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Casinos in Japan Could Turn Out to Be a Losing Bet

By Rich Duprey – Apr 2, 2018 at 10:05AM

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Its potentially huge gaming market has made Japan highly alluring to casino operators. Potentially intense regulation, however, could markedly reduce the appeal.

As more information becomes available about what Japan's emerging casino sector may look like, it appears leading gaming companies may not want to make as a big a bet on the country as they'd planned.

Those companies' initial enthusiasm led them to speak of spending upwards of $10 billion apiece to build integrated resorts in what was hailed as potentially the world's largest gambling market -- bigger even than Macau. That fervor might cool once the Japanese government starts firming up the rules and regulations casino operators will have to live by. Indeed, from reports so far, expanding into Japan might be more trouble for them than it's worth.

Roulette wheel

Image source: Getty Images.

Mad scramble for position

Ever since Japan took its first steps toward legalizing casino gaming two years ago, the major casino operators have been pledging their full support. Las Vegas Sands (LVS 11.81%) said a new integrated resort in Japan would cost it anywhere from $6 billion to $10 billion, two to three times more than it spent to build its French-themed Parisian resort in Macau. MGM Resorts (MGM -0.20%) said it wasn't going to build any more casinos -- unless it wins a Japan license, in which case it, too, would be willing to spend $10 billion to construct a new resort there.

Other operators eying the chance to get in on the ground floor include Caesars Entertainment, Galaxy Entertainment, Hard Rock, Melco Resorts & Entertainment (MLCO 25.47%), and the son of Macau casino magnate Lawrence Ho.

While the high estimated costs likely reflect that it's more expensive to build in Japan, they also show the opportunity these companies see in the Japanese gaming market, which is billed as possibly being worth $40 billion a year. Wynn Resorts (WYNN 11.99%) never put a price tag on its ambitions, but former CEO Steve Wynn described the Japanese casino market as "thoroughly delicious."

Galaxy also just bought a 5% stake in Wynn Resorts, purchasing shares that Steve Wynn was selling, partially in hopes of it giving it a better chance of gaining access to the market. (Wynn subsequently sold his entire stake in the company that bears his name.)

Unattractive rules of engagement

Here's the issue: Because legalizing casino gaming remains highly unpopular among the Japanese public, it looks like it the Diet, Japan's legislature, is building in roadblocks and hurdles that might markedly reduce the allure for casino operators. Among the proposals being considered:

  • Limiting the number of times a gambler could visit a casino to three times in seven consecutive days or 10 times in 28 consecutive days. (The limits would only apply to Japanese citizens, not to tourists.)
  • Visits would be monitored by the use of government-issued, chip-embedded ID cards.
  • Casinos could be no more than 15,000 square feet in size, or 3% of an integrated resort's total floor space, whichever is smaller.
  • Casinos would be required to file reports on customers (including their name, address, and birth date) who deposit or withdraw amounts exceeding 1 million yen, or about $9,500, during any given 24-hour period.
  • The tax rate for casinos would start at 30% and rise as high as 50%, surpassing even that of Macau, which has tax rates on resorts of 39%. (In Las Vegas, the tax rate is 7%.)

These proposals reflect the competing interests vying to influence the final bill. The public's antipathy toward casinos is driven in part by reports that Japan's gambling addiction rates are significantly higher than those of other countries. Meanwhile, there's a fear that under-regulated casinos could become money-laundering hubs for organized crime. In response, the politicians are putting together proposals with rules that may be unpalatable to casino operators.

If those proposals make it into the final law, the gaming companies that win Japanese casino licenses may find that, for once, the odds are stacked against them.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

MGM Resorts International Stock Quote
MGM Resorts International
$29.99 (-0.20%) $0.06
Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
$66.80 (11.99%) $7.15
Melco Resorts & Entertainment Limited Stock Quote
Melco Resorts & Entertainment Limited
$6.65 (25.47%) $1.35
Las Vegas Sands Stock Quote
Las Vegas Sands
$39.66 (11.81%) $4.19
Caesars Entertainment Corporation Stock Quote
Caesars Entertainment Corporation
Galaxy Entertainment Group Limited Stock Quote
Galaxy Entertainment Group Limited
$5.94 (10.82%) $0.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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