JAPAN TOBACCO INC.

Triggered by the FCTC, tobacco regulations have been tightening globally year by year, with expanding measures such as plain packaging regulations (already introduced in Australia, the UK, France, etc.), flavor regulations (the EU decided in November 2022 to apply these to heated tobacco products), and passive smoking prevention regulations (in Japan, a specialized committee on passive smoking countermeasures was established in October 2025). If regulatory tightening progresses, it could adversely affect business performance through declines in tobacco demand and market share and increased compliance costs. The Group is working to swiftly gather information on regulatory trends and engage in constructive dialogue with governments and regulatory authorities.

Tobacco tax increases continue to be implemented in various countries from fiscal and public health perspectives; in Japan, the FY2025 tax reform determined that the national tobacco tax will be raised by a total of ¥1,500 per 1,000 cigarettes between April 2027 and April 2029. Price increases in response to tax hikes may lead to declines in tobacco demand, shifts to lower-priced brands, and increased smuggling, while forgoing price increases would deteriorate the profit structure—either of which could adversely affect business performance. The Group responds through appropriate pricing, cost efficiency measures, and securing multiple markets.

Tobacco sales revenue from key markets such as Japan, Russia, and the UK contributes significantly to the Group's overall sales revenue, and a decline in tobacco demand, tax increases, tightened regulations, or the materialization of country risk in these markets could have a material adverse effect on business performance. In particular, regarding the Russian market, given the likelihood of significant disruption to stable business operations due to the prolongation and complexity of the situation, the Group continues to consider options including separation from Group management, and at this time it is not possible to reasonably estimate the impact on business performance. The Group is working to reduce dependence on specific markets by strengthening its global business foundation.

Overseas operations account for more than half of the Group's sales revenue and adjusted operating profit, and fluctuations in exchange rates against the yen for the Russian ruble, euro, British pound, US dollar, and other currencies may have a material impact on the consolidated financial statements. In addition, since a substantial portion of foreign leaf tobacco is procured in US dollars while products are sold in local currencies, profit margins deteriorate during periods of dollar appreciation. The Group formulates and implements foreign exchange and interest rate hedging policies, and the finance department regularly reports to the President and the Board of Directors.

The Group has actively acquired external resources through transactions such as the acquisition of RJR Nabisco's international tobacco business, the acquisition of Gallaher, and the acquisition of Vector Group (2024, acquisition price of approximately ¥344.6 billion), and as of the end of the current fiscal year, goodwill and intangible assets account for 34.7% (¥2,923.1 billion) and 4.7% (¥395.7 billion) of consolidated total assets, respectively. If it is determined that expected results will not be achieved due to changes in the business environment or competitive landscape, or if the applicable discount rate rises, impairment losses may occur, adversely affecting business performance. The Group regularly monitors business operations after acquisitions, working to maximize synergies while identifying signs of impairment.

The Group operates in more than 130 countries and regions, and changes in local political, economic, social, or legal systems, as well as riots, terrorism, or war, could disrupt supply chains, damage assets, or make business management difficult. In addition, if the Group is found to have violated sanctions while operating in countries subject to economic sanctions, it could face substantial fines, and changes in sanction content could also make it difficult to continue operations. The Group collects and monitors country risk information for each country and works to ensure stable business operations through scenario planning.

Tobacco demand may decline, with regional variation, due to economic conditions, social circumstances, regulatory trends, tax increases, and price increases, which could adversely affect business performance through decreased sales volume. There is also a risk that an increase in illicit trade such as smuggling and counterfeiting could damage brand value and lead to increased countermeasure costs. The Group works to optimize its product portfolio, improve and develop new RRP (Reduced-Risk Products), and secure multiple markets, while also organizing an illicit trade countermeasure team that cooperates with relevant authorities.

TCFD scenario analysis has identified that transition risks toward a decarbonized society, such as increased carbon tax burdens, and physical risks, such as changes in leaf tobacco growing environments due to intensifying climate change, could adversely affect business performance. In addition, if natural disasters or unforeseen events such as earthquakes, floods, or infectious diseases occur, damage to the supply chain and distribution network could result in product supply shortages or stoppages and decreased demand. The Group has set a target of net-zero GHG emissions across the entire value chain by 2050 and is advancing leaf tobacco variety development, improvements to cultivation systems, and the development of business continuity plans.

Attacks through unauthorized access and computer viruses are becoming increasingly complex and sophisticated alongside the development of digital technology, and if attacks on the Group or its suppliers result in system failures or leakage of confidential information, this could adversely affect business performance through temporary suspension of information systems, loss of social credibility, loss of competitive advantage, and response costs. The Group takes measures from both hardware and software perspectives, including developing information security regulations, conducting technical inspections of critical systems, and implementing e-learning for all employees.

The Government of Japan holds 33.34% of the Company's total issued shares under the JT Act, giving it significant influence over ordinary resolutions such as director elections and veto power over special resolutions such as mergers and changes to the articles of incorporation, and the government's interests may not align with those of other shareholders. In addition, the Minister of Finance has authority to supervise the Company under the JT Act and the Tobacco Business Act, and entry into new businesses requires approval from the Minister of Finance, which may constrain the flexible execution of business strategy. Furthermore, the obligation to purchase the entire domestic leaf tobacco crop may adversely affect competitiveness compared to competitors that use only foreign leaf tobacco.