Three Strikes for Japan?

Japan’s developing IR industry has been trammeled by public opposition, a corruption scandal and the ripple effects of Covid-19. But don’t count out this important market. Only MGM (l.) seems to have locked up a city, with Osaka poised to give the U.S. company the nod.

GGB Exclusive
Three Strikes for Japan?

In recent comments about Japan’s planned integrated resort (IR) industry, Bloomberry Resorts Chairman and CEO Enrique Razon called the IR development process there “a bit of a joke.”

Speaking to Inside Asian Gaming earlier this month, the Philippine billionaire pulled no punches. “So what is this process anyway?” he demanded. “Where’s the clarity?”

Razon, who owns the Solaire Resort & Casino in Manila’s Entertainment City, seemed irked by the indecision of prospective host markets, such as Hokkaido, which first was all in to host one of the first IRs, then backed out, citing environmental concerns.

“Tokyo doesn’t want one. Yokohama? Maybe, maybe not. Chiba said they wanted one, and now they say they don’t want one. The process is pretty much muddled still, and nobody really knows what’s going on.”

Operators who once didn’t blink at a multibillion-dollar price tag to be part of the market have expressed concerns about the cost of entry. “It’s a US$10 billion investment,” said Razon. “If I had US$10 billion sitting on me, I don’t know if I would build that casino.”

He’s not the only one to rethinking his Japan-or-bust position. Sands President and COO Rob Goldstein has said $10 billion might just be “the starting point” for a Japan development, with $12 billion a more realistic figure.

Speaking on a third-quarter earnings call last October, Goldstein said, “No matter how good you are at this business, that must give you pause to stop and think, ‘Is that prudent? Can you really deploy, can you get the return?’”

Integrated resorts, heavily promoted by Prime Minister Shinzo Abe as a way to boost tourism, were approved by the Diet, or Japanese parliament, in December 2016. In the beginning, analysts were agog at the potential of the jurisdiction, with some saying a mature market in Japan could be worth $40 million per year—second only to Macau.

More than three years later, those projections have been ratcheted back to as low as $10 billion. Public opposition to IRs remains strong, and grew stronger in the wake of a recent bribery scandal, in which six lawmakers were accused of taking bribes from China-based gaming operator 500.com, which sought a berth in the IR industry.

Making matters worse, the Covid-19 virus, which has pummeled markets around the world, could make this seem an imprudent time to invest.

With so many vital details still up in the air—the basic rules and regulations have yet to be ironed out—“operators are feeling some angst,” said Brendan Bussmann, partner and director of government affairs for Global Market Advisors. “Japan has not finalized or even produced a final draft of the IR regulations. Arguably, we don’t know the full market opportunities.”

Chief among investors’ concerns, he said, is the casino floor limit—no more than 3 percent of total resort space—and how it will be defined, as every square foot of gaming space will have an impact on profitability. “Does that 3 percent include hallways?” asked Bussmann. “Does it include a public space, where I may be hosting a convention or meetings? What am I basing my gross floor area on?”

Questions of taxes and entry fees for locals all must be worked out, and there are even questions about the appetite for baccarat among Japanese gamblers, who traditionally are avid pachinko players.

“We get asked that a lot: ‘What’s going to be the flavor of the day?’” said Bussmann. “Japan is an untapped gaming market right now for a lot of things, other than pachinko; the overall (gaming) mix is yet to be determined, and will depend on what locals want and what may be garnered from tourists from other Asian countries and around the world.”

Yet another aggravating factor is the unfolding corruption scandal. Last December, Tsukasa Akimoto, a government official directly involved with IR regulations and a member of Abe’s Liberal Democratic Party, was charged with taking bribes, along with five other lawmakers. In a survey by Kyodo News taken shortly after Akimoto’s arrest, nearly 71 percent of respondents said the government’s plans for casino resorts should be suspended.

As for the ongoing Covid-19 panic, it’s another X factor, with unknowable outcomes, at least for now. “We don’t know how long or the extent to which any of this will last,” Bussmann said. “First and foremost, I think Prime Minister Abe is concerned about the health and safety of his citizens. The scandal has somewhat taken a back seat to virus concerns, though it’s slowed the process of finalizing the regulations. There also may be some slowdown in the overall process because of virus restrictions, because they’re not able to have public meetings.”

Despite these setbacks, winning an IR license in Japan remains a priority for many of the world’s top operators, including Wynn Resorts, the Sands Corp., Galaxy Entertainment Group and Melco Resorts & Entertainment. MGM Resorts, the presumed operating partner for Osaka and the only bidder there, has been actively engaged in a so-called “asset-light” strategy, selling off real estate in part to have capital to invest in Japan. Osaka and Yokohama are still clearly in the race. Nagasaki International University is considering the establishment of an IR Management Course as part of its Department of International Tourism.

The process is continuing, speed bumps and all. When all is said and done, “Osaka is in a good position to garner one of those three licenses, which obviously gives good credence to MGM as the operator,” said Bussmann. “With the other two, it’s an open race.” He believes Tokyo “will raise its hand at some point,” and Wakayama, Aishi or Nagasaki could be well-positioned for a regional license. A regional IR with a lesser investment could be within reach of a smaller operator—“the Nagas or Bloomberrys of the world,” he said.

For all his complaints about the process, Razon has called Japan “very attractive” and “a high priority” for his company, and said he may be willing to invest up to $4 billion in a secondary market, outside the major metropolitan areas. He called on the Japanese government to “come up with a very clear process on how they are going to shortlist candidates and locations.”

While key details may be murky, one thing is clear, according to Bussmann. “Do we know Japan will be a great market? Yes. We’re confident it will be a great, strictly regulated environment. I don’t think the bloom is off the rose, or that the cherry trees aren’t blossoming as they should be this spring.”

Articles by Author: Marjorie Preston

Marjorie Preston is managing editor of Global Gaming Business. She is a writer, editor, author and expat Pennsylvanian who now considers herself a New Jerseyan. Based on Brigantine Island north of Atlantic City, Preston has been writing about the gaming industry since 2007, when she joined the staff of Global Gaming Business as managing editor of Casino Connection.