The high hopes for casino legalization in Japan have dimmed considerably. But the arguments for integrated resorts remain strong
A year ago, casino legalization in Japan looked like a sure thing. The bill to promote integrated resorts had been introduced in December 2013 and was due for debate during the Diet’s 2014 legislative session, backed by Prime Minister Shinzo Abe. Gaming companies from across the globe were jostling for position to win favor in the widely anticipated licensing contest in the world’s third-biggest economy. For a variety of reasons, the IR bill wasn’t approved last year.
This year, Mr Abe, the country’s No. 1 casino booster, is coming off a landslide victory in a December snap election that increased his coalition’s lower-house majority in the Diet, which began its new legislative session late last month. Yet casino legalization doesn’t look like a sure thing anymore.
Proponents in Japan still believe IRs will be legalized in time to open by the 2020 Summer Olympic Games in Tokyo. However, for the international gaming community, which has long seen Japan as Asia’s most promising untapped market outside mainland China, the fever has cooled-decidedly in the face of Japanese realities. International gaming executives who believed strongly that casino legalization was imminent now put the chances at no better than even money.
“There was likely a confluence of factors that changed the outlook so dramatically, including [IR legislation] getting caught in the ‘politics as usual’ vortex, as well as a wary populace, with polling suggesting many Japanese are opposed to casino gaming,” explains Union Gaming Research Macau Managing Partner Grant Govertsen.
A report last month from US parent company Union Gaming Group forecasted IRs won’t happen by 2020 and cast doubt on the logic of IRs to drive tourism in Tokyo and Osaka, already Japan’s top tourist destinations. “This doesn’t change our overall bullish view that someday Japan will, indeed, be second only to Macau in terms of global gaming markets. It’s just that the 2020 timeline is in doubt at this point,” says Mr Govertsen. “We also fully believe that both Tokyo and Osaka will be home to IRs, regardless of the original intention of the tourism mandate.”
Certain circumstances that derailed IR legalization last year—during the regular Diet session, a gaming opponent chaired a crucial upper house committee, and, during the extraordinary session, two cabinet ministers resigned amid campaign scandals—were unique events unlikely to be repeated. But other key issues haven’t been resolved, and IR legislation remains hostage to national politics and current events.
“The recent election did consolidate some further support for pro-casino interests in Japan,” contends Global Market Advisors partner Jonathan Galaviz. But, he adds, “There are certainly more pressing economic and public policy issues presenting themselves in Japan than the issue of casino gaming.”
Mr Abe, the leader of Japan’s Liberal Democratic Party, called the December election after the country’s economy fell into recession in the third quarter of last year, following a rise in its consumption tax— the equivalent of other nations’ sales tax or value-added tax—from 5% to 8% in April. His major campaign platform in 2012 had been a recovery plan known as Abenomics, prescribing the “three arrows” of monetary easing, fiscal stimulus and structural reform to pull Japan out of a quarter-century of economic stagnation. The election was called to refresh Abenomics’ mandate, within which IR legalization could provide a boost to tourism and help reorient the economy.
However, the recession means more immediate stimulation of the economy will take precedence during the current Diet session. “The recession is just one more factor adding to the growing list of issues that are of greater immediate priority than passing IR legislation,” Spectrum Asia CEO Paul Bromberg says.
Mr Abe has also prioritized national defense for the legislative session amid simmering disputes with China over islands in the seas between the two countries. Mr Abe is considered a keen nationalist who aims to upgrade Japan’s armed forces and amend its pacifist Constitution.
Despite these competing priorities, gaming observers in Japan feel the initial legislative step toward casino legalization could happen this year “The landslide victory of the LDP [in December] could allow the IR Promotion bill to be passed in the [current] parliamentary session, hopefully in June,” suggests Satoshi Okabe, consulting director for integrated resorts and tourism at Dentsu Consulting, Japan’s leading advertising and PR firm.
Local elections due in April complicate legislative timing. LDP’s coalition partner, Komeito, a Buddhist-based party that has expressed reservations about casinos, reportedly won’t allow internal discussion of legalization until nationwide local elections conclude on 26th April. Apart from many party supporters’ religious objections, Komeito raises concerns over the potential negative impacts, including money laundering and problem gambling.
Nihon University gaming expert Kazuaki Sasaki believes submission of the IR bill will be delayed until May or June. He doesn’t expect passage until the Diet’s extraordinary session late in the year.
Approval would be just the first part of the legislative process, with an IR-implementation bill to follow. The first bill would authorize the government to create the national legal, taxation and regulatory framework for integrated resorts, perhaps including a Singapore-style entry levy for Japanese citizens and a requirement for IRs to include at least partial Japanese ownership. The second bill would enact that framework, enabling issuance of IR licenses under whatever plan the government devises, likely with local authorities doing the licensing and adding their own taxes and perhaps other conditions.
Creating an IR regulatory structure faces many challenges. “Too many local and regional interests are creating headwinds to legalization at the national level,” Mr Galaviz points out. “Japan will not legalize any form of casino gaming until the local prefectures agree on a national framework.” The national bureaucracy is also thought to be reluctant to take on the responsibility of casino regulation, and the National Police are wary of the impact on crime.
To overcome these obstacles Mr Abe formed an IR task force with about two dozen members drawn from relevant government agencies. It has been working since September to craft provisions of a potential implementation bill, attempting to break down bureaucratic resistance. That’s creating “smoothness” for passage of the final bill next year, says Mr Sasaki, the director of Japan’s IR Gaming Academy.
With the task force at work, “Japan’s gaming opportunity is just around the corner,” claims Mr Okabe. He thinks 2016 enactment of the implementation bill would enable an IR to open before the 2020 Olympics, though the timing would be tight. Variables include how quickly national and local authorities can agree on sites and how fast the selected jurisdictions can produce bidding documents for IR aspirants. Localities keenest for IRs, such as Osaka, would likely move fastest. Others, such as Tokyo, where Governor Yoichi Masuzoe has said casinos are “not a priority” with Olympic projects looming, could lag. Overall, even this rosy scenario has a lot of ifs, and plenty can go wrong.
With one disappointment in the books and present uncertainty, the international gaming community has turned skeptical on IR legalization. “It’s being perceived as a missed opportunity despite the fact that some of the people are saying they’ll try to push it in the  session,” Mr Bromberg says. “Because we’ve already heard that now for two sessions in a row, it starts to look like they’re not going to get their act together.”
In a recent report on Macau gaming, Morgan Stanley Asia Pacific noted that Melco Crown Entertainment could be reallocating capital earmarked to Japan for other purposes. (Melco Crown didn’t respond to an inquiry on the matter.) Mr Galaviz agrees it’s sensible that “business development budgets of the major corporates are being allocated to more promising opportunities.”
Behind the international skepticism is the observation that proponents of casino legalization haven’t tackled major factors behind last year’s failure. Though separate polls in 2014 showed nearly identical majorities for and against IRs—and Japan already has pachinko and lotteries, plus pari-mutuel wagering on horse, boat, motorcycle and dog racing—the negative poll result more likely reflects Japan’s public mood.
“When you look at the UK or Australia, everybody gambles on sports, it’s a way of life. In Japan, it’s a negative to gamble,” says Aya Kudo, business development director for J Squared, a specialist in casino marketing for Japanese customers. “The government needs to show Japan what casinos can bring: entertainment, shows, MICE. The government has been bad at explaining that—it’s just casino, casino, casino.”
Mr Govertsen agrees opposition to casinos may stem from “the lack of education/awareness of IR development and the positive effects it can and does have on tourism and economies.” He believes more outreach would help build public support. “It is important to use places like Singapore as an example of the positive effects of IRs when done right,” he says.
Dentsu’s Mr Okabe agrees: “Few Japanese are aware of this industry’s potentiality. More public awareness of IRs is needed, and more precise information on the gaming business should be publicized.”
Japan’s major corporations have largely stayed on the sidelines of the debate, though Mr Govertsen expects passage of IR legislation would prompt “a large number of mainstream Japanese companies to put their hat in the ring.”
“More explicit information on the coffer fill for government and pet causes” could help move public opinion, suggests Geomatrix CEO and Portfolio Manager Robert Howe, who has managed assets in Japan since the 1980s. But the government has yet to produce any hard economic estimates of the potential impact on tax revenue and the economy in general from green-lighting IRs, fostering suspicions that legalization is just another half-baked government stimulus idea, like the endless stream of public works projects that have failed to lift Japan’s economic pall.
QUADRILLION REASONS TO TRY
One basis for optimism is that Japan needs to do something to change its economic and fiscal path. Amid anemic economic growth since the 1990s, following the burst of the 1980s asset bubble, Japan’s public debt ballooned to more than 1 quadrillion yen— that’s a thousand trillion yen (US$8.5 trillion)—double the size of its national GDP.
“From an outside perspective the country is in very poor economic shape: they are now doing their own QE [quantitative easing] and borrowing trillions of more yen at a time when they’re probably the most indebted country in the world per capita,” Mr Bromberg says. “Legalizing IRs is a proven method that will have a beneficial financial impact if done properly. It won’t solve all the problems, that’s for sure, but it would have tangible benefits for the government and for the country.”
The 96.34 trillion yen budget approved by the cabinet last month forecasts a revenue shortfall of more than $350 billion at current exchange rates. Estimates for Japan’s gaming market range from $20 billion to $40 billion annually, so gaming taxes would still fall far short of eliminating the deficit, but they’d be a start. Proponents argue IRs would also spur related economic activity, generating further government revenue.
IRs could also contribute to revamping the sluggish economy. “Japan needs a radical change of industrial structure from an exportoriented economy to an inbound-tourism-oriented economy,” Mr Okabe says, adding, “We still lack a high level of tourism infrastructure to accommodate international tourists.”
“Tokyo is one of the biggest cities in the world, but it has no convention center,” observes Ms Kudo. “Tokyo needs a convention center and more accommodations.” IR development could help address that situation, without requiring government spending, even providing some infrastructure needed for hosting the Olympics.
But IRs in any form won’t happen until the government presents a convincing case for them. Mr Bromberg cites Taiwan’s Penghu IR referendum in 2010 as an example. “The pro-casino lobby was complacent and ineffective while the anti-casino lobby, which was backed by the opposition Democrat Progressive Party, mobilized their forces very effectively and they managed to vote down the referendum,” he says. “It takes action on the part of the parties in favor of legalization, and I don’t think they’ve done it very effectively to date.”
A Western executive with extensive experience in Japan says, “There’s one time over there, and it’s not on your watch.” Japan’s IR proponents could be playing according to that clock.
Or as Mr Bromberg puts it, “You know what, they may do it in the next session. They’re a lot more patient than we are.”
Editor at large Muhammad Cohen also blogs for Forbes on gaming throughout Asia and wrote Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie.