Pulse

Does Japan still want casinos?

By William - 1 November 2021

A scramble to submit bid applications has reversed polarity. Now the most coveted licences in the world have run into serious head-winds. How did it get to this?

G3 speaks to gaming consultant Jonathon Strock, who spent six years investigating a bid for France’s Barriere Group in Wakayama, Japan. He assesses the bidders, the reasons for the withdrawals and the likely outcome for Japan’s great IR project.

Licensing requirements, huge financial investments and a nervous public – has the initial interest in Japan waned to the point that it’s become difficult to see the advantages?

Yes, it has waned. When I started looking at the market in 2014, you had every company in the world seeking a spot in Japan: LV Sands, MGM, Caesars, Rush Gaming, Galaxy, SJM, Melco, Barriere, Crown Resorts, Casinos Austria etc. Everyone wanted a piece of the action.

Now, a few years down the road and we have three cities that remain with bids for the licences; Osaka, Wagayama and Nagasaki. What happened to Tokyo, what happened to Yokohama?

And more importantly, what happened to Hokkaido, which from a tourism point of view was the perfect location for the stated purpose of opening Integrated Resorts in Japan – to encourage tourism to remote areas. Hokkaido is the perfect place – so why is no one interested in creating an IR in the place that most fulfils the brief?

Why has Sands, Melco, MGM, Crown, Galaxy etc., all pulled out? I think the reason is that the Japanese government looked at the international interest and rubbed its hands. It believed that it could do whatever it wanted with regulation because such was the interest in the bids.

They thought that meant the big gaming companies would do whatever was required to get their projects over the line. And I think they over- played their hand.

Most details in the regulations are acceptable. They’re not especially business-friendly, but perhaps they could be accepted. However, there is one thing that has definitely gone too far, and that’s the obligation for the licence to be awarded for a five year duration.

And that the prefecture has to pass through its assembly a renewal order that then passes to the Tokyo government for final approval. This means that operators are essentially looking at a five-year licence.

What happens if the government that has awarded the licence loses the next election? Are you out? Possibly…

Our Wakayama project represented a US$4bn investment, the one in Nagasaki is a little more at $4.5bn and the MGM project in Osaka is currently $9bn, but oscillated up to $13bn at one point. The now dropped Yokohama bid was around the same amount – and a Tokyo IR would probably demand a $15bn investment.

This money has to come from somewhere – and despite the size and scale of some of the bidders, the majority of the capital must be borrowed. Unfortunately, the bank or the lenders for these types of projects want to be repaid during the term of the licence.

There’s a big difference between borrowing on a 20-year licence in Europe or the US, as opposed to repayments of extremely large sums in a very short period as we see in Japan. It becomes economically unviable.

When I tried to make our projections work on a five-year payback, the whole model falls apart, and I presume the other operators have come to the same conclusion.

Is the IR project in Japan a lost cause? Probably not. Osaka remains viable thanks to its economic status. It’s the third largest city in Japan after Tokyo and Yokahama (which actually touch to become one massive urban area).

Osaka, though, is large, financially rich and very powerful. Tokyo wouldn’t be able to say no if Osaka pushes ahead with its bid for an Integrated Resort. Next is Nagasaki and then Wakayama. Neither of which have large populations or the economic power of Osaka. I don’t see both locations being awarded a licence.

I think the government is most likely to keep one licence in reserve, just in case Yokohama, Hokkaido or Tokyo change their mind in the near future.

The law doesn’t allow for additional casinos for at least seven years after the opening of the first casino (which is now likely in 2027 – making the next possibility to open up another licence bid in 2034). If the government does keep a licence in reserve, then the fight is between Wakayama and Nagasaki for the one licence.

A lot of water has passed under the bridge since Integrated Resorts were first proposed in Japan and the person behind the regulation, Prime Minister Abe, has stepped down and his successor, Yoshihde Suga, will no longer be in the role by the time this is published.

This presents the incoming Prime Minister, Fumio Kishida, with the perfect opportunity to reappraise the laws, as any modification to the laws up to this point would have meant a loss of face for Prime Minister Suga.

In fact, it was nigh impossible for him to make changes to the law. However, as he’s now replaced, it become possible again for the Japanese government to look at reviewing the licence duration and some of the more general points that can be improved.

How much of a delay could a review of the legislation inflict on operators?

Well, we’re currently not looking at the first casino opening until at least 2027, so it’s probably worth waiting until 2029 to have a decent, profitable series of Integrated Resorts, as opposed to one opening sooner without the required investment.

If operators start to try to find savings and make cutbacks, rather than creating a world class offering, then the intention of the IR project will be lost.

If the licences are reconsidered, do you think we’d see a return of operators that have abandoned their projects to date?

I’d say most definitely yes. Most casinos are fairly small companies worldwide and I met a lot of US and Asian colleagues in Japan and generally speaking, if some of the key sticking points of the licensing rules were modified, they would be straight back on the plane.

Do you think the Nagasaki prefecture acted inappropriately in the awarding of the bid to Casinos Austria International as some of the losing bidders have claimed?

I spent a lot of time with the authorities in Nagasaki and even more time with Wakayama, and I don’t personally believe there will have been any problem with the awarding of the tender process.

I think what we’re looking at is bad losers failing to accept a fair result and they’re kicking up a storm. I think they’re trying to undermine the process in a bid to spoil the bid for everyone involved. I have absolutely no question about the integrity of the authorities in Nagasaki or Wakayama. I think they have run a very thorough licensing campaign.

If the choice is between Wakayama and Nagasaki, who’s the winner?

In 2014, on my big tour of Japan, I pretty much decided upon Wakayama back then. I think it’s the best place for several reasons. Firstly, it’s half an hour from Osaka airport, which is one of Japan’s largest international airports. It is two hours flying time from Shanghai.

The local government is also very much behind the project and is well connected in Tokyo, which shouldn’t be understated. The Secretary General of the Liberal Democratic Party, the ruling party in Japan, is from Wakayama and still represents the prefecture in the parliament.

Wakayama makes political and economic sense. The city used to be a major steel producer, but it lost Nippon Steel in the 1980s when the factories moved to South Korea, and as an industrial centre it has been in decline ever since.

Osaka is only an hour away, which has meant a drain on the population as the young have moved away from Wakayama to the bigger city. It is essential for the existence of Wakayama to secure a project of international standing that brings investment, tourism and jobs.

Alternatively, if you look at Nagasaki, which is about two hours from the nearest international airport, which is a long way for an IR. There is a much closer domestic airport, but that’s not able to be upgraded for international carriers.

Nagasaki is close to South Korea, but as the bids have made clear, the IRs are not being targeted at Koreans – it’s the Chinese market they’re most interested in attracting to Japan.

It is beneficial that South Korea’s casinos currently only allow foreigners to play in their domestic casinos, but as more players leave to play in Japan, I can see the South Korean government changing those rules.

Will domestic players in Japan feed the Integrated Resorts or does tourism have to play a large role in keeping the engines stoked?

I think the Japanese domestic market is very interested in casino gaming. Pachinko plays the part of slot machines in Europe or AWPs in the UK. The Japanese are very much tables players. If you ask operators in Macau, they all have regular Japanese table players at their resorts.

Over half of South Korea’s customer base is from Japan, Philippines is very high too. That said, the intention of the government was to drive tourism to Japan. What I think we will see in reality is a 60/40 split, local versus international, because there is so much pent-up demand in Japan.

Can Wakayama and Nagasaki feed from a local base of players?

A lot of play will be drawn to Osaka, but its IR is likely to open at least three years after the other locations have opened their doors, with Wakayama poised to open in 2027. This means that the local Osaka market will visit Wakayama, those from Tokyo too. It is more complicated for Nagasaki.

The international airport in Fukuoka, which is two hours away. There is no natural population. We call it the Nagasaki bid, but in fact it is the prefecture of Nagasaki, not the city of Nagasaki.

The location of the IR is the small town of Huis Ten Bosch in Sasebo, Nagasaki (which is also the location of a theme park that recreates the Netherlands by displaying life-sized copies of old Dutch buildings and translates as House at the Woods). The population is very small, as you’d imagine, and not enough to sustain a casino.

Having said that, Wakayama would also have difficulty sustaining a casino on its own. However, there is a very large population base in neighbouring Osaka and the Nara prefecture in the middle of Japan (pop. 1.32m).

Wakayama is also located on the spiritual path that every Japanese person is supposed to take once in their lives (the Koyasan Choishi-Michi trail is an ancient path that pilgrims have travelled for more than 1,200 years).

I’m much more confident in Wakayama’s prospects of winning a bid than I am Nagasaki – and I do think that only one of the two will emerge with a licence at the end of the process.

If the government does keep back a licence, is it simply to keep Tokyo’s options open?

n most democratic countries you have elections and then winning party gets to govern the country for a set period of time. In Japan, there has only been one party ruling the country since 1945. Due to this one party system, Japan is a country in which every must agree, and until they all agree – nothing gets done.

The background to the Tokyo bid is that the city has been hesitant in bidding for a licence. The Governor of Tokyo, Koike Yuriko, is the ex- Chairperson of the Liberal Democratic Party, and for political reasons has been reluctant to back Integrated Resorts in Japan due to her higher ambitions.

It is commonly believed that Tokyo does want an IR, but it also doesn’t want to be the first. My view is that one licence will be held back so that Tokyo can put in a bid once the other two IRs are established. In the unlikely event that Tokyo withdraws completely, in that case the government is likely to choose Hokkaido, which in this electoral cycle has said it isn’t interested in an Integrated Resort, but hasn’t closed the door.

If a licence is still available, then Hokkaido could put in a bid in five years time. However, it would require Tokyo to decline the bid as it would have priority.