The Japanese Gaming Obsession: Why Casinos Will Win in Japan

While casinos are currently outlawed in the Land of the Rising Sun, many analysts estimate that Japan could be the second-largest gambling market in the world. The only obstacle in the way for casino companies to build in Japan is getting casinos legalized in the country. Fortunately, this may be about to change. 

That's a good thing for the companies ready to build there as soon as the government gives the go ahead. Las Vegas Sands (NYSE: LVS  ) and Melco Crown (NASDAQ: MPEL  ) are two frontrunners saying that they will invest huge sums in Japan as soon as allowed, with a statement from Las Vegas Sands CEO Sheldon Adelson saying that he would invest $10 billion if need be. MGM Resorts International (NYSE: MGM  ) and Wynn Resorts (NASDAQ: WYNN  ) are also both getting serious about their talks with Japanese officials, with statements from both companies that they will happily invest the estimated $4.8 billion needed to build a casino resort in Japan.

The government will vote on legislation in the coming months that will decide whether or not casinos will be allowed to start building in Japan. Because the government has said that it would like casinos to fund a portion of the cost of the upcoming 2020 Olympics in Tokyo, the general consensus is that the government will give its approval and that four licenses total will be awarded in Tokyo and Osaka. Though large casinos will be allowed in the country for the first time, gaming is already an obsession in Japan.


Half arcade, half gambling hall, this is a typical Pachinko parlor in Japan. Photo: Electric City

Pachinko -- the Japanese gaming craze
A cross between an arcade game and a typical slot machine or gambling device, this legal gambling craze has swept the Japanese gaming market. Almost like a pinball machine with no flipper and multiple small balls, Pachinko is a fast-paced, exciting, and overall addicting game for what would be mainstream gamblers if gambling for money were legal in the country. The object of the game is collect as many balls or points as possible, which can then buy the gamer prizes. However, the balls are often exchanged for prizes which are then conveniently traded for cash nearby.

Pachinko parlors are widespread in Japan. According to Japan-zone.com, Pachinko makes up as much as 40% of Japanese leisure spending from over 20 million Pachinko enthusiasts. The parlors together employ over 300,000 people, which is three times as much as the steel industry in Japan. This is why analysts believe that the Japanese gamers will respond very well to slot machines and gambling directly for money. It's believed that Japan's gaming industry could pull in revenue of at least $40 billion a year.

Seedy gaming in Tokyo: What the government hopes to avoid
Casinos as we know them are not in the country, but underground gaming in the form of sneaky betting and similar more "seedy" gambling options is rampant in certain areas. Unfortunately, the industry has been pushed to the fringe of the market; it resides in pockets of dirty, grungy gambling hotspots within major cities like Tokyo.

Nowhere is this more true than in an area called Kabukicho within Tokyo. Taking up about one square kilometer, this area is filled with betting houses, massage parlors, seedy hotels, and the Yakuza gang. The government does not want a gaming industry that operates in this way. Politicians believe that they can help to pull gambling out of this seedy mess by putting it into large, family friendly, regulated casinos.

Melco Crown is a serious contender as a company that can show it has more to offer Japan than just gambling. The company will be able to use its Macau casinos as an example of how it will incorporate world-class entertainment into its Japanese casino.

The City of Dreams resort in Macau brings entertainment to a new level. World-renowned live acrobatic and dance shows housed in the Macau casino, such as the beautiful House of Dancing Water, have made this property a popular destination for vacationers, even those who are not gambling. An analyst at Barrons notes that "the House of Dancing Water show is a well known and respected brand and has given [Melco Crown] some brand equity in Japan."


A scene from the acrobatic spectacular-House of Dancing Water. Photo: House of Dancing Water

The industry is there, these companies just need to capitalize on it
Gaming is not new to the Japanese; in fact, it's already a major industry. The Japanese government has shown that it is ready to allow casinos to come in and build resorts that will bring the country revenue while limiting underground gambling issues. With an expected $10 billion a year in revenue that will come from the Japanese gaming market when the government legalizes the industry, the casino companies that win bids to build there are likely going to see big gains.

These are reasons to be bullish long-term on companies like Las Vegas Sands and Melco Crown that are aggressive about getting in the Japanese market. Foolish investors should continue to watch in the coming months for the official vote from the Japanese legislators.

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