Message from the Management

Mitsuyoshi Nakamura President, Representative Director

The financial year to March 2005 was marked by several positive developments for Kajima. Despite the slow pace of recovery in construction and the economy in general, we succeeded in growing revenues and earnings in most areas of the Company by enhancing cooperation and taking advantage of current trends, and won several important new contracts. We also undertook important measures to strengthen our business foundations and enhance corporate governance, moves that have swept away the legacy problems of the last decade and laid the foundation for healthy growth as a corporate group.

Recovery in Japan's economy, which to this point has been driven by private capital expenditures and exports, has now begun to level off, and has yet to show signs that it will pick up again soon. Rising economic indicators, however, show that the domestic economy overall is performing well. Although construction investment in Japan has been on the decline for the past decade, and the Japanese government has not wavered from its policy of reducing investment in public works over the medium to long term, we expect this to be mitigated by strong private capital investment during the financial year to March 2006.

The Kajima Group performed strongly during the financial year to March 2005, achieving a significant jump in non-consolidated recurring profit to ¥50.0 billion. This figure surpasses the original target of ¥32.0 billion for this year set down in our current medium-term business plan, and completes this aspect of the plan a year ahead of schedule. Although a downturn in performance at our European subsidiary left a significant impact on consolidated results, and investment in public works continues to decline, we managed to secure a large-scale public works project at the end of the term for expansion of Tokyo's Haneda Airport.

During the financial year to March 2006-the final year of our medium-term business plan begun in the financial year to March 2004-we expect non-consolidated recurring profit to decline year on year due to the sale of the Higashi Shinagawa Phase 2 Development ahead of schedule in the financial year to March 2005, and because sales and earnings in the development business will enter an interval period during the financial year to March 2006. Consolidated recurring profit is expected to reach ¥50.0 billion, up ¥3 billion from the previous year, considering improved performance at principal subsidiaries and affiliated companies. We will continue to further improve our consolidated recurring profit to fulfill the expectations of shareholders.

In our core business of construction, we continued to focus on the goals that we had set in our medium-term business plan of maintaining contract flow and improving profitability in construction projects. We also concentrated on creating total value for each client, integrating knowledge with hardware and software technologies, and enhancing the solution-based proposal capabilities that underpin our competitiveness. In our civil engineering and building construction divisions we focused on integrating expertise and technology across our marketing, design and construction departments, with the resulting synergies expected to increase competitiveness.

In the real estate development business, which forms the second pillar of our operations, we concentrated on improving coordination with marketing and design departments as a means to maximize our strengths as a general contractor and generate superior development projects. The Kajima Real Estate Fund was officially established in February 2005, adding diversity to our sources of earnings in the development business, and giving us new opportunities for effective exit strategies.
Development in the private finance initiative (PFI) sector is an area in which Kajima can realize its full potential. Several large-scale projects in the Tokyo metropolitan area have been or are slated to be launched in 2005, and we will make a concerted effort to win those contracts.

In the engineering and environmental business, because public awareness of environmental issues was particularly high during the financial year to March 2005 following the enactment of the Kyoto Protocols and the opening of the World Exposition Aichi, we expanded this business by further strengthening its technical capabilities and cost competitiveness. These efforts were also meshed with our strategy to diversify and expand sources of profit.

In leading-edge areas of the life sciences, such as biological and genomic research, Kajima established the Office of Life Sciences in January 2005 to pursue contracts and increase its competitiveness in this burgeoning field, which is expected to grow significantly in both the public and private sectors.

In strategic research and development, Kajima established an R&D communication center during the financial year under review at the newly opened Akihabara Crossfield, an industrial exchange and event center in which Kajima is a partner. This global IT facility, focused on collaboration between industry and academia, has garnered much attention from media and industry, and we are confident that our R&D facility will generate the kind of innovative technologies that will enhance our competitiveness.

We have launched several initiatives recently designed to strengthen our current business foundations and provide a solid base for the future. Dissolution of the Kajima Pension Fund in the financial year to March 2004 significantly reduced our retirement benefit costs, and we completed all accounting for the impairment of assets in the first half of the financial year under review, a full year ahead of the government mandated deadline. The total profit margin for completed works has begun to improve, and we are taking this opportunity to establish the Center for Shared Administrative Services, in which we will consolidate the administrative functions of our head and branch offices, as well as those of Group companies. This move will help improve operational efficiency, and eliminate redundancy in our personnel structure.

We have now finally managed to account for all the losses from assets remaining after the bubble period of the late 1980s. However, our remaining interest-bearing debt and capital adequacy ratio still need improvement. We are addressing this issue by optimizing our asset holdings, steadily adding to earnings each year through our operations, and working to increase operating revenues.

In our medium-term business plan we set a target for stable recurring profit of over ¥10 billion from consolidated subsidiaries. Consolidated recurring profit fell below that of the non-consolidated total in the financial year under review, and although we expect this to recover in the financial year to March 2006, we expect that it will be extremely difficult to achieve our target. We intend to make a concerted effort to deal with the problem companies.

We have implemented three main measures to improve our corporate governance and management structure. First, we revised the articles of incorporation to reduce the maximum number of authorized board members from 55 to 20 (currently 14). This move will enhance the speed and efficiency of decision-making regarding management issues for the Company as a whole, as well as strengthen the supervisory functions for operations.

Second, we introduced the executive officer system, providing a structure that will allow the executive responsible for an assigned business or area to concentrate on it fully. This will enhance the speed and efficiency of operations, as well as clarify management responsibilities.

Finally, we reorganized our committee structure, installing a Management Committee and Joint Committee of Directors and Executive Officers alongside the Board of Directors, and revised our standards for submission of items for consideration in order to effectively implement the new system.

In addition to these key measures, we restructured and reorganized our head office corporate divisions, and implemented organizational reform in our head office for overseas operations, and our Tokyo branch office.

I believe that these structural reforms will enhance our management foundations in a way that will allow us to respond more quickly and flexibly to changes in the market environment, and will be an important first step toward further growth.

In conclusion, I would like to briefly mention my policies going forward.

When I assumed the position of President, I laid out a goal for earnings capacity that struck a balance among orders, revenues and earnings. As we go through the process of formulating a new medium-term business plan, it is clear that we will achieve our targets for the financial year to March 2006, and we are preparing for the start of the new business plan in April 2006. We will focus not only on our main construction business, but are also considering to what extent we can achieve growth in the real estate development, engineering and other aspects of the business, as well as how we can use Kajima's technological capabilities to increase orders. I believe that it's necessary for architectural design, construction and sales to operate as one to enhance our ability to win orders.

Furthermore, we will implement measures appropriate to a construction company, including thorough safety and quality management, maintaining transparency in the corporation, and the creation of safe and comfortable environments. With the cooperation of shareholders, clients and local residents we will move forward to increase our corporate value and strengthen our earnings capacity.

Thank you for your continued support of Kajima.

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