held-to-Maturity Due within one year ¥1,909 ¥ 701 $19 $ 7 Due after one year through five years 6,145 1,522 62 16 Due after five years through ten years 410 — 4 — Due after ten years 1 — 1 — Total ¥8,465 ¥2,223 $86 $23

For the years ended March 31, 2007, 2008 and 2009, 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 nil, ¥11,154 million and ¥7,062 million ($72 million), respec- material, is considered to have experienced “significant deterioration.” tively. In evaluating security values, a security, whose value has If a security has a strong chance of regaining its value, the security declined by more than 50% is considered to have experienced is not written down. 084 JT Annual Report 2009 6. Inventories

Inventories at March 31, 2008 and 2009 consisted of the following: Eleven-Year Consolidated Millions of Financial Summary Millions of yen U.S. dollars 2008 2009 2009 Leaf tobacco ¥300,671 ¥294,020 $2,993 Finished products 102,331 88,234 898

and Analysis of Other 91,071 Business Results 81,903 834 Financial Condition and Management’s Discussion Discussion Management’s Total ¥494,073 ¥464,157 $4,725

JT leaf tobacco inventory in excess of the minimum amount Annual devaluation was discontinued beginning in the year ended necessary for future production was subject to annual devaluation. March 31, 2008. Effective from April 1, 2008, JT and its domestic Financial Statements Notes to Consolidated The net effect of the change in the devaluation credited to cost of subsidiaries applied the “Accounting Standard for Measurement of sales at March 31, 2007 was ¥9,585 million. Inventories” (see Note 3 (f)).

7. Short-term Bank Loans, Long-term Debt and Lease Obligations

Short-term bank loans as of March 31, 2008 and 2009 consisted of the following: Millions of Millions of yen U.S. dollars 2008 2009 2009 Yen loans with interest rates of 0.010% to 7.047% at March 31, 2008 and of 0.216% to 2.750% at March 31, 2009 ¥106,673 ¥ 51,444 $ 524 Foreign currency loans with interest rates of 3.69% to 12.70% at March 31, 2008 and of 0.130% to 83.000% at March 31, 2009 162,361 61,787 629 Total ¥269,034 ¥113,231 $1,153

Long-term debt at March 31, 2008 and 2009 comprised the following: Millions of Millions of yen U.S. dollars 2008 2009 2009 1.98% yen bonds, due 2009 ¥ 150,000 ¥ 150,000 $ 1,527 1.34% yen bonds, due 2010 49,996 49,998 509 1.53% yen bonds, due 2011 40,000 40,000 407 1.68% yen bonds, due 2012 59,995 59,996 611 Unsecured 5.88% Euro bonds issued by foreign subsidiary due in 2008 63,054 — — Unsecured 6.63% Sterling pound bonds issued by foreign subsidiary due in 2009 68,904 39,523 402 Unsecured 4.63% Euro bonds issued by foreign subsidiary due in 2011 134,266 102,673 1,045 Unsecured 5.75% Sterling pound bonds issued by foreign subsidiary due in 2013 56,581 32,733 333 Unsecured 4.50% Euro bonds issued by foreign subsidiary due in 2014 83,390 63,974 651 Unsecured 0.99% yen bonds issued by domestic subsidiary due in 2009 10,000 — — Other bonds 500 1,261 13 Long-term bank loans due through 2028 403,575 325,944 3,320 Lease obligation due through 2019 2,452 16,746 170 Total 1,122,713 882,848 8,988 Less current portion (81,062) (222,256) (2,263) Long-term debt, less current portion ¥1,041,651 ¥ 660,592 $ 6,725

The weighted average interest rate for long-term lease obligation outstanding at March 31, 2009 is 12.97% and current portion is 8.16%. 085 JT Annual Report 2009 JT entered into interest rate swap agreements in March 2004 to payments of Japanese yen loans. convert interest payments on 1.98% yen bonds due 2009 to floating Annual interest rates applicable to Japanese yen long-term rate payments on a LIBOR basis, which was at 1.24% at March 31 loans of JT and certain domestic consolidated subsidiaries at Eleven-Year 2005, in order to manage interest rate risks on these bonds. Taking March 31, 2008 and 2009 ranged from 0.65% to 6.17% and 0.77% Consolidated Financial Summary changes in market conditions into consideration, JT unwound the to 5.30%, respectively. above interest swap agreements in May 2005. Consequently, JT now Annual interest rates applicable to long-term loans denominated pays a fixed rate interest of 1.61%. in foreign currencies outstanding at March 31, 2008 and 2009 In addition, certain domestic consolidated subsidiaries have ranged from 2.35% to 9.20% and 2.35% to 8.00%, respectively. and Analysis of Business Results Financial Condition and entered into interest rate swap agreements to fix variable rate interest Discussion Management’s

Annual maturities of long-term debt at March 31, 2009 were as follows: Millions of Years Ending March 31, Millions of yen U.S. dollars Financial Statements 2010 ¥222,080 $2,261 Notes to Consolidated 2011 77,567 790 2012 167,555 1,706 2013 63,010 641 2014 287,289 2,925 2015 and thereafter 65,171 663 Total ¥882,672 $8,986

Under the JT Law, obligations created by the bonds issued by JT preference to unsecured creditors (with the exception of national and are secured by a statutory preferential right over the property of JT. local taxes and certain other statutory obligations). This right entitles the holders thereof to claim satisfaction in

Substantially all of the short-term bank loans and long-term debt are unsecured. Secured loans and debt of certain consolidated subsidiaries at March 31, 2009 were as follows: Millions of Millions of yen U.S. dollars Long-term bank loans ¥3,388 $35 Current portion of Long-term bank loans 2,694 27 Short-term bank loans 2,591 26 Others 680 7 Total ¥9,353 $95 086 JT Annual Report 2009 The carrying amounts of assets pledged as collateral for the above secured loans and debt at March 31, 2009 were as follows: Millions of Millions of yen U.S. dollars

Eleven-Year Buildings and structures ¥ 5,331 $ 53 Consolidated

Financial Summary Machinery, equipment and vehicles 1,732 19 Land 4,316 44 Others 89 1 Total ¥11,468 $117 and Analysis of Business Results Financial Condition and Management’s Discussion Discussion Management’s General agreements with respective banks provide, as is custom- have the right to offset cash deposited with them against any long- ary in Japan, that additional collateral must be provided under certain term or short-term debt or other debt payable to the banks. JT has circumstances if requested by such banks and that certain banks never been requested to provide additional collateral. Financial Statements Notes to Consolidated

8. Income Taxes

The Domestic Group is subject to Japanese corporate tax, inhabitants 40.35% for the years ended March 31, 2007, 2008 and 2009. ­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, 2008 and 2009 were as follows: Millions of Millions of yen U.S. dollars 2008 2009 2009 Deferred tax assets: Liabilities for employees’ retirement benefits ¥ 57,341 ¥ 55,718 $ 567 Obligations under the Public Official Mutual Assistance Association Law 51,568 47,726 486 Net operating loss carryforwards 37,314 42,855 436 Foreign currency exchange losses 2,757 26,558 270 Allowance for doubtful accounts 5,611 16,330 166 Other 87,820 99,558 1,015 Less valuation allowance (44,964) (64,920) (661) Total 197,447 223,825 2,279 Deferred tax liabilities: Deferred gain on sales of fixed assets for income tax purposes (31,772) (32,360) (329) Basis differences in assets acquired and liabilities assumed upon acquisition (122,961) (73,387) (747) Other (80,939) (72,921) (743) Total (235,672) (178,668) (1,819) Net deferred tax assets (liabilities) ¥ (38,225) ¥ 45,157 $ 460 087 JT Annual Report 2009 Net deferred tax assets and liabilities at March 31, 2008 and 2009 were reflected on the accompanying consolidated balance sheets under the following captions: Millions of

Millions of yen U.S. dollars Eleven-Year Consolidated

2008 2009 2009 Financial Summary Other current assets ¥ 32,008 ¥ 29,675 $ 302 Deferred tax assets 110,709 128,787 1,311 Other current liabilities (6,547) (2,915) (29)

Deferred tax liabilities (174,395) (110,390) (1,124) and Analysis of Business Results Financial Condition and Net deferred tax assets (liabilities) ¥ (38,225) ¥ 45,157 $ 460 Discussion Management’s

A reconciliation between the normal effective statutory tax rates for the years ended March 31, 2007, 2008 and 2009 and the actual effective tax rates reflected in the accompanying consolidated statements of income was as follows: Financial Statements 2007 2008 2009 Notes to Consolidated Normal effective statutory tax rate 40.35% 40.35% 40.35% Tax rate difference applied for foreign consolidated subsidiaries (6.99) (9.67) (12.60) Non-deductible expenses 3.06 2.34 3.77 Amortization of goodwill (0.31) 0.48 10.05 Increase in valuation allowance 0.21 7.26 5.42 Increase (reduction) of FIN48 liability, net — (1.51) 3.41 Increase (reduction) in enacted tax rates, net 0.29 (5.49) (0.49) Other—net (0.61) 0.69 1.58 Actual effective tax rate 36.00% 34.45% 51.49%

9. Stock Options

Stock option expense that is accounted for as “Selling, general and administrative expenses” on the consolidated statement of income for the years ended March 31, 2007, 2008 and 2009 amounted to nil, ¥186 million and ¥179 million ($2 million), respectively.

The stock options outstanding as of March 31, 2009 are as follows: Number of Options Stock Option Persons Granted Granted Date of Grant Exercise Price Exercise Period 2008 stock option 11 Directors 426 shares January 8, 2008 ¥1 From January 9, 2008 to 16 Executive officers ($0.01) January 8, 2038 2009 stock option 11 Directors 547 shares October 6, 2008 ¥1 From October 7, 2008 to 14 Executive officers ($0.01) October 6, 2038

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. 088 JT Annual Report 2009 The stock option activity is as follows: 2008 stock option 2009 stock option For the year ended March 31, 2008 Eleven-Year Consolidated Non-Vested (Shares) Financial Summary March 31, 2007—Outstanding — Granted 426 Canceled — Vested (320) and Analysis of Business Results

Financial Condition and March 31, 2008—Outstanding 106 Management’s Discussion Discussion Management’s Vested March 31, 2007—Outstanding — Vested 320 Exercised — Financial Statements Notes to Consolidated Canceled — March 31, 2008—Outstanding 320 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 0 137 Vested March 31, 2008—Outstanding 320 — Vested 106 410 Exercised — — Canceled — — March 31, 2009—Outstanding 426 410 Exercise price ¥1 ¥1 ($0.01) ($0.01) Average stock price at exercise — — Fair value price at the grant date ¥581,269 ¥285,904 ($5,802) ($2,911)

The assumptions used to measure fair value of 2009 stock options are as follows: 2009 stock option Estimate Method Black-Scholes option pricing model Volatility of stock price*1 32.815% Estimated remaining outstanding period*2 15 years Estimated dividend*3 ¥4,800 per share ($49 per share) Interest rate with risk free*4 1.841%

*1 Calculated based on stock prices for the period on and after listing date (from October 27, 1994 to October 6, 2008) *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 2008 *4 A yield of 15-year government bond, a period of which corresponds to expected remaining period 089 JT Annual Report 2009 10. Liabilities for Retirement Benefits

(1) Employees’ Retirement Benefit Domestic consolidated subsidiaries principally have unfunded Eleven-Year JT has unfunded severance indemnity plan and a cash balance severance indemnity plans and/or defined benefit pension plans Consolidated Financial Summary pension plan as well as a defined contribution plan. The unfunded covering substantially all of their employees, under which benefits are severance indemnity plan provides lump-sum retirement benefits provided based on the rate of pay at the time of termination, years based on credits earned in each year of service. Employees are of service and certain other factors. entitled to receive larger payments in certain circumstances such as Foreign consolidated subsidiaries principally sponsor non-­ and Analysis of Business Results Financial Condition and involuntary termination, retirement at the mandatory retirement age, contributory defined benefit pension plans covering most of their Discussion Management’s voluntary termination at certain specific ages prior to mandatory employees. Plans covering regular full-time employees provide retirement age or death. The cash balance pension plan provides pension benefits based on credits, determined by age, earned retirement benefits in the form of a lump-sum payment or annuity throughout an employee’s service and final average compensation payments based on current and past principal credits earned and before retirement. Financial Statements Notes to Consolidated interest credits over time based on these principal credits.

The liabilities for employees’ retirement benefits at March 31, 2008 and 2009 consisted of the following: Millions of Millions of yen U.S. dollars 2008 2009 2009 Projected benefit obligations ¥(567,044) ¥(424,413) $(4,321) Fair value of plan assets 449,588 280,513 2,856 Funded status (117,456) (143,900) (1,465) Unrecognized actuarial net loss 12,033 44,997 458 Unrecognized prior service cost 8,094 6,204 63 Net amount recognized (97,329) (92,699) (944) Pension liability adjustment of foreign consolidated subsidiaries (see Note 3 (q)) (12,212) (25,662) (261) Prepaid pension cost (49,387) (27,642) (281) Other current liabilities 3,342 (5,136) (52) Liabilities for employees’ retirement benefits ¥(155,586) ¥(140,867) $(1,434)

“Pension liability adjustment of foreign consolidated subsidiaries” statements of changes in Equity for the year ended March 31, is the unfunded obligation recognized by foreign consolidated sub- 2007. sidiaries applying U.S. GAAP. “Other current liabilities” is the amount JT transferred a portion of the unfunded severance indemnity plan by which the actuarial present value of benefits included in the benefit to the defined contribution plan on April 1, 2006, and thereby recog- obligation payable in the next 12 months exceeds the fair value of nized ¥3,097 million for the year ended March 31, 2006 as other plan assets in foreign consolidated subsidiaries applying U.S. GAAP. expense which led to an increase of liabilities for retirement benefits The amount of the reversal of the minimum pension liability by by the same amount in accordance with “Accounting for the Transfer foreign consolidated subsidiaries applying U.S. GAAP was recorded between Retirement Benefits Plans (ASBJ Guideline No. 1)” and in “Minimum pension liability adjustment of foreign consolidated “Practical Solution on Accounting for Transfer Between Retirement subsidiaries” of retained earnings in the accompanying consolidated 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 defined contribution plan will be paid in installment by 2010. 090

JT Annual Report 2009 The components of net periodic retirement benefit cost for the years ended March 31, 2007, 2008 and 2009 were as follows: Millions of Millions of yen U.S. dollars 2007 2008 2009 2009 Eleven-Year

Consolidated Service cost ¥ 9,684 ¥ 13,115 ¥ 13,123 $ 134 Financial Summary Interest cost 9,685 20,149 21,720 221 Expected return on plan assets (6,829) (19,782) (20,133) (205) Recognized actuarial loss 315 (430) 748 8 Amortization of prior service cost 1,502 1,530 1,256 12 and Analysis of Business Results

Financial Condition and Net periodic retirement benefit costs ¥14,357 ¥ 14,582 ¥ 16,714 $ 170 Management’s Discussion Discussion Management’s

Significant assumptions used for the years ended March 31, 2007, 2008 and 2009 were as follows: 2007 2008 2009 Discount rate 2.5% 2.5% 2.5% Financial Statements Notes to Consolidated Expected rate of return on plan assets 2.5% 2.5% 2.5%

Actuarial gains or losses that result from changes in plan experi- These restructuring activities resulted in recognition of additional ence and actuarial assumptions are principally amortized over 10 retirement benefits as business restructuring costs of nil, ¥2,285 years. The amortization period for the prior service cost that million and ¥2,691 million ($27 million) for the years ended March 31, resulted from retroactive application of a plan amendment is prin- 2007, 2008 and 2009, respectively, and as other expenses of ¥790 cipally 10 years. The retirement benefit attributable to each year is million, ¥1,122 million and ¥32 million ($0 million) for the years ended calculated by assigning the same amount of pension benefits to March 31, 2007, 2008 and 2009, respectively, which included a each year of service. one-time charge for the unrecognized actuarial net loss and unrec- The Group’s contributions to the defined contribution plans which ognized prior service cost attributable to the employees who retired were charged to expenses for the years ended March 31, 2007, 2008 earlier than expected. and 2009 were ¥3,002 million, ¥4,208 million and ¥3,948 million ($40 Certain domestic consolidated subsidiaries participate in multi- million), respectively. employer contributory pension plans, the required contributions to Certain domestic and foreign subsidiaries provided additional which are recognized as a net pension cost for the year. Of these retirement benefits for early-retired employees in connection with pension plans, information about Tokyo pharmaceutical industry the reorganization of domestic distribution operations or rationaliza- employees’ pension funds for the years ended March 31, 2007 and tion of Domestic and International tobacco businesses for the years 2008 were as follows: ended March 31, 2006, 2007 and 2008. Millions of Millions of Yen U.S. dollars 2007 2008 2008 Fair value of plan assets ¥ 461,860 ¥ 415,833 $ 4,233 Benefit obligations (469,729) (497,473) (5,064) Deficit ¥ (7,869) ¥ (81,640) (831)

2008 2009 Proportion of the Domestic consolidated subsidiary’s contributions to the entire plan 1.2% 1.2%

Certain foreign consolidated subsidiaries also provide certain (2) Obligation under the Public Official Assistance ­ health and life insurance benefits for retired employees and their Association Law dependents. Employees of JT, including former employees of JTSPC and others The Domestic Group’s liabilities for retirement benefits for directors are entitled to receive benefits under the government-sponsored and corporate auditors as of March 31, 2007, 2008 and 2009 were pension plan by the Public Official Mutual Assistance Association Law ¥1,018 million, ¥744 million and ¥624 million ($6 million), respectively. (the “Law”). The benefits, in the form of lifetime annuity payments by the Social Insurance Agency, are determined based on the standard pay rate, the length of service and other factors. As a formerly wholly government-owned company, JT is obligated by the Law to 091 JT Annual Report 2009 reimburse the Japanese government for pension expenses incurred Such obligations were first recorded as liabilities at April 1, 2003 each year by the government in respect of former employees of based on the actuarially determined computation method. Any JTSPC and others for their services during certain periods before July actuarial gain or loss arising subsequent to April 1, 2003 is deferred Eleven-Year 1, 1956, the enactment date of the Law. and amortized over 10 years. Consolidated Financial Summary

The liabilities and costs recognized for such obligations as of and for the years ended March 31, 2007, 2008 and 2009 were as follows: Millions of Millions of yen U.S. dollars and Analysis of

2008 2009 2009 Business Results Financial Condition and Benefit obligations ¥(127,871) ¥(116,890) $(1,190) Discussion Management’s Unrecognized actuarial (gain) loss 70 (1,389) (14) Liabilities recognized ¥(127,801) ¥(118,279) $(1,204)

Millions of Financial Statements Millions of yen U.S. dollars Notes to Consolidated 2007 2008 2009 2009 Interest cost ¥2,288 ¥2,094 ¥1,918 $20 Recognized actuarial loss 425 240 107 1 Net periodic costs ¥2,713 ¥2,334 ¥2,025 $21

The assumed discount rate used in the actuarial computation for the years ended March 31, 2007, 2008 and 2009 was 1.5%.

11. Equity

Since May 1, 2006, Japanese companies have been subject to the (b) Increases/Decreases and Transfer of Common Stock, Companies Act. The significant provisions in the Companies Act that Reserve and Surplus affect financial and accounting matters are summarized below: The Companies Act requires that an amount equal to 10% of divi- dends must be appropriated as a legal reserve (a component of (a) Dividends retained earnings) or as additional paid-in capital (a component of Under the Companies Act, companies can pay dividends at any time capital surplus) depending on the equity account charged upon the during the fiscal year in addition to the year-end dividend upon resolu- payment of such dividends until the total of aggregate amount of legal tion at the shareholders meeting, if companies meet certain criteria reserve and additional paid-in capital equals 25% of the common such as; (1) having the Board of Directors, (2) having independent stock. Under the Companies Act, the total amount of additional auditors, (3) having the Board of Corporate Auditors, and (4) the term paid-in capital and legal reserve may be reversed without limitation of service of the directors is prescribed as one year rather than two of such threshold. The Companies Act also provides that common years of normal term by its articles of incorporation. The Board of stock, legal reserve, additional paid-in capital, other capital surplus Directors of such company may declare dividends (except for divi- and retained earnings can be transferred among the accounts under dends in kind) at any time during the fiscal year if the company has certain conditions upon resolution of the shareholders. prescribed so in its articles of incorporation. Semiannual interim dividends may also be paid once a year upon (c) Treasury stock resolution by the Board of Directors if the articles of incorporation of The Companies Act also provides for companies to purchase treasury the company so stipulate. The Companies Act provides certain limita- stock and dispose of such treasury stock by resolution of the Board tions on the amounts available for dividends or the purchase of of Directors. The amount of treasury stock purchased cannot exceed treasury stock. the amount available for distribution to the shareholders which is determined by specific formula. Upon the meeting of the board of directors held on February 27, 2006, JT decided to split JT’s shares on five for one basis with the effective date of April 1, 2006. 092 JT Annual Report 2009 The Special Taxation Measures Law in Japan permits companies assets, net of tax, included in retained earnings provided under the to take as tax deductions certain reserves if provided through year- Special Taxation Measures Law at March 31, 2008 and 2009 were end book closing. Under Japanese tax laws, these reserves must be ¥51,005 million and ¥47,969 million ($488 million), respectively. Eleven-Year Consolidated reversed to income in future years. The deferred gain on sales of fixed Financial Summary

12. Research and Development Costs and Advertising Costs and Analysis of Business Results Financial Condition and

Management’s Discussion Discussion Management’s Research and development costs charged to expenses as Advertising costs were charged to expenses as incurred and incurred for the years ended March 31, 2007, 2008 and 2009 were totaled ¥151,523 million, ¥186,607 million and ¥188,023 million ¥41,239 million, ¥45,163 million and ¥47,296 million ($481 mil- ($1,914 million) for the years ended March 31, 2007, 2008 and lion), respectively. 2009, respectively. Financial Statements Notes to Consolidated

13. Lease Transactions

The Group, as a lessee, leases certain vehicles, vending machines Pro forma information of leased property, such as acquisition cost, and other assets. accumulated depreciation, accumulated impairment loss, obligations For the year ended March 31, 2008, the Group recorded an under finance leases, allowance for impairment loss on leased impairment loss of ¥14 million on certain leased property held property, depreciation expense and other information of finance lease under finance leases that do not transfer ownership and an allow- that do not transfer ownership of the leased property to the lessee ance for impairment loss on leased property, which is included in on an “as if capitalized” basis at March 31, 2008 was as follows: current liabilities. Millions of yen 2008 Acquisition cost: Machinery, equipment and vehicles ¥ 7,212 Tools 20,903 Others 3,232 Total acquisition cost 31,347 Accumulated depreciation 15,032 Accumulated impairment loss 14 Net leased property ¥16,301

The above acquisition costs includes related interest expenses. Millions of yen 2008 Obligations under finance leases: Due within one year ¥ 5,235 Due after one year 11,080 Total ¥16,315 Allowance for impairment loss on leased property ¥ 8

The above obligations under finance leases includes related interest expenses. Millions of Millions of yen U.S. dollars 2007 2008 2008 Depreciation expense and other information: Depreciation expense ¥4,836 ¥5,230 $52 Lease payments 4,836 5,230 52 Reversal of allowance for impairment loss on leased property — 1 0 093 JT Annual Report 2009 Depreciation expenses, which were not reflected in the accompanying consolidated statements of income, were computed by the straight- line method. Eleven-Year The minimum rental commitments under noncancellable operating leases at March 31, 2008 and 2009 were as follows: Consolidated Financial Summary Millions of yen U.S. dollars 2008 2009 2009 Due within one year ¥ 7,724 ¥ 7,497 $ 76 Due after one year 25,290 24,020 245 and Analysis of Total ¥33,014 ¥31,517 $321 Business Results Financial Condition and Management’s Discussion Management’s

The Group, as a lessor, leases certain computer equipment and Information of leased property included in the accompanying other assets. Total lease revenue under the above leases for the financial statements, such as acquisition cost, accumulated years ended March 31, 2007 and 2008 was ¥253 million and ¥363 depreciation and claims under finance leases that do not transfer Financial Statements million, respectively. ownership of the leased property to the lessee, at March 31, 2008 Notes to Consolidated was as follows: Millions of yen 2008 Acquisition cost: Machinery, equipment and vehicles ¥ 129 Others 1,679 Total acquisition cost 1,808 Accumulated depreciation 782 Net leased property ¥1,026

Millions of yen 2008 Claims under finance leases: Due within one year ¥ 367 Due after one year 769 Total ¥1,136

The above claims under finance leases included related interest income. Depreciation expenses for the years ended March 31, 2007 and 2008 which have been reflected in the accompanying consolidated statements of income were ¥240 million and ¥347 million, respectively.

14. Commitments and Contingencies

(1) On August 11, 2004, JTI-Macdonald received a Notice of Assess- company’s failure to pay the tax bill immediately could have ment from the Quebec Ministry of Revenue (“QMR”) requiring an prompted the QMR to confiscate its business assets, making it immediate payment of approximately 1.36 billion Canadian dollars difficult for it to continue its normal business operations. As of (approximately ¥106.4 billion), based on allegations that the March 31, 2009 (the end of fiscal 2008), the company was con- company had contributed to tobacco smuggling from 1990 to tinuing its business operations with its assets protected under the 1998, prior to JT’s acquisition of RJR Nabisco Inc.’s overseas CCAA. In order to enable JTI-Macdonald to repay part of its debts (non-US) tobacco operations. to other subsidiaries of JT, JT International Holding B.V., the Dutch JTI-Macdonald filed an application for protection with the subsidiary of JT, provided a court-appointed monitor in April 2006 Ontario Superior Court of Justice on August 24, 2004 under the with a letter of credit issued by a financial institution for the amount Companies’ Creditors Arrangement Act (“CCAA”), because the corresponding to the repayment. 094 JT Annual Report 2009 JT believes that if JTI-Macdonald incurs financial damage or concluded an early resolution agreement with the OFT. Gallaher bears any costs associated with this case, it will be entitled to seek has agreed to pay a fine for anti-competitive business practices indemnification from RJR Nabisco Inc. or its successors, based relating to the retail pricing of tobacco products in the UK market Eleven-Year Consolidated on the contract entered into among JT, RJR Nabisco Inc. and RJR during the period prior to JT’s acquisition of Gallaher. Financial Summary at the time of JT’s acquisition of JTI-Macdonald in 1999. In August 2003, the OFT notified Gallaher of an inquiry into In July 2004, ZAO JTI Marketing & Sales (“M&S Corp.”), a vertical agreements between manufacturers and retailers in the UK Russian subsidiary of JT that oversees the distribution-related cigarette, tobacco and tobacco-related markets. Since that time, business in the Russian market, received an assessment from the Gallaher has been fully cooperating with OFT regarding the and Analysis of Business Results Financial Condition and

Management’s Discussion Discussion Management’s Moscow tax authorities in which it was ordered to pay approxi- investigation. Regarding this matter, the OFT issued a statement mately 2.4 billion rubles (approximately ¥6.9 billion ) as VAT, etc. for of objections on April 25, 2008. Following a careful and compre- the period of January to December 2000. The taxed amount hensive review of the document, the JT Group decided to conclude includes unpaid taxes (VAT, etc.), interest and additional taxes. an early resolution agreement with the OFT, which JT believes best Believing that the assessment by the Moscow tax authorities was serves the interest of all parties involved. Financial Statements Notes to Consolidated based upon a misinterpretation of facts, M&S Corp. filed a lawsuit A certain amount, based on the company’s assumptions about with the Moscow Arbitration Court seeking to invalidate the assess- the fine, has been booked as liabilities in the purchase price alloca- ment. Although the Court of First Instance, the Court of Appeals tion related to JT’s acquisition of Gallaher Group Plc (now Gallaher and the Court of Cassation dismissed M&S Corp.’s argument, the Group Ltd.). In the Consolidated Balance Sheet ending March Russian Federation Higher Arbitration Court reversed the lower 2009, the amount is included in current and noncurrent liabilities. courts’ judgments and remanded the case to the Court of First This agreement requires us to cooperate with the OFT regarding Instance in April 2006. In October 2007, the Court of First Instance the investigation. The fine of approximately £93 million (approxi- rendered a judgment upholding M&S Corp.’s argument and invali- mately ¥13 billion) payable by Gallaher is scheduled to be finally dated the tax assessment, and the Court of Appeals and the Court decided after such investigation has been completed. If the pay- of Cassation dismissed the appeal by the tax authorities and ment amount is set as the fine amount specified in the early resolu- upheld M&S Corp’s argument in February and May 2008, respec- tion agreement, the difference between the actual fine and the tively. Then the tax authorities filed a petition for appeal to the liability already posted, approximately £71 million (approximately Russian Federation Higher Arbitration Court. In October 2008, the ¥10 billion), will be recorded as other income. Court decided not to accept the appeal. As a result, the judgment While the agreement reached with the OFT relates only to in favor of M&S Corp. became final and binding. Gallaher’s past business activities prior to JT’s acquisition of the On July 11, 2008, the Office of Fair Trading (OFT), the UK Gallaher group of companies, JT takes it seriously. competition authority, announced that Gallaher Group Ltd, (former JT and its subsidiaries continue to strive to enhance efforts to Gallaher Group Plc) and Gallaher Ltd. (together, hereinafter, ensure that they are in compliance with all laws and regulations ­“Gallaher”), JT’s tobacco subsidiaries in the United Kingdom, have applicable to them.

(2) Contingent Liabilities At March 31, 2008 and 2009, the Group had the following contingent liabilities: Millions of Millions of yen U.S. dollars 2008 2009 2009 Trade notes discounted ¥1,008 ¥106 $ 1 Guarantees and similar items of bank loans: Kotobuki Business Company Corp.,Ltd 733 128 1 Zhouzan Koumei Foods Co.,Ltd (38 Million of CNY and 332 thousand of USD)* 570 — — Mitoyo Cable Television Co.,Ltd 406 357 4 Zhouzan Katoka Foods Co.,Ltd (24 Million of CNY and 350 thousand of USD)* 380 — — Cook Foods. Co.ltd. 240 165 2 Others* 127 60 0 Total ¥3,464 ¥816 $ 8

* The translation of the guaranteed amounts denominated in foreign currency were made at the rate of exchange at March 31, 2008 and 2009. 095 JT Annual Report 2009 15. Other Income (Expenses)

(1) Business Restructuring Costs Eleven-Year Business restructuring costs for the years ended March 31, 2007, 2008 and 2009 consisted of the following: Consolidated Financial Summary Millions of Millions of yen U.S. dollars 2007 2008 2009 2009 Additional Retirement Benefits (see Note 10) ¥— ¥(2,285) ¥ (2,691) $ (27)

Loss on disposition of property, plant and equipment — — (404) (4) and Analysis of Business Results Financial Condition and Others—net — (4,157) (21,269) (217) Discussion Management’s Total ¥— ¥(6,442) ¥(24,364) $(248)

Business restructuring costs were incurred in line with the other assets, except for idle property, which is grouped individually. Financial Statements business restructuring measures mainly for the rationalization of Loss on Impairment for the years ended March 31, 2007, 2008 Notes to Consolidated Domestic and International tobacco business. For the year ended and 2009 amounted to ¥2,712 million, ¥3,825 million and ¥16,365 March 31, 2009, others—net includes a revision of the business million ($167 million) respectively, which relates principally to land, model in the Philippines. and certain buildings and structures of company housing which are planned to be demolished. (2) Loss on Impairment of Long-lived Assets The recoverable value of such assets was calculated mainly by Asset grouping is based on the smallest identifiable unit that gener- its value in use, which is set at “nil.” ates cash flows that are largely independent of the cash flows from

(3) Other—net ‘‘Other—net’’ included in ‘‘Other Income (Expenses)’’ for the years ended March 31, 2007, 2008 and 2009 consisted of the following: Millions of Millions of yen U.S. dollars 2007 2008 2009 2009 Financial support for domestic tobacco growers ¥ (3,505) ¥ (2,005) ¥ (768) $ (8) Foreign exchange loss—net (14,465) (31,790) (21,802) (222) Gain on sales of investment securities—net 1,908 352 172 2 Introduction costs for vending machines with adult identification functions (5,746) (12,879) (13,469) (137) Costs related to the recall of frozen foods products — (5,624) — — Others—net (9,390) (13,403) (11,710) (119) Total ¥(31,198) ¥(65,349) ¥(47,577) $(484)

“Introduction costs for vending machines with adult identification special IC cards that indicate whether the purchaser is an adult or not. functions” is the cost to establish the system of vending machines with “Costs related to the recall of frozen foods products” is mainly the functions to prevent minors from purchasing cigarettes from vending cost to recall some frozen foods products which were imported and machines and to dispense cigarettes only after scanning and verifying sold by the Group. 096 JT Annual Report 2009 16. Segment Information

The Group’s business is divided into the domestic tobacco, interna- manufacturing and sale of cigarettes in other markets worldwide not Eleven-Year Consolidated tional tobacco, pharmaceutical, food and other industry segments. covered by the domestic tobacco segment. The pharmaceutical Financial Summary 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

and Analysis of China, Hong Kong and Macau, which are covered by the China real estate business, engineering business and other operations. Business Results Financial Condition and

Management’s Discussion Discussion Management’s Division. The domestic tobacco segment includes the sales by TS With respect to the international tobacco business, the accounting Network Co., Ltd., JT’s subsidiary. TS Network Co., Ltd. distributes period of consolidated overseas subsidiaries, represented by JT the tobacco products and conducts wholesale etc. of foreign brand International, ends December 31, 2008 and the results for the twelve tobacco products purchased from foreign tobacco manufacturers months ended December 31, 2008 are consolidated for the year through importers. The international tobacco segment consists of ended March 31, 2009. Financial Statements Notes to Consolidated

(1) Industry Segments Information about the industry segments of the Group for the years ended March 31, 2007, 2008 and 2009 were as follows: Millions of yen 2007 Domestic International Elimination / Tobacco Tobacco Pharmaceuticals Food Others Total Corporate Consolidated Sales to customers ¥3,416,274 ¥ 999,658 ¥ 45,452 ¥286,554 ¥ 21,449 ¥4,769,387 ¥ — ¥4,769,387 Intersegment sales 45,005 26,355 — 110 25,876 97,346 (97,346) — Total sales 3,461,279 1,026,013 45,452 286,664 47,325 4,866,733 (97,346) 4,769,387 Operating expenses 3,215,891 944,928 56,659 279,959 37,994 4,535,431 (98,035) 4,437,396 Operating income (loss) ¥ 245,388 ¥ 81,085 ¥ (11,207) ¥ 6,705 ¥ 9,331 ¥ 331,302 ¥ 689 ¥ 331,991 Assets ¥1,180,395 ¥1,275,045 ¥106,165 ¥158,818 ¥249,604 ¥2,970,027 ¥394,636 ¥3,364,663 Depreciation and amortization other than goodwill 79,965 31,583 3,010 3,894 12,254 130,706 (600) 130,106 Impairment Loss 710 112 — 44 — 866 1,846 2,712 Amortization of goodwill 1,118 — — 1,419 — 2,537 — 2,537 Capital expenditures 55,243 32,017 3,046 4,866 8,054 103,226 (1,079) 102,147

Millions of yen 2008 Domestic International Elimination / Tobacco Tobacco Pharmaceuticals 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 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) 129,555 097 JT Annual Report 2009 Millions of yen 2009 Domestic International Elimination / Tobacco Tobacco Pharmaceuticals 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 Eleven-Year Consolidated

Intersegment sales 48,390 40,631 — 133 12,044 101,198 (101,198) — Financial Summary Total sales 3,248,884 3,158,950 56,758 436,099 32,814 6,933,505 (101,198) 6,832,307 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 and Analysis of Business Results Financial Condition and Depreciation and amortization Discussion Management’s 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 Statements Notes to Consolidated

Millions of U.S. dollars 2009 Domestic International Elimination/ Tobacco Tobacco Pharmaceuticals Food Others Total Corporate Consolidated Sales to customers $32,581 $31,745 $ 578 $4,439 $211 $69,554 $ — $69,554 Intersegment sales 493 414 — 0 123 1,030 (1,030) — Total sales 33,074 32,159 578 4,439 334 70,584 (1,030) 69,554 Operating expenses 31,157 30,380 568 4,556 235 66,896 (1,045) 65,851 Operating income (loss) $ 1,917 $ 1,779 $ 10 $ (117) $ 99 $ 3,688 $ 15 $ 3,703 Assets $ 8,029 $27,488 $1,135 $3,387 $889 $40,928 $(1,431) $39,497 Depreciation and amortization other than goodwill 844 702 39 186 36 1,807 (6) 1,801 Impairment Loss — — — 39 — 39 128 167 Amortization of goodwill 11 959 — 104 — 1,074 — 1,074 Capital expenditures 473 609 35 236 12 1,365 2 1,367

Operating expenses represent the aggregate amount of the cost million ($11,558 million), respectively. of sales and selling, general and administrative expenses. Capital Effective from April 1, 2008, JT applied the “Practical Solution on expenditures include long-term prepaid expenses and expensed Unification of Accounting Policies Applied to Foreign Subsidiaries for amounts of the long-term prepaid expenses are included in deprecia- Consolidated Financial Statements” (see Note 3 (b)). As a result of tion and amortization other than goodwill. this change, the operating income for the international tobacco The domestic tobacco segment includes the sales by TS Network segment for the year ended March 31, 2009 decreased by ¥94,235 Co., Ltd. Net sales of such imported tobacco products via TS million ($959 million) as compared to the case where the previous ­Network Co., Ltd. for the years ended March 31, 2007, 2008 and method was adopted. 2009 were ¥1,216,249 million, ¥1,193,178 million and ¥1,135,320 098 JT Annual Report 2009 (2) Geographical Segments The geographical segments of the Group for the years ended March 31, 2007, 2008 and 2009 were summarized as follows:

Millions of yen Eleven-Year Consolidated 2007 Financial Summary Western Elimination/ Japan Europe Others Total Corporate Consolidated Sales to customers ¥3,718,450 ¥ 353,831 ¥697,106 ¥4,769,387 ¥ — ¥4,769,387 Intersegment sales 47,350 156,414 23,331 227,095 (227,095) — and Analysis of

Business Results Total sales 3,765,800 510,245 720,437 4,996,482 (227,095) 4,769,387 Financial Condition and Management’s Discussion Discussion Management’s Operating expenses 3,517,318 529,055 618,885 4,665,258 (227,862) 4,437,396 Operating income (loss) ¥ 248,482 ¥ (18,810) ¥101,552 ¥ 331,224 ¥ 767 ¥ 331,991 Assets ¥1,487,678 ¥ 1,023,183 ¥304,630 ¥2,815,491 ¥ 549,172 ¥3,364,663

Millions of yen Financial Statements Notes to Consolidated 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

Millions of U.S. dollars 2009 Western Elimination/ Japan Europe Others Total Corporate Consolidated Sales to customers $37,381 $20,748 $11,425 $69,554 $ — $69,554 Intersegment sales 544 2,278 399 3,221 (3,221) — Total sales 37,925 23,026 11,824 72,775 (3,221) 69,554 Operating expenses 36,027 23,272 9,792 69,091 (3,240) 65,851 Operating income (loss) $ 1,898 $ (246) $ 2,032 $ 3,684 $ 19 $ 3,703 Assets $11,035 $24,215 $ 3,574 $38,824 $ 673 $39,497 Amortization of goodwill 115 959 — 1,074 — 1,074

“Western Europe” includes Switzerland, United Kingdom and Effective from April 1, 2008, JT applied the “Practical Solution Germany while “Others” includes Canada, Russia and Malaysia for on Unification of Accounting Policies Applied to Foreign Subsidiaries the years ended March 31,2008 and 2009. Operating expenses for Consolidated Financial Statements” (see Note 3 (b)). As a result represent the aggregate amount of the cost of sales and selling, of this change, the operating income for the Western Europe seg- general and administrative expenses. ment for the year ended March 31, 2009 decreased by ¥94,235 For the year ended March 31, 2007, “Western Europe” includes million ($959 million) as compared to the case where the previous Switzerland, France and Germany. method was adopted. 099 JT Annual Report 2009 (3) Sales to Foreign Customers and 2009 amounted to ¥1,056,762 million, ¥2,705,461 million and Sales to foreign customers for the years ended March 31, 2007, 2008 ¥3,179,852 million ($32,371 million), respectively. Eleven-Year Consolidated Financial Summary 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. and Analysis of Business Results Financial Condition and

Financial instruments Discussion Management’s 2007 2008 2009 Foreign currency forward contracts Foreign currency forward contracts Foreign currency forward contracts Currency options Currency options Currency options Currency swaps Currency swaps Currency swaps Financial Statements Notes to Consolidated

JT and certain consolidated subsidiaries also entered into derivatives described below as a manner of managing their interest rate exposure. Financial instruments 2007 2008 2009 Interest rate swaps Interest rate swaps Interest rate swaps Interest rate cap options Interest rate cap options Interest rate swaption

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

2007 Hedging instruments Hedged items Foreign currency forward contracts Forecasted foreign currency transactions Currency options Forecasted foreign currency transactions Interest rate swaps Borrowings

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

2009 Hedging instruments Hedged items Foreign currency forward contracts Forecasted foreign currency transactions Interest rate swaps Borrowings 100 JT Annual Report 2009 Because the counterparties to the derivatives are limited to major contracts that do not qualify for hedge accounting as of March 31, international financial institutions, the Group does not anticipate any 2007, 2008 and 2009: losses arising from credit risk. The Group had the following derivatives Eleven-Year Consolidated Millions of yen Financial Summary 2007 2008 2009 Contract/ Contract/ Contract/ Notional Fair Gain Notional Fair Gain Notional Fair Gain Amount Value (Loss) Amount Value (Loss) Amount Value (Loss) Foreign currency forward contracts: and Analysis of Business Results Buying ¥ 2,972 ¥ 3,113 ¥ 141 ¥317,417 ¥311,944 ¥(5,473) ¥154,553 ¥151,600 ¥(2,953) Financial Condition and Management’s Discussion Discussion Management’s Selling 40,624 40,839 (215) 607,925 611,502 (3,577) 183,728 185,286 (1,558) Currency swaps: Buying — — — 7,784 (306) (306) 59,712 (242) (242) Selling — — — 2,193 (151) (151) 3,148 287 287 Financial Statements Notes to Consolidated Currency options: Buying — — — 1,935 1 1 — — — Selling 2,615 (318) (318) — — — — — — Total ¥(392) ¥(9,506) ¥(4,466) Interest rate swaps Receive fixed pay floating — — — 270,582 (1,218) 2,211 72,284 2,811 2,811 Receive floating pay fixed — — — — — — 470 (5) (5) Interest rate cap options Buying — — — 484,867 718 718 318,042 101 (1,504) Total ¥ — ¥ 2,929 ¥ 1,302

Millions of U.S. dollars 2009 Contract/ Notional Fair Gain Amount Value (Loss) Foreign currency forward contracts: Buying $1,573 $1,543 $(30) Selling 1,870 1,886 (16) Currency swaps: Buying 608 (2) (2) Selling 32 3 3 Currency options: Buying — — — Selling — — — Total $(45) Interest rate swaps Receive fixed pay floating 736 29 29 Receive floating pay fixed 5 (0) (0) Interest rate cap options Buying 3,238 1 (16) Total $ 13

The contract or notional amounts of derivatives which are shown in the above tables do not represent the amounts exchanged by the parties and do not measure the Group exposure to credit or market risks. 101 JT Annual Report 2009 18. Net Income Per Share

Reconciliation of the differences between basic and diluted net income per share (“EPS”) for the years ended March 31, 2008 and 2009 is Eleven-Year as follows: Consolidated Financial Summary Millions of yen Shares Yen U.S. dollars Weighted Net Income average shares EPS EPS For the year ended March 31, 2009

Basic EPS and Analysis of Business Results Financial Condition and Net income available to common shareholders ¥123,400 9,580,080 ¥12,881 $131 Discussion Management’s Effect of dilutive securities: Stock acquisition rights 846 Diluted EPS:

Net income for computation ¥123,400 9,580,926 ¥12,880 $131 Financial Statements Notes to Consolidated 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

19. Subsequent Event

1. JT’s board of directors resolved on April 30, 2009 that the com- (2) Total issue amount: ¥100 billion ($1 billion) pany would close three cigarette factories in Japan. The Morioka (3) Issue price: ¥100 per face value of ¥100 factory and the Yonago factory will cease to manufacture at the (4) Issue date: June 3, 2009 end of March 31, 2010, and the Odawara factory will cease to (5) Interest rate: 1.128 % per annum manufacture at the end of March 31, 2011. (6) Redemption price: ¥100 per face value of ¥100 The financial impact of this resolution has not yet been (7) Final redemption date: June 3, 2014 confirmed. (8) Method of redemption: Redemption at maturity 2. JT’s board of directors resolved on April 30, 2009 that they would The company may repurchase and issue a new corporate bond to refinance the existing first series redeem the Bonds after the date of straight bonds to be matured on June 25, 2009. The fifth series issuance. straight bond with general mortgage was issued with the follow- (9) Mortgage: General mortgage under the JT Law ing terms: (See note 1) (1) Type of bonds: The fifth series straight bonds with (10) Purpose of funds: Funds for bond retirement general mortgage (11) Special contracts: Not applicable Independent Auditors’ Report

102 JT Annual Report 2009 Eleven-Year Consolidated Financial Summary and Analysis of Business Results Financial Condition and Management’s Discussion Discussion Management’s To the Board of Directors of

Japan Tobacco Inc.: Financial Statements Notes to Consolidated We have audited the accompanying consolidated balance sheets of Japan Tobacco Inc. (“JT”) and consolidated subsidiaries (the

­“Company”) as of March 31, 2009 and 2008, and the related consolidated statements of income, changes in equity, and cash flows for

each of the three years in the period ended March 31, 2009, all expressed in Japanese yen. These consolidated financial statements are

the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements

based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan

and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit

includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes

assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial

statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial

position of the Company as of March 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each

of the three years in the period ended March 31, 2009, in conformity with accounting principles generally accepted in Japan.

As discussed in Note 14(1) to the consolidated financial statements, JTI Macdonald Corp. (“JTI MC”), JT’s Canadian subsidiary, received

a Notice of Assessment from the Quebec Ministry of Revenue on August 11, 2004, demanding payment of approximately 1.36 billion

Canadian dollars (approximately ¥106.4 billion). JTI MC filed an application for protection with the Ontario Superior Court of Justice on

August 24, 2004, under the Companies’ Creditors Arrangement Act, to make it possible for JTI MC to continue business operations with

its assets safeguarded.

Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation

has been made in conformity with the basis stated in Note 2. Such U.S. dollar amounts are presented solely for the convenience of readers

outside Japan.

June 23, 2009 Fact Sheets

103 JT Annual Report 2009 Contents

104 Financial Data 107 Return on Assets (ROA) 104 Net Sales Including Excise Taxes Free Cash Flow (FCF) Net Sales Excluding Excise Taxes Capital Expenditure (CAPEX) SG&A Expenses Depreciation & Amortization R&D Expenses 108 Total Assets 105 EBITDA Total Equity and Equity Ratio Operating Income Book Value per Share (BPS) Non-Operating Income and Expenses Liquidity and Interest-Bearing Debt Recurring Profit 109 Debt / Equity Ratio 106 Extraordinary Profit and Loss Interest Coverage Ratio Net Income (Loss) Annual Dividends per Share Earnings per Share (EPS) Dividend Payout Ratio on Return on Equity (ROE) a Consolidated Basis

110 Domestic Tobacco Business 120 International Tobacco Business 110 Total Domestic Market 120 Tobacco Sales Volume (by Brand) JT Sales Volume and JT Share Tobacco Sales Volume (by Region) Sales Volume of China Division and Domestic Duty-Free Net Sales Excluding Excise Taxes per Thousand Cigarettes Number of International Factories 111 Market Share by JT Brand Family Top 20 Selling Products in Japan by Market Share

112 Market Share by Tar Level (Market Share in Top 100 Sales Products) 121 Pharmaceutical Business Market Share by Tar Level (JT Products) 121 R&D Expense on a Non-consolidated Basis Menthol Products Market Share Clinical Development Products Priced at ¥320 or more per pack and D-spec Products Market Share

113 JT Net Sales Excluding Excise Taxes per Thousand Cigarettes Composition of JT Products by Price Range

114 New Product Launches and Sales Area Expansion 122 Food Business Number of New Products Launches 122 Net Sales Number of JT Cigarette Products Number of Marking / Combined Vending Machines

115 Smoking Rate (by gender) Smoking Rate (by age)

116 Taxation Changes of Tobacco Excise Taxes Breakdown of Price Levels per Cigarettes Package 122 Number of Employees

117 Tobacco Manufacturing System Number of Domestic Cigarette Manufacturing Factories Tobacco Manufacturing-related Factory Location

118 Tobacco Sales System Number of Tobacco Retailers Number of Tobacco Vending Machines Number of Tobacco Vending Machines (JT Tobacco Vending Machines)

119 Number of Domestic Tobacco Growers and Area under Domestic Leaf Tobacco Cultivation Volume of Domestic and International Leaf Tobacco Purchase Value of Domestic Leaf Tobacco Purchase and Price per 1kg Leaf Tobacco Reappraisal Profit / Loss Financial Data

104 JT Annual Report 2009 Net Sales Including Excise Taxes

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

7,000 Total 4,371.2 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 Tobacco Business 4,024.4 4,140.2 4,178.0 4,134.4 4,236.9 Financial Data 6,000 Domestic 3,491.4 3,405.2 3,416.2 3,362.3 3,200.4 5,000 International 792.7 881.1 999.6 2,639.9 3,118.3 Pharmaceutical Business 67.7 66.4 61.8 53.9 51.2 57.6 49.2 45.4 49.0 56.7 4,000 Food Business 195.0 210.3 221.1 232.4 250.1 265.3 278.3 286.5 336.4 435.9 3,000 Other Business 83.9 84.6 83.0 71.4 86.8 57.2 23.5 21.4 21.8 20.7 2,000

1,000

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Net Sales Excluding Excise Taxes

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

3,000 Total 1,881.0 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 Tobacco Business 1,534.3 1,635.2 1,675.8 1,649.7 1,631.5 Domestic 1,203.8 1,173.2 1,147.2 1,122.2 1,070.3 International 429.7 484.3 550.3 1,057.7 1,243.3 2,000 Pharmaceutical Business 67.7 66.4 61.8 53.9 51.2 57.6 49.2 45.4 49.0 56.7 Food Business 195.0 210.3 221.1 232.4 250.1 265.3 278.3 286.5 336.4 435.9 Other Business 83.9 84.6 83.0 71.4 86.8 57.2 23.5 21.4 21.8 20.7 1,000

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

SG&A Expenses

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1,000 SG&A 712.6 790.5 781.5 733.9 707.1 677.4 596.6 592.6 750.2 914.1 Personnel (*) 207.2 220.6 222.7 209.7 205.3 183.9 150.8 158.5 206.0 231.5

800 Advertising and General Publicity 36.9 48.3 40.2 35.7 35.4 27.4 23.9 23.4 22.9 25.6

600 Sales Promotion 134.5 162.5 155.2 142.0 141.7 140.1 142.1 128.0 163.6 162.3 R&D 47.5 47.0 52.6 44.5 42.1 40.4 37.5 41.2 45.1 47.2

400 Depreciation 51.2 58.9 59.5 56.7 56.7 54.2 53.4 57.4 80.3 113.0 * Personnel expense is the sum of compensation, salaries, allowances, provision for retirement benefits, statutory benefits, employee bonuses and accrual of employee bonuses 200

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

R&D Expenses

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

60 R&D 47.5 47.0 52.7 44.5 42.2 40.5 37.5 41.2 45.1 47.2 Tobacco Business 15.7 13.7 14.5 14.8 16.6 Domestic 16.1 15.1 15.1 15.8 17.7 International 2.1 0.9 1.3 3.3 3.8 40 Pharmaceutical Business 28.9 30.5 35.4 27.1 23.7 20.5 19.9 23.4 24.4 23.8 Food Business 0.9 0.7 0.7 1.2 1.0 1.0 0.8 0.7 0.7 1.1 Other Business 1.8 1.1 0.7 0.6 0.1 0.0 — — — — 20 Note: R&D expense in FY2000–2005 includes expenses posted as manufacturing cost

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 105 JT Annual Report 2009 EBITDA

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

700 EBITDA 315.1 312.0 334.1 337.2 373.4 400.1 433.3 464.6 602.0 646.2 Tobacco Business 299.4 296.3 320.9 321.4 343.1 600 Financial Data Domestic 296.0 305.7 326.4 306.7 272.2 500 International 65.4 94.0 112.6 270.7 337.9 Pharmaceutical Business (0.7) (3.1) (8.5) (5.1) (4.4) 5.4 (1.8) (8.1) (6.2) 4.8 400 Food Business (0.4) (2.6) 2.2 0.5 3.3 7.9 11.8 12.0 8.3 17.0 300 Other Business 16.0 20.0 19.6 19.6 30.6 26.8 22.1 21.5 22.0 13.1 200 Note: EBITDA = operating income + depreciation and amortization

100

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Operating Income

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

500 Operating Income 153.9 139.9 163.8 188.9 234.0 273.3 306.9 331.9 430.5 363.8 Tobacco Business 181.5 165.9 192.1 213.3 238.4

400 Domestic 215.8 220.0 245.3 222.3 188.2 International 44.4 71.0 81.0 205.3 174.7 300 Pharmaceutical Business (11.4) (12.8) (18.9) (13.8) (12.8) 1.8 (5.0) (11.2) (9.6) 1.0 Food Business (14.5) (17.3) (11.8) (13.1) (4.8) 1.9 6.3 6.7 0.6 (11.4) 200 Other Business (1.7) 3.4 1.7 0.9 11.9 10.4 8.6 9.3 10.4 9.6

100

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Non-Operating Income and Expenses

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0 Non-Operating Income and Expenses (14.3) (7.8) (7.1) (15.7) (20.4) (3.1) (9.1) (19.9) (67.8) (56.2) –10 Non-Operating Income 22.6 15.1 11.2 9.3 10.3 15.9 12.6 16.0 21.5 30.3 ( 1) –20 Financial Income * 7.5 6.5 4.7 3.7 3.2 3.3 5.9 12.1 13.4 12.2 Non-Operating Expenses 37.0 23.0 18.3 25.0 30.7 19.0 21.7 35.9 89.4 86.5 –30 Financial Expense (*2) 15.9 12.4 10.2 8.7 8.1 5.1 5.7 6.9 42.0 51.3 –40 *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. –50 *2 Financial expense is the sum of interest expense, bond interest paid, loss of redemption of securities, etc.

–60

–70 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Recurring Profit

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

400 Recurring Profit 139.5 132.0 156.6 173.2 213.5 270.2 297.8 312.0 362.6 307.5

300

200

100

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 106 JT Annual Report 2009 Extraordinary Profit and Loss

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Extraordinary Profit and Loss (12.0) (12.3) (58.4) (30.7) (221.2) (168.9) 3.1 25.1 9.9 (45.4) 50 Extraordinary Profit 16.8 20.7 30.0 18.3 29.3 79.2 65.4 50.8 68.9 48.3 Gain on Sale of Property, Financial Data 0 Plant and Equipment 8.0 16.3 28.2 15.4 17.2 73.3 60.0 47.5 66.7 46.4 Extraordinary Loss 28.8 33.0 88.5 49.0 250.5 248.2 62.3 25.7 59.0 93.8 Loss on Sale of Property, –50 Plant and Equipment 2.9 1.6 2.2 2.6 4.8 2.2 24.8 3.1 3.2 2.1 Loss on Disposal of Property, –100 Plant and Equipment 11.9 13.3 9.3 9.8 10.8 13.6 12.2 10.4 6.3 11.5 Business Restructuring Costs — — 13.4 11.4 40.8 224.8 8.0 — 6.4 24.3 –150 Impairment Loss — — — — — 0.1 11.4 2.7 3.8 16.3 Introduction Costs for Vending Machines with Adult –200 Identification Functions — — — — — — 0.1 5.7 12.8 13.4 Write-down of Investment –250 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 Securities — — — — — — — — 11.1 7.0 Costs related to the Recall of Frozen Foods Products — — — — — — — — 5.6 — Note: Extraordinary loss in FY2004 includes ¥185 billion of one-time loss on recognition of obligations under the Public Official Mutual Assistance Association Law Net Income (Loss)

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

250 Net Income (Loss) 50.7 43.6 36.8 75.3 (7.6) 62.5 201.5 210.7 238.7 123.4

200

150

100

50

0

–50 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Earnings per Share (EPS)

(Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

100,000 EPS 25,395 21,843 18,425 37,527 (3,966) 32,089 105,084 22,001 24,916 12,880 Note: A 5 for 1 stock split went into effect on April 1, 2006

80,000

40,000

20,000

0

–20,000 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Return on Equity (ROE)

(%) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

14 ROE 3.5 2.9 2.4 4.7 (0.5) 4.2 12.4 11.3 11.8 6.8

12

10

8

6

4

2

0

–2 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 107 JT Annual Report 2009 Return on Assets (ROA)

(%) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

12 ROA 6.1 4.7 5.4 6.4 7.9 9.2 10.4 10.7 10.5 8.4 Note: ROA = (Operating Income + Financial Income) / Total Assets [average of beginning and ending figure for the period] Financial Data 10

8

6

4

2

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Free Cash Flow (FCF)

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

400 FCF (786.4) 307.3 31.4 170.3 269.1 269.4 145.5 223.0 (1,493.7) 240.1 Note: FCF = (cash flow from operating activities + cash flow from investing activities) excluding the following items: 300 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 / 200 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) 100

0

–700

–800

–1,500 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Capital Expenditure (CAPEX)

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

500 Capital Expenditure 442.8 114.8 96.5 109.1 90.8 85.1 98.9 102.1 129.5 134.2 Tobacco Business 401.1 77.3 70.0 60.9 60.5 Domestic 46.4 75.0 55.2 57.2 46.5 400 International 18.7 24.9 32.0 48.4 59.7 Pharmaceutical Business 3.8 3.6 2.2 1.1 2.6 3.1 2.1 3.0 4.2 3.4 200 Food Business 14.5 4.2 6.9 7.2 9.1 7.3 4.5 4.8 6.0 23.2 Other Business 23.2 29.2 18.1 38.8 18.0 10.6 19.3 8.0 14.7 1.1 Notes: 1. CAPEX in FY1999–2000 = Tangible Assets + Intangible Assets 100 2. CAPEX in FY2001–2008 = Tangible Assets + Intangible Assets + Long-Term Prepaid Expenses 3. CAPEX in FY2000 includes Intangible Assets of ¥323 billion related to the RJRI acquisition

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Depreciation & Amortization

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

300 Depreciation & Amortization 138.8 172.0 170.3 148.3 139.4 126.7 126.4 132.6 171.5 282.4 Tobacco Business 110.1 130.3 128.8 108.0 104.7

240 Domestic 80.1 85.6 81.0 84.3 84.0 International 21.0 23.0 31.5 65.3 163.1 180 Pharmaceutical Business 4.9 9.7 10.4 8.7 8.4 3.6 3.2 3.0 3.3 3.8 Food Business 6.0 14.7 14.1 13.7 8.1 5.9 5.5 5.3 7.6 28.4 120 Other Business 17.1 16.6 17.8 18.7 18.6 16.3 13.4 12.2 11.6 3.4 Notes: 1. Depreciation & Amortization in FY1999–2000 = Depreciation of Tangible Fixed Assets + Amortization of Intangible Fixed Assets 60 2. Depreciation & Amortization in FY2001–2008 = Depreciation of Tangible Fixed Assets + Amortization of Intangible Fixed Assets + Amortization of Long-Term Prepaid Expenses + Amortization of Goodwill

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 108 JT Annual Report 2009 Total Assets

(Billions of Yen) As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

6,000 Total Assets 3,095.2 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 Tobacco Business 2,346.7 2,452.7 2,309.5 2,153.0 2,122.2 Financial Data 5,000 Domestic 1,298.2 1,131.7 1,180.3 847.1 788.6 International 838.5 994.8 1,275.0 3,804.4 2,700.0 4,000 Pharmaceutical Business 126.6 129.9 125.2 114.7 114.3 117.8 117.9 106.1 111.4 111.5 3,000 Food Business 126.9 133.8 133.2 135.3 141.4 141.6 141.4 158.8 353.2 332.6 Other Business 195.5 198.1 190.1 236.5 250.2 197.0 194.4 249.6 90.0 87.4 2,000

1,000

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Total Equity and Equity Ratio

(Billions of Yen) (%) As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

2,500 80 Total Equity 1,526.5 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 Equity Ratio 49.3 47.5 52.7 54.9 49.8 50.2 58.0 58.3 40.8 40.0

2,000 70 Note: Total Equity in FY1999-2006 excludes Minority Interests

1,500 60

1,000 50

500 40

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 30

Book Value per Share (BPS)

(Yen) As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1,000,000 BPS 763,291 756,922 806,552 811,204 771,516 781,813 919,780 204,617 216,707 162,087 Notes: 1. Total Equity in FY1999-2006 excludes Minority Interests 2. A 5 for 1 stock split went into effect on April 1, 2006 800,000

600,000

400,000

200,000

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Liquidity and Interest-Bearing Debt

(Billions of Yen) As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ( 1) 1,500 Liquidity * 496.8 645.7 550.7 623.5 798.4 863.6 979.6 1,185.6 218.8 169.8 Interest-Bearing Debt (*2)(*3) 660.5 606.0 511.7 424.4 381.2 230.7 216.6 219.2 1,389.2 996.0

1,200 *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 900

600

300

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 109 JT Annual Report 2009 Debt / Equity Ratio

(Times) As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0.7 Debt / Equity Ratio 0.43 0.40 0.32 0.26 0.25 0.15 0.12 0.11 0.67 0.64

0.6 Financial Data

0.5

0.4

0.3

0.2

0.1

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Interest Coverage Ratio

(Times) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

60 Interest Coverage Ratio 10.2 11.8 16.5 22.1 29.3 54.2 54.9 49.9 10.6 7.3 Note: Interest Coverage Ratio = (Operating Income + Financial Income) / Financial Expense

40

20

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Annual Dividends per Share

(Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

16,000 Annual Dividends per Share 8,000 8,000 8,000 10,000 10,000 13,000 16,000 4,000 4,800 5,400 (Retroactively Adjusted) 1,600 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 12,000

8,000

4,000

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Dividend Payout Ratio on a Consolidated Basis

(%) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

100 Dividend Payout Ratio 31.5 36.6 43.4 26.6 (252.1) 40.5 15.2 18.2 19.3 41.9 Goodwill amortization adjusted 22.6 Note: Payout Ratio before goodwill amortization 50

0

–150

–300 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 Domestic Tobacco Business

110 JT Annual Report 2009 Total Domestic Market

(Billions of Cigarettes) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

350 Total Domestic Market 332.2 324.5 319.3 312.6 299.4 292.6 285.2 270.0 258.5 245.8 Source: Tobacco Institute of Japan Financial Data 300

250

200

150 Business

Domestic Tobacco Domestic Tobacco 100

50

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

JT Sales Volume and JT Share

(Billions of Cigarettes) (%) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

350 100 JT Sales Volume 250.1 243.1 237.2 229.0 218.3 213.2 189.4 174.9 167.7 159.9 JT Share 75.3 74.9 74.3 73.3 72.9 72.9 66.4 64.8 64.9 65.1 300 90

250 80

200 70

150 60

100 50

50 40

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 30

Sales Volume of China Division and Domestic Duty-Free

(Billions of Cigarettes) Years ended March 31 2002 2003 2004 2005 2006 2007 2008 2009

6 Sales Volume 5.8 6.0 5.4 5.1 3.2 3.4 3.5 3.6 Note: China Division covers China, Hong Kong, and Macau markets

4

2

0 ’02 ’03 ’04 ’05 ’06 ’07 ’09’08 111 JT Annual Report 2009 Market Share by JT Brand Family

(%) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

80 Mild Seven 34.5 34.0 33.2 32.5 32.6 32.9 32.2 31.6 32.0 32.3 Seven Stars 7.8 7.7 8.2 8.3 8.4 8.3 8.7 9.0 8.9 9.3 Financial Data Caster 8.3 8.0 7.8 7.5 7.1 6.6 6.3 6.0 5.9 5.9 60 Cabin 5.3 5.0 4.7 4.4 4.1 4.2 4.0 4.0 4.0 3.8 Peace 3.2 3.1 3.0 3.0 3.0 2.9 2.9 2.8 2.8 2.8 40 Pianissimo — — — — — — 1.9 2.4 2.5 2.6

Hope 2.1 2.1 2.1 2.0 2.0 2.1 2.1 2.0 2.0 2.0 Business

Frontier 3.1 2.9 2.8 2.6 2.2 1.9 1.7 1.5 1.4 1.2 Domestic Tobacco 20 Other Brands 11.0 12.1 12.5 13.0 13.5 14.0 6.7 5.5 5.4 5.2

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Top 20 Selling Products in Japan by Market Share (FY ended March 31, 2009)

Product Brand Owner Share (%) 1 SEVEN STARS JT 5.1 2 MILD SEVEN SUPER LIGHTS JT 4.9 3 MILD SEVEN LIGHTS JT 4.3 4 MILD SEVEN JT 3.6 5 MILD SEVEN ONE 100’s BOX JT 3.3 6 MILD SEVEN EXTRA LIGHTS JT 2.7 7 MARLBORO LIGHTS MENTHOL BOX PMJ 2.7 8 CASTER MILD JT 2.4 9 SEVEN STARS BOX JT 1.9 10 CABIN MILD BOX JT 1.8 11 MILD SEVEN ONE JT 1.6 12 KENT ULTRA1· 100’s BOX BATJ 1.6 13 PIANISSIMO ONE JT 1.6 14 CASTER ONE 100’s BOX JT 1.5 15 MILD SEVEN LIGHTS BOX JT 1.4 16 MARLBORO KS BOX PMJ 1.4 17 MILD SEVEN ONE BOX JT 1.4 18 MILD SEVEN SUPER LIGHTS BOX JT 1.3 19 HOPE (10) JT 1.3 20 MILD SEVEN EXTRA LIGHTS BOX JT 1.3 Source: Tobacco Institute of Japan 112 JT Annual Report 2009

Market Share by Tar Level (Market Share in Top 100 Sales Products)

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

100 1 mg 12.9 14.0 14.6 16.1 18.4 19.9 21.2 22.7 24.0 2–3 mg 8.1 7.9 7.5 6.6 6.7 7.4 7.0 8.2 8.5 Financial Data

80 4–6 mg 24.8 24.0 23.8 23.5 23.1 23.2 23.4 23.0 22.4 7–13 mg 40.8 40.8 40.9 40.3 39.8 37.7 36.3 34.1 32.9 60 14 mg or Higher 13.4 13.4 13.3 13.4 12.1 11.9 12.1 12.1 12.2 Source: Tobacco Institute of Japan

Business 40 Domestic Tobacco Domestic Tobacco

20

0 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Market Share by Tar Level (JT Products)

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

80 1 mg 5.8 6.0 6.1 7.2 8.5 11.7 12.9 14.0 14.7 2–3 mg 5.8 5.8 5.9 5.4 5.9 6.6 6.7 6.7 6.9 4–6 mg 18.6 17.9 17.3 17.0 16.5 14.5 13.9 14.2 14.2 60 7–13 mg 32.2 32.0 31.6 30.9 30.0 22.0 19.7 18.5 17.8 14 mg or Higher 12.6 12.5 12.5 12.4 12.0 11.6 11.6 11.5 11.5 40

20

0 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Menthol Products Market Share

(%) Years ended March 31 2001 2002 2003 2004 2005 2006 2007 2008 2009 ( ) 20 Menthol Products * 10.0 11.3 12.7 14.0 16.4 17.2 17.4 19.3 19.8 Menthol JT Products 5.5 6.4 6.8 7.6 8.9 7.0 6.8 7.4 7.6 * Market Share in top 100 sales products 15 Source: Tobacco Institute of Japan

10

5

0 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Products Priced at ¥320 or more per pack and D-spec Products Market Share

(%) Years ended March 31 2003 2004 2005 2006 2007 2008 2009 ( 1) 12 JT Products Priced at ¥320 or more per pack * 10.2 11.1 11.8 6.3 5.5 5.4 5.2 D-spec Products (*2) 0.01 0.38 0.93 1.72 4.04 4.59 4.96 10 *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 8 response to customer demands for a reduction in the unpleasant smell of smoke

6

4

2

0 ’03 ’04 ’05 ’06 ’07 ’08 ’09 113 JT Annual Report 2009 JT Net Sales Excluding Excise Taxes per Thousand Cigarettes

(Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

4,100 JT Net Sales Excluding Excise Taxes Per Thousand Cigarettes 3,822 3,840 3,850 3,856 3,908 3,941 3,864 3,990 4,057 4,057 Financial Data 4,000 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 3,900

3,800 Business 3,700 Domestic Tobacco Domestic Tobacco

3,600

3,500 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Composition of JT Products by Price Range

(%) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

100 Products Priced at ¥300 or more per pack (*1) 36.5 37.7 38.2 38.4 42.6 44.8 40.2 71.7 87.0 87.2 Products Priced at 80 ¥320 or more per pack 12.1 14.7 16.1 9.5 8.5 8.3 8.0 Products Priced at 60 ¥310 per pack 3.8 1.0 0.0 0.0 0.0 0.0 0.0 Products Priced at 40 ¥300 per pack 22.5 26.9 28.7 30.7 63.2 78.7 79.2 Products Priced at 20 ¥290 or less per pack (*2) 63.5 62.3 61.8 61.6 57.4 55.1 59.8 28.3 13.1 12.8 *1 ~ Nov. 98: ¥240 or more, Dec. 98 ~ Jun. 03: ¥260 or more, Jul. 03 ~ Jun. 06: ¥280 or more 0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 *2 ~ Nov. 98: ¥230 or less, Dec. 98 ~ Jun. 03: ¥250 or less, Jul. 03 ~ Jun. 06: ¥270 or less 114 JT Annual Report 2009 New Product Launches and Sales Area Expansion

Year ended March 31, 2009 (6 products) (D-spec: two product, Menthol: two products, Tar 1mg: two products, Products at ¥320 (include ¥160 or more per pack) or more per pack: three products) Tar Nicotine Date Product D-spec Menthol Price Sales Region (mg) (mg) Financial Data May-08 MILD SEVEN IMPACT ONE 100’s BOX 1 0.1 ¥300 (Jul-09) Nationwide Jul-08 CABIN ROAST BLEND 100’s BOX 8 0.6 ¥300 Hokkaido—>(Apr-09) Nationwide Jul-08 CAMEL NUTTY LIGHTS BOX 6 0.5 ¥320 Fukuoka Oct-08 PIANISSIMO FRAM MENTHOL ONE 1 0.1 ¥160 Nationwide

Business Dec-08 SALEM ALASKA MENTHOL 5 0.4 ¥320 Nationwide

Domestic Tobacco Domestic Tobacco Feb-09 SEVEN STARS BLACK IMPACT 7 0.7 ¥300 Nationwide

Number of New Products Launches

Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

20 Number of New Products Launches 2 4 7 4 14 18 14 9 3 6

15

10

5

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Number of JT Cigarette Products

As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

120 Number of JT Cigarette Products 99 99 102 98 93 95 117 106 94 96 100

80

60

40

20

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 115 JT Annual Report 2009

Smoking Rate (by gender)

(%) At the time of survey 1999 2000 2001 2002 2003 2004 2005 2006(*) 2007 2008

60 All Adults 33.6 32.9 32.7 30.9 30.3 29.4 29.2 26.3 26.0 25.7 Male 54.0 53.5 52.0 49.1 48.3 46.9 45.8 41.3 40.2 39.5 Financial Data

50 Female 14.5 13.7 14.7 14.0 13.6 13.2 13.8 12.4 12.7 12.9 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 40

30 Business Domestic Tobacco Domestic Tobacco

20

10 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08

Smoking Rate (by age)

(%) Survey in 2008 Total 20s 30s 40s 50s over-60s

50 Male 39.5 41.0 46.0 47.8 46.4 27.0 Female 12.9 18.1 19.3 17.9 13.4 6.0

40 Source: JT “Japan Smoking Rate Survey”

30

20

10

over- 0 Total 20s 30s 40s 50s 60s 116 JT Annual Report 2009 Taxation All tobacco products sold in Japan are subject to the national tobacco Law, a 5% consumption tax is imposed as with other goods and excise tax, the national tobacco special excise tax, and local tobacco services. All tobacco excise taxes and consumption tax are imposed

Financial Data excise tax. The national tobacco excise tax is set at ¥3,552 per thou- not only for tobacco products manufactured in Japan but also for sand cigarettes, the national tobacco special excise tax at ¥820 per imported tobacco products. From April 1987, no customs duties thousand cigarettes, and the local tobacco excise tax is set at ¥4,372 apply to imported tobacco products. per thousand cigarettes. In addition, under the Consumption Tax Business Domestic Tobacco Domestic Tobacco

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 National Tobacco Special Excise Tax — — — — — — 820 820 820 820 Local Tobacco Excise Tax 22.4 550 22.4 1,000 3,126 3,126 3,126 3,536 3,946 4,372 Total Excise Tax 45.4 1,132 45.4 2,032 6,252 6,252 7,072 7,072 7,892 8,744 Consumption Tax — — — — 3.0% 5.0% 5.0% 5.0% 5.0% 5.0% Tobacco Regulation Changes • Tobacco Consumption *¥1,000 was deducted from tax base • Consumption Tax • Consumption Tax • National Tobacco • Review of budget • Tobacco Excise • Tobacco Excise Tax was introduced for Ad valorem was introduced was increased Special Excise Tax allocations in line Tax was increased Tax was increased • Tobacco Consumption • Tobacco was introduced with a revision Tax was increased Consumption of laws Tax was renamed 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 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 117 JT Annual Report 2009 Tobacco Manufacturing System

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

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

Cigarette manufacturing factory Business Customer Retailer Packaging Rolling Flavoring Cutting Blending Domestic Tobacco Domestic Tobacco

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

Number of Domestic Cigarette Manufacturing Factories

As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

25 Domestic Cigarette Manufacturing Factories 25 25 25 25 22 18 10 10 10 10

20

15

10

5

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Tobacco Manufacturing-related Factory Location

As of March 31, 2009

Cigarette manufacturing factories: 10 Morioka factory (to be closed in March 31, 2010) Koriyama factory Kita-Kanto factory Odawara factory (to be closed in March 31, 2011) Tokai factory Hamamatsu factory Kanazawa factory (closed in March 31, 2009) Kansai factory Yonago factory (to be closed in March 31, 2010) Kyushu factory

Other tobacco related factories: 4 Tomobe factory Hiratsuka factory Okayama printing factory Hofu factory 118 JT Annual Report 2009 Tobacco Sales System

Customers

sales Financial Data direct sales JT Retailers Wholesalers

licensing requirement for selling approval registration for the wholesale by way of wholesalers or direct sales requirement for the approval of retail price approval The Minister of Registered Business Finance Importers approval requirement for the approval of retail price Domestic Tobacco Domestic Tobacco registration notification imports

registration requirement for registered importers Foreign Tobacco Companies

Number of Tobacco Retailers

(Thousands of Stores) As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

350 Tobacco Retailers 302 306 307 307 305 304 304 302 298 293 Source: Ministry of Finance 300

250

200

150

100

50

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Number of Tobacco Vending Machines

(Thousands) As of December 31 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

700 Total Tobacco Vending Machines 529 625 629 629 626 622 616 565 520 424 600 Source: Japan Vending Machine Manufacturers Association

500

400

300

200

100

0 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08

Number of Tobacco Vending Machines (JT Tobacco Vending Machines)

(Thousands) As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

300 JT Tobacco Vending Machines 193 220 251 254 237 226 243 228 207 196

200

100

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 119 JT Annual Report 2009 Number of Domestic Tobacco Growers and Area under Domestic Leaf Tobacco Cultivation

(Thousands of Growers) (Thousands of Hectares) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

30 30 Number of Domestic Tobacco Growers 24 23 21 20 20 18 14 14 13 13 Financial Data Area under Domestic Leaf Tobacco Cultivation 24 24 23 23 22 21 19 18 17 16 20 20 Business 10 10 Domestic Tobacco Domestic Tobacco

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 0

Volume of Domestic and International Leaf Tobacco Purchase

(Thousands of Tons) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

100 Domestic 64 60 60 58 50 52 46 37 37 38 International 95 94 100 85 90 85 39 60 68 73

80

60

40

20

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09

Value of Domestic Leaf Tobacco Purchase and Price per 1 kg

(Billions of Yen) (Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

200 2,000 Amount 121.6 117.1 114.7 109.2 93.1 98.0 84.3 68.5 69.2 69.4 Price per 1 kg 1,879 1,926 1,895 1,878 1,839 1,862 1,801 1,818 1,833 1,803

150 1,500

100 1,000

50 500

0 ’00’01’02’03’04’05’06’07’08’09 0

Leaf Tobacco Reappraisal Profit / Loss

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

15 Leaf Tobacco Reappraisal 14.7 4.1 1.9 0.7 6.6 (9.8) (9.5) 9.5 4.1 4.1 Note: ( ) indicates reappraisal loss 12 9 6 3 0 –3 –6 –9 –12 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 International Tobacco Business

120 JT Annual Report 2009

Tobacco Sales Volume (by Brand)

(Billions of Cigarettes) Years ended December 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total 203.1 215.1 203.3 198.8 212.4 220.3 240.1 385.6 452.3 500 GFB Total 95.7 107.8 109.8 117.5 131.4 133.8 149.1 203.2 245.5 Financial Data Winston 35.0 43.0 48.0 55.9 70.1 76.4 93.9 111.0 126.4 400 Camel 33.0 36.0 34.0 34.8 35.1 35.2 35.4 38.6 42.3 Mild Seven 16.0 18.0 17.0 17.2 17.2 17.5 17.5 16.8 18.8 300 Benson & Hedges 8.3 11.2 Silk Cut 3.9 5.2 LD 17.5 29.0 Business 200 Sobranie 1.2 2.3

International Tobacco International Tobacco Glamour 5.9 10.3 100 Other Brands 107.4 107.3 93.5 81.3 81.0 86.5 91.0 182.4 206.8 Notes: 1. Sales volume in the China Division (China, Hong Kong, and Macau) was included in 2000 and 2001, but excluded from 2002 to 2007 2. GFB in FY2000–2006: Winston, Camel, Mild Seven, Salem 0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 GFB in FY2007: Winston, Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, Sobranie, Glamour

Tobacco Sales Volume (by Region)

(Billions of Cigarettes) Years ended December 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total 203.1 215.1 203.3 198.8 212.4 220.3 240.1 500 Asia 38.0 42.0 39.0 40.4 40.6 33.5 29.1 Europe 37.0 38.0 38.0 36.9 38.1 39.2 44.1 400 Americas 11.0 11.0 10.0 9.9 9.9 9.3 8.8 CIS & Others 118.0 124.0 116.0 111.6 123.8 138.3 158.0 300 Total 240.1 385.6 452.3 North & Central Europe 5.7 39.3 50.8 200 CIS+ 108.6 195.1 219.7 South & West Europe 40.1 55.2 64.0 100 Rest of the World 85.7 95.9 117.7 Note: Sales volume in the China Division (China, Hong Kong and Macau) were included in 2000 and 2001, but excluded from 2002 to 2007 0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08

Net Sales Excluding Taxes per Thousand Cigarettes

(U.S. Dollars) Years ended December 31 2000 2001 2002 2003 2004 2005 2006 2007 2008

25 Net Sales Excluding Taxes per Thousand Cigarettes 14.4 14.0 15.0 17.4 18.6 19.9 19.7 20.8 23.6 Note: Net sales in the China Division (China, Hong Kong, and Macau) were included in 2000 and 2001, but excluded from 2002 to 2007 20

15

10

5

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08

Number of International Factories

As of March 31 2001 2002 2003 2004 2005 2006 2007 2008 2009

35 Number of International Factories 19 17 16 16 16 17 17 31 30

30

25

20

15

10

5

0 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 Pharmaceutical Business

121 JT Annual Report 2009 R&D Expense on a Non-consolidated Basis

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

35 R&D Expense on a Non-consolidated Basis 26.0 29.0 34.5 26.4 23.1 20.1 19.3 21.9 22.9 23.2 Financial Data 30

25

20

15 Business Pharmaceutical 10

5

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’09’08

Clinical development

As of May 1, 2009 Code Stage Key Indication Mechanism Characteristics Rights JTT-705 Phase 2 (Japan) Dyslipidemia CETP inhibitor Decreases LDL and increases HDL by inhibition of CETP Roche (Switzerland) obtained the rights to develop and (oral) commercialize the compound worldwide, with the –CETP: Cholesteryl Ester Transfer Protein, facilitates exception of Japan. transfer of cholesteryl ester from HDL to LDL – HDL: High-density lipoprotein (“good cholesterol”) *Development stage by Roche: Phase 3 – LDL: Low-density lipoprotein (“bad cholesterol”) JTT-130 Phase 2 (Japan) Dyslipidemia MTP inhibitor Treatment of dyslipidemia by reducing absorption of (oral) Phase 2 (Overseas) cholesterol and triglycerides via inhibition of MTP

– MTP: Microsomal Triglyceride Transfer Protein JTK-303 Phase 1 (Japan) HIV infection Integrase inhibitor Integrase inhibitor which works by blocking integrase, Gilead Sciences (U.S.) obtained the rights to develop (oral) an enzyme that is involved in the replication of HIV and commercialize this compound worldwide, with the exception of Japan. – HIV: Human Immunodeficiency Virus *Development stage by Gilead Sciences: Phase 3 JTT-302 Phase 2 (Overseas) Dyslipidemia CETP inhibitor Decreases LDL and increases HDL by inhibition of CETP (oral) – 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 (Japan) Osteoporosis CaSR antagonist Increases BMD and decreases new vertebral fractures Merck (U.S.) obtained the rights to develop and (oral) by accelerating endogenous PTH secretion via antago- commercialize this compound worldwide, with the nism of circulating Ca on CaSR in parathyroid cells exception of Japan.

– BMD: Bone Mineral Density – PTH: Parathyroid Hormone – CaSR: Calcium-Sensing Receptor JTS-653 Phase 1 (Japan) Pain TRPV1 antagonist Improves pain and overactive bladder via antagonism of (oral) Overactive bladder TRPV1 on sensory neurons

– TRPV1: Transient Receptor Potential Vanilloid subtype 1 JTT-654 Phase 1 (Japan) Type 2 diabetes HSD-1 inhibitor Improves type 2 diabetes through reducing excessive (oral) Phase 1 (Overseas) mellitus glucocorticoid action by inhibiting HSD-1

– HSD1: 11 beta-hydroxysteroid dehydrogenase type 1 JTK-656 Phase 1 (Overseas) HIV infection Integrase inhibitor Integrase inhibitor which works by blocking integrase, (oral) an enzyme that is involved in the replication of HIV|

– HIV: Human Immunodeficiency Virus JTT-751| Phase 2 (Japan) Hyperphosphatemia Phosphate binder Decreases serum phosphorous level by binding phos- JT obtained the rights to develop and commercialize this (oral) phate derived from dietary in the gastrointestinal tract compound in Japan from Keryx Biopharmaceuticals (U.S.) (Developed jointly with Torii) Food Business

122 JT Annual Report 2009 Net Sales

(Billions of Yen) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

450 Food Business 195.0 210.3 221.1 232.4 250.1 265.3 278.3 286.5 336.4 435.9 Processed Foods (*) — 41.6 48.0 60.0 73.6 87.8 93.0 95.7 141.4 248.6 Financial Data 400 Beverages — 165.4 173.1 172.3 176.5 177.4 185.3 190.7 194.9 187.3 350 * 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 300 not comparable. In addition, JT had decided to commence proceedings to dissolve Australian chilled processed foods subsidiaries such as HANS and others on 250 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. 200

Food Business 150 100

50 0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’09’08

Number of Employees Number of Marking / Combined Vending Machines

(Machines) Years ended March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

120,000 Vending Machines — — 190,000 201,000 211,000 226,000 237,000 250,500 257,000 254,000 JT-Owned 30,000 31,000 36,500 45,500 45,000 44,500 40,500 38,000 35,500 32,000 100,000 Combined 20,000 31,000 38,500 43,500 50,500 54,000 61,500 66,000 71,500 76,500 Note: Number of vending machines includes machines operated by JT’s affiliates and cup vending machines. Combined vending machines focus on JT brand 80,000 beverages but also sell non-JT brand beverages

60,000

40,000

20,000

0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’09’08

Number of Employees

Number of Employees

(Employees) As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total 41,703 40,237 39,387 38,628 39,243 32,640 31,476 33,428 47,459 47,977 50,000 Tobacco Business 32,367 30,894 29,860 28,946 28,504 24,350 Domestic 11,795 11,534 11,548 11,281 40,000 International 11,943 12,401 22,324 23,227 Pharmaceutical Business 1,682 1,670 1,580 1,530 1,551 1,566 1,532 1,554 1,569 1,616 30,000 Food Business 3,397 3,654 4,097 4,581 5,409 5,357 5,232 7,084 11,169 10,975 Other Business 3,093 2,820 2,707 2,437 2,608 706 604 461 441 429 20,000 Corporate 1,164 1,199 1,143 1,134 1,171 661 370 394 408 449 Note: Number of employees is counted at working basis, unless otherwise indicated

10,000 As of March 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Number of Employees 0 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’09’08 (parent company) 16,235 15,588 14,462 14,172 13,769 10,124 8,855 8,930 8,999 8,908 Number of Employees Based on Enrollment (parent company) 20,194 19,355 17,815 17,272 16,690 11,300 9,931 9,984 10,010 9,973

As of December 31 1999 2000 2001 2002 2003 2004 JT International (Thousands of Employees) (*) 13.0 11.8 11.7 11.6 11.9 12.0 * From FY2006, the data is disclosed as those of international tobacco business Shareholder Information (As of March 31, 2009)

123 JT Annual Report 2009 Common Stock Note: A 5 for 1 stock split was completed on April 1, 2006 Information Authorized: 40,000,000 Shareholder Issued : 10,000,000 Number of shareholders: 62,931

Administration of the Registry of Shareholders 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 Nagoya Stock Exchange Fukuoka Stock Exchange Sapporo Securities Exchange

Principal Shareholders Name Shares held The Minister of Finance 5,001,390 Japan Trustee Services Bank, Ltd. (Trust Account) 266,683 Japan Trustee Services Bank, Ltd. (Trust Account 4G) 258,891 The Master Trust Bank of Japan, Ltd. (Trust Account) 212,913 State Street Bank and Trust Company 505223 171,774 Trust & Custody Services Bank, Ltd. as trustee for Mizuho Bank, Ltd. Retirement Benefit Trust Account re-entrusted by Mizuho Trust and Banking Co., Ltd. 169,000 State Street Bank and Trust Company 130,567 Deutsche Bank AG London-PB Non-Treaty Clients 613 124,737 The Chase Manhattan Bank. N.A. London Secs Lending Omnibus Account 123,711 The Chase Manhattan Bank. 385036 72,215

Composition of Shareholders (Years ended March 31)

（％）

100 9.5 8.0 7.4 7.1 7.4 23.7 27.4 29.0 28.9 26.1 80

1.1 0.9 0.9 0.8 0.8 60 0.7 1.0 0.9 0.6 0.5 15.0 12.7 11.8 12.7 15.2 50.0 50.0 50.0 50.0 50.0 40 Individuals and others Foreign institutions and others 20 Other institutions Securities companies Financial institutions 0 ’05 ’06 ’07 ’08 ’09 Japanese government 124 JT Annual Report 2009 Offering JT Shares by Government 1st Offering Method Offering by Bids Offering by non-Bids Information Shareholder Shareholder 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 (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) (Point) 700,000 All Time High 3,500 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

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

0 0 ’94/10’95/03 ’96/03 ’97/03 ’98/03 ’99/03 ’00/03 ’01/03 ’02/03 ’03/03 ’04/03 ’05/03 ’06/03 ’07/03 ’08/03 ’09/03 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 High (Yen) 240,000 204,000 204,000 208,000 240,000 204,000 193,800 182,800 178,000 163,600 266,000 435,000 604,000 708,000 555,000 Low (Yen) 153,200 142,000 149,600 156,400 153,200 142,000 138,000 139,000 137,600 128,800 152,800 238,000 362,000 492,000 216,000 Trading volume (shares) 207,678 162,657 330,107 362,349 207,678 162,657 448,631 464,116 500,302 596,318 1,213,156 1,412,073 6,119,498 5,660,892 7,699,734 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 Members of the Board, Auditors, and Executive Officers (As of June 23, 2009)

125 JT Annual Report 2009 Members of the Board Executive Officers

Chairman of the Board President Senior Vice Presidents

Yoji Wakui Hiroshi Kimura Hirotoshi Maejima Auditors, and Executive Officers

Chief Executive Officer Deputy R&D Officer, Tobacco Business Members of the Board, Shinichi Murakami Representative Directors Head of Domestic Leaf Tobacco General Division, Executive Deputy Presidents Tobacco Business Hiroshi Kimura Munetaka Takeda Atsuhiro Kawamata Munetaka Takeda Assistant to CEO in Compliance, Finance and Head of China Division, Tobacco Business Masaaki Sumikawa Food Business Akira Saeki Mitsuomi Koizumi Masaaki Sumikawa Head of Tobacco Business Planning Division and Assistant to CEO in Strategy, HR, Legal and Chief Corporate, Scientific & Regulatory Affairs Officer, Masakazu Shimizu Operational Review and Business Assurance Tobacco Business Mitsuomi Koizumi Junichi Haruta President, Tobacco Business Head of Central Pharmaceutical Research Institute, Members of the Board Pharmaceutical Business Masakazu Shimizu Noriaki Okubo Chief Communications Officer and Ryoko Nagata Sadao Furuya Assistant to CEO in CSR and General Administration Head of Soft Drink Business Division, Food Business Yasushi Shingai Satoshi Matsumoto Chief Human Resources Officer Senior Executive Vice Presidents Hideki Miyazaki Noriaki Okubo Chief Financial Officer President, Pharmaceutical Business Auditors Ryoji Chijiiwa Ryuichi Shimomura Chief General Affairs Officer Standing Auditors Chief Legal Officer Hisao Tateishi* Gisuke Shiozawa Executive Vice Presidents Yoshihisa Fujisaki Chief Marketing & Sales Officer,Tobacco Business Auditors Tadashi Iwanami Takanobu Fujita* Chief R&D Officer, Tobacco Business Kenji Iijima Koichi Ueda* Head of Manufacturing General Division, Tobacco Business * Outside Corporate Auditors under the Companies Act of Japan Sadao Furuya President, Food Business Mutsuo Iwai Chief Strategy Officer Corporate Data ( As of March 31, 2009)

126 JT Annual Report 2009 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 Corporate Data 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, Deputy CEO and Chief Financial Officer

Number of Employees Thomas A. McCoy Chief Operating Officer 47,977 (Consolidated) 8,908 (Parent Company) David Aitken Senior Vice President Consumer & Trade Marketing Domestic Sales Offices Paul Bourassa Senior Vice President Legal, Regulatory Affairs and Compliance Hokkaido (Hokkaido) Jörg Schappei Sendai (Miyagi) Senior Vice President Human Resources Tokyo (Tokyo) Bill Schulz Senior Vice President Global Supply Chain Nagoya (Aichi) Takehisa Shibayama Osaka (Osaka) Senior Vice President Research & Development Hiroshima (Hiroshima) Frits Vranken Shikoku (Kagawa) Senior Vice President Business Development and Corporate Strategy Fukuoka (Fukuoka) 17 other sales offices Martin Braddock Regional President CIS / Adriatica / Romania Domestic Factories Stefan Fitz Regional President Central Europe / Nordic Kita-Kanto (Tochigi) Hans-Gerd Hesse Tokai (Shizuoka) Regional President Asia Pacific Fadoul Pekhazis Kansai (Kyoto) Regional President Middle East / Near East / Africa / Turkey and WWDF Kyushu (Fukuoka) Eddy Pirard 10 other factories Regional President United Kingdom / Ireland Michel Poirier Domestic Laboratories Regional President Americas Roberto Zanni Leaf Tobacco Research Laboratory (Tochigi) Regional President Western & Southern Europe / Baltics Tobacco Science Research Institute (Kanagawa) Central Pharmaceutical Research Institute (Osaka) 2-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8422, Japan Tel: (81) 3-3582-3111 Fax: (81) 3-5572-1441 www.jti.co.jp ANNUAL REPORT 2009

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