Japan casino debate brings challenges, opportunities to pachinko industry

Published in: Latest Intelligence Japan’s casino bill has been put on the back burner, with no realistic prospect for the enactment of basic legislation authorizing casinos for at least a year. However, the ruling Liberal Democratic Party has certainly not given up on the idea, having added this initiative to its campaign promises in this month's snap election.
One consequence of the casino debate is renewed attention on Japan’s massive pachinko industry, the pinball-like game that operates on the margins of Japan’s current anti-gambling laws.
A proposal being debated among lawmakers is that the rules governing pachinko parlors be revised to formally allow players to receive their cash winnings. Exchanging pachinko balls for cash is the reality of the current system, with players walking just a short distance “off-site” to receive their earnings. The proposal is that this reality finally be acknowledged and that pachinko parlors begin to pay out in cash instead of gifts within the establishments themselves.
Such a legal change, though it may accord better with common sense, would be quite unwelcome to some sections of the pachinko industry if it were accompanied by a requirement that they then begin paying gambling taxes and lose their current formal status as simple leisure facilities.
The pachinko industry in Japan is huge: There are about 11,000 pachinko parlours around the nation and it has revenue of about 8.8 trillion yen ($153 billion), according to The Leisure White Paper 2014 published by the Japan Productivity Center. The parlours also employ some 310,000 employees, which is approximately 1.5 times the number employed by Japan’s top ten automotive companies.
However, these figures have been in steady decline since the industry’s peak year of 1995. With the ageing of the Japanese population and years of sluggish economic growth, the number of players is now less than half of what it once was.
With their deep roots in the Japanese gaming industry, pachinko-related companies could potentially exercise a large impact on the fate of the casino bill, either by becoming active participants in developing casinos themselves, or negatively by throwing their political weight against the initiative.
When AGB contacted the Okinawa Prefecture Amusement Industry Cooperative, they claimed to take a neutral position on whether or not the bill should be passed. Okinawa is considered one of the leading candidates for the construction of a future integrated resort, and so the impact there would seem to be a direct concern for them. The spokesman for the cooperative, however, said that their assessment was that the customer base for their pachinko businesses and that of future casinos would likely be quite distinct.
This same perception was held by a small, local pachinko operator in Okinawa Prefecture, who anticipated “no impact” on his business as the result of the possible establishment of casinos in future years.
Indeed, there is plenty of reason to believe that the establishment of casinos would have a marginal effect on the direction of the pachinko industry.
In the first place, some versions of the integrated resort plan suggest that Japanese casinos could be limited to, or predominantly aimed at, foreign tourists instead of the Japanese people themselves, similar to the South Korean model. It was suggested earlier this year by the bill’s promoters that the establishment of casinos should be linked with the Summer Olympics to be hosted by Tokyo in 2020. However, potential casino investors have criticized this notion as unfeasible, arguing that demand from foreign tourists alone would be insufficient.
But even if Japanese citizens are indeed the main target customers for future casinos, all indications are that the integrated resorts created thereafter will be extremely limited in number. The most likely locations appear to be the Tokyo waterfront, Osaka, and Okinawa. The skepticism of the Japanese general public about hosting casinos could reduce that number even further to perhaps one or two—assuming that some new legislation is passed at all.
It’s difficult to imagine such casinos posing any serious threat to the pachinko industry. Every small, local community in Japan boasts its pachinko parlors, even in areas which are otherwise underdeveloped. Pachinko has become the habit of housewives going to the market and businessmen on their way home from their day’s work. The customer base indeed seems that it would be quite different, with only those pachinko parlours that happen to be placed in the immediate vicinity of the handful of casinos potentially affected.
If there is a threat that casinos indirectly pose to the pachinko industry, it is the one already alluded to above—that the debate may bring unwanted public scrutiny to pachinko, especially in relation to issues like gambling addiction, public morals, and the dubious legality of its cash prizes.
Most of all, the threat is that the spotlight on casinos may encourage the tax authorities to take a hard look at pachinko and wonder if they ought not be demanding a bigger cut of pachinko revenues on behalf of the public interest.
However, as is pointed out by Kazuaki Sasaki, Assistant Professor at Nihon University's College of Economics, the impact of such a development would likely fall hard on the majority of small pachinko operators, but could open up new opportunities for the larger companies with substantial capital to invest in renewal strategies.
Some of these larger operators are also looking abroad for their expansion prospects.
Hong Kong-listed Dynam Japan Holdings has invested about $85 million in Macau Legend Development in the past year and is seeking approval to locate pachinko machines in the company’s casinos.
Sega Sammy has teamed up with South Korea’s Paradise Co. to build a $1.1 billion integrated resort on the island of Yeongjongdo Island, Incheon. This joint venture partnership expects to complete the foreigner-only property by July 2017. Paradise has a 55 percent stake in the firm, while the Japanese partner holds the remaining stake.
Sega Sammy has said the venture will help it to learn how to operate casino resorts, suggesting that they are eager to take their experience back to the home market in future years.
Dynam says it still sees potential for growth inside Japan, but says the industry needs to consolidate.
“The pachinko industry is highly fragmented and hall operators operating networks of over 10 halls is limited to the few in the entire industry... We believe that there is significant potential to expand in terms of both scale of operations and market share,” it said in a recent results filing to the Hong Kong Stock Exchange.
The company is aiming for economies of scale through adding halls and is also proactively promoting cheaper games, which involve reducing costs to users by setting one yen per-ball and 5 yen-per-token games, as opposed to conventional 4 yen-per-ball and 20 yen-per-token games.
Professor Sasaki adds that many pachinko parlours are also looking for a "cleaner image" by hiring highly educated younger executives, creating more non-smoking zones, and trying better to appeal to Japanese women.
As polls show that Japanese resistance to the creation of integrated resorts featuring casinos is indeed closely related to fears about the possible expansion of crime, it is clear that both the casino bill and the pachinko industry share some of the same challenges in terms of public perception.
 

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