Japan’s great gamble

All forms of gambling are illegal or rigidly controlled here now, but the odds are shortening fast on a seismic shift that could see huge, Las Vegas-style casino complexes opening across the land

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Sheldon Adelson, crusading chairman of the Las Vegas Sands Corporation, was in Singapore last month to launch his company’s latest casino-anchored mega-resort, the $5.5 billion Marina Bay Sands Singapore.

What the 76-year-old found himself talking about most often, though, was not what his company had just achieved in the Southeast Asian island state, but what it was going to do next and, crucially, where it was going to do it.

At the press conference for the new resort, Adelson was peppered with questions in this vein. Was he interested in building a Marina Bay Sands-type resort — complete with convention, retail, accommodation, amusement and, of course, gambling facilities — in South Korea / Italy / China’s Hainan Island / the Middle East / North Africa?

Yes, he was interested in all those places, he answered, usually giving a quick summary of what legal change needed to be made in each market before his company could play its hand.

From the sound of it, Las Vegas Sands Corp. has designs on every corner of the globe. But, like any company in the midst of rapid expansion, the world’s largest casino operator has its priorities — key markets on which its sights are set. Talk to Michael Leven, the company’s president, and he tells you that “our first priority right now” is Japan.

And American operators are by no means alone in wanting to bring casinos to this country.

In April, more than 100 Japanese lawmakers from a broad range of political parties got together to form what they called the “league of Diet members for the promotion of the international tourism industry.” This cross-party grouping now convenes once a week to explore what kind of legislative reforms are needed to make the first Japanese casino a reality.

While it seems unrealistic to suppose they will hit their stated goal of drafting a “casino law” by autumn, it does seem likely that, when it is ready — probably in spring 2011 — their law will be passed. When that happens, the door will open onto what one commentator described to The Japan Times as “the last major untapped market” for the casino business.

As Japanese law stands today, casinos and most forms of gambling are illegal. Article 185 of the Penal Code states that “a person who gambles shall be punished by a fine of not more than ¥500,000.” Article 186 makes it a crime to “run a place of gambling.”

There are six legislated exceptions to the prohibition: the parimutuel betting on horse racing, bicycle racing, motorcycle racing, motorboat racing and also the Toto and Takarakuji lotteries — all of which are operated, exclusively, by public agencies.

The wildly popular game of pachinko — generally played in large, cacophonous “pachinko parlors” housing hundreds of machines — has no exemption from the laws banning gambling. Both this slot- machine game that’s like vertical pinball, and its electronic cousins known as pachislot, are permitted because, as far as the law is concerned, they’re not used for gambling.

The trick is that a pachinko parlor only makes “payouts” in the form of tokens. If you want to exchange those for cash (and research suggests that 95 percent of players do), then you need to take them to “exchange centers” which are invariably located nearby.

It’s the separation of the game parlors from the exchange centers that allows pachinko to circumvent Japan’s no-gambling laws.

In 2003, Tokyo Gov. Shintaro Ishihara floated the idea of running a casino whose payouts would be effected in the same narrow legal space as pachinko. It didn’t work. Ishihara couldn’t get the National Police Agency and the Justice Ministry to agree to a system whereby “prizes” won at the casino could be recouped for cash.

Since then, it has been the generally accepted wisdom that any attempt to build a casino in Japan must be preceded by legislative reform. S o why would anyone want to build a casino?

Shozo Azuma, a lawmaker member of the ruling Democratic Party of Japan and a member of the pro-casino Diet league, outlined his reasoning in a speech last week.

“What this country needs is a way of stimulating the economy that won’t use tax money. The only way left to do that is casinos,” he said.

“In order for this country to develop energetically in the future, then I think the casino industry has potential worth exploring.”

Of course, it’s not just the central government that stands to gain through tax revenues from casinos. Regional governments, which are suffering from drastically reduced revenues as their residents age and decrease in number, are desperate to host what they see as potential gold mines.

According to a study by the Tokyo Metropolitan Government that was completed in 2002, a combined casino, hotel and entertainment facility that attracted 2.25 million people each year would generate ¥57 billion in earnings, resulting in a total tax yield of ¥13.84 billion (including local and national taxes on the operator, as well as income tax levied on the earnings of the projected 4,095 employees).

Naturally, Gov. Ishihara’s interest in casinos hasn’t waned: “I still want to make one. (The problem is) the national government won’t move,” the feisty 77-year-old told the press in November.

The list of other prefectures that have expressed interest in hosting a casino is long — according to some counts, longer than the list of prefectures that haven’t. In the last six months alone, prominent claims have been made by and on behalf of Okinawa, Nagasaki (the plan is to build one at the Huis Ten Bosch amusement park), Osaka, Wakayama, Kanagawa, Chiba, Miyagi, Akita and Hokkaido.

Toru Mihara, a professor at Osaka University of Commerce, is one of Japan’s leading authorities on gambling law and casinos. He is not only advising the current league of Diet members, but also advised a similar group in 2006/’07, when the Liberal Democratic Party was in power.

As was the case back then, the current group of pro-casino lawmakers is comprised primarily of members of the two largest political parties, the LDP and the DPJ. Participation is on a voluntary basis, and the goal is that a casino law will be sponsored by Diet members — as opposed to being sponsored by one or more political parties.

“Political parties can’t sponsor this kind of bill, because there will always be division within their own ranks,” Mihara said. “But because we have been through this once when the LDP was in power, and now we’re doing it with the DPJ in power, the chances of a Diet member-sponsored bill being passed are high.”

Also, as the issue is not linked to a single political party, Mihara explained that the outcome of the Upper House election on July 11 is unlikely to affect the debate.

So why did the 2006/’07 bid fail?

“Political squabbling, and an election,” Mihara explained.

The pro-casino camp found its members on opposing sides of one of the key debates of the day: the privatization of the postal service. Mihara explained that it never really recovered from that. “The other reason was simply that the LDP was weakening,” he said.

Mihara painted a rough outline of the bill currently being mulled by the Diet members.

“It’s an interesting model,” he said. “At the moment, the lawmakers are thinking of initially allowing two casinos, but that number may increase.

“There will be a three-step process by which casino location and operators are determined. First, the national government will select prefectures where casinos will be located. Then, the governments of those prefectures will select private-sector operators via an open tender.

“Finally, the winning bidder will need to acquire a casino operating license from the national government — probably through a dedicated casino control authority set up under the Cabinet.”

Mihara was unwilling to name the two prefectures he thought most likely to be selected, saying that it will “likely involve political considerations.”

He did say, however, that “one option” would be to give Okinawa a casino as a kind of peace offering after the DPJ botched its handling of the contentious U.S. military base relocation issue there during its first year in government since its August 2009 election landslide.

He also said that, if a “resort-style” casino complex were to be built in a place like Okinawa, the second casino might be given to a major urban center.

When asked how prefectures would go about selecting casino operators, Mihara said, “It will be an entirely open, international tender.

“The local governments will be keen to determine which bidder is bringing the most to the table in terms of the size of their investment,” he continued. “So the process will naturally be limited to companies, or consortiums, that can raise substantial sums.”

It’s already possible to get a fairly clear idea of who is likely to bid.

Michael Leven, the Las Vegas Sands president, told The Japan Times that, “We have already expressed our interest in building a casino in Japan on several occasions.”

However, he added that his company was only interested in realizing a project on a scale similar to that of the Marina Bay Sands project, which has a hotel with 2,560 guest rooms, a 120,000-sq.-meter convention center, a shopping center with more than 300 outlets, and a casino with 1,500 slot machines and more than 600 gaming tables.

“That means,” he said, “that we need a location with sufficient infrastructure to support it.”

The size and proximity of an airport is one consideration, as is the presence of a sizable local population, both as a workforce and as customers, he continued. “We’d be interested in a place like Tokyo or Osaka. If they were going to do it in Okinawa, we wouldn’t be.”

Of the other major international casino operators, Wynn Resorts is in a unique position to move into Japan. The company is 20 percent owned by a U.S. subsidiary of Universal Entertainment, which is one of Japan’s largest slot-machine makers.

Several years ago, Universal Entertainment Chairman Kazuo Okada is reported to have said he would love to make a casino in Japan with Wynn Resorts’ Chairman Stephen Wynn.

However, Masanao Kudo, Universal Entertainment’s public relations officer, was a little more coy. “We’d be interested” in opportunities to bid to operate a casino in Japan, is all he would comment to The Japan Times last week.

Since acquiring its stake in Wynn Resorts, Universal Entertainment has become the Japanese company most deeply involved with casino ownership and operation. And they are expanding their interests rapidly.

Over the last few years, the company has acquired one of just three casino licenses made available in the Philippines. (It was the only entirely foreign-owned company to do so.) Consequently, it is now working on a casino-resort project named Manila Bay Resort, which will have two casino-hotels, one catering to high-end customers and the other to a more general clientele. One of the hotels may open as early as 2014.

“If the Manila project is a success then of course we would be interested in making other casinos in the Asian region,” Kudo said.

Another Japanese company that is expanding into the casino business is Maruhan Corporation, the nation’s largest operator of pachinko parlors.

In 2007, Maruhan purchased an 18 percent stake in Macau Success Limited, a Hong Kong company that is currently developing the Ponte 16 casino in Macau in stages.

Mihara said that among Japanese companies that might bid for a domestic casino license are other slot-machine makers, such as Konami, large-scale property developers, and also major players in the tourism and entertainment industries.

“They couldn’t do it alone, but they could form consortiums with major international casino operators,” he said.

One company that is already active in Japan’s nascent casino industry is the nation’s second-largest advertising agency, Hakuhodo. Akira Kurita, who heads the company’s Casino Entertainment Project, told The Japan Times he has been working on casino-related issues for 11 years.

“We do consulting work for regional governments to help them understand what type of casino is appropriate to their needs,” he said, adding that Hakuhodo is also involved in assisting foreign casino companies interested in entering the Japanese market and advises the national government on regulatory issues.

Peripheral industries are starting to pop up in Japan, too.

Just last week, a company called CNH Academy announced that it would open a school for casino dealers and managers in Tokyo in partnership with the University of Nevada, Las Vegas — and it was at the launch party for the school that DPJ Diet member Shozo Azuma described the need for casinos quoted above.

Of course, once the casino legislation has been drafted, its supporters will have to contend with opposition to get it enacted.

Mihara explained that the main resistance would come from religious groups and politicians with ethical objections.

The Japanese Communist Party, for example, is a longtime opponent of casinos. “The risks of people becoming dependent on gambling, of bad influence on the young, are all large,” Ashiya Terasawa of the JCP’s policy committee told The Japan Times. “People say that it will lead to the revitalization of local communities, but there are no real grounds for those assertions. It sounds irresponsible to say that casinos are the only solution.”

Mihara said that New Komeito, the political party that is backed by one of the nation’s largest religious groups, Buddhism-based Soka Gakkai, has a number of Diet members who would support the legalization of casinos, though others in its ranks would oppose the move.

Mihara believes that the key to winning over a majority of Diet members will lie in the ends to which the expected public revenue windfall will be directed.

“You need to be able to tell the public that the funds will go directly to something that is easy for them to relate to,” he said. “The idea I am recommending is that they direct all of the extra revenue straight to the nenkin (national pension-fund system).”

To offset concerns over gambling addiction and other social problems, most pro-casino politicians emphasize their potential to lure international tourists to the gambling tables and slot machines.

They point to the astounding figures coming out of the casinos in Macau, which overtook Las Vegas as the gaming capital of the world in 2006 when its total gambling revenue reached $6.95 billion, compared with the Nevada mecca’s $6.5 billion. This year it is projected to be as high as $23 billion.

The vast majority of Macau’s visitors are from mainland China. But, according to Mihara, it is not just Chinese money that potential casino operators in Japan have their eyes on. It’s local money, too.

“In South Korea there are 16 casinos already, but they are for foreigners only; locals can’t use them,” he said. “Half their customers are from Japan.

“In terms of sophistication, aspiration, size of individual incomes and the amount of disposable income, Japan is at the top of every scale in this region,” Mihara said. “That is why Adelson and others want to come here. This is the biggest market left.”

In part, too, the high expectations stem from the massive size of the pachinko market. In 2006, Japanese spent a mind-boggling ¥27.45 trillion ($230 billion, using the rate of the day) on pachinko and pachislot — although that represented a decrease on previous years.

Mihara said that a small slice of that expenditure can be expected to flow to casinos. “The size of the stakes and the potential payouts are much larger in casinos, so that will appeal to a certain sector of pachinko users,” he said.

On the question of whether those various parties with an interest in the pachinko industry — including the National Police Agency, under whose jurisdiction it falls — will try to oppose the legalization of casinos, Mihara said the industry will be divided.

“The NPA obviously can’t claim that casinos will compete with pachinko, because to do so would be to admit that pachinko is a form of gambling, and gambling is illegal,” he said. “I think they will stay quiet.”

Large-scale operators in the pachinko industry, such as Maruhan, will support casinos, Mihara said, because they will regard it as a new business opportunity.

“It’s the smaller pachinko operators who will be against casinos,” he said. “But, still, you are talking about just two casinos initially, so they just won’t be that easy for everyone to get to — very different to pachinko, which is on every other corner.”

For a concrete example of the way things may soon go in Japan, the best place to look is perhaps Singapore, where the government first legalized casinos in 2005, and then granted a license to Las Vegas Sands in 2006. Now, just four years later, one of the largest entertainment facilities in the region is open for business.

Mihara said that Japan will be just as quick.

“This country is very slow to make a decision,” he said, “but once it makes the decision, it is very fast to act.”

In his view, the necessary laws will likely be passed next year, and Japan’s first casino will be opening its doors in 2015.

“We would consider any viable situation that has (the necessary legal and infrastructure) components to make an integrated resort work,” Adelson, the Las Vegas Sands chairman, told the 1,000-plus journalists who had gathered in Singapore last month. If there are “other countries seriously interested,” he continued, “we of course stand ready to help them.”

It seems that he and others like him won’t have much longer to wait before spinning their wheels of fortune here in Japan.

Edan Corkill traveled to Singapore on a working visit as a guest of the Marina Bay Sands resort.