KOKUYO CO., LTD.

As the majority of sales are directed toward the domestic market, changes in Japan's economic trends, corporate earnings, capital investment, and demographics have a direct impact on business performance. In China, a key overseas market, economic stagnation and uncertainty over the outlook continue, and there is a risk that U.S. policy impacts and rising crude oil prices due to conflict in the Middle East could push up raw material and logistics costs. In response, the Group is pursuing a business model transformation from "goods" to "experiences" and strengthening its country risk management framework through collaboration between local subsidiaries and domestic related departments.

Competition is intensifying due to economic fluctuations, changes in customer purchasing channels, and market fragmentation and digitalization, which may make it difficult for the Group to maintain or acquire competitive advantage. In FY2025, competition within the industry temporarily intensified in the Business Supply Distribution Business as a reaction to an unauthorized access incident that occurred at another company in the industry, which may affect the business results of this segment. In addition, in response to the mid- to long-term labor shortage in the logistics and construction industries, the Group is working to shorten waiting and loading/unloading times, promote business DX, and establish a CLO (Chief Logistics Officer) position based on the revised Logistics Efficiency Act to be enforced in April 2026.

The range of price fluctuations in foreign exchange markets has widened, increasing the risk of sharp exchange rate fluctuations affecting transactions denominated in foreign currencies. In addition, domestic long-term interest rates, as represented by the 10-year government bond yield, are trending upward, resulting in increased costs associated with a rising risk-free rate. In response, the Group has implemented forward exchange contracts for a portion of foreign-currency-denominated transactions with overseas suppliers, and is working to reduce risk by optimizing the proportion of local procurement of raw materials and diversifying suppliers.

The Group is subject to a wide range of laws and regulations covering quality, transactions, the environment, labor, health and safety, accounting standards, and taxation, and if a violation is discovered or determined, it may affect business results and financial condition. In some businesses subject to frequent changes based on customer needs, there is a risk of intentional advance recognition of sales, fictitious sales, or fraudulent transactions due to pressure to achieve sales targets in sales departments. In response, the Group thoroughly enforces the "KOKUYO Group Code of Conduct," has formulated and provides training on competition law and anti-bribery policies, and conducts evaluations of the effectiveness of internal controls over financial reporting through the J-SOX Committee.

As the Group holds confidential business information, customer information, and personal information, there is a risk of data destruction, tampering, leakage, or system outages caused by virus infections or cyberattacks, and this threat is increasing year by year with the spread of remote work. There is also a risk that the growing gap between the coverage of core systems and actual business operations could affect business productivity and internal controls. In response, the Group is strengthening detection and defense through the "IT Risk Subcommittee," building and operating a CSIRT, and carefully advancing its core system renewal plan.

The Group is promoting the use of AI technologies, including generative AI, to improve operational efficiency and services, but there is a risk of erroneous output due to data contamination, leakage of confidential or personal information, privacy violations, and ethical issues. As AI utilization becomes possible beyond previous assumptions, new risks that cannot be fully addressed by existing governance frameworks may emerge. In response, the Group is currently considering establishing internal operational policies regarding AI utilization and building a governance framework.

Under the Fourth Medium-Term Management Plan, the Group plans approximately ¥70.0 billion in growth investments (with further investment in M&A envisioned depending on the deal), and if the initially expected results are not achieved due to changes in the business environment or other factors, there is a risk of recognizing impairment losses on tangible fixed assets, intangible assets such as goodwill, and investment securities. While prior screening and monitoring are conducted by the "Investment Review Committee," it may not be possible to fully respond to sudden changes in the external environment. In response, the Group is utilizing the expertise of external advisors, continuously improving its screening and monitoring processes, and accumulating expertise within investment-related organizations.

Prices of key raw materials (paper stock, resin, steel, etc.) are affected by global supply-demand trends and exchange rate fluctuations, and long-term fluctuations may affect business results and financial condition. From an ESG perspective, there is growing demand for advanced responses to human rights conditions and environmental considerations within the supply chain, and if deficiencies are found at suppliers, there is a risk of suspension of raw material procurement or negative impact on social reputation. In response, in addition to forward exchange contracts, optimization of local procurement ratios, and diversification of suppliers, the Group has established regulations such as the "KOKUYO Group Sustainable Procurement Policy" and regularly confirms progress at the Sustainable Management Committee.

Due to intensifying competition for talent in the labor market, if the Group is unable to continuously secure and develop the human resources necessary to maintain and grow its business, future growth may be hindered. If workplace accidents, health damage, harassment, or similar issues occur, there is a risk of deteriorating operational performance, workers' compensation costs, and damage to brand value. In response, the Group has formulated a human resource management policy, is accelerating investment in human resource development through "KOKUYO Academia," strengthening harassment training, and operating the "KOKUYO Group Hotline" (55 internal reports in the fiscal year under review).

With business offices and factories located both in Japan and overseas, the increasing scale of natural disasters associated with climate change and the occurrence of infectious diseases may cause partial suspension or reduction of business activities, affecting business results and financial condition. It is difficult to avoid all risks, and widespread disruption of social infrastructure is also anticipated. In response, the Group formulates and continuously reviews its BCP, implements safety measures at facilities, stockpiles disaster response supplies, and maintains insurance coverage. The new head office building, to which the Group plans to relocate, will feature state-of-the-art earthquake resistance functions and is expected to function as an alternative headquarters in the event of an emergency in the eastern Japan area.