Japan considers new levy as casino proposals threaten to take gray-zone industry legit

Pachinko parlors face taxing times

by Farah Master and Nathan Layne

Reuters

Moves toward legalizing casinos in Japan have reignited a debate over the legal status of pachinko, with a potential new tax mooted for a $200 billion gaming industry that has existed for decades on the fringes of the law.

Pachinko, a slot-cum-pinball form of gambling, is a national obsession, with 1 in 6 Japanese playing the game, though that number is declining as younger generations prefer to play games on their mobile phones.

With past links to organized crime, pachinko is not classified as gambling, which is illegal in Japan. Instead it’s treated as an amusement activity like arcades and hostess bars, and the operators of the parlors that are found in city streets across Japan pay no gaming tax.

As some lawmakers push to allow casinos that would contribute billions of dollars to state coffers, pachinko, too, could come under a new regulatory umbrella.

Takeshi Iwaya, a leading proponent for casinos from the Liberal Democratic Party, reckons any move to change pachinko laws should come once casinos are up and running, which could be as early as 2020, when Tokyo will host the Olympic Games.

While years away, such reforms may have greater implications for the pachinko industry than the likely loss of customers to new casino resorts, analysts say. And reforming the industry won’t be easy, given the web of special interests involved — not least the national police agency, which oversees it.

“I see no easy way out for the pachinko industry,” said Ichiro Tanioka, an expert on Japanese gaming industries and president of the Osaka University of Commerce, a leading proponent in the casino debate. “It’s a mess.”

In pachinko, players buy baskets of small silver balls that they feed into the machine and guide into a hole that spins out numbers or characters on an electronic screen. Matching series win the player more silver balls, which can be exchanged for snacks, alcohol or small items in the pachinko hall.

Most players, however, opt to trade in their winnings for “special prizes,” which they then swap for yen at small booths outside, but close to, the hall. Legally, these booths are separate from the hall operator, skirting anti-gambling laws.

The police stop short of fully endorsing this system as legal, placing it in a regulatory gray zone that has effectively barred pachinko hall operators from listing their shares on a Japanese stock exchange.

To help bring the game out of the regulatory shadows, a lawyer with ties to the industry suggested a “pachinko law” that would allow balls to be exchanged for cash inside pachinko halls. The main lobby group for parlor operators, though, wants to keep the existing system, but give it legitimacy through a state-supervised program.

Either plan would generate about $2 billion in annual revenue for the government, according to copies of the proposals.

Yoji Sato, one of Japan’s wealthiest tycoons and chairman of Dynam Japan Holdings, a pachinko hall operator listed in Hong Kong, backs reforms that bring all the industry’s moving parts under one law. He acknowledged the industry faces close scrutiny.

“Any industry that cannot be accepted or understood by society will cease to exist,” Sato, 68, said in an interview. “Dynam is in principle behind any move to clarify the industry’s role in society.”

Seiko Noda, another LDP lawmaker involved in both pushing for casinos and the pachinko debate, said there is no consensus yet on how best to regulate pachinko.

Among the 4,000 or so firms involved in the industry, the smaller, financially weaker hall operators are more worried about change, and particularly about any new tax plan, Noda said. “The hall owners are quite afraid they will be ordered to pay more tax to the government, so I’m considering it very carefully,” she told reporters at her office in Tokyo.

Dynam and other leading pachinko operators, meanwhile, are vying to open multibillion-dollar casino resorts — should regulations permit.

A recent Morgan Stanley report predicted that Japan’s casino market could be worth $21 billion to $22 billion — though that’s less than half the size of Macau’s, and well below a consensus view of around $40 billion, by 2025.

Sato said his focus is on that domestic casino opportunity, adding his company has held talks with casino operators including Macau’s Galaxy Entertainment and Melco Entertainment.

Rival hall operator Maruhan and two of Japan’s biggest pachinko machine makers, Sega Sammy and Konami, have also met casino operators, industry executives say. To gain experience in the resort business, Sega Sammy is building a $1.7 billion casino in the South Korean coastal city of Incheon with local gaming firm Paradise Co.

This diversification isn’t just driven by potential pachinko reforms. Pachinko revenues are falling as Japan’s population ages and as younger people turn to mobile devices for entertainment. On a recent visit to a brightly lit pachinko hall in an outlying Tokyo suburb, most of the players were middle-aged men.

While pachinko is unlikely to be badly hit in the short term — parlors are informal and widespread, while casinos will be upscale and out of town — a recent increase in Japan’s sales tax may squeeze small operators and accelerate consolidation.