Research Services

Japan A Legislative Update

With the legislative process now fully underway, Japan represents the most attractive single gaming development opportunity worldwide.

JAPAN - A LEGISLATIVE UPDATE

February 2014

JAPAN - A LEGISLATIVE UPDATE

February 2014

Contents
Japans bureaucrats are mobilising The Singapore Model is contentious There is considerable enthusiasm for the idea of casinos in the boardrooms of Japan Casino legalisation in Japan: Timeline of anticipated future actions Map Regional agendas: IR locations The Governor Issue is relevant in every potential market 4 5 6 7 8 9 9

Authors
Andrew Gellatly Daniel Stone

Gambling Compliance Research Services made a recent visit to analysts, politicians, academics and lobbyists in Tokyo, Osaka and Kyoto.
As a result of our visit, we make the following observations: 1. Japans bureaucrats are mobilising. The casino-enabling bill is moving steadily in the right direction and has a window of opportunity for passage in the Diet session between April and June this year. Ahead of that, Japans civil servants are accelerating their activity in anticipation of successful passage of the bill and the subsequent crafting of implementation legislation.

Head of Research Services Head of Content, GamblingData

2. Early talk of a Singapore Model of IR development is increasingly being questioned as stakeholders begin to theorise what a Japanese-style IR might look like. Japans civil servants are studying alternative models worldwide. 3. Cash-rich Japanese companies are becoming involved in a more serious way, learning about the opportunities of IRs, although the terms of financial partnerships with western operators are still distant. 4. Regional interest is mushrooming for the obvious reasons of tax and economic benefits. So far 18 cities in 13 prefectures have expressed interest in hosting IRs. Although the central government will be in charge of picking the sites for integrated resorts development, the regions themselves will be in charge of choosing the operators. 5. The Governor Issue will be key to determining which regions succeed in pushing forward IR plans. In December 2013 Tokyo Governor Inoshe was jettisoned following a financial corruption scandal. Tokyo is now heading into a gubernatorial election set to take place on February 9, where the leading candidates have diverging views on casinos. For governors and their advisors, casinos are becoming an important political talking point across the Japanese archipelago, from Okinawa in the south to Hokkaido in the north.

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Notable Data

CITIES IN 13 PREFECTURES HAVE EXPRESSED INTEREST IN HOSTING IRs

GGR $11.3 Likely from the Japanese casino billion gaming market

Use of this information

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$1.5 billion

Anticipated EBITDA from casinogaming resorts in Japan

JAPAN - A LEGISLATIVE UPDATE

February 2014

JAPAN - A LEGISLATIVE UPDATE

February 2014

alk of legalising casino gambling in Japan is not new. There have been discussions on legalising casinos by the major political parties in Japan as far back as 2000, but the Integrated Resorts (IR) Enabling Bill submitted in December 2013, and backed by a 140 member-strong cross party group for casino promotion, (the socalled IR Giren) represents, without question, the best chance yet for the introduction of casino gambling in the worlds third biggest economy. Certainly the conditions are uniquely favourable. The relative political stability shown by the LDP government helmed by seasoned veteran Prime Minister Shinzo Abe is a strong positive, bringing a temporary halt to the revolving door of Japanese political leaders. Abes platform for economic growth is constituted around three key elements monetary easing, fiscal stimulus and structural reform. Japan lags its Asian rivals in terms of inbound tourist visitation, and the Integrated Resorts proposal is widely seen to be a proven mechanism for international tourism and Meeting, Conventions, Incentives and Exhibition (MICE) activity. Hopes of casino legalisation received a fresh boost last summer when Tokyo was awarded the right to host the 2020 Olympic Games, sparking a frenzy of legislative activity. If done at a brisk pace, gaming expansion in Japan could connect perfectly with the Olympics, offering an opportunity to extend the tourism uplift of the Games with the costs met by private funding. Should Japan introduce casino gambling in the form of integrated resorts it will likely become the worlds second biggest gambling jurisdiction behind Macau, the only place in China where gambling is legal.

The size of Japans casino market could be at least $11.3bn We estimate the size of the Japan gaming market could be at least $11.3bn. Our assumptions are based on a notional GGR/GDP ratio of 0.25 percent for Japan. This compares to the 2012 ratio of casino GGR/GDP in other comparable legal gaming jurisdictions specifically 0.41 percent for the US, 0.27 percent for Singapore and 0.44 percent for Macau.1 Recent Asian casino precedents tend to show actual demand typically turns out to exceed original predictions. 1) Japans bureaucrats are mobilising The major political parties, the Liberal Democratic Party (LDP), the Democratic Party of Japan (DPJ), the ultra-nationalist Restoration Party and the Peoples Life Party, jointly resubmitted a casinoenabling bill in December but failed to reach agreement with other parties, including the LDPs minority coalition partner New Komeito, meaning the measure is not a jointly-backed coalition bill that its promoters had promised. The future of the first stage IR enabling bill is by no means 100 percent certain. A free vote on the bill is likely, allowing dissenting communists and Buddhists within the New Komeito party to vote in line with their conscience. Although it is widely believed that consensus building efforts and realpolitik by the LDP will facilitate passage of the bill, considerable political energy and capital will be expended. The second stage is to have the cabinet office introduce an IR implementation bill, designed to develop the specific tourism facility districts. The IR development bill is designed to clarify the concept of promoting casinos, and the aim is to have legislation ready 12 months later at most (a fast- tracked plan with a duration half that of the usual two-year process), to set up the casinos. At a December 18, 2013 presentation to tourism industry stakeholders and the press, the coalition supporting casinos gave very clear guidance that they believed the IR promotion bill would be passed by May 2014.

Once an enabling bill passes everything changes. Until December 2013 focus had remained firmly on the policy and enabling law, but the next debate on how to frame the process is beginning as bureaucrats start modelling implementation scenarios now. The police agency, the tourism agency and the Ministry of Economy, Trade and Industry (METI) that oversees horseracing, powerboat and motorbike race betting, will all be sending staff to the cabinet office during February. Currently no strong opponent to casino development exists in the cabinet committee, consequently a new level of seriousness exists around the issue, and more senior colleagues are reinforcing junior civil servants. While work continued on the drafting of an implementation bill over the Christmas and New Year period, a new and more relevant acceleration of the process is now beginning. Facilitated by the Ministry of Foreign Affairs, Japanese bureaucrats are currently visiting regulators worldwide to learn from the experiences of other IR processes.

These conversations will inform the casino implementation bill, with important details regarding taxes, licence numbers, corporate and partnership/structure requirements, to be determined through late 2014/early 2015, potentially to be passed by the end of 2015. A number of points will be under discussion: 1) Selection of the location of IRs. 2) The regulations to be imposed on the operators including table/ slots limits. 3) Tax rates and how to utilise tax revenues. 4) The issue of addiction and the possible need for problem gambling prevalence studies that might delay the IR process. The commission to oversee integrated resorts will be implemented within one of the government ministries most likely the Prime Ministers office.

An IR located in Tokyo or Osaka could potentially become the highest grossing casino in the world in EBITDA terms.

2) The Singapore Model is Contentious The success of Singapores two integrated resorts, operated by Genting and Las Vegas Sands, has so far framed the discussion of casino introduction in Japan. In Singapore, the government decided in April 2005 to introduce MICE/IR, and in February 2006 it legalised casinos and decided to develop two sites: Marina Bay and Sentosa Island. Through a closely fought bidding process, Las Vegas Sands won the rights to develop Marina Bay and Genting International (now Genting Singapore Plc) won the rights to develop Sentosa Island, resulting in Resorts World Sentosa. Subsequent to the opening of the two IRs in Singapore in 2010, which added considerable room capacity and MICE facilities,

visitation to Singapore rose 60 percent in four years while visitors average length of stay extended. Despite the introduction of new inventory into the market, hotel room rates remained stable and then quickly rose as MICE business accelerated. Currently Singapore, with a 5m population, attracts 15m tourists annually. Japan, with a 127m population, draws barely 10m annual visitors. The Singapore visitation effect is something Japan would very much like to replicate, but while the Singapore model has been firmly targeted towards international visitors, the Japanese model will likely rely, initially at least, on domestic VIP play.

JAPAN - A LEGISLATIVE UPDATE

February 2014

JAPAN - A LEGISLATIVE UPDATE

February 2014

Casino legalisation in Japan:

Timeline of anticipated future actions
December 2013 May 2014 Early 2014 Mid-2015-2016 Submission of a casino enabling bill to the Diet. Enabling bill enacted Government organisation put into place IR implementation bill presented to Diet, passes 2015 on 12-month fast-track process. Selection of special IR zones Selection of private local developers Construction begins/completed; operations begin. Tokyo Olympics Parallel implementation of casino control commission and licensing

2016 2016-2017 2016-2020 2020

Other differences exist. Singapore is a top-down governmental model. Japan is a more turbulent democracy. The intergovernmental tensions that can exist in Japan did not exist in the Singapore process. In Singapore the government has taken steps to moderate the social effects of casino gambling, including the introduction of selfexclusion policies for domestic gamblers. The Japanese government too will need to balance the social costs of casino introduction and may feel the need for problem gambling prevalence studies that might delay the IR process. However, it will be wary of opening discussion of pachinko addiction, something that is already receiving coverage on national TV in Japan and has the potential to be a Pandoras box of concern. Some Japanese companies do not think Singapore is a good example, nor is Macau, which is considered non-clean, and there is a perceived need instead for a Japanese style-IR. Analysts point to the Tokyo Disneyland franchise, which is operated almost 100 percent under licence by the Oriental Land group, as an example of Japanese operational competence. 3) There is considerable enthusiasm for the idea of casinos in the boardrooms of Japan Casinos are being seen as a way to exploit the financial resources held on the balance sheets of Japanese companies. The Keidanren (the Japan Business Federation) staged a watershed meeting on January 22-23, 2014, which saw representatives of 200 companies meet with Takeshi Iwaya, the director general of the IR Giren. For context, one stated objective in the Keidanrens path to growth is that of Urban redevelopment to create attractive cities and promotion of tourism - Rebuild transportation infrastructure, promote MICE (Meeting, Incentive Convention, Exhibition).2 Separately the executives of several Japanese consumer brands, including convenience store chain Lawson and distillery group Suntory, have pledged their support to a new group expected to be formed to support casino legalisation.

There is growing understanding that large-scale MICE facilities, with or without casinos, represent an important international trend, which is under intensified competition, and in which Japan is lagging with its undersized and over-booked facilities.

Pachinko Fears
Among potential investors there remains a concern that objections by the incumbent pachinko gaming machine industry could represent a roadblock to the progress of IRs in Japan. Total pachinko GGR is approximately $38bn based on a 15 percent hold and total drop of $250bn, but the industry has lost a third of its scale, and some of its political power in the past 20 years. The pachinko industrys lobbying power is limited with only around 20 congressmen seen as having any affiliation. Additionally Japans business press continue to scrutinise leading pachinko companies for evidence of inappropriate political contributions. Nor is the pachinko industry one homogenous whole instead it should be seen as comprising three elements: 1) Parlour operators (2,000 families operating 12,000 parlours). 2) Pachinko machine manufacturers (Konami). 3) Pachislo manufacturers (Sega Sammy, Universal). Pachinko manufacturers cannot admit their interest in games of chance or readily participate in the IR process. Only a minority of the pachinko group want their activities to be counted as gambling and therefore requiring a new law. Should casinos be brought within regulation in Japan it would be politically hard to leave pachinko in an unregulated space outside. Consequently it is thought future pachinko regulation will focus on regulating the exchange of prizes for money, a move that is driven by bureaucrats in the police agency. But pachislo manufacturers, on the other hand, have the desire to get involved in the IR process, with an interest that goes beyond selling machines to actually becoming operators/owners.

Source: Casino IR working group, Coalition of Diet Members for the Advancement of International Tourism

JAPAN - A LEGISLATIVE UPDATE

February 2014

JAPAN - A LEGISLATIVE UPDATE

February 2014

Japans prefectures and regional cities are eager to move forward with integrated resorts as soon as possible. Their relatively smaller scale could make possible a timeline of opening ahead of the 2020 Tokyo Olympics, but awarding multiple licences in the first phase also represents political risk to the central government.

Hokkaido
4) Regional agendas: IR locations The locations for Japans integrated resorts have not yet been decided, although the investment community continues to believe Tokyo and Osaka are the front runners for a first phase of licensing and that a simultaneous opening at the time of the 2020 Tokyo Olympics continues to be credible. Still, it is becoming increasingly evident the bidding and construction processes could prevent any casinos from opening in Tokyo until 2022. 5) The Governor Issue is relevant in every potential market The February 9 gubernatorial elections in Tokyo represent an early illustration of the challenges posed to IR development by regional politics and the intersection of national issues. Polling campaigns have already begun in Tokyo. There are currently three outstanding candidates: Yoichi Masuzoe, Kenji Utsunomiya and Morihiro Hosokawa. Morihiro Hosokawa, a former Prime Minister, but also an art collector and potter, is standing with an anti-nuclear power platform, and observers believe he would likely be anti-casino too. Analysts observe Hosokawa could be a big problem. He will likely be supported by some democrats following support from his political ally, the maverick former PM Junichiro Koizumi, and he stands to gain some Restoration Party support too. His main opponent is former health minister Yoichi Masuzoe, a former TV commentator and LDP party member, while Kenji Utsunomiya has also polled well in early results. In Osaka Toru Hashimoto, the strongly pro-casino mayor and restoration party boss, faces re-election in 2015 and, at that stage, opposing candidates could well be IR sceptical. To the south in Okinawa the issue of casino-resort development has become material in the process on whether to let the state begin filling in areas off the coast of Henoko in northern Okinawa Island to build a replacement airstrip for the US base at Futenma. Speculation is growing that Okinawa Governor Hirokazu Nakaima has asked for assurances of a casino-resort, effectively as compensation from the central government. Over the past few weeks, Okinawa and Tokyo media have reported that a plan exists to build a casino in the area now occupied by Futenma in Ginowan. Governor Nakaima has long sought such an enterprise to attract tourists from Japan and nearby parts of Asia. As a result, the prospects for an IR in one of Japans pre-eminent tourism destinations have become entwined with political wrangling over a long running and contentious issue. Still, estimates are that a casino-resort would cost some US$3.14bn, generate about US$2.05bn in GGR annually and employ 13,000 people.

Prefecture Hokkaido Akita Chiba Kanagawa Tokyo Shizuoka Aichi Wakayama Osaka Tokushima Miyazaki Nagasaki Okinawa

City Kushiro, Otaru, Tomakomai, Sapporo Akita Chiba, Narita, Kisarazu Yokohama Tokyo Atami Nagoya

Akita

The largest hurdle seems to be the availability and cost of construction materials and labour. Currently, ongoing post-tsunami reconstruction is a major focus for the country. Further, once the Olympic villages and related infrastructure begin to get built, there is a concern by the government that simultaneous construction of casino-resorts could bid up construction prices. By contrast, outside Tokyo the dynamics are somewhat different. The tax and economic development opportunity represented by integrated resorts makes it hard for beleaguered regional governments to say no, although their taxation benefit is of little interest to central government. At the same time the tenants of Abenomics mean the IR rollout cannot ignore regional cities and must give them equal consideration. Hiroshi Mizohata, the former head of the Japan Tourism Agency, noted that casinos will provide a spark not just for tourism but also for the revitalisation of local economies in the countryside. Consequently, a tension exists in the decision-making process that will see IRs awarded, and many local governments have already started in on their own feasibility studies. A Japanese tour and theme park company, Huis ten Bosch3, is underway with its plans for a casino project on Kyushu Island in Nagasaki prefecture. Kyushu has a 10m population and 2m annual visitors. The female governor of Hokkaido, Harumi Takahashi, made a procasino speech at a recent symposium in Otaru city and met with LDP general council Seiko Noda promising to work on the IR issue. So far there are at least four Hokkaido cities in contention: Sapporo, Otaru City, Kushiro City and Tomakomai City.

Osaka, Izumi Sano

Miyazaki Sasebo Urazoe, Chatan

Osaka

Tokyo Kanagawa Chiba Aichi Shizuoka

Wakayama Tokushima Nagasaki Miyazaki

Okinawa

The difficult choice will be how to prioritise one candidate city. Operators, in the meantime, are leveraging the independence of municipalities to open discussions with numerous potential locations. If there is a request for concept (RFC) process later this year, local governments will have to have their blueprints in place before submitting plans.

Barclays Capital Equity Research: Will Japan Be Next? If So When? Felicia R. Hendrix, Phoebe Tse. January 13, 2014. 2 http://www.keidanren.or.jp/en/policy/2014/006_outline.pdf 3 http://www.huistenbosch.co.jp
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