December 2014 | www.selectasset.com
Casino Industry Facing Tough Odds in Japan

Hold your bets on Japan. Attempts by the administration of Prime Minister Abe to roll the dice on relaxing casino gambling restrictions have faced numerous obstacles and stimulated much argument on both sides of the table. Abe’s gambit to dissolve the government’s lower legislative house and hold a snap election on December 14 seems to have mostly paid off for him. However, new casino litigation still seems like a long shot. Even with the odds so high, what are the economic implications for casinos in Japan?

At the moment, legal gambling is alive and well in Japan. However, betting is confined to lotteries, scratch-cards and certain sports: cycling, motorbike, powerboat and horse racing. In addition, there is the huge, semi-legal pachinko and slot machine industry, where players can win “prizes” that are quickly traded for cash at separate, but nearby redemption shops.

However, because pachinko is considered an “amusement,” in the same category as arcade games, operators are not required to pay gaming taxes. And therein lies the rub. The prospect of legalized casino gambling could open the door to placing the pachinko business under full state supervision, with Reuters reporting a potential U.S. $2 billion in additional tax revenue waiting to be cashed in.

Initially, the driving force behind the Abe government’s casino wager was to give the country an economic boost through gambling tourism in anticipation of the 2020 Olympics. Licenses for the proposed new casinos would be granted primarily around tourist resorts or areas largely insulated by both location and customer demographic from existing pachinko businesses. Thus, Japan’s proposed casino resorts are conceived as competition for other Asian gambling hubs, such as Macau and Singapore, rather than slicing into the existing domestic gaming industry pie.

Foreign investors ready to parlay for a big payday
No doubt, global high rollers view Japan as a lucrative potential market for casino gambling, and The Wall Street Journal reports keen interest from big Las Vegas-based casino firms such as Las Vegas Sands, Wynn Resorts and MGM Resorts International. The independent Asian brokerage firm CLSA estimates the potential of a Japanese casino gambling market at around U.S. $40 billion, which is comparable to Macau’s $45 billion annual gambling pot. Although, Morgan Stanley’s estimate places Japan at a considerably lower figure of $21-22 billion. A study, reported The Japan Times, by Chiba City into a possible casino resort in the Makuhari area, which includes Tokyo Disneyland Resorts and Narita Airport, projects potential revenue of  ¥800 billion or $6.8 billion. Not bad, when compared with the $6.5 billion pulled in by the Las Vegas Strip in 2013.

The most enthusiastic political support of the casino proposals comes from Japan’s regional leaders who see construction of new casino resorts as a way to revive the economies of depressed local areas and increase employment through the growth of ancillary businesses. Benefits from tax revenues are also, not surprisingly, attractive to many politicians at both the regional and national level.

Hold your cards until after the Olympics
One potential problem for the proposals, however, comes from the focus on the 2020 Olympics, which is expected to bring huge numbers of visitors to Japan for a short period over the summer. Japan’s late 1980-90s construction boom in amusement parks resulted in numerous bankrupt and abandoned, white elephant facilities littering the countryside. Casino opponents question how an industry built around the expectation of a large influx of visitors would struggle to deal with the subsequent drop in demand once the Olympics left. Some interests are suggesting that a later target of 2025 for casinos would allow Japan the time to smoothly transition into a more manageable gambling-friendly society.

Unfortunately, current public support for casinos is weak. A recent survey of voters by Japan's Nikkei financial newspaper reports 59% opposed legalisation of casino gambling while only 27% supported it. According to The Japan Times, sustainability of the proposed resorts and the potential for ill social effects are key factors in opposition to the plans. The paper cites testimony by senior National Police Agency officials who are not enthusiastic about the idea of legalized casinos, citing the adverse effect it will have on society and the need to ensure organized crime is not involved. Good luck with that.

One point is clear, as perceived from outside investors and the gaming industry at large, the growth potential of legal casino gambling in Japan is huge and untapped. For now, however it appears that the big international players seem happy to play the long game while the politicians fight out the details.