Game on | Asian Legal Business

In December last year, Japanese lawmakers submitted to the National Diet a draft act to introduce integrated casino resorts to the island nation. The draft proposes lifting Japan’s current ban on casinos, and outlines broad standards for licensing and regulating casino operators and their partners. Advocates of the draft believe that the creation of casino resorts will create jobs, encourage tourism and boost revenue in an economy struggling with deflation and sluggish growth. Japan is widely viewed as a prize market for casino operators due to its wealthy population and proximity to China, home to some of the world’s most prolific, and wealthiest, gamblers. Brokerage CLSA estimates the country could be the world’s third biggest gambling market after Macau and the United States, raking in revenues of at least $40 billion annually and with many more years of growth before it starts to mature.

Gathering steam

After more than a decade of deliberations, the chances have never been higher that Japan will move to allow casino resorts. If the Diet approves the initial bill, bureaucrats can then start working on concrete laws that would be incorporated in a second bill that proponents aim to pass in 2015, say Dale Caldwell and Masahiro Shiga, partners at Morrison & Foerster in Tokyo. “It is important to note that even after the passing of the draft act, casinos would still be illegal in Japan. But within one year the Diet will try to establish the legal framework to lift the illegality and allow for the implementation of large integrated resorts, similar to what you have in Singapore,” says Caldwell.

Importantly, say Caldwell and Shiga, the draft does not consider stand-alone, gambling-only casinos. Rather, it aims to permit integrated resorts that include casinos as well as hotels, conference centres, recreation and exhibition facilities, as well as other facilities that contribute to the promotion of tourism. In recent months, several international casino operators including MGM Resorts International, Las Vegas Sands Corp, Wynn Resorts and Melco Crown Entertainment have announced plans to develop casino resorts in Japan. Melco pledged $10 million for cultural projects in Japan in December, and is trying to distinguish itself from the pack by incorporating Japanese culture and philosophy in its resort instead of replicating the Las Vegas experience, the company told Reuters.

Domestic developers too are planning for the draft’s possible enactment. Mitsui Fudosan Co, Japan’s biggest property developer, has joined forces with media firm Fuji Media Holdings and builder Kajima Corp to construct a proposed integrated resort complex in Tokyo that would include a hotel, conference centre and a casino. In addition, property developer Mori Building Co, which controls land in the Odaiba area, has also been working on plans to develop a casino resort with other companies, Reuters reports.

Smaller cities up the ante

So far, most international gaming operators have set their sights on the major urban cities of Tokyo and Osaka. “These are the locations you can drive that kind of business tourism into and are known as commercial and financial hubs,” George Tanasijevich, president of Las Vegas Sands unit Marina Bay Sands, told Reuters after a presentation last September, in which he showed a mock-up for a casino resort on Tokyo Bay.

But while Tokyo and Osaka are seen by many as prime targets for an integrated resort, they are likely to face competition from more than a dozen other locations across the country. The northernmost island of Hokkaido is shaping up as one of the key casino resort battlegrounds with three locations – the port towns of Otaru and Tomakomai and Kushiro on the eastern coast – officially putting themselves forward as aspiring hosts. Hokkaido, which draws tourists seeking a cooler location in the summer and skiers in the winter, is cited by casino executives as one of the most attractive spots outside Tokyo and Osaka, along with the beaches of Okinawa in the south. Casinos Austria is one of the global casino operators that has shown an interest in Otaru, a harbour town whose proximity to Sapporo, the biggest city on Hokkaido, is considered a key asset in the casino stakes.

Caesars Entertainment Corp too confirmed that both Hokkaido and Okinawa are on its radar. It has visited officials in Kushiro, a Hokkaido city of 200,000 that is proposing a casino built around a hot springs resort that would also promote the culture of the indigenous Ainu people. Caesars is qualified to run a casino in Japan regardless of whether it is “an urban resort in Tokyo or Osaka, a beach resort in Okinawa, or a mountain resort in Hokkaido,” Steven Tight, head of the company’s international development division, told Reuters.

In contrast to the massive resorts of Las Vegas and Singapore, hopeful hosts outside the big cities are looking to the more compact facilities of Europe as a guide. The German spa town of Baden-Baden, which also has casinos, is serving as a model for casino proponents in two traditional hot springs towns - Atami, in Shizuoka Prefecture, and Naruto, in southwestern Japan’s Tokushima Prefecture.

Meanwhile, in Sasebo in Nagasaki Prefecture, business and political leaders are hoping to secure a licence for a proposed casino alongside the windmills and canals of Huis Ten Bosch, a theme park modelled on a 17th century Dutch town. The complex, which would include a hotel and entertainment facilities in addition to gaming tables and slot machines, would generate nearly $1 billion in annual revenue, the local group estimates.

To ensure local governments are on equal footing with the big cities, the draft plan submitted by Japanese lawmakers suggests establishing a transparent bidding process. “The local governments are going to be heavily involved because they are the ones that are going to apply to the national government for the licences. They will identify an area as an integrated resort zone, and will develop integrated resorts there, presumably bringing to it the local flavour of the community,” says Caldwell.

At the same time, the draft does not specify the number and locations of integrated resorts that will be allowed. However, in a separate document describing basic ideas on the implementation of the bill for integrated resorts (the “Basic Ideas”) – which was adopted by the lawmakers’ caucus but does not comprise a bill – it is suggested that it would be desirable to envisage two types of integrated resort: urban-type integrated resorts and regional-type integrated resorts, says Eriko Ozawa, a partner at Japanese law firm Mori Hamada & Matsumoto.

Furthermore, advocates of the draft plan also recommend that Japan initially limit the number of licences for integrated resorts, prioritising locations promising the biggest economic impact and with the capacity to attract overseas tourists. While there has been no indication as to how many locations would be given the right to develop a casino, some politicians involved in the discussions have suggested that one or two licenses might be allocated to big cities and one or two to regional economies. Even if the number of licenses awarded is limited at the beginning, the Basic Ideas suggests the possibility that this number may be increased incrementally in the future, says Ozawa.

Addressing concerns

While the draft act has received strong backing, lawmakers note that significant measures need to be taken to keep out organised crime. To address those concerns, the draft plan calls for the creation of an agency that would have control over the issuing of licences and the policing of gaming operations, Reuters reports. “There is going to be a huge amount of focus on keeping organised crime out of the casinos,” says Caldwell. “There is also going to be intense scrutiny over everybody that applies for a licence, as there is in the U.S. these days,” he says.

“The hurdles to enter the business should be set high. It should not be easy for anyone to get a licence and participate in the industry,” the policy plan says. “With proper regulation and enforcement of the law, there is absolutely no reason for casinos to become hotbeds of criminal activity,” the plan adds.

The plan also recommends stringent checks on the “suitability” of the people and businesses involved of the kind conducted by the Nevada Gaming Control Board. For example, directors and senior executives of licensees in Japan would be required to provide bank account, credit card, and tax records for themselves and their families going back 10 years. As a further safeguard, the agency charged with policing casinos would be attached to the Cabinet and not part of any ministry. That is intended to prevent corruption and the “amakudari” practice of ministry officials retiring to cushy posts in the industry they once regulated, the draft plan says.

Foreign expertise

There has also been discussion over the extent of ownership foreign operators will retain over their casino resort projects in Japan. Some international gaming magnates have in recent months publicly announced plans to set up integrated resorts on their own, without relying on help from domestic partners. But proponents of the draft want Japanese companies to have the opportunity to invest, and to make sure some of the money stays in Japan.

At the same time, lawyers acknowledge that the implementation and operation of integrated casino resorts, which is new to Japan, will require the experience and expertise of international gaming operators. “Foreign companies will bring the expertise on how to operate a casino and run one of these gigantic integrated resorts. So they certainly will be involved to a certain extent because none of the Japanese companies have ever done anything like this before,” says Caldwell. “It will likely be local land owners and developers working together with international gaming companies,” adds Caldwell.

Ozawa agrees: “Developing integrated resorts would require full understanding of real estate transactions and business in Japan. The Japanese real estate practice is complex and different from other countries, so I think it would be worth considering for a foreign operator to collaborate with a Japanese developer.”

Not all international gaming companies have opted to go it alone. Casinos Austria AG and Switzerland’s Grand Casino Luzern are both considering entering the Japanese market with a local partner, but don't have billions of dollars to spend. To cut costs, they could use existing hotels and buildings. “There are buildings that could be re-utilised and rejuvenated in Japan. That's a key feature of the European model,” Grand Casino Luzern CEO Wolfgang Bliem, who recently spoke at casino conferences in Naruto and Tokyo, told Reuters. “The casino operation should blend into the community,” he says.

A slight delay

Regardless of whether foreign operators look to enter Japan with domestic partners, industry experts claim that addressing the needs of the various domestic stakeholders could prove a major challenge. Nonetheless, concrete gaming laws still lie on the horizon. Advocates are eager to have the new laws passed this year in the hopes of having the first casino resorts up and running in Japan in time for the 2020 Olympics. The draft is still with the Diet, with lawmakers expected to start deliberating an initial bill in May. But the most recent reports indicate that the draft may not get through the Diet as quickly as anticipated, says Morrison & Foerster’s Shiga. “Certain public bills have priority, and those have moved above the draft. As a result, there’s going to be a lot of discussion over other legislation before the draft act gets put on to the docket, and therefore there may be a delay. This doesn’t mean that people aren’t optimistic about the draft. It’s just going to take a little longer.”