Japan IR winners emerge as framework becomes clear

The increased clarity regarding the terms of IR regulation in Japan following the ruling coalition compromises is also throwing light on which institutions are now advantaged and which are disadvantaged in the race for licenses.

Seth Sulkin, head of the American Chamber of Commerce in Japan’s task force on IRs, describes the outcome to Asia Gaming Brief as “a major victory for the major casino operators and large Japanese cities.”

The ruling coalition’s decision to stick with the 3 percent casino floor area rule while at the same time removing any absolute ceiling favors large urban IRs and simultaneously disadvantages the regional initiatives. Sulkin puts it starkly: “The 3 percent rule is bad news for small, regional cities hoping to lure an IR. I don’t see how it will be economically viable to cope with this rule in any place other than Osaka, Yokohama, or Tokyo.”

Jane Tsai, CEO of JCT Holdings, holds a similar view that the major urban areas have been given the clear advantage: “This will add even more pressure to the ROI targets for IR consortium partners, so it is imperative the first Japanese IR location are in areas easily accessible and with existing high tourism visitation.”

A third independent gaming industry analyst who asked not to be named, put it this way: “It does not take into account different types of IR and the different mix of amenities within an IR.”

Tax impact

The analysts consulted by AGB were split, however, on the issue of the 30 percent tax rate that the ruling coalition agreed upon.

The analyst who asked not to be named had the most negative take, explaining that “the 30 percent tax rate seem unrealistically high compared to other regional jurisdictions apart from Macau, which survives on gaming tax alone. It may lead to a reduction in the total investment to which the major operators are willing to commit.”

Tsai finds the 30 percent rate to be “quite high given the anticipated high costs of development and operations in Japan.”

Sulkin appears somewhat more sanguine: “The tax rate remains higher than other jurisdictions, but is at least at a level that will not be a strong disincentive to build extra facilities.”

Finally, Jay Defibaugh, senior research analyst at CLSA Securities, observes, “If capex budgets and overall IR scale fall short of levels suggested in the past, it would be the result of recent political realities in which the LDP needs to exhibit greater policy flexibility to get things through committee and accepted by the general public.”

Local government

In a situation in which well over a dozen municipalities are considering IR bids at one level or another, the limitation of three IRs in the first round means that even some of most aggressive bidders will be losing out—at least until the anticipated second round from the mid-2020s.

The Japanese brokerage Nomura issued a note on Tuesday making interesting and germane observations in this respect.

Nomura cited four municipalities likely to come out on top for the initial three licenses: Osaka, Hokkaido, and either Yokohama or Nagasaki. This prediction tallies with the reporting that AGB has been doing on the subject over the past months.

Nomura added, however, their views on which operators have gained an advantage at each of these potential locations. Nomura sees Osaka as a battle between Las Vegas Sands and MGM Resorts. Hokkaido they see leaning towards Hard Rock International. Yokohama (if it chooses to throw its hat into the ring) is another location where they believe MGM is well positioned. Finally, Nomura believes that Genting has the edge in Nagasaki.

Nomura does not provide any specific basis for making these calls in their note.

Circumstantial support, however, may be available in the case of Hard Rock and Tomakomai, Hokkaido. In an interview published Wednesday in Casino News Daily, Hard Rock’s CEO for Asia Edward Tracy all but stated flatly that his company was focused in on its Tomakomai bid.

“Hokkaido is conveniently located,” Tracy noted, “to both US, European, and Asian customers and has a year-round climate that will be appealing to the IR visitor. The excellent site with close vicinity to a world-class international airport, a well-planned long term urban development vision, all amidst a spectacular seasonal climate of bright summer colors and white wonderland in winter give us hope that Tomakomai City is the place for us.”

Wakayama Blues

One of the most unhappy with the shape of recent developments is Wakayama Governor Yoshinobu Nisaka, whose project to establish an IR at Marina City, Wakayama, is now in deep trouble.

The decision to limit casino floor space to 3 percent, and especially the cap of three licenses to be issued nationally in the first round, is making Wakayama’s bid appear increasingly far-fetched. The governor himself seems to realize this reality, based on his comments at a press conference on Tuesday: “Why have they made positions four, five, and six useless? We will endeavor with all our power to come in third.”

Governor Nisaka also stated that he now seeks to allow local Japanese to utilize the Wakayama casino as well, the first time he has openly stated this change in local policy.

As justification for his turnabout on his original foreigners-only casino idea, Nisaka cited the likely efficacy of the MyNumber card in preventing gambling addicts from entering the casino as well as the restrictions on the weekly and monthly number of visits by Japan residents.

Neither of these measures, however, are new proposals, and the terms of the presumably more comprehensive anti-addiction bill have yet to be outlined.