The Journal The Authority on Global Business in Japan

After 15 years of political argument, the National Diet has approved a bill authorizing the establishment of integrated resorts (IRs) that combine casinos with hotels, conference, and entertainment facilities. Japanese lawmakers hope this will create a never-ending Olympics-style tourism boom.

Under the legislation, passed on December 15, the government gave itself another year to finalize an implementation bill that will lay down the terms of operation for what could become the biggest casino industry in Asia, if not the world.

Japan’s move to legalize casinos has sparked a gambling gold rush, as foreign and local operators line up to get a share of a potential $40 billion jackpot. But having experienced setbacks in the past, few expect a trouble-free ride to the development of the first resort, likely to be in Osaka.

Having quietly lobbied Tokyo for years, the industry is hopeful the government will not mess up what could become one of the most tangible reforms of Abenomics.

“It’s been a frustrating journey, but with a surprising outcome. It felt like it was a Christmas tradition for the lawmakers to ditch the casino legislation, so last December’s move surprised everyone,” said Andrew Gellatly, head of global research services at GamblingCompliance, a provider of independent business intelligence to the global gaming industry.

“Japan has represented the holy grail for the gambling industry. It’s very rare that a new, regulated industry like gambling can appear from nowhere in a sophisticated G7 economy like Japan’s. If you go to any international hotel in Tokyo right now, chances are the lobby is full of American gaming lawyers and consultants—it’s a bit of a gold rush.”

READY TO PLAY
Legalized gambling in Japan is currently limited to lotteries and bicycle, horse, and motorboat racing. However, analysts suggest the pachinko industry, which operates in a legal grey area but generates sales of almost $200 billion a year, is indicative of the potential for casino gaming.

“As we saw in Singapore, when you have a population that is already familiar with machine-based gambling, the resorts will open at full speed from day one,” Gellatly said. “The population will be absolutely ready to play.”

Analysts estimate annual gaming revenue of more than $10 billion from two IRs, and this could exceed $40 billion should Tokyo allow numerous resorts nationwide. By comparison, gambling-mad Macau generated about $28 billion in casino revenue in calendar 2016, while the Las Vegas Strip earned $6.3 billion in gaming revenue in 2015.

Singapore’s two IRs, the Las Vegas Sands Corporation-owned Marina Bay Sands and Resorts World Sentosa, operated by Genting Singapore PLC, are forecast by Fitch Ratings to generate $4 billion in revenues in 2017.

“Japan will be a supersized Singapore, and it can even outstrip Macau,” said Daniel Cheng, senior vice president of development for Asia–Pacific at Hard Rock Cafe International, speaking to Bloomberg News.

Already familiar to Japanese with its Hard Rock Cafe outlets in Fukuoka, Tokyo, Osaka, and Yokohama, the Florida-based restaurant and casino chain is reportedly seeking Japanese partners, eyeing a “major investment” in Japan.

Hard Rock and other operators face intensifying competition for the new IR licenses. Among those jockeying for position are the big two US operators—Las Vegas Sands Corporation and MGM Resorts International—along with US rivals such as Caesar’s Entertainment Corporation, Wynn Resorts Limited, and Boyd Gaming Corporation. Elsewhere, international competition is coming from Genting Malaysia Berhad and Australia’s Crown Resorts Limited.

Significant investment will be required. Las Vegas Sands Chairman and CEO Sheldon Adelson, speaking at an investor conference in Tokyo on February 21, said that a Japan IR “would be at least what we paid in Singapore, $6 billion including the land, but it could be as much as $10 billion,” according to CNBC.

MGM anticipates a similar cost and is touting the creation of a publicly traded real estate investment trust to attract investors.

“The kind of IR project that would be developed in large locations across Japan would likely have an investment of up to $10 billion . . . [and] will involve a collaboration and consortium with many companies, likely with majority Japanese ownership,” Ed Bowers, senior vice president of global gaming development at MGM Resorts International, told The Journal.

Similarly, Las Vegas Sands has flagged an “unmatched investment in Japan,” saying it would work to develop an IR based on meetings, incentives, conferences, and exhibitions (MICE), “while also recognizing and celebrating Japan’s unique heritage and culture.”

Several Japanese companies have expressed interest, including travel agency H.I.S. Co. Ltd., developer Intrance Co. Ltd., railway operator Keikyu Corporation, and contractor Taisei Corporation, along with trading houses Sumitomo Corporation and Mitsubishi Corporation. However, only gaming company Sega Sammy Holdings Inc. has casino experience, having built an IR in South Korea in partnership with local company Paradise Group.

Pacifica Capital KK’s Seth Sulkin, chair of the Integrated Resorts Task Force at the American Chamber of Commerce in Japan (ACCJ), suggests the beneficiaries could extend even wider.

“When I started the task force, I was amazed at the number of industries that signed up,” he explained. “Obviously, I expected gaming operators to be interested, but we’ve seen banks, law firms, accounting firms, education and training companies, advertising and marketing firms, and consultants from a range of industries—it’s incredible the number of industries that expect to benefit.”

An integrated resort concept for Kansai.

REGIONAL BENEFITS
A study by global advisory firm Oxford Economics has estimated that an IR in the greater Tokyo area would support 103,000 jobs on an annual basis, while generating annual tax revenues of ¥470 billion ($4.1 billion) and providing an additional ¥180 billion boost to the local economy. Similarly, an Osaka IR could generate 77,500 jobs and annual tax revenues of ¥340 billion, while adding another ¥150 billion to the Kansai economy.

The Kansai Association of Corporate Executives is even more bullish, eyeing potential investments of up to ¥800 billion, annual revenues of ¥600 billion, and the creation of nearly 100,000 jobs by a Kansai IR.

Osaka’s Yumeshima Island is a probable site, with about 80,000 square meters of municipal land available. With Japan’s third-largest city eyeing a bid to host the 2025 World Exposition, an IR could aid Osaka’s plans to regain its status as the nation’s commercial capital.

Importantly, political support has strengthened Osaka’s position as the front-runner in the race to host Japan’s first IR. The governor of Osaka Prefecture and the mayor of the City of Osaka, along with local business and tourism organizations, have joined forces to promote Yumeshima. They are eyeing not only a casino, but also a convention center, hotels, shopping facilities, and exhibition halls.

Other leading contenders include Yokohama and Tokyo; in addition, a range of regional sites from Hokkaido to Nagasaki have also entered the race.

“Osaka and Yokohama are the two front-runners, although the issue is becoming politically contentious in Yokohama, with Mayor Fumiko Hayashi recently backtracking on some of her earlier support, while Osaka’s proposed site of Yumeshima will require billions of dollars of new infrastructure investments,” GamblingCompliance’s Gellatly said.

A range of other IR sites have been proposed, including the Dutch theme park Huis Ten Bosch near Nagasaki, Wakayama Marina City, and various locations in Hokkaido and Nagoya. Backed by a number of local companies, Odaiba, an artificial island in Tokyo Bay, has also been touted as a potential site.

“This has always been pitched by the politicians as part of regional development, so they’ll likely go for two IRs initially—at Osaka and Yokohama—and a regional site such as Nagasaki,” an industry source told The Journal.

POLITICAL OBSTACLES
According to The Japan Times, a Liberal Democratic Party task force is expected to submit recommendations to the government by the end of March, addressing such issues as problem gambling and operational details.

The focus on problem gambling—or gambling addiction—reflects public concern over the industry’s potentially negative impact. A poll by public broadcaster NHK in late 2016 showed 44 percent of those surveyed were opposed to casinos, with just 12 percent in favor and 34 percent undecided.

A 2014 health ministry study found nearly five million Japanese were addicted to gambling—principally pachinko—at an estimated rate five times that of Western countries such as the United Kingdom. The London-based newspaper The Economist estimates Japanese lose $24 billion a year on gambling, lagging only China ($62 billion) and the United States ($117 billion).

“Any time you talk about an integrated resort and the activity of a casino, people immediately bring with them images of Las Vegas in the 1960s. What’s critical to consider, though, is that modern regulations cleaned that up,” MGM’s Bowers said.

“Japan is going to want to have the best kind of regulation,” he added, “and fortunately there are many examples of it, with the closest being Singapore.”

At GamblingCompliance, Gellatly suggested technology, such as identity cards linked to facial recognition software, could provide a solution to problem gambling. Training staff to address problem behavior can also help.

However, he criticized Singapore’s move to charge locals a membership fee of S$100 (US$70) per day to restrict local access, suggesting it would be disastrous for addicts as it encouraged “loss-chasing behavior” by gamblers to win back the fee.

The ACCJ’s task force has suggested options that “permit individuals to limit or restrict their own access to gaming,” while calling for regulatory frameworks, similar to those existing in other industrialized nations, designed to prevent the involvement of organized crime.

Other potential stumbling blocks include the gross gaming revenue tax rate (the ACCJ suggests no more than 10 percent), and whether the government imposes consumption tax on casino gambling.

Critics warn that corruption and organized crime also offer challenges.

The ACCJ’s Sulkin also warned that a three-percent limitation on the casino portion of an IR’s total gross floor area could make it impossible for smaller cities to host resorts without special exemptions.

Nevertheless, an industry source said Tokyo had shown a “remarkable” commitment to understanding the issues, with the goal of ensuring the best possible legislation.

“There are plenty of examples of casino control acts that would act as great examples for Japan,” the source said. “The Cabinet Office has done very advanced work on the legislation, and appears ready to submit it to an extraordinary Diet session by November.”

Along with responsible gaming, measures to promote the development of MICE business and the further development of the hospitality and tourism industries are a priority for Tokyo, which is targeting 40 million inbound tourists by 2020 and 60 million by 2030.

“They want to ensure there are ongoing reasons for tourists to keep coming back to Japan once the major sporting events are over,” the source added.

Should the implementation bill be approved before year-end, industry observers expect Japan’s first IR to be launched in 2023 at the earliest—a development that its Asian rivals are closely monitoring.

Sulkin expects Japan to have the advantage, though, with local customers likely to account for more than 50 percent of revenues. Significant non-gaming revenues are expected from new convention and shopping centers, as well as restaurants that attract both local and foreign tourists.

“Japan is a lot larger country than Singapore, with much more tourism resources,” he said. “Combining a trip to Kyoto and Nara with an IR in Osaka is going to be an attractive option.”

Wynn Resorts chief executive Steve Wynn has described the Japan casino market as an “opportunity [that] is thoroughly Japanese and thoroughly delicious.”

Winning the public over will require raising awareness of the benefits of IRs, along with mitigating the risks. Should the government and industry succeed, Japan just might have a shot at winning one of its biggest bets in decades.

Singapore’s Marina Bay Sands

NEW CASINO UPS AND DOWNS
South Africa Soars
South Africa’s move to legalize casino gambling in 1996 has seen the growth of a tourism-oriented industry that generates gross gambling revenue of about $1.4 billion a year and created thousands of jobs for disadvantaged citizens. Fears of crime, corruption, and addiction proved largely unfounded.

Found on the fringes of most cities, South Africa’s 40 registered casinos have been designed to attract tourists and typically include hotels, restaurants, and bars along with large entertainment complexes.

According to South African Tourism, many have been designed around a specific theme and are aimed at being one-stop relaxation destinations for business and leisure travelers, with access to both indoor and outdoor entertainment.

Among the most popular is the Sun City complex in North West Province, famous for its golf course, game drives, and outdoor activities. In Durban, Sun Coast Casino has its own private beach, while Gold Reef City, Montecasino, and Emperor’s Palace in Johannesburg, Gauteng, are geared to nightlife and indoor activities.

Britain Stumbles
Plans by the Tony Blair government to create a new generation of mega-casinos in the United Kingdom under the Gambling Act 2005 fell apart following public backlash. While licenses were created for eight large and eight small casinos, by 2015 only three of the larger ones had opened, with plans for a super casino in Manchester blocked.

The move by then British Prime Minister Gordon Brown to stop development of the Manchester casino, which would have created an estimated 3,500 jobs, was described by Blair as “the worst form of puritanism,” under pressure from the church and media.

Nevertheless, as of March 2016, Britain hosted 148 casinos, unchanged from the previous year. According to the UK Gambling Commission, the entire gambling industry brought in a total gross gambling yield of £13.6 billion ($16.9 billion) from April 2015 to March 2016.

Anthony Fensom is a communication consultant/writer with experience in Australian/Asian financial and media industries, including six years in Tokyo.
Legalized gambling in Japan is currently limited to lotteries and bicycle, horse, and motorboat racing