Integrated Resorts in a post-Covid19 Japan: will casinos roll a hard eight ?

A few days ago, Las Vegas Sands announced it has shelved its plans to open a casino in Japan. Previously, Caesars Entertainment and Wynn Resort had also withdrawn from the opportunity. Casino operators in Las Vegas and Macau were once emphatic in their assertions that Japan should open up its destination markets. What changed ? The Covid-19 curve is finally starting to flatten in Japan but, along the way, headwinds have picked up for prospective casino operators.

Pachinko and the scourge of gambling addiction

A National Action Plan Act for Pandemic Influenza & New Infectious Diseases was executed by Prime Minister Shinzo Abe’s administration when he announced a State of Emergency on April 7^th, subsequent to Prefectural Governors asking operators for voluntary restraint in opening pachinko parlors. These requests did not have legally binding power, so dozens of owners continued their business as usual. This triggered the Governors of Tokyo, Chiba, Osaka, Niigata, and Hokkaido (among other prefectures) to publicly name-and-shame these pachinko parlors, thus attempting to humiliate owners as well as patrons into temporarily closing down and respecting social distancing.

Ironically, this tactic turned into unintended advertisement and encouraged addicted pachinko gamblers to travel through prefecture lines. The front-liners, fully motivated to race for favorable seats with open-nailed panels, triggered mile-long queues at each of the parlors ignoring social distancing recommendations. It was a moment for the whole nation to recognize the seriousness of compulsive gambling existing in this country. Ordinary people felt compelled to ultimately choose life over money in the midst of this pandemic, when addicted gamblers chose to keep playing pachinko with no questions asked. Inevitably, local TV talk shows relayed wide-spread skepticism over having casinos opening up at three of the destinations the government had committed to designate next year, as part of its Integrated Resort (IR) development plan.

The final straw : the 500.com bribery case

The bribery case of Shenzhen’s 500.com and Tsukasa Akimoto, ex-Chairman of Japan’s House of Representatives Cabinet Committee on casino legalization, cast a shadow in global media over Carlos Ghosn’s great escape at the end of last year. Allegedly, 500.com gave JPY3.5 million cash to Akimoto and overwhelmingly entertained him through travels to Hokkaido and China, with the hope to be designated as a casino operator in Hokkaido.

It was the first time in ten years for the investigation team of the Tokyo District Public Prosecutors Office to arrest a member of parliament. Even in Japan, it is a de facto standard way of thinking to say that, as long as bribery and corruption continue to exist in the political world, Japan cannot consider itself a truly democratic nation. The Governor of Hokkaido did not underestimate this scandal and subsequently announced the Prefecture’s withdrawal from all future casino license considerations. For Caesars Entertainment and Hard Rock International, this was a major blow as they both were seeking for a license opportunity in Tomakomai, a port city in southern Hokkaido and a short drive from Sapporo’s New Chitose Airport.

The delicate balance of financing while maintaining compliance

When it comes to IR development, the City of Osaka was always a front-runner among Japan’s municipal governments.

In November 2018, the great Kansai metropolis was awarded the hosting of the 2025 World Expo. They have won the bid under the slogan “Designing Future Society for Our Lives”, with the venue being Yumeshima Island, a man-made island in Osaka Bay. Key to this achievement was Toru Hashimoto, a famous political commentator, founder of Nippon Ishin no Kai (Japan Innovation Party) and Governor of Osaka Prefecture between 2008 and 2011, before holding the position of Mayor of Osaka from 2011 to 2015. One of his many political feats was his effective capitalizing on his predecessors’ “dark moments” and leveraging the city’s Port & Harbor Authority’s influence in local matters. Yumeshima Island was certainly one of his leading projects, so to win the races for both Expo and IR featured prominently in his revitalization strategy. MGM Resorts assiduously worked together with Orix, Japan’s largest leasing company, to become the sole consortium to register as a participant in the IR race in February 2020. Genting Singapore and Galaxy Entertainment, the two other operators once interested in competing for an Osaka license, passed at the very last minute.

However, according to Nikkei, the MGM-Orix consortium is now short of cash to the tune of JPY140 billion, and have thus inquired approximately twenty Kansai-based companies such as Panasonic and JR West for minority investment in their project. In the current legal and compliance environment in Japan, capital injection seems to be the safest way to go as Japanese mega banks see casino operations as fraught with compliance dangers and are wary of being involved.

Daniel Cheng, a former Genting Singapore and Hard Rock International executive, shared his concerns on Nikkei: “As a measure to prevent money laundering, it’s important to restrict the activities of junkets”. Junkets are brokers providing travel arrangements, hospitality services, entertainment as well as financial services to high rollers, primarily from Mainland China, and it is said that they have played a significant role in growing the Macau market into becoming larger than Las Vegas. If the Japan Casino Regulatory Commission (JCRC) does not duly execute background checks on these junkets and the licensed casino operators consign to external parties, it will certainly leave huge gaps for anti-social groups (organized crime) to play that role, a role they have been known to excel at in other markets.

Japanese banks in particular have voiced their opposition to any scenario under which junkets are left unregulated since their debt is collectable so long as the business permit is valid. If junket activities are tabooed by the casino operators, banks have no way of knowing until the license is cancelled by the JCRC. At this stage of regulation, it was thus inevitable for MGM-Orix to pursue raising capital to its maximum instead of turning to bank financing.

Japanese banks are also concerned about the discrepancy existing on Article 10 of the Integrated Resort Implementation Bill. The Japanese government plans to have JCRC issue the three awarded operators with casino license next year that will be valid for ten years from the point of issuance. If the IR businesses for three destinations are likely to start between 2025-2026, it will only leave five to six years validity until the expiry date. The three Japanese mega banks call this a “Jujo-mondai”, which can be translated as “Article 10 Problem”. Unless the point of license issuance aligns with the actual starting date of operations, the financial institutions will not be able to structure a project finance under such incoherent status. However, Prime Minister Shinzo Abe’s administration’s hands are tied with Covid-19 and the controversial Prosecution Office Law Revision proposal, among other matters. For the casino operators and other parties involved in IR development, this status is tantalizing as they had wished the amendment of Article 10 be discussed as soon as possible. We can therefore speculate this to be another reason why MGM-Orix pursued to raise private capital instead.

Finally, the JCRC is likely to adopt the Nevada model upon license renewal, in which case something similar to Form 7 (Application for a Casino License) will be applied to the consortium. A major hurdle however is the fact that disclosure requirements stipulated in Form 7 could be considered too stringent for license holders and their investors. For example, Managers and above of a shareholder with 5% or more stake in the consortium will need to disclose their professional profile, stockholding history of 5% or more, and bankruptcy and default history for the past 20 years, among other private information. This is a huge impediment for the companies that have been inquired for minor investments…

Yokohama vs Tokyo : infighting among LDP factions

Since December 2016, Mayor of Yokohama Fumiko Hayashi has been pushing the municipal government to attract IR as a lucrative way of raising taxable income. Hard Rock International, Galaxy, Genting Singapore, Melco and Japan’s Sega Sammy have focused from the onset on Yokohama development. However, lobbying conditions have become atrocious as civil society has been pressuring City Hall to abort the plan.

Opposition to the project is being led by Yukio Fujiki, Chairman of Yokohama Harbor Transportation Association and literally the general controller of labor union members working at Yokohama’s Yamashita Pier. Fujiki is also the Chairman of Yokohama Stadium, the home ground of the local professional baseball team, DeNA Baystars. Ever since May 2017, he is opposed to inviting IR to Yokohama and this has certainly triggered the situation to take a dark turn. One of the many reasons for his opposition may be found in his feud with City Hall over several instances where he was sidelined over important local development decisions. One latest illustration is his project to upgrade the DeNA Baystars ballpark to a dome stadium at Yamashita Pier, a discussion from which he was later kept out of the loop…

For IR champion Yoshihide Suga, the Chief Cabinet Secretary of Prime Minister’s Shinzo Abe administration, a casino in Yokohama is an issue of critical importance as he owes his seat at the National Diet to his being an elected representative of neighboring Kanagawa’s 2^nd electoral district (Yokohama West). While citizens struggle between safety and business opportunities in the midst of this outbreak, Yokohama-based politicians are faced with the conundrum of reconciling the opinion of their electorate and their own political agenda.

Meanwhile, Toshihiro Nikai, the LDP Secretary General, is setting the table for the second course: in case Yokohama eventually declines welcoming IR on its shores, he is talking with Governor of Tokyo Yuriko Koike, who expressed an interest toward IR prior to the Covid-19 pandemic and the state of emergency. Tsukasa Akimoto, of the aforementioned 500.com bribery case, belongs to Nikai’s faction within the LDP, so the man has been keeping low profile…

The next Tokyo gubernatorial election might be postponed, but the notification date was set for June 18^th, and election date for July 5^th. It will certainly be interesting to see whether Governor Koike includes IR in her election pledges, thus taking advantage of the confused state of affairs.

Covid-19 makes legislation clarification all the more urgent…

In order to polish Japan’s image overseas and prop up the country’s soft power, Prime Minister Shinzo Abe has been refraining from publicly visiting Yasukuni Shrine, where the deceased soldiers of previous wars are enshrined and commemorated, so as not to deteriorate already fragile relations with China and other neighboring countries. Reverse engineering this policy, PM Abe aims at making Japan a tourism-oriented country and repeatedly encouraged both the private and public sectors to attract inbound tourists to enjoy Japan’s legendary omotenashi hospitality.

Ironically, this direction has contributed to spread Covid-19 in Japan (as illustrated with the Diamond Princess fiasco) and, unavoidably, will negatively impact hospitality businesses, especially those with non-depreciated buildings and equipment. In the context of this pandemic, the financial strength of casino operators has been deteriorating so it would not be surprising to see other companies follow in the footsteps of Las Vegas Sands, Caesars Entertainment, and Wynn Resort and retire from the Japan IR competition, at least temporarily. The Japanese government is yet to release the full basic policy for IR, which was originally due in March, and this certainly is making stake holders nervous as they lack visibility to grasp the full extent of this market opportunity.

Picture credits: calvinayre.com