The Journal The Authority on Global Business in Japan

Japan’s government is betting on a multi-billion-dollar windfall from the newly legalized casino industry after having pushed through the necessary legislation in July. With US operators among those eyeing a seat at the table, will the new industry deliver its promised benefits?

Known as integrated resorts (IRs), because they combine casinos with hotels, entertainment, and conference facilities, the centerpiece of Japan’s new industry can now take shape after two decades of debate.
Public opinion polls showed six in 10 Japanese opposed casinos, amid concerns over adding to gambling addiction and crime. The opposition made desperate attempts to block passage of what has come to be known as the Casino Law.

Yet, Japanese Prime Minister Shinzo Abe’s push to create a “tourism-oriented country” ultimately won the day. It has delivered a potentially powerful tool for the administration to use in its plans to attract new investment and jobs—particularly for regional economies.

GROUND RULES
In what commentators described as “Singapore-style” legisla­tion, the IR bill allows just three licenses to be issued initially while requiring that 30 percent of the gaming tax will be paid to the central and local governments. The rate is higher than that in Singapore but lower than in Macau.

Gaming areas will be restricted to three percent or less of total resort floor space, allowing plenty of room for hotels, restaurants, and shops. Similar to Singapore, entry will be free for international visitors while locals will face a ¥6,000 ($53) admission fee, will be restricted to 10 visits per month, and must present their My Number identification card.

Insiders polled by The ACCJ Journal were generally positive about the legislation, amid earlier concerns over potential restrictions—including tougher limits on casino size and calls for Japanese to be barred from entering.

“We were led to believe it would be Singaporean in its style—and it is. It’s out-Singapored Singapore in some ways,” said Andrew Gellatly, head of global research services at London- and Washington DC-based GamblingCompliance, which provides legal, regulatory, and business intelligence to the gambling industry.

Gellatly highlighted the entry fee for locals, saying that “the same sort of entry fee has been tried in Singapore and it’s had an effect.”

A bigger concern for companies eyeing one of the three licenses is the stipulation that they will be valid for just 10 years, then subject to renewal every five years providing the companies gain approval from the local legislature.

“Ten years is not a lot of time—including construction—to make money out of a casino. For example, Macau has 20-year licenses.” Gellatly explained. “And the building process is not fast in Japan, since buildings have to be earthquake-proof and environmental impact assessments, which can take years, must be done.”

Operators will also be watching nervously as Tokyo bureau­­crats map out some 300 regulations that will shape matters such as the amount of convention space available and tourism promotion.

“Like all Japanese legislation, the devil is in the interpretation and application, and we’re yet to see how a local government will handle it,” said an industry source.

A casino control commission to oversee the new industry is planned for 2019. Local governments are then expected to select operators by 2020, after which the central government will award licenses to the winning three bidders.

Allowing for a three-to-four-year construction period and potential environmental issues, and the first IR might not open until 2024 or 2025 at the earliest.

Game machines at The Venetian Macao, the world’s largest casino.

GOLDEN GOOSE
Estimates of the industry’s value vary, depending on the location and number of IRs established.

In September 2017, Fitch Ratings, Inc.—one of the Big Three credit agencies—predicted that Japan could generate gross gaming revenues of $6–$9 billion, “depending on the number of integrated casinos approved and their physical footprint.”

However, in May 2018, the agency slashed this forecast to $6 billion due to its expectation that only one IR license would be awarded to a major city. The other two it saw going to smaller locations. Annual revenues of $3 billion are predicted for the large metropolitan IR and $1.4 billion each for the provincial resorts.

Goldman Sachs Japan estimates potential total gaming revenue of ¥1.75 trillion yen ($15.8 billion) a year assuming the three IRs are located in Tokyo, Osaka, and Hokkaido. This would exceed the $11.1 billion brought in by Nevada’s casinos in Las Vegas and Reno.

GamblingCompliance’s 2017 report noted the resorts’ potential to reinvigorate regional economies by making them hubs of tourist activity and employment opportunities, as well as boosting the nation’s meetings, incentives, conventions, and exhibitions (MICE) industry, which trails that in each of its Asian rivals. In 2014, Singapore hosted 142 MICE events and Beijing hosted 104. Tokyo hosted only 90.

Each IR is expected to ultimately generate up to 60,000 new jobs, which would be a game changer in a location such as Wakayama, with its relatively small population of 360,000. It would also boost larger cities such as Yokohama, which is looking to step up efforts to shore up its tourism industry.

Despite higher costs than other Asian markets for construc­tion and labor, Japan is still seen as a highly profitable location for IRs. In fact, the country could potentially achieve the world’s highest daily win-rate for slot machines.

“The casino industry in Japan still looks like a golden goose that could lay some golden eggs,” said Gellatly. “But, right now, there are 300 regulations and two years of lobbying ahead to stop it becoming an ugly duckling.”

OSAKA 2025?
November 23 looms large as a key date for Osaka, which is bidding against contenders from Azerbaijan and Russia to become the host city for Expo 2025.

Should the Kansai city win the bid, it plans to build the necessary facilities for the world exposition on Yumeshima, a man-made island in Osaka Bay that is also being eyed for Japan’s first IR.

While building both simultaneously could cause construc­tion delays, securing the expo might help Osaka get national funding for the required rail and road infrastructure to the island, which could cost up to ¥20 billion ($177.9 million).

Declaring plans to open an IR in time for the expo, Osaka Governor Ichiro Matsui has said that he would seek to accelerate the process by gaining provisional authorization from the central government before the guidelines are finalized.

“If all goes well, a casino in Osaka could open by 2023 or 2024 at the latest,” Matsui said.

Support from both the prefectural and city governments—along with a desire to strengthen the Kansai economy—have put the western Japan metropolis in pole position among potential sites.

Morgan Stanley has estimated that a casino in Osaka could generate some $4 billion a year in revenue. A study by the UK-based Oxford Economics projected the creation of more than 77,500 jobs and annual tax revenues of $3 billion. The prefecture expects a resort to attract 22 million tourists a year by 2030, including seven million from overseas.

Arthur Matsumoto, co-chair of the ACCJ-Kansai External Affairs Committee, believes Osaka will be the first to receive a license.
“Osaka is leading the pack, and our members are pretty positive about hosting an IR,” he said. “There’s available land, the government is supportive, and the business community is onboard.”

FRONT-RUNNERS
At least eight major operators are said to be courting Japan’s third-largest city, including Las Vegas-based Caesars Entertainment Corporation, MGM Resorts International, and Las Vegas Sands Corporation from the United States, along with Hong Kong-based Melco Resorts & Entertainment Limited. MGM is considering a potential total investment of “up to and around $10 billion.”

“Of the major cities in Japan, Osaka is the only one that has formally raised its hand and expressed interest,” Alan Feldman, executive vice president of MGM Resorts International, told The ACCJ Journal.

MGM Resorts Japan CEO Ed Bowers said that “MGM is focused on potential opportunities in the larger areas of Japan. Certainly those cities would include Tokyo, Yokohama, and Osaka.”

And Feldman added that MGM “does not intend to go it alone. Our intention is to work with Japanese companies in a consortium.”

Tokyo would represent the jewel in the crown for operators, with Odaiba in Tokyo Bay and Chiba Prefecture seen as potential sites.

But, Tokyo Governor Yuriko Koike has seemed less enthusiastic amid the capital’s focus on building infrastructure for the upcoming Tokyo 2020 Olympic and Paralympic Games.

“There are voices concerned with addiction and other problems,” Koike told reporters at a news conference on July 20. “We need to consider the merits and the drawbacks.”

Nearby Yokohama, Japan’s second-largest city, is also facing political opposition despite support from the business community. An inquest into public opinion found 94-percent opposition to a proposed IR, while the city government has indicated that it will pull out if Tokyo bids.

In April, Yokohama Mayor Fumiko Hayashi suggested the project remained a “blank slate” and still faced issues, including gambling addiction.

Yukio Fujiki, chairman of the Yokohama Harbor Transport Association, has been a vocal opponent of the planned IR, which probably would be built at the port city’s Yamashita Pier.

“People are saying one thing and doing another. Mr. Fujiki had a press conference recently saying he would present a master plan for the harbor that wouldn’t include a casino, yet he had a couple of responsible gaming experts on his panel. So, if he’s not planning a casino why is he worried about responsible gaming?” asked Gellatly.

REGIONAL REVITALIZATION
Apart from the three major cities, some 35 other munici­palities reportedly have shown interest in hosting an IR. These include ones in Hokkaido, Nagasaki, and Wakayama Prefectures.

Among the towns and cities vying for a license, Hokkaido’s port city of Tomakomai is seen as potentially the second favorite behind Osaka. Near New Chitose Airport, which offers direct flights across Asia, the city of 170,000 is eyeing an IR as a means of keeping its young people at home and preventing a further population decline.

In March, the city government projected that an IR would require an investment of up to ¥300 billion ($2.7 billion) and could generate ¥150 billion ($1.3 billion) in annual revenue. It is expected to provide direct and indirect employment for up to 44,000 people and to attract up to six million tourists a year.

“Casinos have a proven record of revitalizing local economies by increasing tax revenue and jobs,” said Adam German, vice president of business development and marketing director at Housing Japan K.K. “The increased tax revenue—if managed well by city officials—can be used for infrastructure upgrades that are necessary to attract talent from other parts of the country. While this new talent may or may not work directly for or with the casino, the additional revenue their presence generates will help the city more than a casino might harm it.”

German added that those who claim that a casino will create only temporary or part-time jobs aren’t seeing the big picture. “This is too short a view, in my opinion. It doesn’t take into account the secondary job creation that comes from entrepreneurs who choose to plant the roots of their companies in the city.” This secondary job creation, fueled by better infrastructure thanks to increased tax revenues from the casino, will, in time, spur increased wage growth and higher household spending.

While Sapporo and Kushiro cities have also indicated their interest, Tomakomai appears favored due to strong backing from all levels of government as well as the local business community.

Further south, Nagasaki Prefecture’s Huis Ten Bosch resort in Sasebo is seen as a strong contender. The Nagasaki prefectural government predicts an IR in Sasebo could generate economic benefits of at least ¥260 billion ($2.3 billion), create 22,000 jobs, and attract 7.4 million visitors annually. But the city and prefecture would need to improve transportation links.

Similar to other favorites, the Huis Ten Bosch plan has the support of politicians and the local community—particularly young people—according to a May 6 story in The Japan Times.

While Osaka, Tomakomai, and Sasebo appear to be the most likely candidates, other local governments have also expressed varying levels of interest. Wakayama Marina City in Wakayama Prefecture, Echizen in Fukui Prefecture, and Aichi Prefecture’s Tokoname—home to Chubu Centrair International Airport—are all in the mix.

However, the latter three reportedly face various issues, including political differences and concerns over costs. In the case of Wakayama, the prefecture is competing with Osaka for attention in the Kansai region.

“Wakayama can’t be ruled out due to the political power of Toshihiro Nikai, the Liberal Democratic Party’s Secretary General who represents the Wakayama third district in the lower house, although it is a waterside location and suffers similar infrastructure issues [to Yumeshima],” Gellatly said.

“So, I think you’d say Osaka, Hokkaido, and one of the cities in Nagasaki or Wakayama would be the first three licenses. But, Tokyo emerging would immediately push all three down the list.”

LOBBYING GAME
While city governments are eyeing potential economic gains, operators from the United States, Asia, Europe, and Australia—as well as local Japanese operators—are engaging in their own race to win favor ahead of the licensing decisions.

From intricate IR designs to donations to natural disaster recovery efforts and support for Japanese arts, the bidders are seeking to win the hearts and minds of politicians, governments, and the community.

Caesars Entertainment has promoted different themes for its IR concepts, including a wellness-themed IR for Osaka, an integrated eco-resort for Hokkaido, and an arts and culture park for Yokohama that would have a wave theme that reflects the city’s history as a port.

Goldman Sachs sees seven main players among the foreign bidders: Las Vegas Sands; Hong Kong’s Galaxy Entertainment Group; MGM; Wynn Resorts of Las Vegas; Macau’s Melco; Genting Singapore; and Caesars Entertainment.

Other operators have emerged from Europe and the Philippines, while Australia’s Crown Resorts Limited has also quietly continued its engagement efforts despite media reports to the contrary.
Gellatly suggested Genting was gaining a lot of traction at the political level.

“They’ve already put money aside for a development and have no negatives, in that they’re not associated with Macau and have shown they can operate an IR of decent size in Singapore without the involvement of junkets [Chinese gambling groups], which is what would be required in Japan, too.”

He also pointed to Les Vegas Sands, which has predicted an investment in Japan of “as much as $10 billion” and has a track record of having built Marina Bay Sands in Singapore.

Among the locals, travel agency H.I.S. Co., Ltd., railway operator Keikyu Corporation, financial services group Orix Corporation, and trading house Sumitomo Corporation have all been linked to potential bids—although only gaming company Sega Sammy Holdings Inc. has previous industry experience, in South Korea.

“What’s interesting is, as it gets to the beauty contest stage, we’re now seeing 20 to 25 different groups emerging as potential suitors. There is more discussion of Japanese bids. They’ll find a Western gaming partner to do the gaming management, but will do the bid themselves,” Gellatly said.

PROBLEM GAMING
Achieving the industry’s ambitions will require greater community engagement along with measures to tackle problem gaming—a particular focus of current corporate social responsibility (CSR) efforts.

In one example, Caesars Entertainment has committed ¥50 million to a CSR fund to support responsible gaming initiatives in Japan.

“The government has made it clear that problem gambling is a significant concern, and we will make certain that the funds will be used to address government priorities to decrease problem gambling prevalence in Japan and create strong prevention campaigns,” said Caesars President and CEO Mark Frissora.

Pointing out that problem gamblers exist in every country—regardless of whether it has a casino industry—MGM’s Feldman suggested the industry could adopt new technological solutions in Japan such as facial recognition, and combine them with existing solutions such as self-limit or self-exclusion.

“Japan is going to have newer technology, in part because it’s Japan and also because we’re looking at building these programs in the 2020s and not the 1990s,” he said.

“We’re very actively engaged with companies in Japan and else­where in trying to determine the right combination of technology.”

Yet, if the industry can successfully manage such issues and deliver on its promises, the potential exists for Japan’s market to become “bigger than Singapore and likely end up being the second-biggest IR market in the world,” MGM’s Bowers said.

Should that occur, Abe’s vision of a sustained boom in tourism is far more likely. Data released by the Japan National Tourism Organization on October 9 shows 21.3 million visitors for the year through August, and Abe’s goal is 40 million per year by 2020. If the projected boost from IRs is correct, one of Tokyo’s biggest political gambles in decades might just pay off.

Anthony Fensom is a communication consultant/writer with experience in Australian/Asian financial and media industries, including six years in Tokyo.