WEEKLY FEATURE: All Eyes on Japan, Brazil

Excitement is mounting among global gaming operators as Japan moves closer to a legal casino industry. Enabling legislation was passed December 2. But a second implementation bill could face big hurdles in parliament. Meanwhile, legalization efforts in Brazil had taken a turn for the worse when pro-gaming Senate President Renan Calheiros (l.) was ordered out by Supreme Court Justice Marco Aurelio Mello as he awaits a trial on corruption and embezzlement charges. But the full court reinstated Calheiros.

The hope for gaming expansion in Japan and Brazil both took hits last week as both efforts hits bumps in the road.

In Japan, CSLA analyst Aaron Fischer summed up the feelings of many gaming operators earlier this year when he said, “The Japanese gaming market is going to be the Holy Grail.”

To the surprise of many, earlier this month the Japanese Diet OK’d an enabling bill for legal casinos that basically approved the concept. The legislation now moves to the upper house of parliament, where it may face a tougher road to passage despite ardent support from Prime Minister Shinzo Abe’s ruling Liberal Democratic Party.

After the historic vote, opponents promised to do all they can to block the second part of the legislation, a so-called implementation bill that will fill in the details of casino regulation and taxation; the locations of the gaming halls; and the number of licenses to be awarded.

A note from Union Gaming cautioned that though Abe’s LDP now holds an outright majority in both houses of parliament, “it does not chair the cabinet committee that will receive the Integrated Resort bill in the upper house.” That committee is led by Namba Shoji of the opposition Democratic Progressive Party.

“Getting the bill out of the upper house cabinet committee represents a higher hurdle than getting it out of the lower house cabinet committee,” in the opinion of the Union Gaming team. “The LDP will clearly need to bargain with the chairman.”

Some opponents in parliament “have taken to the media to voice their displeasure after walking out from the initial debate session/vote,” wrote analysts from Deutsche Bank. Moreover, polls show “a rather unenthusiastic public view towards casinos,” and even some LDP members “have been upset with the handling of the bill to date.”

A committee comprised of upper-house Diet members was expected to begin debating the first bill last week.

Lawmakers could take as little as six months to pass both bills and officially launch the industry, which some say could bring in up to $40 billion per year for the world’s third largest economy and outstrip even Macau ($27.1 billion) and Las Vegas ($6.3 billion).

“Previously, regulations required a minimum of a 12- to 24-month gap between the introduction and implementation bills,” wrote analysts from Morgan Stanley. “However, since the draft casino implementation bill is already under discussion and being completed by a task force, it is possible to shrink the timeline.”

To start, two integrated resort licenses could be issued, one for Tokyo and one for Osaka with a possible third license for Yokohama, GGRAsia reported. Over time, additional licenses could be issued outside major metropolitan areas.

But casinos are not just around the corner in Japan. “Given the infrastructure in Japan, and assuming operators are selected by year-end 2019, we would anticipate a build timeline of close to four years, which implies a 2023 opening timeframe,” wrote the Deutsche Bank team.

A number of international operators including the Las Vegas Sands Corp., MGM Resorts International, Hard Rock International, Melco Entertainment and Genting Singapore Plc have expressed interest in bidding for a casino license in Japan. Genting even cited the possibility of a Japanese IR bill as one of the reasons it decided to sell its Jeju casino stake worth S$588 million (US$413.60 million). In November, MGM CEO Jim Murren said the Vegas-based company is willing to invest up to US$9.5 billion in a casino project in Japan.

Morgan Stanley says MGM, the Sands Corp. and Genting would be the front runners “and should benefit in the near term.” Morgan Stanley has valued the market at $20 billion per year.

“Despite Japan potentially being a very large casino gaming market,” the financial services company wrote, “returns for the operators may not be high if they spend high capex up to and if Japan levies a high revenue tax.”

Prime Minister Abe continues to bang the drum for casinos, and recently told lawmakers that gaming resorts “will bring about growth by inviting various sorts of investment and creating jobs.” He also said gaming would comprise a fraction of the total floor area of any casino built in the country—just 3 percent. “These integrated resorts will be able to be enjoyed by families, not just for business activities or conferences,” Abe said.

But opposition party leader Renho Murata slammed the bill as easy money for operators at the expense of the public. “What is really problematic about the casino bill is that such an institution basically thrives on bets lost by gamblers, who will then get addicted to the thrill to the point where they will resort to borrowing money,” Murata told the Japan Times. “How could this possibly be a growth industry? I think it will debase Japan’s national dignity.”

But Japan’s Yomiuri newspaper took a dim view of casinos. “Gamblers’ losses are what makes the casinos money,” an editorial said. “It’s truly unhealthy to build a growth strategy on exploiting others people’s misfortune and bad luck.”

So what’s next? According to investment firm Bernstein, the country’s first casino likely would not open until 2023.

“If the enabling bill passes, the next step would be to move forward with further legislation as there is a two-step process in the casino legislation. The further legislation would need to be fully drafted and debated in 2017 (or could slip into 2018 depending on scope, debate and other pressing matters). After legislation is passed and regulations are developed, the selection process would occur.

“Adding in time for the selection process and development period means the first casino likely would not open until 2023 (we would not envision temporary casinos being authorized as has occurred in some US regional markets),” said the brokerage.

Interested operators are looking at the long-term. Jan Jones Blackhurst, heads of government relations for Caesars Entertainment, told the Wall Street Journal, “We’re very encouraged with the progress. We think the legalization of casino resorts would be excellent for job creation and growth of tourism, and we would be very interested in being part of the process if it moves forward.”

Brazil, meanwhile, has problems of its own. One of the major supporters of the legislation that would allow the introduction of casinos into South America’s largest country was forced out last week. Senate President Renan Calheiros was ordered to resign by the Supreme Court Justice Marco Aurelio Mello while he awaits trial on charges of corruption and embezzlement. Calheiros is an ally of President Michael Temer and was pushing his Agenda Brasil, a series of bills designed to cut public spending and stimulate economic growth in the struggling country. Legalizing casinos was part of that package.

But the nation’s ongoing political turmoil attempted to snag Calheiros as it had Temer’s predecessor Dilma Rousseff. Calheiros, however, refused to step down and the Senate cancelled its agenda, just a day before the gaming bill was scheduled for a vote, in order to appeal the ruling by the court. One day later, the full Supreme Court voted 6-3 to allow Calheiros to remain in office.

Calheiros has been embroiled in the “Lava Jato” or “Car Wash” scandal, which is also targeting two other senators who are also backers of the gaming bill. Should Calheiros be forced to step down, he would be succeeded by Jorge Vianna, a member of the PT or Workers Party, which is diametrically opposed to anything Temer and Calheiros are trying to accomplish. Both Temer and Calheiros are members of the PMDB party and widely seen as orchestrating the fall of Rousseff, a member of the PT party.

The political chaos in Brazil has the three branches of government— executive, legislative and judicial—clawing for power, and despite the positive vote from the Supreme Court, Calheiros was vilified by several justices. Mello called Calheiros’ refusal to obey his order as “unconceivable” and “grotesque.” Chief Justice Carmen Lucia accused him of turning his back on justice, and ,” Justice Luiz Fux, who voted for Calheiros’ reinstatement, said, “Brazil is living an institutional anomaly at this moment.”

One negative impact of the Supreme Court ruling for Calheiros is that he has been ruled out as the immediate successor to Temer. And his term as Senate president concludes in February, so if expanded gaming is to pass under his watch, there must be some urgency.

Gambling has been outlawed for 70 years in Brazil, but the legislation being considered would raise between $5.9 billion and $8.8 billion annually for the country’s social security programs. It would approve an unspecified number of licenses, with some indications of location. It also would approve bingo parlors that would include Class II style video gaming machines.

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