Business Risks

The KOKUYO Group seeks to comprehensively manage group-wide risks in conjunction with our management strategy while maintaining an appropriate balance between risks and returns. In addition, we aim to develop and operate this structure in an integrated manner with governance and internal controls. To ensure the appropriate development and operation of internal controls, we have established the Group Internal Control Committee chaired by the Representative Corporate Officer and President. Based on the basic policies on the internal controls system established by the Board of Directors, this committee establishes specific company-wide policies and regulations concerning the internal controls system. Together with this, it monitors the development and operation status of the internal controls system. In addition, we have a structure in place to identify a broad swathe of risks relevant to our organization, assess these risks, and control them (which, depending on the case, may mean avoiding, reducing, transferring, or accepting the risk). The Risk Management Committee, an advisory body to the Representative Corporate Officer and President, reviews the risks from an organization-wide perspective and advises the Representative Corporate Officer and President accordingly. If the committee determines that the risk in question is critical or urgent, it will report also to the Board of Directors and Audit Committee.
To enhance risk management across KOKUYO Group, the Risk Management Division gathers the key facts about incidents that have occurred in KOKUYO Group, decides how each incident should be handled in view of the risk level, and prepares a process for enacting the policy.
Described below are risks that have been identified as significant. These risks are associated with KOKUYO’s financial or operational performance or its cash flow.
All forward-looking statements are based on assumptions considered reasonable in light of information available as of the date on which we submitted the latest annual securities report.

Since we operate primarily in Japan, our operational and financial performance are vulnerable to socio-economic conditions in the country, particularly corporate earnings, capital expenditure, public investment, and demographic trends.
Some of our business operations (sales, production, purchasing) occur in Asian and other overseas markets. One of the key overseas markets is China. The Chinese economy remains sluggish. On top of the economic uncertainties in China, the direction of US policy could create volatility. Thus, our operational and financial performance are vulnerable to macro-environmental factors in China and in other countries where the company operates. These factors include economic, sociopolitical, and regulatory developments, and expectations related to ESG performance. Moreover, conflicts have arisen in the Middle East. This has caused crude oil prices to rise. Accordingly, there are concerns about the impact on future raw material prices and logistics costs.
To control these risks, we have committed to expanding the reach of our business fields in a way that drives sustained growth. In Japan, we are transitioning our business model from tangible products to intangible solutions in order to expand the reach of our existing business fields and create new businesses.
Our overseas business operations are exposed to country- and region-specific risks. As we expand further overseas, we will enhance our approach whereby local subsidiaries coordinate with the relevant corporate divisions in Japan in identifying the socio-political landscape in the country or region concerned and in building an organizational structure for managing the risks.

We offer value-added products and services. The markets for these products and services are vulnerable to economic changes and consumers’ purchasing preferences. These markets are also increasingly crowded amid the trend of diversification and digitalization. If, as a result of these factors, we fail to maintain or improve our market position, our operational and financial performance may be harmed.
The reaction from the unauthorized access incident that occurred in another company in the business supply distribution industry in FY2025 has led to competition within the industry intensifying. This may temporarily have an impact on the operating results of this business.
To control these risks, we will create business structures and processes that are adaptive to market change.
In Japan, an agenda is underway to solve social issues such as by reforming working practices in response to the projected medium- to long-term labor shortages in the logistics and construction industries. We recognize supporting this agenda is also an unavoidable and ongoing issue in terms of ensuring the sustainability of the business. As such, we are seeking to lighten workload while maintaining and growing business by shortening cargo waiting and handling times and improving loading efficiency at logistics sites and carrying out digital transformation of operations at construction sites. Furthermore, in accordance with the provisions in the revised Act on Advancement of Integration and Streamlining of Distribution Business that will come into effect in April 2026, we have appointed a Chief Logistics Officer (hereinafter “CLO”) and established the Company-wide Logistics Promotion Committee to serve as an advisory body to the CLO. Under this structure, we will strive to improve logistics efficiency.

KOKUYO invests in securities. As such, KOKUYO is exposed to the risk that an investment’s fair value deteriorates as a result of unfavorable trends in money markets. Such cases would adversely impact KOKUYO’s operational and financial performance.
To mitigate this risk, KOKUYO regularly appraises its investment securities outside the quarterly fair value measurements and makes selling or purchasing decisions accordingly.

Shares held under cross-shareholding arrangements are regularly reviewed to verify their quantitative and qualitative value, and the results are reported to the Board of Directors. If the report suggests that there is little value in continuing to hold the shares, the board may decide to sell off all or some of the shares.

The margin of fluctuation in prices (price range) in foreign exchange markets is expanding. Moreover, there is an upward trend in long-term interest rates in Japan as exemplified by the yield on 10-year government bonds that are generally considered the risk-free rate. Rapid fluctuations in foreign exchange rates pose a risk of having an impact on foreign currency-denominated transactions. In addition, costs are going up as the risk-free rate rises. We are also closely monitoring the impact of the conflicts in the Middle East on financial markets.

We operate in a volatile business environment, and our strategy for sustained business growth emphasizes change. That is, we pursue organic growth by strengthening longstanding businesses and expanding into new business sectors, and inorganic growth through M&A deals. With this emphasis on change, we must update our business processes from time to time, which may result in unforeseen scenarios arising within or outside of the organization or in atypical transactions. If our internal controls prove inadequate to deal with these situations, our operational and financial performance may be harmed.

As part of a wider effort to enhance our internal controls, we make our business processes more effective and efficient by visualizing, standardizing, and rectifying them.

Our operations are subject to regulations related to quality, fair trading, environment, workers’ rights, health and safety, accounting, and tax. If any of our operations are found to be in non-compliance with such regulations, this could harm our operational and financial performance.
KOKUYO’s marketing and sales operations are vulnerable to the risk of sales fraud. That is, there is a risk that staff accelerate revenue recognition or record fake sales in response to pressure to meet sales targets. In certain business units, such malpractice may occur because of alterations made in response to client demands, including alterations in the specified deliverables (tangible goods or intangible outputs), in the amount of revenue to be recognized and the timing of the recognition, in the services to be purchased from external partners, and in the amount to be paid for these services.
Furthermore, our compliance requirements may increase if regulations change (if there is a new regulation or tightening of an existing one) or if we further globalize our operations or expand our portfolio. In such an event, we need to grasp the details of that and then respond in a timely manner. Any such additional requirements may increase the costs of our operations or compel us to invest in compliance measures, which may harm our operational and financial performance.
To control this risk, we take action to build a culture of compliance. The KOKUYO Group Code of Conduct clarifies the requirement for employees to observe legal and regulatory requirements and internal rules and to uphold high ethical standards. In addition, the KOKUYO Group has established Compliance Promotion Month. Meanwhile, management repeatedly sends messages to staff about integrity in the workplace, and we provide education and training programs (including educational videos). We also regularly check whether our rules and processes are up to date with the latest regulatory developments and whether employees are complying with them. We have formulated the KOKUYO Group Competition Law Policy and the KOKUYO Group Anti-Bribery and Anti-Corruption Policy for the prevention of anti-competitive practices (such as bid rigging), bribery, and organized crime. Moreover, employees in domestic and overseas subsidiaries receive regular awareness training on these issues. Our organizational framework for compliance includes the Risk Management Committee. An advisory body to the Representative Corporate Officer and President, the committee is responsible for monitoring compliance across the organization. The framework also includes the J-SOX Committee, which reviews the effectiveness of our internal controls for reporting and conducts other auditing and monitoring activities.

There is always a possibility that KOKUYO may need to recall a product because it was used in ways that the design team never envisaged. Such cases may adversely impact KOKUYO’s operational and financial performance as well as its brand reputation.
To mitigate this risk, the KOKUYO Group has formulated the Quality Management System (QMS) Regulations and established an ISO 9001-compliant QMS. We manage the design and development of products and services, manufacturing, and service provision in accordance with the QMS. Together with this, we strive to improve quality throughout our entire value chain, from product and service planning and development to after-sales services, such as by developing a quality check structure and conducting quality audits. For cases where, despite all these efforts, a problem arises in a product or service, KOKUYO has product liability insurance to cover recall costs and to protect itself from any claims of damage that may ensue. However, if the insurance fails to provide sufficient cover, KOKUYO’s operational and financial performance would be adversely impacted.

We source some raw materials (e.g., base paper, resin, steel) from domestic and overseas companies. We therefore face the risk of unfavorable sales prices for the raw materials and the risk of adverse exchange rates or an adverse supply-demand relationship. If such adverse conditions persist over the long term, our operational and financial performance may be harmed. Additionally, with the increasing focus on ESG standards, companies are now expected to apply greater supply-chain due diligence to check for human rights violations or ecologically unsustainable practices in their supply chains. If our suppliers are unable to comply with ESG standards, we may be unable to procure the necessary raw materials. This situation would harm our reputation as well as its operational and financial performance.
In the immediate term, we control the risk of adverse exchange rates or an adverse supply-demand relationship by entering into forward exchange contracts for some of our cross-border transactions. Over the longer term, we do so by working toward an optimal percentage of procurement from local suppliers and by diversifying the supply chain.
To help build trusting and mutually beneficial relationships with suppliers, we have formulated the Regulations for the KOKUYO Group Sustainable Procurement Policy and the Regulations for the KOKUYO Group Sustainable Standards for the procurement of raw materials and purchased goods. Both sets of guidelines incorporate the revised standards on internal controls related to evaluating and auditing financial reporting and align with the latest trends in non-financial disclosures (sustainability reporting) and with the new (2025) edition of the Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control – Integrated Framework. In this way, we strive to fulfill our social responsibilities, such as respecting human rights and conserving the environment, and contribute to the development of society. Three of our five materialities (issues that matter to our business and our stakeholders) concern the environment: “respond to the climate crisis,” “contribute toward a circular economy,” and “contribute toward a society that coexists with nature.” For these materialities, we have a set “challenge” goals to be achieved by 2030. For these and other sustainability initiatives, the Sustainability Committee, attended by all managing officers, holds regular discussions, hears reports of progress in the initiatives, and monitors sustainability risks based on the sustainability management plan established by the Board of Directors.

We take recruitment and training seriously on the belief that building a diverse workforce is crucial to our long-term business success. However, the fiercely competitive labor market may disrupt our efforts to recruit and train the staff we need to maintain and grow our businesses. If such efforts are disrupted, our future growth would be threatened.
KOKUYO values diversity and works to build an employee-friendly workplace, believing that creating a positive working environment is crucial to the organization’s long-term success. However, there remains a risk that KOKUYO’s efforts to create such a workplace fail to go as planned, leading to incidents in which employees suffer accidents, adverse health effects, or workplace harassment. Such incidents could damage business performance, incur accident compensation, or harm the KOKUYO brand. Any such eventualities could adversely impact KOKUYO’s operational and financial performance.
Our Talent Management Policy enshrines our commitment to supporting employees’ career development and empowering them to reach their potential, and sets out actions for this purpose. For example, it declares that both management and employees recognize that talent is an asset of society and that the company will support and empower its talent to drive business growth and benefit society. Based on this policy, all business divisions hold Talent Development Committee meetings. These meetings involve those in managerial positions discussing the career potential of each individual from multiple perspectives. In particular, we strive to discover and develop talent capable of working on the global stage in the future. Moreover, we are accelerating investment in talent development through initiatives such as the establishment of the KOKUYO Academy talent development body to provide training that goes beyond on-the-job training (OJT).
In addition, we have formulated the Regulations for the KOKUYO Group Human Rights Policy and the Regulations for the KOKUYO Group Health and Productivity Management Declaration. To promote diversity and inclusion, our training course on bullying and harassment now includes additional content, including content on abusive customer behavior and on bullying and harassment that targets a person’s sexual orientation and gender identity. We have also opened a health-management office in the nursing care and welfare center to guide efforts to make the workplace inclusive and safe for people with disabilities.
We are committed to making sure the workplace is safe and comfortable, with safety measures in place for emergency scenarios, as we believe that occupational health and safety are foundational to employee engagement. As such, we have formulated the Regulations for the KOKUYO Group Health and Safety Policy. Furthermore, in line with a manual on global (Japan and overseas) safety standards, the KOKUYO Group Central Safety Health Committee coordinates the activities of all health and safety teams across KOKUYO Group and establishes processes and organizational structures for health and safety, incorporating feedback from employees. As part of a horizontal, cross-organizational approach to addressing talent-development challenges, the Global H&C Planning Office helps group companies in hiring and retention. Together with this, it promotes measures to secure the safety of employees working at overseas locations and those traveling on business.
To prevent health-and-safety risks from aging property, plants, and equipment, we schedule major renovation work, relocations, or rebuilding work, starting with the oldest facilities and aligning the schedule with business strategies. We also work to reduce overtime across the organization to promote employee wellness and allow employees more disposable time that they can use to plan their career.
We also provide employees with the KOKUYO Group Hotline for raising concerns about or seeking advice on matters of corporate ethics, compliance, and other matters that they may feel unable to raise through the usual channels. The hotline is global and accessible to all employees of the global KOKUYO Group, whether they work in Japan or an overseas location. Employees in Japan can additionally contact a third-party whistleblowing service, enhancing whistleblower protection. In June 2024, we extended the hotline to cover our supply-chain partners to encourage healthy and mutually beneficial supply-chain partnerships.
In the fiscal year under review, 55 calls were made to the KOKUYO Group Hotline.

KOKUYO has established processes for controlling access to sensitive information, including confidential business information and customers’ personal information. These processes include safeguards against system failure and cyberattacks. Cyberattacks are increasingly prevalent, and this threat is increasing year by year as workstyles diversify with working from home and other remote work. If a data breach does occur, KOKUYO’s operational and financial performance would be adversely impacted.
As our business profile expands, our frontline business processes may increasingly fall outside the coverage of our core IT system, creating risks for productivity and internal controls. If such risks occur, KOKUYO’s operational and financial performance would be adversely impacted.
In response to this, our group is taking measures through the Risk Management Committee’s IT Risk Subcommittee to prepare for increasingly sophisticated external threats. For example, we are strengthening detection and defense against virus infections and cyberattacks, and taking regular backups. Moreover, we have established the Computer Security Incident Response Team (CSIRT). The purpose of the CSIRT is to minimize damage in the event an information security incident occurs due to a cyberattack or other issue. The team is functioning effectively. To manage customer information and personal information, we have set out rules on handling information and are taking safety management measures. These measures include raising awareness about information security among employees through e- Much time has passed since our core IT system was first launched. Additionally, as our organization grows, our business portfolio and business processes change. We therefore plan to review our business processes and update our core IT system. Cases have been reported in other companies of inadequate internal controls related to financial reporting and unexpected additional costs arising from updating core IT systems. In light of such risks, we plan to update our core IT system carefully.

Our group is promoting the use of generative AI and other AI technologies. Our aim in doing so is to increase operational efficiency and improve services. The use of AI requires that appropriate data be input. In addition to the risk of erroneous output due to data contamination and other issues, there are risks such as the leakage of confidential and personal information, and violations of privacy. Furthermore, there is a risk of ethical issues arising due to the possibility of AI being used in a way that exceeds assumptions made to date.
In response to this, our group is currently considering the establishment of an internal operational policy and governance structure for AI use to ensure its appropriate use.

KOKUYO pursues M&A deals and invests in companies with a view to sustainably improving its enterprise value. The fourth medium-term plan provides a budget of ¥70 billion for M&A investments and other growth capital expenditure (the M&A investments may go over budget depending on the potential deals). All potential investments are subject to a due diligence process by the Investment Council, which examines, among other things, the potential investee’s financial health and the terms and conditions of the contract.
Investments are then subject to regular reviews, which focus on how well the profit plan has progressed and whether the investment still represents value for money. Despite these measures, there remains a risk that changes in the business landscape will cause KOKUYO to lose money on an investment. In such cases, KOKUYO may need to recognize impairment of tangible assets, intangible assets (such as goodwill), or investment securities, which would adversely impact its operational and financial performance.
To minimize the risk of impairment loss, KOKUYO subjects potential investments to a due diligence process with advice from outside experts, and continually works to improve its due diligence. To build competence as an investor, KOKUYO accumulates knowledge related to M&A deals and stakes in businesses, and trains general staff in these matters.

In addition to our existing real estate asset holdings, our group has launched a project to revitalize and monetize existing buildings. In this project, we handle the process in-house from real estate planning to renovations and operations. However, macro-economic developments could cause our real-estate holdings to lose their value. If this occurs, KOKUYO’s operational and financial performance would be adversely impacted.
To control this risk, we try to keep our real-estate and net cash flows efficient by selling off non-business assets and selling off properties when the lease agreement expires.
The year ended December 2025 was the first year of Unite for Growth 2027, the fourth medium-term plan aligned with CCC 2030, our long-term vision for sustainable corporate development. Unite for Growth 2027 sets out an updated version of our Forest-Like Management Model, under which we will deliver experience value by leveraging our forte in the wow-factor creation cycle and bolster our strategic assets to increase the replicability of business success. In these ways, we will expand the reach of our business fields and penetrate international markets, delivering higher business value and raising the overall value of our organization. As part of this, we have decided to relocate our head office. The new location will provide a more employee-friendly workplace and stimulate communication with a wide range of stakeholders, expediting the company’s distinctive creativity. We plan to sell the vacated land and office building in due course.

Our business assets are located in Japan and overseas. These assets are vulnerable to emergencies that disrupt social infrastructure across a large region. Such emergencies may include natural disasters, which have become larger and more frequent with climate change. They may also include an unprecedented outbreak of infectious disease. Such risk is hard to avoid. If such a disaster occurs, we may be forced to suspended operations, which would adversely impact our operational and financial performance.
To control the risk, we engage in disaster management and business continuity planning so that our businesses will continue to function in a range of disaster scenarios and so that normal operations resume as soon as possible. Emergency protocols are regularly reviewed and amended as necessary to ensure their effectiveness. For natural disasters, we work to preempt the dangers by establishing safety protocols for each workplace. We also stockpile emergency supplies and subscribe to an appropriate insurance policy to ensure an effective response if and when a natural disaster occurs. The head office, where we will relocate to this year, is equipped with state-of-the-art earthquake resistance features. As such, we expect it to function as alternative headquarters in the event of an emergency occurring in the eastern Japan area. For disease outbreaks, we work to minimize the effects on business activities while prioritizing the safety of customers and employees.
In compliance with government directives and public demand, we have set guidelines for safeguarding employees in emergencies and are prepared to use different locations and communication methods as circumstances warrant. We will always try to strike a balance between safeguarding our customers, employees, and partners and keeping our businesses running so that they can serve as social infrastructure.