A Gamble on Casinos May Help Japan’s Economic Outlook

March 16, 2015
by Jeff Allan

 It was a November of surprises as the investment community received news that Japan’s economy had fallen into recession after two sustained quarters of economic decline. After the long-anticipated consumption tax increase, the second quarter saw economic activity plunge just over 7 percent. While analysts expected that contraction due to a reduction in consumer spending, they had anticipated activity to recover by the following quarter.
? The surprise came when mid-November economic results showed ?the Japanese economy further contracted 1.6 percent during the third quarter. Japan was officially in a recession, and few if any economists had seen it coming. Twenty-one economists polled by Bloomberg prior to the release of the latest economic data showed a median expected increase of 2.2 percent quarter-over-quarter for the current period. The most pessimistic of the lot expected a 0.8 percent increase.
 These results highlight the fact ?several of Prime Minister Abe’s economic policies under the “third arrow” have met significant resistance from special interests, including agriculture and labor. In an effort to provide more economic stimulus, the Bank of Japan (BOJ) expanded its current programs to the 80 trillion yen range, pushing the yen to eight-year highs against the dollar. Despite the movement by the yen, though, quantitative easing alone will not be sufficient to help Japan climb out of the current recessionary spiral, brought on by a combination of factors during this fiscal year.

The Gaming Industry Offers Potential

 However, There are rays of hope on the horizon, ?that could help pump US $40 billion annually into the Japanese economy. Prime Minister Abe has previously called the legalization of casinos in Japan a “pillar of his economic growth policy.” The policy has the potential to elevate Japan to the position of world’s third largest gambling destination after Macau and the United States. In addition to the economic benefits directly derived from the gaming industry through the creation of new jobs and tax revenues, legalized casinos would help propel Japan toward its goal of 20 million annual visitors by 2020. That would provide substantial indirect benefits for the hotel, hospitality, transportation, and retail sectors.

Casinos Face Obstacles

 Despite the potential that the gaming industry can bring to Japan, though, there have been a few hurdles preventing passage of legislation aimed at legalizing gambling in Japan. The primary concern has been about the potential for an increase in the number of the nation’s gambling addicts. Many in Japan look to the country’s large number of pachinko parlors, and players who spend exorbitant amounts of time and money at these establishments.
 A recent study by Japan’s Health Ministry found that up to 4.8 percent of Japanese adults could fall into the category of chronic gamblers. Likewise, few of those addicted to gambling actually seek professional help due to cultural stigmas associated with addiction. Opponents fear that legalizing casinos could open a Pandora’s box that leads to more gambling addiction.
 Proponents of the new legislation counter that argument by noting that the country already hosts over 11,000 pachinko parlors and allows betting on horse racing. They contend that the addition of a few casinos is unlikely to have any significant effect on the number of problem gamblers in Japan.

Bill Delayed Until Next Session

 As of this writing, the gambling legislation bill has been shelved until the next session of the Japanese Diet in the coming year. The Abe administration came to the decision to delay the legislation while it attempts to reassure coalition lawmakers that it can avert the potential social risks of legalized gambling. Members of the Buddhist-backed Komeito party want to further discuss their position on the legislation and the planned safeguards that will prevent exacerbation of gambling addiction.
 The Abe administration sees Komeito’s backing as critical to help the bill pass the legislature without encountering any significant resistance by opposition groups.
 The delay means that it will be too late for Japan to have any casinos constructed in time for the 2020 Olympics in Tokyo. Despite the delay, however, the Japanese gaming sector could still be worth over $40 billion annually by as quickly as 2025 according to brokerage firm CLSA.

Eager Hosts and Participants

 While the legislation has been pushed back for the time being, prefectural and municipal governments from Hokkaido to Okinawa are eager to get in on the potential that casinos could offer. At the forefront of this has been Osaka prefecture, which hopes to locate an integrated casino resort on the man-made Yumeshima Island in Osaka Bay. Osaka’s mayor has already met with eight different gaming companies from Asia and the US. Notably, MGM Resorts expressed an interest in investing up to $8.4 billion to develop an integrated casino resort in Osaka. The Osaka government hopes that a casino could help bring between 70 to 240 thousand new jobs to the area.
 Likewise, Okinawa prefecture sees a casino resort as a promising replacement for the soon-to-be-departing US military base at Futenma. The Okinawa government expects that a casino could create 10,000 new jobs and bring up to $4.2 billion in annual revenue to the prefecture.
 For their part, the gaming industry is ready to bid aggressively for the chance to build casinos in Japan. Industry icons including Las Vegas Sands, Wynn Resorts, Harrah’s, and Penn National, as well as domestic players like Aruze and Maruhan are expected to make a land rush once the legislative hurdles have been cleared.
 Fund managers and investors should keep an eye on the progress of this legislation, as its passage would mean an entire new array of investment options for the institutional investment community. Japan’s potential to emerge as a premiere gambling destination would provide some of the most significant direct and indirect investment opportunities in a generation.