Inside Asian Gaming

INSIDE ASIAN GAMING | April 2011 22 Cover Story likely to fall in line with declining revenues and consolidation within the industry. At any rate, pachinko —as a mature industry dating back nearly 70 years to the post-war era—seems unlikely to be able to provide the kind of inward investment and economic stimulus the country will badly need in the next few years. 3. Professionalisation and corporatisation of gambling business funding Pachinko ’s semi-legal status means Japanese banks have traditionally been reluctant to lend to the industry. Deutsche Bank did raise ¥70 billion (US$860.4 million at current exchange rates) for Gaia—one of the largest and most transparently operated pachinko chains in Japan—back in 2005. But the financial crisis of 2008 made the banking sector adjust its risk exposure, effectively closing down global funding sources for ‘grey’ sectors such as pachinko . Competitionfromotherleisureindustries and technologies is, though, continuing to drive demand for reinvestment capital in the pachinko operation business. In most regulated casino jurisdictions, after initial project payback the economic power essentially rests with the taxman and the casino operator. With pachinko , the operator is often beholden to the equipment manufacturer and funded by the equipment wholesalers and technical support companies, according toKnowledge Counselling for Solution, (KCS), a Japanese business consultancy based in Tokyo. KCS says even those pachinko operators running significant profits and keeping transparent accounts are considered by the authorities to be running businesses “injurious to public morals,” and for that reason they are not allowed to raise money via IPOs within Japan. Pachinko operators and their vendors thereforehave little access to capitalmarkets. The only other sources of cash and credit are small amounts of bank debt, non-bank sources, and tegata (Japanese equivalents of promissory notes). The tegata is a promise by the issuing company, the pachinko operator, that it will pay the note recipient (usually an equipment supplier) the amount covered by the note generally within 60 to 180 days. Because of the relatively long repayment cycle compared to promissory notes in other industries in other developed economies, the tegata are often redeemed by suppliers ahead of the payment period (at discount) at a local bank. The redeemability of the note and the size of the discount applied by the bank depend on the issuer’s size, profitability and reputation. For large companies, the discount rate may only be 3% to 5%. However, for smaller, less stable companies, the rate could be as high as 25%. According to KCS, the issuance of tegata in the pachinko industry is a huge business, with about ¥3trillion (US$37 billion) of promissory notes in circulation at any particular time. Clear regulation of pachinko at the same time as any enabling legislation for casinos could create a significant market for more formal and more competitive financial instruments to serve the pachinko industry. 4. General legal reform on gambling-type activities Regulation of casino gambling in Japan would arguably create immediate and direct pressure to produce an equivalent law for pachinko , though for some interest groups (arguably including the police) this would constitute an equally powerful argument against reform. An alternative—to put casino gaming on the same legally woolly footing as pachinko by offering prizes exchangeable for cash— has already been rejected by the National Police Agency and the Justice Ministry. Such a proposal was made by Governor Ishihara in Tokyo back in 2003. Mr Ishihara is a member of the old guard of Japan’s post war politics. He didn’t take the Tokyo top job until he was 66, and is still batting on at the age of 78. But Prof. Tanioka in Osaka says pro-casino politicians are a varied bunch. “Many politicians who favour legalising casinos are actually former members of groups that support pachinko and related industries,” explains Prof. Tanioka. “Those who support casinos but not pachinko are relatively young newcomer politicians regardless of which party they belong to,” he adds. “As a tendency, the Left—specifically the Japanese Communist Party—tends to be opposed to pachinko and the Democratic Party of Japan [that of current prime minister Naoto Kan] is more favourable, but it depends on each individual.” Prof. Morse adds: “In the future, pachinko can only become a competitive global entertainment industry by creating an appropriate legal framework for it to pursue its goals. And since casinos are filled with slot machines, there is no way for the Japanese government to build casinos without legalising and regulating the pachinko business—a linkage that the members of [Japan’s] Parliament don’t seem to understand.” It could be, however, that some Japanese politicians understand that linkage all too well. 5. Political reform The recent resignation of Japan’s foreign minister Seiji Maehara for unwittingly receiving political campaign donations from a Korean (i.e. ‘foreign’) restaurateur (albeit one living in Japanmost of her life) was about far more than an old lady’s kindness being misunderstood. It related to a perception in parts of the Japanese media and society that pachinko operations are largely Korean-run and have a disproportionate influence over Japanese politics. It is routinely reported as fact in the Japanese media that at least 60% and as many as 90%of the 16,000 pachinko parlours in Japan are operated by Zainichi Koreans. Cost of the 2011 Japan earthquake disaster Cost Estimates Estimated total disaster damage, in trillions of yen Barclays Capital ¥15 Goldman Sachs ¥16 Word Bank* ¥19 Japanese government ¥16-25 1995 Kobe quake: actual cost, not inflation adjusted ¥10 * Upper range based on other estimates Note: ¥1 trillion = $12.36 billion Source:Wall Street Journal Size counts—bigger pachinko operators are squeezing out mom and pop