IN-DEPTH 28 March 2017
Following a series of pledges to build multi-billion-dollar integrated resorts from international operators, the Japanese Parliament voted to pass its controversial “casino bill”. The decision had been divisive, despite the promise of an influx of tourism which would no doubt boost the country’s economy. So what does the future hold for the gambling industry’s next potential gold-mine?
By Gambling Insider
In 2002, Stanley Ho’s monopoly of the land-based gaming industry in Macau ended and the small region on the south coast of China became an immediate “gold-rush” for the casino gaming industry. Macau generated revenues which vastly surpassed Las Vegas in 2006, and has taken approximately an annual gross revenue of $28bn ever since.
However, a new hub for land-based gambling may be appearing on the horizon: Japan – one of the last developed countries to legalise land-based gambling – finally passed its long-disputed “casino bill” last December, and could be saying “Kon'nichiwa!” to multi-billion-dollar integrated resorts by 2024. According to CNBC, these integrated resorts will be predicted to generate an annual revenue of $40bn, dwarfing the current revenue potential of Macau.
Back in November, gaming industry analysts certainly sensed the oncoming tension that was likely to accompany the bill’s consideration in parliament: “It feels that the likelihood has never been higher given the pieces that have been put in place: From a political perspective the LDP has a majority in both houses of parliament and would not need coalition partner support for passage,” says Grant Govertsen, Managing Director and Head of Asia Equity research at Union Gaming. “At the same time, the LDP’s coalition partner, Komeito, seems to have agreed to let the bill come up for debate. From an economic perspective, the ‘casino bill’ could be sold as a long-term boost to the economy by expanding Japan’s tourism industry and supplying employment opportunities for the Japanese people.”
Akiyoshi Tsuruoka, General Manager and Chief Editor at Gaming Capital Market, describes how fears of rising gambling addition rates affected the bill’s passage through to the upper house: “Gambling addiction has been a stumbling block to passing the bill. A lack of information about the upcoming casinos has made the public extremely anxious, even though the draft bill unquestionably included countermeasures to prevent gambling addition rates from soaring.”
Pachinko machines – arcade-style games akin to pinball, where players can win money depending on the games' outcome – have been a primary cause of 5% of the Japanese population suffering from gambling addiction in 2014. In comparison to other developed countries, where the gambling addiction rate stood at 1%, Japan’s lead is indeed exceptionally high. Nonetheless, the local popularity of these machines is likely to contribute to the casinos’ inevitable success.
Despite Japanese legislators’ fears of increasing the gambling addiction rate, the “integrated resorts” bill went ahead on 15 December 2016. Hitoshi Ishihara, Partner at Anderson Mori & Tomotsune Law Firm, addresses the nature of the bill’s passing: “The aim of passing a bill to legalise casinos (or more accurately, the Specified Integrated Resort Areas) was to allow the development of Japan’s tourism and local economies.
“Part of the reason the Japanese Casino Implementation Act was enacted in the 2016 Diet session is attributable to the fact that previous obstacles, such as the dissolution of the Lower House and national security concerns, were cleared this time around.“The Japanese Casino Implementation Act is part of a two-stage legislative process: firstly, an act must be passed to “facilitate” the development of integrated resorts; and secondly, an act must be approved to fully “implement” the nature of the Integrated Resorts.
“Thus, the passage of various subsequent series of bills will be necessary in order to actually operate casinos in Japan. It is anticipated that measures to counter the gambling addiction problems will be addressed in these subsequent series of bills.”
However, Desmond Lam, Associate Professor in Hospitality and Gaming Management at the University of Macau, predicts that “more tension will arise in Japanese Parliament as plans for new regulations and policies to facilitate the establishment of their new integrated resorts begin”.
Nonetheless, industry experts are sensing the enormous hype surrounding the Japanese Parliament’s move to legalise casinos as many analysts ardently believe that Japan will instantly become Asia’s new gaming go-to destination: “Japan could match the prestige of Las Vegas or Macau,” says Lam. “The Japanese have already proven that they love to gamble. Japan is also a top tourist destination for many Asians including those from Hong Kong, Taiwan, and mainland China. These are all key markets for Macau, with a proven interest in casino gaming. “The Japanese offer high quality customer service, a novel and exciting culture which appeals to a younger generation of tourists, and top notch amenities such as transport and dining. Top casino operators will no doubt use these invaluable qualities to support their offering and lead Japan to become a world class casino gaming market. It all depends on how committed and willing they are to open up to this opportunity.”
Tsuruoka comments that due to the number of licenses that will be permitted and the location of the prospective casinos, the situation in Japan will be completely different from that of Macau a decade ago. However, he remains confident that Japan will meet the global gaming industry’s expectations and become a major casino market, matching those of Las Vegas, Macau and Singapore. Tsuruoka agrees with Lam that integrated resorts coupled with the region’s unique attractions will boost inbound tourism by what government hopes to be 40 million visitors by 2020, and could indeed become the next Las Vegas.
Govertsen, taking a more cynical view of Japan’s market potential, highlights the differences between the current leading markets, Macau and Las Vegas, and what we can expect the Japanese market to become: “There will be significantly more interest in Japan than there was in Macau, when gaming was liberalised in the early 2000s. Not everybody recognised the opportunity in Macau, but everybody recognises the potential that Japan holds and will certainly want to be part of it. Japan will most likely surpass Las Vegas, although nothing is certain at the point; we need to wait and see what regulatory structure will be put in place before we can accurately assess the market potential. A key driver of Vegas’ and Macau’s success is the fact that there are dozens and dozens of resorts. Japan has the potential to be very successful, but will be more comparable to Singapore: a popular market with just a small number of resorts. That being said, Japan will likely become the second-biggest gaming market in the world as measured by GGR, closely following Macau.”
Govertsen is also confident that Japan will not be the last big opportunity for the gambling industry to cash-in on a land-based gaming hub: “Japan will definitely be the next gold rush for a very small slice of the global gaming industry – although, it probably won’t be the last. There are still markets like Vietnam and Korea that hold significant potential if the regulatory environments adapted to attract and support global players.”
There seems to be a universal agreement that Japan will be an extremely promising market in the gaming industry; whether this market will surpass the current success of other gaming hot-spots remains to be seen, and will no doubt be influenced by other regulatory factors that are yet to be decided. However, will the arrival of integrated reposts in Japan negatively affect current leading markets? The consensus seems to be that this is highly unlikely. “Japan will most likely have no material impact on established markets, such as Las Vegas or Macau, in that Japan will primarily be a domestic market. It could have negative impacts on markets like Korea where a decent chunk of business comes from Japanese,” Govertsen argues. “But keep in mind that GGR in places like Macau and Las Vegas that are derived from Japanese persons is exceedingly low and their absence wouldn’t be felt.”
Tsuruoka is in agreement that the Japanese market will pose no threat to the success of Macau. “I don’t believe that there will be substantial competition between Macau and Japan, because they are aiming to attract different types of players. Japan is hoping to attract all types of tourists to its resorts, and not limit these reports to simple gaming hubs. However, there may be minor initial impact on the market in Macau when Japanese casinos open their doors for the first time.”
Analysts who have been approached by the media have predicted that legislation will impose strict limitations on casinos and the number of licences, which could possibly affect the region’s performance against its well-established rivals. Nonetheless, there is generally a sense of excitement amongst global operators, who have begun to formulate strategies to secure one of the widely-coveted Japanese casino licences on offer.
Ishihara explains that that Japan will indeed most likely welcome foreign operators: “Article 2.1 of the Japanese Casino Implementation Act expressly provides that an integrated resort will have “casino facilities...and other facilities that are acknowledged as contributing to the promotion of tourism and are operated by a private entity”, thereby opening the doors for private entities to become casino operators. On the other hand, the Japanese Casino Implementation Act expressly excludes public entities from establishing and operating casino facilities, but at the same time includes no provision that requires the operator to be an entity incorporated in Japan; thus, it is possible for foreign companies to operate casinos in Japan.
However, Govertsen explains that there are multiple factors for operators to consider before they begin to devise strategies to obtain a licence, and all of which will hinge on the regulatory structure that legislators will plan to implement: “For example, will there be a requirement for local partnership? Will there be restrictions on the ability of Japanese citizens to gamble? What will the tax rate be? All these factors will have a significant impact on how international developers approach the market.”
Tsuruoka highlights that the Japanese market will be especially competitive for foreign operators, as legislation could limit the number of licences on offer: “It is anticipated that Japan will welcome overseas operators. The government is willing to set up a special economic zone for IR, and it is predicted that there will be only one or two licences for each location.”
In anticipation of the inevitable competition to enter the Japanese market, many foreign operators have already sought to make strong alliances with Japanese businesses in order to give themselves a considerable edge: “Many operators are already seeking partnerships with local Japanese companies. MGM Resorts has just intended to spend as much as $10 billion on Japan casino projects,” says Tsuruoka. “However, it is unlikely that one big entity will be granted 100% ownership of an integrated resort because it is expected that real estate and infrastructure will
be handled by local contractors, and the overall development of these casinos will be mediated by the government.”
Despite the lack of clarity on the nature of the upcoming market, the possibility of high profits awaiting the future operators of these exclusive casinos led operators to begin their battle for a Japanese casino licence before the bill was even passed in the Lower House. James Packer, co-chairman of Australian operator Melco Crown Entertainment Limited made a pre-emptive bid for potential partners in Japan back in 2014: “Our expectation would be to have a strong set of Japanese partners. We have had very preliminary talks.” At the time, Packer was prepared to make a high pledge for this investment opportunity: “I do not envisage an integrated resort in either Tokyo or Osaka would be successful at anything under $5bn. The cost for the successful applicant would probably be more than $5bn.”
Crown Casino, who has struggled to maintain an amicable relationship with Asian authorities since its employees were arrested in China throughout the winter of 2016, has halved its investment in the region. After leaving the company for just over a year, Packer has returned has returned as a director, and may advise new governance to consider Japan as a possible area of interest for investment opportunities.
Hard Rock Cafe International Inc is another operator who has looked into its crystal ball and foreseen that its next “major investment” lies in the Japanese casino market. During an interview with Bloomsburg, Hamish Dodds, Chief Executive Officer at Hard Rock Cafe, reached out to potential partners with the intent to make a joint bid for a casino licence: “We can either play a lead role or a partnership role. We really hope that we can collaborate with Japanese partners and institutions.”
While keenly awaiting the initial approval of the ‘casino bill’, operators were also making enormous bids for a casino licence; MGM Resorts pledged to spend between $4.8bn and $9.5bn in an integrated resort in an urban area of Japan, and Las Vegas Sands similarly expressed an interest in making a large proposition for a coveted licence. Govertsen confirms that these high bids are to be expected: “the investment sizes that are likely to be seen in Japan will surpass those of any individual integrated resort that we’ve seen so far.” Indeed, when asked if he thinks any more operators will be interested in the forthcoming Japanese market, Lam responded: “I think everyone else is already interested. This is the next big thing in gaming.”
Assuming that foreign operators are granted a casino licence, Japan could potentially become a big opportunity for operators to cash-in on a major market in land-based gambling, despite the limited number of casinos licences on offer. But for now, operators can only sit on the edge of their seats and second-guess the nature of the upcoming Japanese market, while they await Japanese lawmakers to devise a profitable regulatory structure.
Indeed, further regulatory legislation will be at the forefront of discussion in the Japanese Parliament from this point onwards. This legislation, which is likely to be discussed throughout 2017, will ultimately determine the landscape of Japan’s casino gaming industry, its potential success as a top gaming destination, and in what capacity foreign operators will be able to attack this new market.Thus the next steps of this mammoth project are critical; the overall success of this new market is completely dependent on both the location of the integrated resorts, their proximity to each other, and the restrictions that are placed upon them by the Japanese authorities.
Lam confirms that: “Japan’s success in the land-based gambling industry will depend on the nature of the liberalisation. Where the casinos will be placed (urban areas or off-shore islands) and the rules of the casino games are two major factors which will determine the success and prestige of Japan’s land-based gambling market.”
If heavy restrictions are placed on the casinos, which could include the exclusion or control of local gamblers to subdue the public’s fear of rising gambling addition rates, this may inhibit the revenue potential of the casinos: “The operators would certainly look forward to entering the Japanese market as it holds great potential for profitability, provided there are little to no restrictions on local gambling on any new casinos on Japanese soil,” Lam explained. “If Japan does open its door to casino operators overseas, it will most likely follow on the Singapore model: an integrated resort model with some restrictive policies on local gamblers.”
Ishihara advises that operators should take any opportunity to influence the nature of the Japanese market from its founding, in order to assure that they can harvest maximum revenue from this promising new market: “I personally feel that in order for Japan to match the prestige of Las Vegas or Macau, it is essential for foreign casino operators who have rich experience in those venues to take part in the establishment of the casinos in Japan from the outset.”
The potential success of Japan still remains a controversial issue, mainly because so many crucial factors remain ambiguous. When these final decisions are made, analysts can approach the subject of Japan’s potential to challenge the top land-based gambling hot-spots with greater clarity.