The way of the samurai

Japan’s gambling liberalization has been one of the most awaited deregulation moves since Macau opened its sector to competition in 2002. Bets and expectations remain high, but time is still on the Japanese government’s side

Since Japan’s parliament passed a law legalising integrated resorts in the country, analysts and news outlets have placed the value of the country’s gaming market at over US$40 billion (MOP319 billion) when fully ramped. While this is higher than Macau’s current annual gaming gross revenues – estimated at nearly US$28 billion (MOP223.21 billion) in 2016 – scholars and analysts talking to Business Daily concur that until all the facts are in, estimating the size of Japan’s market and its potential impact on the Macau gaming paradigm is difficult to judge.
“Quite frankly it is far too early to try and forecast the Gross Gaming Revenue (GGR) potential of Japan simply because we do not yet know what the government has in mind in terms of regulatory parameters,” says Grant Govertsen, Head of Asian Equity Research, Macau, at Union Gaming Securities Asia, a securities firm.
Speaking to Business Daily, Govertsen explains that, depending on the coming details of the bill, Japan’s market could be either bigger or smaller than Macau’s. “The market is likely going to be big, but how big it will be is going to be entirely dependent on the regulatory construct. Until the second bill – that contains all of the regulatory details – is passed by the legislature, all forecasts as to the size of the Japanese gaming market are to be taken with a large grain of salt”.
For Toru Mihara, a Professor at Osaka University of Commerce who has been advising the Japanese government on the issue for the last 15 years, it is also too early to comment on detailed elements, including figures such as the taxation rate, number and location of casinos, or potential contenders, which would allow for a better idea of the size and structure of the market. “Any indication or suggestions at this stage should be considered as just unfounded rumour,” he notes.
Wang Changbin, a professor at the Gaming Teaching and Research Centre of the Macau Polytechnic Institute (IPM) believes that because “the VIP market of gaming is basically a global market, in which each country with casino gambling competes for high-rollers around the world,” the approval of Japan’s gambling bill will definitely have an impact on Macau over the long-term, especially with regard to the VIP market.

To VIP or not to VIP
The main differences in opinion from analysts and consultants speaking to Business Daily stem from forecasts regarding the premium market. All seem to agree that VIP customers will most likely compose a share of patronage at Japan’s IRs, as Professor Wang points out. But financial returns and market allocation are still a point of divergence.
Professor Mihara opines that Japan’s market would never be a threat to Macau, due to the gaming mix, noting: “Japan is a totally different market, where healthy premium mass and mass [market] are abundant. Approximately 80 per cent of patrons shall be Japanese”.
Yet Ben Lee, an analyst at iGamiX specialising in the Asian gaming market and the VIP segment, suggests that, on the contrary, Japan could be a potential threat to the city. “Japan has been one of the top destinations in Asia over the past few years, and the fact that they are looking at introducing casinos despite the overwhelming public opposition is [because of] the undeniable lure of gaming revenue.”
It seems though that Japan would only slightly bend to the ‘Chinese’ promise.
“Chinese VIP could come to Japan if they are interested. But their presence can never be a mandatory precondition,” notes Professor Mihara. According to him, Chinese patronage would be, at most, a small part of Japan’s market, since the country has an “abundant healthy layer of potential patrons,” he commented.
Indeed, explains Grant Govertsen, “we expect the lion’s share of gross gaming revenue to be driven by local Japanese players, though we would also expect there to be a real amount of mass market Chinese gross gaming revenue driven by the fact that millions of Chinese tourists are already going to Japan”.
Moreover, under the assumption that VIP junkets would be allowed to exist, the Union Gaming analyst opines that “we would expect a modest amount of Chinese VIP play”.
To Ben Lee, political stakes, both in China and Japan, will likely converge into the creation of an important VIP segment in Japan. On the one hand: “with all the likelihood of strict measures to restrict local gaming, multi-billion dollar resorts will have to look for significant revenue from outside Japan,” notes the analyst.
On the other hand, with continued pressure from China’s Central Government on high-roller patrons coming to Macau, Japan – given its vicinity and tourist pull – will be “a very attractive alternative destination for VIPs from all over the region, particularly China,” furthers the analyst.
Professor Wang is on the same page, noting that: “Japan is not far, just a three-hour flight from most of the major cities in China. It is quite convenient for high-rollers to go to Japan with the current easy visa policies. And in Japan, the high-rollers do not have to worry too much about the exposure of their identification”.

High hopes, high stakes
In all likelihood, analysts say, the regulatory construct forged by Japan’s Diet will follow the Singapore model. According to Grant Govertsen: “we will end up with perhaps only two massive IRs (integrated resorts) and perhaps a few smaller IRs.”
Further alluding to some of the elements adopted by Singapore’s government in its gambling liberalization bill, Govertsen notes that “things like the tax rate on gross gaming revenue, whether or not locals will have to pay an entry fee, and whether or not VIP junkets will be allowed, will have meaningful impacts on how big the Japanese gaming market can be.”
Ben Lee also believes this is the way that Japan’s government will follow in setting the details of the bill: “From all indications, they are captivated by the Singapore model and will most likely follow suit”.
To Mihara, the model will be close to something “highly” Japanese. “Macau can never be our reference. We have already researched around the jurisdictions globally. The regulations shall be our proper ones but following international standards in this field”.

The cultural approach
Japan’s cultural specificities and historically ambiguous approach to gaming could make it difficult for foreign companies to gain access to its market. For one, before the ban on casino gambling was removed on 14 December 2016, debate on the deregulation bill dragged on for over 10 years through the Diet. Opposition to gambling’s negative impact on society has also been strong, though counter-pointed and eventually overcome by Japan’s need for economic revitalization.
With an unarguable propensity for gambling amongst the Japanese, how to secure a share of and succeed in the casino gambling market in Japan, is the million-dollar question for foreign contenders.
In a report by FTI Consulting, the agency notes that: “from the casino operators’ viewpoint, Japan’s wealthy population renders it an enticing market, as does its geographical position to China, where some of the world’s most prolific gamblers are based”.
However, remarks Ben Lee, “Japan is a closed market and foreign presence in the county is very limited, let alone Macau entities.”
Still, according to the report published by FTI Consulting in 2014, the major casino operators in Macau have been seeking entrance into the potential Japanese market, with operators such as Wynn Resorts Ltd., MGM Resorts International and Las Vegas Sands Corp., all having announced “sweeping plans for investment”.
The iGamiX analyst also believes that “just about all the Macau gaming companies have been sending their emissaries to Tokyo over the recent years, just in a more quiet and diplomatic fashion than their American counterparts”.
Amongst the global gaming industry giants, a multi-billion investment and a “cultural commitment to Japan” covers the proposal of MGM Resorts International. In a press release from 14 December 2016 – the day the bill was approved in the Diet’s Upper House – the corporation stated its intention to pursue future expansion efforts, “with an established, full-time development team in Tokyo pursuing discussions in Japan’s cultural and business communities”.
MGM also said the announcement of the approval of Japan’s casino gambling bill allows the company “to advance relationships with key stakeholders and together create a coalition of Japanese business partners who will collectively define a vision for a uniquely Japanese, world-class integrated resort”.
Also in a statement released in December 2016, Steve Wynn, Chairman and CEO of Wynn Resorts, noted he expects “the Diet’s focus will be on securing a unique resort of unquestioned quality” in which Wynn sees a great opportunity “to create an unforgettable Japanese destination Integrated Resort complex”.
Contacted by Business Daily, spokespersons from both MGM and Wynn informed that the companies do not have any further statements to deliver at this point in time. Sands China had not replied by the time this story went to print.
As for potential locations, FTI Consulting reports that most major casino operations have expressed an interest to invest in the development of casino resorts in Tokyo and Osaka. But the report also signals that a number of prefectures, including Hokkaido, Chiba, Nagasaki, and Okinawa, as well as Yokohama, “were all said to have earmarked budgets as of April 2014 for casino-related studies this fiscal year”.