An Economic Strategy for Casinos in the Land of Pachinko

As we begin the third week of the special autumn parliamentary session in Japan, the focus remains on whether or not substantial progress will be made on casino legalization. Prime Minister Shinzo Abe sees passing the casino bill as a crucial component in his “Abenomics” package of aggressive economic and fiscal policies and reforms. He views Japanese casinos as an opportunity to increase tax revenue and stimulate the flagging economy, and he hopes that foreign investment from major gaming operators and integrated resort (IR) developers will help to pull Japan out of two decades of deflation and weak growth. The timing of the current parliamentary session becomes all the more critical, given that the Japanese GDP took a 7.1% plunge during the first quarter of the 2014 fiscal year. When factoring in recent tax increases and rising energy costs, Japanese workers are now effectively earning less than they were when Abe took office in 2012.

Japanese Prime Minister Shinzo Abe

Japanese Prime Minister Shinzo Abe

Gambling Which Isn’t Gambling: Pachinko

Although gambling is technically illegal in Japan (except for some government-administered racing sports and lotteries) there is already a thriving gambling pastime which has been an integral part of the Japanese lifestyle since the first part of the 20th century, operating in the gray area of the pachinko industry. This pinball-like slot game (which originally utilized ball bearings from dismantled munitions factories after World War II) is regarded as an exception to the criminal code’s gambling prohibition. When players accumulate enough little silver balls, they can redeem them for token prizes such as pen sets, cigarettes, or perfume, then take certain special prizes to off-site shops where they are exchanged for cash.

Although the pachinko business has been on the decline since its peak in the 1990s due to a younger generation eschewing what they see as the dingy, smoky pastime of their parents’ generation, estimates of gross gaming revenue (GGR) for pachinko in 2013 are still thought to be a staggering $30 billion or higher. In order to win over Japanese youth and the untapped female market, and in preparation for competition from casinos, the pachinko business is now trying to rebrand and reinvent itself with stylish, smoke-free lounges, cafes, shopping malls, and even daycare centers for the children of parents with a little extra cash on their hands.

A Pachinko Parlor in Tokyo's Akihabara District

A Pachinko Parlor in Tokyo’s Akihabara District

A telling anecdote which illustrates the fuzziness of pachinko’s classification by Japanese society recounts a group of pro-casino legislators who requested data on annual pachinko winnings from the National Police Agency, which administers the off-site exchange shops. The mind-boggling response provided was that pachinko generates no winnings, as pachinko is not gambling. The industry’s 12,000 parlors are operated entirely by the private sector, and it is not taxed, although that would likely change if taxable casinos were legalized.

How Will Social Implications Affect Casino Legislation?

According to the Ministry of Health, Labor and Welfare, 4.8% of Japan’s adult population, and 8.7% of men over the age of 20 are pathological gamblers who are addicted to gambling. This stands in stark contrast to other developed nations where the average statistic for compulsive gamblers is closer to 1%. As a result, the Ministry supports a total ban on casino use by Japanese citizens, which is the model used at gambling facilities in Monaco. Other groups are exploring requiring special entrance fees for Japanese casino customers, which is the approach used for locals at casinos in Singapore. Either way, restricting casino access for the Japanese would cut into what the government sees as a solution to the nation’s economic woes, especially when some have projected that 80% of casino patrons will be Japanese nationals.

Gambling by Japanese Nationals to be Allowed

Recent media reports on the casino bill being drafted by a multiparty group of Japanese parliament members had stated that a clause was being introduced only allowing foreign nationals to gamble in Japan. Since many believe that the Japanese customer base is crucial to the profitability of Japanese IRs, this would have been seen as a setback discouraging investment by foreign developers. Conflicting reports have now emerged, citing an unidentified “parliamentary source”, stating that the draft law will not ban Japanese locals from casino gambling.

We are closely following all the casino-related developments as they occur in Tokyo, where parliament is in session through November 30th. Check back with TMG Insights to stay current on the latest news from Japan.

Contributed by:

Anthony Mumphrey III
Principal, TMG Consulting
anthony@tmgconsulting.net
(504) 569-9239, Ex.22

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Disclaimer
The views, interpretations, or strategies expressed are those of the authors, and do not necessarily reflect the position of TMG Consulting. This site is meant for educational purposes only and does not constitute professional advice. TMG Consulting makes no representation as to accuracy, completeness, or suitability of any information on this site and will not be liable for damages arising from its display or use.

Japanese Legislators Reconvene to Discuss Casino Bill

Today marks the convocation of the special autumn session of Japan’s parliament (the National Diet). During the previous session which ended last June, a bill was introduced by a cross-party coalition of lawmakers representing both the ruling LDP party as well as opposition parties. Passing this preliminary “enabling bill” is seen as the first step toward the establishment of casinos in Japan, and it would lay the legislative groundwork on a conceptual level. Once passed, a second piece of legislation would be required, outlining the specifics of casino implementation, administration, and regulation in Japan.

Toru Mihara, an Osaka professor who advises pro-casino lawmakers, has said that he sees the bill’s passage as likely occurring by November, barring the introduction of pressing legislation that would distract the Diet from the casino bill. Similarly rosy forecasts of swift action by the Diet have been made many times in the past. The clock is ticking as Tokyo commences preparation for hosting the 2020 Olympics, and many are beginning to wonder whether or not Japanese IRs will be able to open in time for this major international tourism event.

A coalition of LDP and opposition party legislators is working to legalize Japanese casino development.

How Big is the Market?

The consensus among bullish analysts has been that with one integrated resort (IR) in Tokyo and another in Osaka, plus up to ten smaller casinos in other Japanese localities, gross gaming revenue could reach $40 billion annually. This would place the Japanese gaming market far ahead of both Las Vegas and Singapore, and it would approach the size of the world’s largest gaming market, Macau, where revenue was $45.2 billion in 2013. By contrast, a Morgan Stanley report published earlier this year has suggested that Japan might not be as profitable a market as many are expecting. Their analysis has projected Japanese annual GGR to be about one half of the consensus’ estimate, amounting to $21-$22 billion.

Locations Under Consideration for a Japanese IR

More than 20 locations in Japan are vying to be chosen as locations for IRs. There are campaigns underway to attract casinos as far north as Hokkaido and Akita, further south in Tokyo’s neighboring Chiba and Kanagawa Prefectures, in Osaka to the west, as far south as Nagasaki and Miyazaki, and in the southernmost islands of Okinawa. One of the frontrunner sites for an IR is a partially man-made island in Osaka Bay known as Yumeshima. As of this month, seven developers have held meetings with the Osaka prefectural governor, who is recommending this location. Although Tokyo’s governor has been notably lukewarm to the idea of an IR in the nation’s capital, many see Tokyo’s waterfront location of Odaiba as a leading candidate for a casino resort. Another Tokyo location under consideration by developers is the current site of the Tsukiji Fish Market which will relocate nearby in 2016. Tsukiji is one of the largest contiguous parcels of land ever offered for redevelopment in Tokyo, and its prime location is ideal for an IR.

02_Odaiba

The waterfront Odaiba development in Tokyo is one of the leading sites where a Japanese IR might be located.

Contenders for Japanese Licenses

MGM Resorts International has already unveiled images of its plans for an MGM Osaka casino resort, and it has been rumored that they have also been scouting out the Tsukiji site in Tokyo. MGM has held discussions with Universal Studios Japan, and they have pledged to invest $5-$10 billion in the Japanese market, with a 51% requirement for their stake in a Japanese partnership. Las Vegas Sands is said to be eyeing a Tokyo location, and Sheldon Adelson has stated that he would spend “whatever it takes” to gain a foothold in Japan, citing numbers between $7 and $10 billion. Melco Crown is reported to have met with Osaka authorities this past July, while Wynn Resorts is thought to be exploring sites in Tokyo. Caesars Entertainment CEO Gary Loveman has stated that his company would have no problem financing an investment in Japan of at least $5 billion. Another potential foreign IR developer is Genting of Malaysia, while domestic bidders for licenses include pachinko companies Dynam and Konami, Keikyu Railways, and a joint venture of Fuji Media, Kajima Construction, and Mitsui Real Estate.

Contributed by:

Anthony Mumphrey III
Principal, TMG Consulting
anthony@tmgconsulting.net
(504) 569-9239, Ex.22

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Disclaimer
The views, interpretations, or strategies expressed are those of the authors, and do not necessarily reflect the position of TMG Consulting. This site is meant for educational purposes only and does not constitute professional advice. TMG Consulting makes no representation as to accuracy, completeness, or suitability of any information on this site and will not be liable for damages arising from its display or use.

Japan’s Gaming Prospects Heat Up

For years now, many have eagerly speculated that Japan will pass legislation allowing casinos to be opened within the nation. This year, more than in previous years, it looks like Japan may pass such legislation. With things heating up in the Asian gaming market, e.g., in South Korea and The Philippines, and with the 2020 Summer Olympics in Tokyo creeping up, there seems to be more than a hint of urgency to green-light casino development in Japan.

Despite having several forms of legal gaming, such as pachinko, lottery, and race betting, Vegas-style games are not currently permitted in Japan. The opposition to casinos in Japan has cited problem gambling and opportunities for increased organized crime activity as concerns. However, promises of multi-billion dollar foreign investments and the allure of a mechanism for economic recovery may outweigh those concerns this time around. Prime Minister Shinzo Abe has voiced his support for legalizing casinos as a potential means by which to revive the economy, forming part of his “Abenomics” strategy.

This summer, unless snagged by procedural issues, Parliament is expected to pass legislation  for four casino resort licenses. Diet member Takeshi Iwaya of the Liberal Democratic Party leads the push for resort gaming in Japan and has multi-party support. At least one casino is expected for Tokyo, and another in Osaka. We believe that Japan could become one of the most lucrative gaming markets in the world (behind Macau). With the passage of this legislation, Japan will likely become the stage for one of the fiercest battles for casino licenses the world has ever witnessed.


Contributed by:

Anthony Mumphrey, III, Principal
anthony@tmg-consulting.net or 504.569.9239 x 22

and

Nicholas Farrae
Senior Analyst, Economics & Gaming
nicholasfarrae@tmg-consulting.net or 504.569.9239 x 31

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 Disclaimer
The views, interpretations, or strategies expressed are those of the authors, and do not necessarily reflect the position of TMG Consulting. This site is meant for educational purposes only and does not constitute professional advice. TMG Consulting makes no representation as to accuracy, completeness, or suitability of any information on this site and will not be liable for damages arising from its display or use.

The Outlook for Asian Gaming

Attention has been given to the rise of Asia’s booming gaming market in recent years, with some analysts even projecting it to surpass all other regional gaming markets before the decade’s end.  The success of Macau and Singapore has inspired other parts of Asia to either enhance their existing gaming industry to a world-class standard or to establish their own destination gaming markets.

The Philippines and Vietnam, both countries with existing gaming facilities, have passed legislation to support a destination resort casino market.  South Korea may follow their lead.  In other parts of Asia without Las Vegas-style games, such as Japan and Taiwan, things have been heating up with legislators and other constituents seriously considering gaming’s benefits.

Asia’s gaming fever mirrors that of the United States.  In recent years, several states in the U.S. implemented gaming legislation or expanded existing games.  Some U.S. gaming markets could even be described as saturated.  In the Mid-Atlantic region for example, gaming facilities in Delaware, Pennsylvania, New Jersey, New York, West Virginia and Maryland are in heavy competition for the same regional patrons and tourists.  Delaware and Pennsylvania added table games to their facilities, at least partially pressured by a congesting regional market.

The key difference between the pervasion of gaming throughout Asia and the United States is demand.  According to Credit-Suisse’s Global Wealth Report 2011 there are about 949.7 million people living throughout North, Central, and South America.  Throughout the entire Asia-Pacific region (includes China and India) there about 4.25 billion people.  The population of the Americas is not even a quarter of the population of the Asia-Pacific region.  Trying to imagine how much gaming product it would take to saturate the Asia-Pacific region is staggering.

A huge driver behind the success of Macau and Singapore’s gaming markets has been Chinese tourism.  Chinese policy changes opened up its outbound tourism market and greatly increased the proportion of Chinese visitors to all visitors in several regional markets.  Singapore for example, drew about 5.6% of its total visitors in 2000 from China.  In 2010, Chinese visitors to Singapore represented about 10.3% of all visitors to the country.

Asian gaming markets have another thing going their way—Asia is becoming wealthier.  Based on projections made by Credit-Suisse and detailed in their World Wealth Report 2011, wealth in the Asia-Pacific region (including China and India) is increasing at a greater rate than the world’s two wealthiest regions (Northern America and Europe) and the world’s average.  As the average wealth of individuals increases throughout the Asia-Pacific region, more and more people will have the means to indulge in leisure activities and travel—increasing regional demand for destination resort casinos.

With such trends in wealth, tourism, and population it is little wonder that destination gaming has been such a success in Asia in recent times.  It is also no surprise that many other Asian countries want in on the action, and that they are not trying to follow the ‘Las Vegas Model,’ but either the ‘Singapore’ or ‘Macau Model.’

Contributed by:

Nicholas Farrae

Analyst, Economics and Gaming

nicholasfarrae@tmg-consulting.net  or (504) 569-9239 x 31

Disclaimer
The views, interpretations, or strategies expressed are those of the authors, and do not necessarily reflect the position of TMG Consulting. This site is meant for educational purposes only and does not constitute professional advice. TMG Consulting makes no representation as to accuracy, completeness, or suitability of any information on this site and will not be liable for damages arising from its display or use.