With Japan's legislature taking the first steps toward legalized casino gambling, casino operators are angling to get a seat at the baccarat table. Particularly among those with a heavy presence in nearby Macau, the chance to participate in what is estimated to be $40 billion opportunity -- some 40% larger than the gaming revenues Macau casinos took in last year -- is not one to be missed.

The smart money is betting Tokyo will be one of the obvious choices for where casino gambling will be allowed. Image source: Getty Images.

The big players are ready to move once given the green light. Las Vegas Sands (NYSE:LVS) has said it's willing to spend as much as $10 billion to build an integrated resort in Japan, as has MGM Resorts (NYSE:MGM), while Melco Crown Entertainment (NASDAQ:MLCO) indicated it could contribute up to $5 billion to do so. Wynn Resorts (NASDAQ:WYNN) CEO Steve Wynn drooled, "To us, the opportunity is thoroughly Japanese and thoroughly delicious."

Angling for position

It's clear everyone sees the opportunity the new gambling market represents, though it's not as if there is no gambling in the country. After all, Japan does allow gambling on lotteries, horses, boats, and bicycle races, and the 10,000 or so pachinko parlors dotting the country have a sort of quasi-legality to them. Still, a lot remains to be worked out before any cards are dealt, dice thrown, or one-arm bandits have their arms pulled.

Legalizing casino gambling in Japan is a two-stage process and only the first phase has been completed. Still needing to be accomplished is the regulatory process, including where casinos will be permitted and the number of licenses made available.

Most expect Tokyo to be an obvious choice for where casinos will be permitted, though Yokohama and Osaka have been mentioned as well. The main problem actually may be public opposition to casino gambling, with polls reporting as much as 44% of the public is against casino gambling with only 12% in favor. Japan is also said to have substantially higher rates of gambling addicts than other countries, some 5% of the public compared to 1% elsewhere, due in large part to the pachinko parlors.

Japan already allows gambling, as its 10,000 or so pachinko parlors attest, but casino gambling will be something completely different. Image source: Flickr via Raymond June.

A foot in the door

So the enabling legislation is a start, but some operators have been prepping for this day for a long time. Where Sands and Wynn were lobbying the legislature in favor of legalizing casino gambling, pachinko hall operator Dynam Japan Holdings last year was establishing a resort development company in Shimonoseki, the largest city of the Yamaguchi prefecture on the island of Honshu in Japan. It had previously said it was seeking a partnership with an established Asian casino operator and early on in 2016 reportedly was holding discussions with Melco Crown Entertainment, SJM Holdings (OTC:SJMHF), and Galaxy Entertainment.

That could suggest any of them might have a head start on their U.S. counterparts. SJM, however, may have the inside track as it already is a partner with Dynamo through Dynam Macau Legend Development, which it invested in several years ago to learn about casinos, and through which it runs two Macau casinos under SJM licenses.

The Japanese market is going to be large enough when it comes to fruition that many operators will be able to flourish. Moreover, with several years before development begins, casino operators will have plenty of time to build up the cash reserves necessary to finance the projects. MGM Resorts, though, has talked of using a real estate investment trust as "an interesting way to expand the level of involvement." Earlier this year, the casino operator MGM launched the publicly traded REIT MGM Growth Properties.

Image source: Getty Images.

Weight of China lingers

Scoring big may be more of a necessity for operators like Melco Crown, Wynn, and Las Vegas Sands that are highly dependent upon Macau for the majority of their revenues. Melco derives 89% of its revenues from the Chinese gambling district, Wynn gets 61%, and Las Vegas Sands gets 58%. In contrast, MGM realizes just 20% of its revenues from China, though it will be opening up a new resort on the Cotai Strip in early 2017.

Sands recognizes there is a threat present, though it says it's not worried yet. It's hopeful that when Japanese casinos do open their doors, they'll attract gamblers from the northern mainland, not south and central China where many Macau gamblers hail from.

That might not be so easy, as the high-rolling VIPs upon which Macau casinos are still so dependent upon may prefer the relative obscurity of Japan's markets than the intense scrutiny Macau operates under. If so, MGM Resorts may see any impact to its earnings suffer less than its competitors, which would be like hitting the jackpot.