The 23rd chapter of Japan’s Penal Code prohibits any person from partaking in gambling activity, save for a few exceptions. Japanese high rollers are permitted to wager their wallets on horse, boat and motorcycle races, prefectures and large cities still hold small-scale lotteries, and pachinko parlours have found a way to skirt the country’s anti-gambling legislation and dole out cash prizes.

The circumstances here underline the absurdity of Japan’s antigambling laws which, according to critics, are starving the country’s economy of the stimulus it so desperately needs. True, the legislation is steeped in tradition and has stood now for over a century, though the vast majority of the country’s 127-million-strong population, not to mention its leader, are agreed that it’s now time to make way for a casino-led recovery. “Given the amount of pent-up demand in Japan, casino gambling could thrive,” said David Schwartz, Director of the Centre for Gaming Research at the University of Nevada, Las Vegas.

Learning by example
Now, after years of stop-start discussions and any number of administrative changes, the issue of introducing pro-casino legislation has finally made its way to the fore and onto the agenda of the Japanese Parliament, marking the last leg of what has been a marathon ordeal for the bill. The pathway to legalised gambling is a long and arduous one, though few today can ignore the economic advantages it could potentially bring. As was so nicely put in a recent CLSA report: “Hallelujah! Japan’s casino business will be drenched in cash.”

Asia’s foremost equity brokerage estimates that the introduction of a mere dozen or so casinos could contribute $40bn in revenue – not far off Macau’s $51bn equivalent and over six times more than what the Las Vegas Strip makes in a year. Add to that the prime minister’s ambition to make known Japan’s newfound business credentials for international firms, alongside efforts to bump up foreign tourist numbers before Tokyo 2020, and it looks as though the passage of a pro-casino law is looming large on the horizon.

The onset of globalisation, combined with increased average per-capita income and spending in South-East Asia, has seen the likes of Macau make a minnow of former gaming hubs such as Las Vegas. Buoyed by rock-solid economic fundamentals and an influx of wealthy tourists, the former Portuguese colony has come to rank as the world’s fourth-richest territory, and revenues for the region’s major casino players have risen hand over fist.

Proponents of the Japanese casino bill will want to replicate the success of Macau, although perhaps a more accurate comparison is Singapore, which cut the ribbon on two casino resorts in 2010 and a year later matched gaming revenues at the famous Las Vegas Strip. The scale and immediacy of success for casino gambling in Singapore has again reinforced the economic benefits Japan could stand to gain, and acted as motivation for the country to align its gambling offerings with those in neighbouring nations.

There is another major lesson to be learned from Singapore’s gambling endeavours, however: that being a refusal to continually expand upon casino numbers or slacken gambling regulations can slow momentum and cost dearly. After an explosive introduction to the casino business, a marked reluctance to up the ante and build on the industry’s success has turned investors off to the straight-laced Singapore market. As a consequence, gaming revenues have fallen short of Las Vegas’ for two straight years (see Fig 2).

A new era for Japan
For the time being, however, the focus lies not with regulatory technicalities but with pushing a bill through parliament and gaining the necessary support from the public. Japanese Prime Minister Shinzō Abe, for one, has been taking pains to lay the foundations for international business to flourish in Japan, not least casinos, and from what has been said so far, there can be no doubt that the legislation constitutes an important part of the prime minister’s so-called third arrow.

Crucially, no prime minister has supported the push to legalise casinos prior to Abe, and proponents of the move believe that parliament must act now if it is to capitalise on government support and the opportunities that have come by way of the Tokyo Olympics. Beginning with Shintaro Ishihara’s tenure as Governor of Tokyo in the late 1990s and spanning a 10-year-plus period of whirlwind discussion, the casino legislation is as much a part of the political landscape as the issue of unemployment or tax itself. Granted, the approval process is drawn out, the social implications potentially dangerous, and support anything but unanimous, though many are of the opinion that a failure to make good on the support now could cast a long shadow on the legalisation.

“The legalisation process in Japan is a two-step process,” said Jay Defibaugh, Senior Research Analyst at CLSA Japan. “The first-stage law, called the Integrated Resorts Promotion Law, should be passed in an extraordinary Diet session due to take place from late September or early October to early December. Within the Promotion Law is a commitment to pass an Execution or Implementation Law within 12 months. The second-stage law will include various key details including issues on taxation, floor space restrictions, and whether local Japanese will be required to pay entrance fees. We believe that the first-stage law is likely to be passed in the extraordinary session.”

Many, including Defibaugh, are in agreement that a positive verdict is likely to arrive in the autumn session. However, there are some who are less than optimistic about the passage of a casino law any time soon, and believe the obstacles to progress to be too great. “Given the political process and the very emotional issues surrounding casinos, I think the likelihood of casino legalisation in the next year is very small,” said Ellsworth. “If the Japanese Parliament did pass legislation approving casinos, it would require a two-year study to decide all the details and administrative structure of the industry. There is pressure to have casinos up and operating in time for the 2020 Summer Olympic Games, but I think the opposition is too great, and it will be difficult to put all the pieces in place by 2020.”

Although supporters of the bill have put forward a compelling economic case for casinos, whether it is in relation to tourism (see Fig 1), employment or tax revenues, negative perceptions are still widespread, and are shaped primarily by fear of crime. “The Japanese are determined to look closely at the potential downside of legalised casino gambling, including problem gambling, the involvement of antisocial forces, and potential negative effects on the family and children,” said Defibaugh.

However, studies undertaken by CLSA suggest that opinions on casino gambling are not necessarily deeply held, which again emphasises the importance of capitalising on recent media and political attention.

Pachinko to cash in or crash out
Irrespective of the uncertainty, a number of major industry names outside of Japan have made their support known, and many intend to fund the casino rush should the legislation come to pass. Both MGM Resorts International and Wynn Resorts have said that they’re looking to boost their profiles in the country, as part of a wider plan to up their share of the highly lucrative Asian gambling market.

MGM, the largest casino operator on the Vegas Strip, stated in February that it would be willing to inject between $5bn and $10bn into the Japanese market, whereas Las Vegas Sands, the largest gambling firm in terms of market value, is ready to invest $10bn or “whatever it takes” to win a share. The fight to gain a foothold in the market is understandable, given that the country looks set to become the world’s second-largest gambling market, should the bill pass and conservative estimates of $20bn to $40bn prove accurate.

However, interest from major industry names raises another important point, which, according to Ellsworth, is “whether the government should consider partnering with international casino properties to manage and run the operations, or attempt to run the operations with Japanese business operators.” The dilemma centres on the all-important issue of who will benefit from legalised casino gambling and, more broadly, what the country stands to gain by turning tail on the ban.

One of Japan’s home-grown sectors that could either cash in or crash out as a result of the bill is the pachinko industry, which, despite stringent anti-gambling laws, has managed to skirt the restrictions in quite spectacular fashion. Take a look on any one of the country’s bustling commercial districts and you’re likely to see the neon-lit exterior of a pachinko parlour; often-garish establishments that house row upon row of pinball-slot-machine hybrids called pachinko.

The activity has come to represent something of a modern Japanese tradition, in particular among elder generations. However, an ageing player base combined with a distinct lack of investment means that attendance has sunk near enough consistently since the mid-1990s, and the introduction of the casino business to Japanese shores could either kill or kick-start the industry.

Major pachinko industry names claim that the introduction of casino companies could well present the industry with a chance to return to former glories, although there are some that remain unconvinced by the effects of such an adjustment. “To the extent that casino gambling would be pulling would-be pachinko players, it may have an adverse effect on pachinko,” said Schwartz. “How large of an effect would depend on where casinos are sited, how accessible they are, and how many there are. There may be a market for both pachinko and casinos.”

The end of smaller gaming?
There are some, however, who believe the implications of the legislation will affect different parts of the industry in very different ways. “The bigger pachinko operators seem to favour casino legalisation, as they feel recognition of pachinko as a casino operation would follow,” according to Ellsworth. “Some form of taxation would be close behind, and the small ‘mom and pop’ operators could be in danger of going out of business. An estimated 15 to 20 percent of the population plays pachinko, and I don’t believe those players would travel a long distance to play in the integrated-resort-style casinos [see Fig 3]. This could change if they were to legalise local slot parlours, but the effect on the pachinko industry could either be devastating or a lifesaver – it will be interesting to see how this kabuki plays out.”

Other analysts, meanwhile, insist that the overlap between casino and pachinko players will be limited, and that the two customer segments actually share very little in common aside from their contribution to gaming revenues. “Based on the widely accepted view that the initial build-out of integrated resorts in Japan would be limited to about four sites, the direct competition with the more than 12,000 pachinko parlours found throughout Japan will be limited,” says Defibaugh. “Also, pachinko is nearly exclusive to Japanese players, whereas foreigners will be an important component of expected spending at integrated resorts. This speaks to the idea that customer overlap will be relatively limited.”

The fact remains, however, that pachinko operators are perhaps the most capable gambling entities in Japan, and, should legislators decide to sideline international firms in favour of local players, machine makers such as Sega Sammy could well emerge as the biggest beneficiaries of the bill. Once the restrictions on big pay-outs and cash prizes are lifted, pachinko operators need no longer find themselves confined to the smoke-laden, flea-ridden establishments they are forced to operate in today, but could instead be relocated to cavernous and cash-rich casino halls.

At the time of writing, the future for casino gambling in Japan is still very much up in the air. Not knowing whether legalising the industry could open the floodgates for problem gamblers or compromise what few traditions remain for a country in the midst of a major transformation, the casino gambling industry’s prospects are highly uncertain. However, with the correct measures in place and the right partnerships, both the tourism (see Fig 4) and gaming industries in Japan will be cashing in.