Prime Minister Shinzo Abe 's government is creating a task force to jump start preparations for casinos in Japan, when and if the lawmakers in the Diet approve legislation to enable so-called integrated resorts (IRs). The 1.7% fall in Japan's GDP for the second quarter shows that the initial impact of Abenomics has petered out; IRs are part of the reform the prime minister promised but has largely failed to deliver.
The Abe administration hopes the task force will revive momentum for IRs to be developed by the 2020 Olympic Summer Games in Tokyo after the casino bill languished in the Diet. The task force may also be the Abe administration's way to keep enthusiasm from waning among the gaming companies that say they're ready to spend $5 billion or more to build IRs. Even discounting the dismal second quarter economic landscape, Japan's numbers may not justify that level of investment.
The casino legalization bill, introduced last December, failed to come for a vote in the regular Diet session that concluded in late June, despite backing from Abe, his Liberal Democratic Party ruling coalition and a multiparty casino caucus. Supporters brought the casino bill up for debate days before the close of the session, a maneuver that makes it eligible for consideration in the Diet's special session expected to open within the next two months.
The bill, if and when it passes, will simply allow the government to create a framework for casino legalization. A second bill will be required for legalization, after the government creates rules to regulate the licensing process and operation of the IRs. In the scenario for opening casinos by 2020, the bureaucrats would have to overcome their inertia and widespread lack of enthusiasm for casinos to formulate those regulations within a year of the initial bill's passage. That's where the task force comes in, to light a fire under the bureaucracy and get it to work, even before the first bill passes. If the regulations are ready and the second bill is enacted by early 2016, Japan could have a working IR or two by the summer of 2020. The big issue is less likely to be time than money.
A recent Morgan Stanley report enumerates many issues facing Japan's IR ambitions and examines prospects for the market. Analysts Praveen Choudhary, Thomas Allen and Alex Poon conclude that Japan may not be as nearly profitable as casino companies dream. Consensus estimates for annual gaming revenue hover around $40 billion for IRs in Tokyo and Osaka plus up to 10 smaller ones in other areas, nearly as much as Macau last year, and six times bigger than Las Vegas or Singapore. After all, Japan is still the world's third economy, with a population of 128 million and a thriving gambling culture that includes the world's highest racing handle, plus pachinko, Japan's unique pinball and slot machine hybrid that had estimated revenue of $36 billion last year.
But even things that look simple often aren't in Japan. There were half as many Japanese playing pachinko in 2012 as in 2002, and there's no assurance that pachinko players will become casino patrons. Global Market Advisors partner Andrew Klebanow believes casinos won't fill the role of pachinko parlors as a neighborhood gaming hall. 'Las Vegas offers a perfect example,' he says. 'The city has dozens of resort casinos with over 150,000 hotel rooms and over 70,000 slot machines, yet there are hundreds of taverns, slot parlors and other locations that offer a few machines each. They all do very well operating in the shadows of the largest gaming venue in the United States.' Morgan Stanley estimates perhaps 20% of Tokyo pachinko players will migrate to casinos, meaning slot revenue of $1.2 billion, well below most estimates.
The Morgan Stanley analysis suggests Japan's casino gaming revenue could be roughly half the consensus estimate, just $21-22 billion. It reaches that figure through two different, independent calculations, the ratio of gaming revenue to GDP in Asian and US gaming markets and the ratio of gaming revenue to lottery turnover in Singapore, which has the highest such ratio in Asia. The report also analyzes empirical data, such as falling population and contracting leisure and entertainment spending, which back up the top down analysis.
Singapore, with two hugely expensive (and hugely profitable) IRs opened in 2010 amid much public unease, is a likely model for Japan's legalization efforts. To temper the social impact, Japan may follow Singapore with a casino entrance tax on its citizens and a tough line on junket promoters. Whatever the merits of these choices, they will suppress casino revenue.
Japan will diverge from Singapore on a key issue that promises to reduce profits further. For Singapore, IRs were about creating a 'buzz,' in the words of Prime Minister Lee Hsien Loong and attracting more tourists, goals that have largely been achieved. Japan's government would like a new buzz and more tourists (whether it will get them is highly uncertain, even with the Olympics), but what it really needs from IRs is revenue. The second quarter GDP contraction was blamed on a rise from 6% to 8% in the consumption tax, Japan's version of sales tax, and a second rise is due next year to tackle mountainous government debt. Japan won't set casino tax rates as low as Singapore's 12.5% on VIP play and 22.5% on mass market revenue. Higher taxes will hit the bottom line for casino operators, who will likely face taxes at the national and local levels, as well as corporate income tax.
Those lower returns should temper the bidding frenzy among operators that has led to talk of a $10 billion IR in Tokyo. The Morgan Stanley report estimates IR revenue of $5 billion in Tokyo and $2.5 billion in Osaka. If casino companies require the 20% return on capital achieved in other Asian jurisdictions, then the maximum to invest in Tokyo will be $4.2 billion and $2.1 billion in Osaka. Given high labor costs, particularly in light of the Olympics, those numbers will buy less in Japan than in other jurisdictions, and may lack the wow factor that new resorts in Macau or even Manila will deliver.
Japan will be a good gaming market but likely not the gold mine that international casino companies have envisioned. If the task force can't revive legislative momentum toward legalization and the domestic economy heads further south, a wave of sanity could temper expectations and enthusiasm among casino companies, just what Prime Minister Abe and his foundering economy doesn't need.
Entities 0 Name: Japan Count: 19 1 Name: Singapore Count: 7 2 Name: Tokyo Count: 7 3 Name: IRs Count: 5 4 Name: Morgan Stanley Count: 4 5 Name: Osaka Count: 3 6 Name: Abe Count: 2 7 Name: Macau Count: 2 8 Name: Las Vegas Count: 2 9 Name: Asian Count: 2 10 Name: Lee Hsien Loong Count: 1 11 Name: Asia Count: 1 12 Name: Manila Count: 1 13 Name: Praveen Choudhary Count: 1 14 Name: Abenomics Count: 1 15 Name: Thomas Allen Count: 1 16 Name: Shinzo Abe Count: 1 17 Name: United States Count: 1 18 Name: Alex Poon Count: 1 19 Name: Andrew Klebanow Count: 1 20 Name: US Count: 1 21 Name: Liberal Democratic Party Count: 1 Related Keywords 0 Name: casino Score: 140 1 Name: japan Score: 90 2 Name: irs Score: 64 3 Name: pachinko Score: 50 4 Name: abe Score: 43 5 Name: revenue Score: 43 6 Name: singapore Score: 41 7 Name: tokyo Score: 40 8 Name: billion Score: 35 9 Name: gaming Score: 31 Authors Media Images 0
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