Pachinko parlors with old school machines using metal balls and new versions that mimic slot machines are part of Japan’s current gambling industry with estimated revenue surpassing Macau, even without legal casinos. Japanese legislators took a first step toward casino legalization in December, a move many fear will increase problem gambling. (Photo credit: Andy Rain/Bloomberg News)

When Japanese lawmakers passed the Integrated Resort Promotions Bill in December, they answered decades of prayers from casino operators around the world. Casino legalization in Japan is Asian gaming’s most wanted rule change, given that casinos in mainland China casinos are an impossible dream. Even after more than a quarter century of recession and stagnation, Japan is still the world’s fourth largest economy – between India and Germany – offering a sizable domestic market of 125 million with a penchant for other forms of gambling. Japan is also an attractive tourist destination that the government hopes integrated resorts will enhance. But legislation passed last month was just the first step in a process that promises to be as lengthy and as uncertain of a winning outcome as this first step was.

Prime Minister Shinzo Abe has supported casino legalization since his first stint as Japan’s leader a decade ago. Rather suddenly in the final quarter of last year, power politics, personalities and a lack of other pressing business aligned in favor of Abe finally expending some of his political capital on casinos. The bill passed with support of Abe’s ruling Liberal Democratic Party and conservative opposition party Nippon Ishin no Kai rooted in Osaka, where IR enthusiasm runs high among local elected officials, while LDP’s Buddhist based coalition partner Komeito and the main opposition Democratic Party voted again casino legalization.

Opponents say that casino legalization will add to Japan’s problem gambling. Japanese currently wager an estimated US$30 billion, more than revenue in Macau last year, on horse, boat and bicycle racing plus local passion pachinko, evolved from a version of pinball to predominantly slot machine play for cash payouts, unofficially tolerated with a nudge and a wink. Proponents say casinos will help revive Japan’s stagnant economy, generating billions of dollars worth of investment and thousands of jobs, as well as doubling foreign tourist arrivals to 40 million. The public remains unconvinced, with a survey by broadcaster NHK finding just 12% supported the IR legalization bill, 44% opposed it and 34% were undecided.

Spectrum Gaming Asia CEO Paul Bromberg says casino backers have done a poor job of getting their message out to the public and that last month’s bill leaves several contentious issues to be resolved, any of which could sink IRs. Legislators have to pass a second bill that will outline steps to combat problem gambling, decide how many IRs to license, where to put them, who will regulate them, whether Japanese citizens will allowed free access or need to pay an entry tax as in Singapore, and perhaps most important, whether Japanese companies will need to own some or most of the IRs. Wells Fargo Securities Senior Analyst Cameron McKnight suggests foreign casino operators could own as little as 20% of Japanese IRs.

Nevertheless, experts expect almost every gaming company interested in expansion to pursue a role in Japan’s IRs. Bromberg notes that it’s one of the few opportunities in Asia that could move the needle for the major players and has the potential to elevate a lesser known company that’s selected into the global top tier, as Macau did for Sheldon Adelson’s Las Vegas Sands, which just had one casino when it was tapped for a Macau license.

Global Market Advisors Managing Partner Steve Gallaway points out that Japan won’t depend on Chinese players to succeed, with most business coming from the local market. “[Japan] will be an additional outlet where the Chinese will gamble and will grow the overall Chinese gambling pie rather than cannibalize existing locations,” he adds. But making IRs succeed means Japanese stepping up to the plate, starting with lawmakers passing the second bill. Until then, it’s a waiting game, one Japanese play better than Westerners.