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Japan’s Big Bet on Casinos

By Bruce Einhorn, Grace Huang, and Daniela Wei, Bloomberg

For more than a decade, most of the action in the gaming industry has been centered on Macau. Fueled by Chinese high rollers’ seemingly insatiable desire to gamble, the former Portuguese colony—the only place gambling is legal in China—mushroomed into the world’s biggest gaming market before a Chinese government crackdown on corruption pulled many VIP gamblers away from its tables.

Now the industry thinks it’s found the Next Big Thing to help take up the slack: Japanese casinos. After years of delays, the Japanese parliament on Dec. 15 approved a bill to legalize casino gambling in the world’s third-largest economy. Rather than standalone gambling halls, the casinos are expected to be part of integrated resorts, much like Singapore’s two complexes operated by Las Vegas Sands and Malaysian gaming giant Genting. Those properties have transformed Singapore into the world’s third-largest gambling center, after Macau and Las Vegas. But Grant Govertsen, a Macau-based gaming analyst at Union Gaming Group, says Japan would be unlike any other casino market in Asia; because of its large population and high per capita income, it won’t have to rely on gamblers from China and other countries to fill its tables.

Investment bank CLSA estimates potential gaming revenue in Japan could eventually reach more than $25 billion a year. That’s almost four times the gaming revenue the Las Vegas Strip took in last year. For the casino companies, says Govertsen, “Japan is likely the single largest revenue-and-cash-flow greenfield development opportunity for the foreseeable future.”

That’s welcome news to global casino operators such as Las Vegas Sands and MGM Resorts International, which have been lobbying intensely for the legislative change. “Japan will be a supersized Singapore,” says Daniel Cheng, Hard Rock Cafe International’s senior vice president for Asian business development, “and it can even outstrip Macau.” The U.S. cafe and casino chain is looking for partners to jointly bid for a Japanese license. MGM already has a development team in Tokyo and has been sponsoring Kabuki events to raise its profile. Wynn Resorts, which has two casinos in Macau, is also eager to jump in. Chief Executive Officer Steve Wynn said in a statement: “To us, the opportunity is thoroughly Japanese and thoroughly delicious.”

One reason Wynn and his counterparts are so enthralled is that Japanese have a proven history of embracing wagering. Consumers in Japan are already allowed to bet on boat and bicycle races, and its horse-racing industry took in $25 billion in 2015, mostly in wagers, according to the Japan Productivity Center. There also are more than 10,000 pachinko parlors operating what are effectively ball-bearing-based slot machines that get around legal gambling prohibitions by paying off winners with physical prizes that can then be exchanged for cash at a different location. Gamers spent more than 23 trillion yen ($196 billion) on pachinko in 2015, about 30 percent less than a decade earlier, according to data published by the center.

Japan’s legislators have a year to work out the details of how the casinos would be regulated before would-be operators can apply for licenses. Opening two integrated resorts in major population centers could bring in $10 billion in revenue, with the potential for $25 billion if they’re allowed to operate nationwide, according to a CLSA report. Construction, however, may keep casinos from opening for almost another decade.

As they plan, officials are looking closely at Singapore. In 2014, Japanese Prime Minister Shinzo Abe toured the city-state’s two integrated resorts, which combine casinos with hotels, convention halls, shopping, theaters, even a theme park and aquarium. Singapore generated about $4.8 billion in gambling revenue last year. The nation’s more than 120,000-square-meter Sands Expo and Convention Centre in Singapore, part of the company’s gaming complex, is 50 percent bigger than Tokyo’s largest exhibition and conference facility, according to Bloomberg Intelligence. CLSA analyst Jay Defibaugh says integrated resorts will allow Japan’s gaming facilities to gain scale more quickly. “We are talking tens of thousands of people at a time” being put in close proximity to the new gambling halls, just from convention centers.

Japan is allowing casinos despite lackluster public support. In a recent survey by public broadcaster NHK, only 12 percent of respondents favored lifting the ban, with 44 percent opposed, and the rest unsure. But the prospect of jobs and additional tax receipts won over politicians. Satoshi Sakamoto, senior executive director at Tokyo-based gaming-machine maker Konami Holdings, said in an e-mail that a successful integrated model can “secure employment, economic benefits, and tax revenue.”

Tourism is a lure for revenue-hungry legislators as well. Singapore had 15 million visitors last year, almost three times the island’s population. Its integrated resorts and blue-chip events, such as the Formula One nighttime street race, lifted hotel revenue in 2015 to S$3.2 billion ($2.2 billion), from S$1.6 billion in 2009, the year before its first casino opened.

While Singapore imposes a S$100 casino entrance fee on locals to deter problem gamblers, Japan has not decided whether to put similar strictures on casinos targeting its much larger populace. Toru Mihara, a professor at Osaka University of Commerce, says that would mean “cash flow is earned firmly from Japanese locals first, then foreigners become a plus-alpha. There’s no need to emphasize Chinese VIPs. If they want to come, they’re welcome.” But he says the big market will be from wealthy middle-class customers including lawyers and business executives.

Avoiding a dependence on Chinese high rollers would be wise, especially as China tries to stanch capital outflows by clamping down on wealthy gamblers. At Genting’s Singapore resort, where visitors can dine on celebrity chef Joël Robuchon’s sea urchin zephyr with wasabi foam, VIPs accounted for 36 percent of gambling revenue in the third quarter, down from 63 percent in the first quarter of 2014, according to data from BI. Macau has seen its total VIP gambling revenue plunge 46 percent since its 2013 peak.

The bottom line: Casinos in Japan, just authorized in December, could someday reach an estimated $25 billion in revenue annually.