Gaming | When Bureaucratic Irresolution And Pandemic Jabs Japan’s IR Bubble
Ever since Japan’s parliament, the National Diet, ratified the Integrated Resort (IR) Promotion Act in 2016 and ensured the IR Implementation Bill in July 2018 — the stamps of approval of former Prime Minister Shinzo Abe’s administration that legalized gaming and the issuance of three casino licenses in Japan — the world’s casino operators had been strenuously jockeying for footholds in this untouched yet apparently lucrative mecca.
It ought to be a win-win scenario for all, in which the Japanese government could ride on the momentum of gaming activities to turbocharge its tourism and economy, and the winning casino operators might rake in hefty profits from legions of global tourists attracted to Japan and a stable supply of local gamblers.
However, Japan’s IR game plan seems to have been teetering on the brink during the recent months, with more gaming operators backing out of the IR race at close intervals.
They include, but are not limited to, the U.S.-based casino behemoth Las Vegas Sands which took its chips off a Yokohama IR bid in May 2020, followed by an official withdrawal from Yokohama IR by another U.S. giant Wynn Resorts in February 2021.
Among Macau’s casino operators, Galaxy Entertainment Group (GEG) also gave up on the Yokohama IR marathon on May 17. Days prior to GEG’s exit, Macau’s junket conglomerate Suncity Group declared its departure from Wakayama IR venture on May 12.
To many gaming experts, investors cascading out of Japan’s IR development came as no surprise. They point to the ongoing Covid-19 pandemic weakening Japan’s economy and the overly protracted red tape involved in the IR tender process, also dubbed request-for-proposal (RFP). Both factors arguably bear the same weight to investors, dashing their hopes in this high-stakes venture.
Ben Lee, managing partner of IGamiX Management & Consulting, was among one of those who remain skeptical about the prospect of Japan’s IR development. In an interview with the Times, he candidly pointed out: “The Japan market was always an overhyped story.”
“The inability of the Japanese government to be concise on the issue is paralleled by their seeming indecisiveness on Covid-19 actions as well as the Olympics, and appears to be the final trigger for the operators to pull the plug on what is already a long-drawn-out affair,” he said.
IR bids that take forever
Japan has all it takes to be a happy hunting ground for international gaming operators. In 2019, the pre-pandemic era, the gross domestic product (GDP) of Japan totaled over USD5 trillion. Its GDP did experience its sharpest plunge of 6.4% in the last quarter that year since 2014 due to sales tax hike and hits of typhoon, but was still sufficient to make Japan the world’s third-richest countries, following the U.S and second-place China.
For the full year of 2019, Japan welcomed a record high tally of 31.9 million foreign travelers, up 2.2% year-on-year. Holidaymakers from China contributed the lion’s share, or over 70% of total visitor arrivals to Japan, followed by 17.5% by South Korea, 15.3% by Taiwan, and 7.2% by Hong Kong.
These beefy statistics had injected great doses of confidence into IR bidders, vying to be one of the three casinos to be established in Japan. Up to now, Japan is still one of the few highly-developed economies without the encroachment of casinos.
Nevertheless, the IR tender is more laborious than anyone could have imagined. For tenderers to win an IR bid in Japan, they have to submit their IR proposals via RFP application to the interested cities. These cities had previously declared interest in IR investment and reached an agreement with its prefecture on such a development.
Afterwards, both city and prefecture would vet and single out the winning bidder based on preset yardsticks. Following this, the selected tenderer and respective prefecture would have to team up to conceive a comprehensive plan for their proposed IR project — which will later require approvals from prefecture-level assembly and, ultimately, the Japanese government.
The original application period for local governments, together with their chosen IR partners, to submit joint proposals to the national government was set as January 4 to July 31 2021. However, in December last year Japan’s government announced that the application period would be pushed back nine months to October 1 2021 to April 28 2022, due to the hindrance of the Covid-19 pandemic.
Owing to the adverse impact of the coronavirus, the government is eyeing to open the first integrated resort in the late 2020s, at best.
Prefectures of Japan are also one another’s rivals in this IR race. The more world-class the partnership a prefecture can forge with the winning bidder, the higher the odds that it is selected by the national government as one of the three casino sites.
As of now, casino operators have still been bogged down in the RFP process. Across Japan, there are four cities that have proclaimed their intention to run for the IR battlefield: Osaka, Yokohama, Wakayama and Nagasaki.
Four prospective IR sites
Osaka, the second largest metropolitan area and one of the most-visited cities in Japan, was touted to be the most combative and promising candidate in the IR race. Back in 2014, Ichirō Matsui, governor of the Osaka Prefecture, made it clear that the city would transform Yumeshima island into an IR paradise, which will also host The World Expo in 2025. The authorities previously planned to open Japan’s first probable IR by 2025 to tie in with the mega event.
There were seven casino operators taking part in Osaka’s RFP: Genting Singapore Ltd, Wynn Resorts, Galaxy Entertainment Group Ltd, Las Vegas Sands Corp, Melco Resorts and Entertainment Ltd, and MGM Resorts International.
However, MGM, with its local business partner ORIX, is now the only qualified candidate left for the IR bid in Osaka, following the withdrawals of six of its former rivals over the past two years.
In MGM’s earnings calls for the first quarter of 2021, CEO and president of MGM Resorts International Bill Hornbuckle reaffirmed his conviction in investing in Osaka IR.
Having seen many drop-outs, in February the Osaka government made amendments to its IR Implementation Policy, which reopened the application process for new applicants to sign up for RFP until April 6, 2021 to ensure a fairer tender. It also introduced relaxed entry requirements on accommodation and event spaces to enable the winning operator to carry out expansion projects on the IR site in the future.
The RFP deadline for Osaka IR was set for July 20. It is evident that the city failed to meet its original IR opening timetable by 2025.
Should Osaka be chosen by the national government in the final selection process, the world may see an IR at Yumeshima in 2027, the earliest. This was stated by Hiroshi Mizohata, director of the Osaka Convention and Tourism Bureau, in an IR Forum Online, hosted by the Japan IR Association earllier in April.
Yokohama, bearing the geographical advantage of lying to the south of Tokyo, is considered the next strongest rival. Many operators have shown interest in investing in this region, but there are only four left in the race: Genting Singapore, Melco, Sega Sammy, and Shotoku.
The latest investor to give up on Yokohama was GEG, this month. The group’s vice-chairman Francis Lui stated in a release: “[We] have decided to not participate at [Yokohama IR] this time. We will continue our dialogue to support Japan in achieving its goal to develop a sustainable and world class IR industry.”
In May 2020, the late Sheldon Adelson, founder of Las Vegas Sands stated his decision to pull out of Yokohama IR tender. “The framework around the development of an IR [in Japan] has made our goals there unreachable. (…) It is time for our company to focus our energy on other opportunities,” he stated in the press release.
Wakayama prefecture, located in the Kansai region with a close proximity to Osaka, was another fledgling contestant. Its RFP application period closed in January and registered two candidates – Macau-based Suncity Group Holdings and Canada-based Clairvest Neem Ventures, though the first backed off early this May.
Chief Executive Officer and director of Suncity Group Alvin Chau attributed the withdrawal to Covid-19 pandemic, saying: “the time it takes for the IR applications to be finalized is longer than expected. As a business operator, we decided to make the hard decision [to withdraw the project] after careful consideration.”
Nagasaki, on the island of Kyushu and the third largest island in Japan, was the last to declare their place competing for an IR license. In March, three entities were shortlisted for its IR bid: Casinos Austria International, Oshidori International Development, and Niki Chyau Fwu Group.
Japan’s gaming traditions
Alongside its IR pursuit, Japan has two long-established gaming industries – the money-making pachinko and horseracing markets.
Pachinko — a mechanical gaming activity comprised of a mixture of arcade games and slot machines — is undoubtedly a common obsession for the locals. According to Japan Today, the industry used to generate USD200 billion annually and contributed 4% of Japan’s total GDP.
It is estimated that one out of 11 Japanese plays Pachinko once a week, Sung-Yoon Lee, professor of Korean studies at Tufts University told Business Insider.
Ben Lee echoes the professor’s remarks. “Pachinko parlors achieved an extremely high level of penetration into every small city and town that would not be replicated by any potential IRs.”
Such a fact makes Lee doubt the real clamor of Japan’s casino market. “The potential of the market was always questionable as analyst after analyst used the pachinko market as an indicator of the potential size for casinos,” he argued.
Since the pandemic hit the world, Pachinko parlors went under at a rapid pace. According to a report published in April by IAG, the number of Pachinko parlors stood at 8,063 by end of March, down 647 year-on-year and 111 month-to-month.
Meanwhile, Japan’s horseracing has bucked the trend, managing to weather the pandemic storm and registering a yearly growth of 103.5% in 2020, thanks to the support of local online wagerers.
Lee specualtes the Japanese do not appear to have the same propensity to gamble in casinos as the other Asian cultures, notably the Chinese.
The locals’ intense penchant for Japanese traditional gaming activities prompted Ben Lee to be more suspicious as to whether the IRs would pan out as the government expected.
Cautious of casinos crimes
The road to IR development became bumpier when Tsukasa Akimoto, the then cabinet office deputy minister for IR development, was accused of receiving bribes of JPY3 million from China’s 500.com, a Chinese gambling operator, allegedly to buy Akimoto off to enter Japan’s casino market. Akimoto pleaded not guilty to the charge in March.
The bribery scandal has tarnished Japan’s visionary IR project. It drove the Japan Casino Regulatory Commission (JCRC) to publish a raft of stringent draft gaming regulations in April, in a bid to ensure Japan thrives on casinos with the lowest number of gaming-related crimes as possible.
In May, Nagasaki prefecture launched a webinar to raise public awareness about gambling addiction as it expected a possible IR in the future.
In an exclusive interview with the Times, Steve Vickers, CEO of Steve Vickers and Associates (SVA), a specialist political and corporate risk consultancy, said: “I am sure that the Japanese authorities are keen to keep standards high, and would look much more to the Singapore model than the Macau model as a way forward.”
“Macau is a legend for its difficulties with junkets and triad societies, and the Japanese authorities will be mindful to avoid these pitfalls. Japan has had an unfortunate history with organized crime in the pachinko business and seems determined not to repeat such problems,” he said.
The road ahead
In 2018, Goldman Sachs Group, an international investment bank, forecast Japan’s casino market to be valued at JPY1.75 trillion, if the operation of three resorts are in full swing. Such a figure may skyrocket Japan to be the world’s second-biggest gambling market, after Macau.
But the emergence of Covid-19 has caused a paradigm shift among the investment directors of global casino operators. The ongoing pandemic uncertainties, coupled with the habitual procrastination of the Japanese government, had virtually dried up bidders’ enthusiasm.
Vickers expects that the opening of IRs will take “considerably longer,” and the Japanese government is unlikely to speed up the process.
When asked by impact of the recent drop-outs of Macau casino operators from Japan IR tender on the local gaming sector, Lee said it will be “minimal.”
“The Japan IR story was always a hidden tussle between the foreign operators wanting a slice of the perceived domestic Japanese market vs the [Japanese] government seeing it as an opportunity to develop an international VIP market. With China’s recent edicts on anti-gambling, the latter target market segment has all but evaporated for Japan,” he added.
There has been a belief circulating in the global gaming industry that Japan would prefer US operators to Chinese enterprises, given the close ties between Japan and the U.S., and on-and-off tensions between Japan and China.
In response to this, Vickers suggested that these underlying political reasons will make global investors “cognizant of the geopolitical tensions between the US and China, and what that could mean for Chinese businesses investing in Japan.”
With the pandemic showing no obvious signs of abatement, Lee and Vickers agreed that it is still far from clear if operators would resume their pursuit for Japan IRs.
Japan has been grappling with current economic downturn. In the latest figure released by the Japan government, the national GDP shrank 5.1% year-on-year, or 1.3% from the preceding quarter in the first quarter of 2021 just as Japan endures a fresh Covid-19 resurgence.
“For now, though, such investments are probably not a priority, either for the companies or for the government,” said Vickers.