This is the second of an occasional series from The Globe and Mail's Brian Milner, who visited Japan to assess the results of dramatic efforts to revitalize the world's third-largest economy.
The brightly lit, extremely loud but spotless arcade near the Shimbashi rail station in central Tokyo features row after row of beeping electronic machines with flashing lights and screens displaying popular animated characters. Smiling, uniformed attendants eagerly explain how to play the uniquely Japanese amalgam of pinball and video slot machines known as pachinko.
Nearly 12,000 pachinko parlours across Japan lure more than 11 million people annually to risk their money at what is officially described as a leisure activity, but is actually the country's only legal form of machine or table gambling.
The 85-year-old industry has been steadily losing ground in recent years as its customer base ages and shrinks and young people prefer playing games online. It has also been dogged by a seedy reputation – including possible links of some operators to mobsters and even to North Korea – that its bigger corporate players have worked hard to dispel. Yet the industry still expects revenue to reach a staggering ¥27.9-trillion ($286-billion) this year. Outside analysts put the number closer to a still impressive ¥20-trillion, surpassing other retail sectors.
Those are the sort of numbers that will soon bring pachinko's reign as the only game in town to an end, as Japan heads toward legalizing casino gambling for the first time in one of many reforms introduced by Prime Minister Shinzo Abe.
Casinos have gone from a pipe dream in this conservative country to a near sure thing, because long-time advocates have shrewdly attached their goal to the wide net cast by Abenomics, Mr. Abe's package of aggressive monetary and fiscal policies and structural reforms.
As far as the government is concerned, it's all about shoring up struggling local economies, juicing tax revenues and doubling tourism to about 20 million visitors a year by 2020, when Tokyo will host the Summer Olympics for the first time since 1964.
In their determined efforts to steer Japan back to a path of sustained economic growth and restore its former lustre and global clout, Mr. Abe and his allies are leaving no straw ungrasped. That includes the idea of adding more teams to the country's hugely popular major baseball leagues and jumping into the long-prohibited world of casino gambling.
Yet there seems to be little concern that casinos have rarely lived up to their hype as major drivers of job growth and commercial development.
"For some of the more affluent tourists, the casino is one idea we would like to offer," says Tsukasa Akimoto, a lawmaker with the ruling Liberal Democratic Party who heads the parliamentary casino caucus. "The thinking is that there will be casino entertainment along with other types of services. It is part of the strategy for Japan to be more tourist-friendly."
The legalization drive has the support of Mr. Abe, his governing Liberal Democratic Party-led coalition, a casino caucus that includes opposition members and regional politicians who see it as a partial solution to years of economic malaise.
Critics of the initiative, which is expected to come to a vote this fall in a special session of the Japanese parliament, the Diet, say the Abe government is desperate to reverse its sinking popularity in the wake of deteriorating economic growth and a lack of progress on key promised reforms.
"People who are trying to revive the local economies are making a mistake if they're trying to prop them up with this casino plan," says Takanori Shibata, an economics professor at Seigakuin University in Ageo, northwest of Tokyo. "Thinking that casinos will lure in foreign visitors is very optimistic. I don't think that will turn into reality."
The casino prohibition, which dates in its modern form to the 1880s, was based on traditional Japanese notions of hard work and duty. The law is so strict that Japanese-registered cruise ships are not allowed to operate casinos on board, even in international waters. But there is plenty of legal betting on lotteries, as well as horse, powerboat, motorcycle and bicycle races, which account for a combined total of close to ¥5-trillion annually.
Professional boat racing alone, which is largely confined to Japan and South Korea, accounts for about 20 per cent of that amount, according to government figures. Pachinko is not included in the official gambling statistics, because of its designation as pure entertainment.
Illegal gambling, including casinos, siphons off similarly large sums, all of it untaxed and much of which ends up in the coffers of the yakuza, Japan's version of mafia-style organized crime syndicates, which reap fat profits from gambling, protection rackets and loan-sharking.
The prospect of such rich virgin territory is bound to appeal to the global casino industry, which is beset by problems in the overbuilt U.S. market and running out of room for further expansion in saturated parts of Asia. Even in such growth markets as Macau, by far the world's most lucrative gambling mecca, dark clouds loom on the horizon in the form of a further Chinese crackdown on government corruption, including gambling junkets, that could put a serious dent in its biggest source of customers and cash.
Total revenue at Macau's 35 casinos fell in June, the first monthly decline since 2009, and dipped again in July. Elsewhere, markets have also been levelling off.
Beijing's determination to rein in the big spenders could put a crimp in any projections for Japan, which is surely hoping to lure a hefty chunk of Chinese gambling money – the much sought-after whale in gambling initiatives across Asia and as far away as Vancouver. Reflecting their increasing disposable incomes, Chinese tourists have been flocking to Japan and other countries in the region, despite rising political tensions between China and its neighbours.
Estimates of the possible casino take in Japan vary widely, and much will depend on their location, size and tax structure. The economic potential is huge, but "it is too early to judge," says Toru Mihara, director of the Institute of Amusement Industry Studies at Osaka University of Commerce, who has been advising legislators.
Bullish analysts reckon revenue could reach a whopping $40-billion (U.S.) within a few years, based on the size of the gambling market and the government's two-tier strategy of allowing two or three large-scale resorts in major cities and eventually up to 10 smaller casinos in other, touristic regions, such as Okinawa in the south and Hokkaido's ski country in the north.
But the actual market may turn out to be no more than half that amount – perhaps $21-billion or $22-billion, when fully built – Morgan Stanley analysts estimated in a spring report, using total lottery sales and gross domestic product as their gauge. "Japan may struggle to convert pachinko players or attract Chinese VIP customers," the report said. It added that returns might fall below consensus estimates of 20 per cent of operating profits, because of high building costs and various levels of taxation.
The big "integrated resorts" would include hotels, convention space, entertainment complexes and shopping malls. The government hopes to have them running in time to take advantage of the huge influx of visitors for the Olympics. But the plan must pass legislative and regulatory hurdles first, including the creation of an agency to police the industry.
The national government would select the locations based on recommendations from local authorities, which would be responsible for inviting bids and awarding the licences. All the casinos would be privately owned.
The government's preferred model is not Las Vegas but Singapore, which has allowed only two integrated resorts. Their revenues could surpass $8-billion this year, up from zero in just four years of operation.
What the Japanese will not do is import a U.S.-style system with different rules for each state or legal structures advocated by some American gambling companies. "You have to understand the precise background on how things work in Japan," Mr. Mihara said in an interview in the cramped, windowless office he uses when in Tokyo.
Still, foreign players already operating in other Asian markets are expected to join several domestic bidders for licences. Japanese companies that have signalled their interest include Dynam Japan Holdings Co., a major pachinko operator, Konami Corp., which manufactures slot machines and video games, railway company Keikyu Corp., media heavyweight Fuji Media Holdings and Mitsui Fudosan Co., a large property developer.
But much will depend on the tax structure and the percentage of the gambling haul the owners are allowed to keep. Both levels of government intend to get a piece of the action.
"There are successful and unsuccessful casino operators, so we have to be very careful," Mr. Akimoto of the LDP says during an interview in his office. "It's not that easy a business to operate," he adds, noting the fierce competition. "In Japan, I don't think we can build that many."
He is well aware of the industry's woes in the U.S. market, where doors are closing from Mississippi to Atlantic City.
Three large casinos have gone out of business in Atlantic City alone this year. And another operator, Trump Entertainment Resorts, filed for bankruptcy protection this week after losses shot up to $25.7-million in the first six months of the year, compared with a $5.1-million shortfall for all of 2013. One of its two Atlantic City casinos, the Trump Plaza, will be shuttered next week and the other, the Trump Taj Mahal, may soon join it.
U.S. casino operators expecting a gold mine have ended up playing Russian roulette with their investors' money. And they are bound to be leery of jumping into Japan with both feet. Las Vegas executives have already warned Japanese policy makers that the only market where casinos would make enough of a return to justify a multibillion-dollar investment is Tokyo. But the booming capital has shown little interest in getting into the gambling game as it gears up for the Olympics.
By contrast, authorities in such cities as Osaka and Kushiro in eastern Hokkaido have high hopes that casino resorts will provide a badly needed shot in the arm for communities pummelled by industrial decline, high unemployment, and weak business and consumer spending. Numerous towns outside bustling Tokyo and tourist hot spots like Kyoto have been hit with what has been called the "shutter street" phenomenon – whole commercial streets of closed shutters on shops, factories and service businesses.
In Osaka, Japan's third-largest city, a new wave of policy makers sees gambling as part of the solution to the decline, exacerbated by the loss of key employers, which have moved their head offices to Tokyo in recent decades to be closer to the political centre. "The result was much brain drainage and funds outflow," says Ichiro Tanioka, president of Osaka University of Commerce.
Like most casino proponents, Mr. Tanioka dismisses the risks, even though no detailed studies have been done on the potential economic and social impact in a country already suffering from an epidemic of problem gambling.
"When measured by the increase of tax revenue, decline of unemployment or increase in the number of tourists, [there is] no doubt that this would have an overwhelmingly larger impact than any other previous new industries that have emerged," says Mr. Tanioka, 58, a criminologist who has done extensive research into the history and development of Las Vegas, as well as the international casino business.
About 5.4 million people, nearly 5 per cent of the adult population, fall into the category of "pathological gamblers," according to a national survey released last month by the Ministry of Health, Labour and Welfare. For men over the age of 20, the legal minimum for pachinko (although no one is ever carded), the addiction level is an astonishing 8.7 per cent.
By comparison, problem rates in other Asian markets like gambling-mad Hong Kong and South Korea are below 2 per cent. And Japan has few treatment facilities for addicts.
Such a high level in a population with less than full access to legal gambling (even playing poker for cash is prohibited) ought to sound a warning bell for legislators, says the gambling foe Mr. Shibata, who argues that the social costs will outweigh any economic benefits.
Suicide is another risk factor not being taken into account, says Mr. Shibata, who has studied the social and economic impact of casinos in the U.S., where 39 states allow them in one form or another. Japan's high suicide rate has been trending lower in recent years, but "economic suicides are increasing on a statistical basis [to about 20 per cent of the total]. Gambling has the possibility to raise that number," he says.
But gambling advocates argue that the real problem lies with smaller "convenience casinos," including pachinko parlours, with lax supervision.
"No doubt, with casinos opening, patients suffering from gambling dependency will come to the surface," Mr. Tanioka says. He cites the Kansas state law making it mandatory for casinos to earmark more than 1 per cent of gambling revenues for research and treatment of addicts and suggests Japan would implement a similar health measure.
"As long as large-scale casinos would be developed under the [same] plan in Japan, I do not believe that will trigger a sudden emergence of new patients." What's more, "it will offer an avenue for treatment" for those who are already suffering from addiction.
Surprisingly, a large number of pachinko operators welcome the proposed liberalization in the belief that it could help their own flagging business by fuelling more interest in gambling. With no more than three large casino projects likely to be approved, pachinko will remain the only legal option for most Japanese.
But the industry faces a further winnowing of its ranks, which are already down by more than 8,000 stores in just the past five years.
"Almost every corner has a pachinko shop," says Motoyuki Nakajima, managing director of the Pachinko Chain Store Association, who acknowledges his members are divided on the issue. "People don't commute to casinos."