For debt investors

Financial Policy: stability and flexibility

We believe financial stability and flexibility are equally important. We define the former as the ability to stay in business even when major risk events like economic crises occur; the latter as the ability to nimbly take advantage of attractive investment opportunities. We have adopted a financial policy that ensures our financial foundation is both stable and flexible enough to realize sustainable profit growth through business investment.

This policy is shaped by how we think about capital structure and raising capital, as explained below. JT was established under the Japan Tobacco Inc. Act (hereinafter JT Act), not the generic Companies Act. The JT Act currently requires the Japanese government to own at least a one-third equity interest in JT. If JT were to raise equity capital, one-third of the new shares must be issued to the government under the JT Act. JT consequently relies predominantly on debt financing from a financial-agility standpoint. While we have the option of improving our financial stability by refinancing through sale of treasury shares, we believe such an offering would be appropriate only if we are confident we can grow the JT Group’s value enough to more than offset the resultant dilution.

Given the JT Act’s constraints on the equity component of our capital structure, we ascribe critical importance to maintaining a manageable balance between assets and liabilities. We believe the key to doing so is to grow our assets while keeping liabilities at an appropriate level. The main lever by which we regulate the balance between assets and liabilities is cash flow. By boosting our cash-flow generation capacity, we aim to maintain or increase our debt capacity and use it to fund investments as efficiently as possible. We raise debt capital either from subordinated loans or through subordinated bond issuance by subsidiaries, depending on the capital market environment, to improve both our financial soundness and capital efficiency.

We ended September 2021 with a debt/equity ratio of 0.35x and credit ratings of A+(S&P), A2 (Moody’s) and AA (R&I). We periodically perform credit-rating simulations internally. Such simulations involve estimating future operating cash requirements, modeling cash inflows from additional debt and acquirable assets and reviewing our shareholder return policy and investment opportunities from a financial standpoint while also taking into account credit-rating impacts.

"Message from the CFO", Integrated Report 2020