July 9 (Bloomberg) -- “Welcome!” two young women in shorts and Hawaiian shirts chime over the clatter of pinballs and J-Pop at the Million pachinko parlor in the Tokyo residential area of Suginami.
“All of your favorite machines are waiting for you, nice and clean,” beckon orange, green and yellow signs near the door. “We lead you to the next level of amusement.”
For decades, this is how millions of Japanese office workers, housewives and retirees have kicked off long, smoky nights out. They come to play pachinko, a pinball-slot-machine hybrid that has skirted a nationwide gambling ban to become an industry that takes in bets of 19 trillion yen ($187 billion), bigger than the entire economy of New Zealand.
Now, pachinko wants casinos, driven by attendance that has sunk more than 60 percent since the mid-1990s and an uncertain legal status that has prevented them from listing in Japan.
“Pachinko companies are feeling a sense of crisis that they will go into decline unless they do something,” Daigo Fukunaga, a senior analyst at Advanced Research Japan, said in an interview. Casinos would be “a big new market” to pachinko companies, he said.
With the 2020 Tokyo Olympics promising to attract millions of foreign tourists, Japanese lawmakers in December submitted a bill to legalize casinos in the world’s third-largest economy. Prime Minister Shinzo Abe said last month that his ruling party would seek to pass the bill in the fall. If approved, the Japanese casino industry could be worth an estimated $40 billion a year as early as 2025, according to brokerage CLSA Ltd., making it Asia’s second-biggest after Macau.
While Pachinko still attracts players -- about 10 million - - parlor operators and pachinko-machine makers, such as Dynam Japan Holdings Co. and Sega Sammy Holdings Inc., are forced to embrace a change that threatens their long dominance of Japan’s gaming market. The industry is seeking something to give it more legitimacy at home and a greater opportunity for expansion overseas.
Big global casino companies, such as MGM Resorts International and Wynn Resorts Ltd., are courting local partners to help them break into the market. Pachinko companies argue their deep roots in the Japanese gaming industry make them ideal collaborators.
The potential benefits are most obvious for pachinko machine makers like Sega Sammy. Best known outside Japan for its discontinued video game consoles, the company attributes almost half of its revenue to pachinko machines. In May, the company said it would begin making electronic table games for the Macau and Singapore markets as well.
Konami Corp., whose products include pachinko machines and video games, such as the hit Metal Gear series, already makes slot machines and other gambling equipment for Las Vegas Sands Corp. and MGM in Las Vegas and other overseas markets. If approached, the company may tie up with both casino companies, as well as its another client Caesars Entertainment Corp.
Satoshi Sakamoto, the chief executive officer of Konami’s gaming unit, said in an interview on May 28 that Japanese casinos “could be a turning point” for the company.
Sega Sammy rose 1.2 percent to close at 1,992 yen in Tokyo trading today after a two-day decline. Konami climbed 0.6 percent.
Pachinko parlor operators, such as Dynam, Maruhan Corp. and P Ark Holdings, will also benefit from a casino boom. Dynam, Japan’s second-largest pachinko operator, may sell additional shares to fund its entry into the casino market, Chairman Yoji Sato said in a March interview. Maruhan, Japan’s biggest pachinko operator, is also interested in running casinos, according to people familiar with the company’s plans.
Such moves may help pachinko operators overcome legal concerns that have blocked them from securing listings on Japanese stock exchanges.
There are 11,000 pachinko parlors across the country. Players often sit for hours, plunking down up to 4 yen for each metal ball. The balls beget more balls, which beget prizes like a Hello Kitty bread maker or a Nikon Corp. Coolpix digital camera. Players can also choose to take tokens instead which they can take to a shop next door to exchange for money, avoiding laws that bar cash payments.
Japanese law prohibits gambling except for the government-run options such as horse and boat racing. Pachinko operates in a legal gray area, since operators rely on third-party shops to exchange prizes for cash. The National Police Agency, which oversees the pachinko industry, has described the system as “not immediately illegal” without endorsing it.
The legal ambiguity is why Tokyo-based P Ark’s 2005 application to list on the Jasdaq was rejected and why Dynam went to Hong Kong in 2012 for the first-ever public offering by a pachinko operator.
“If casinos are legal, saying ‘no’ to pachinko doesn’t make sense,” said Fukunaga of Advanced Research Japan.
The game’s reputation has also been hit by concerns the game feeds gambling addictions which were exacerbated by machines that generated high payouts. At least seven children have died since 2006 after their parents left them unattended in hot cars to play pachinko, Yoshiyuki Tsuji, the head of community safety for Japan’s National Police Agency, told lawmakers during a June 18 discussion on the casino bill.
The industry voluntarily removed machines that gave high payouts in 1996, while regulators tightened rules to curb jackpots in some of machines in 2004. Without big payouts, pachinko offers few thrills a smartphone can’t match.
The change signaled an end of the seven decades of growth for pachinko, which saw revenues peak at 31 trillion yen in 1995, according to the Japan Productivity Center. Back then, 29 million people dropped a pinball in a pachinko machine, or about a quarter of all Japanese.
Today, the industry takes in bets of 19 trillion yen, or $19-28 billion in revenue based on CLSA’s estimated win rate of 10-15 percent for the game. That is roughly half of the $45 billion in casino revenue recorded last year in Macau, the world’s largest gambling hub.
Pachinko companies are betting that casinos could bring it new legitimacy. That’s why Motoyuki Nakajima, executive managing director at Pachinko Chain Store Association, said he welcomes an end to the ban.
“We have to change our environment which people think is dirty, smoky, and noisy,” Nakajima said. “With casinos, we will be able to change.”
In February, a group of lawmakers led by former Justice Minister Okiharu Yasuoka proposed a legislation to supplement a scheduled cut in the corporate tax with a 1 percent tax on pachinko winnings. This would generate 200 billion yen of tax revenue and pachinko parlors want legitimacy in return. Two of the industry’s five major associations so far support the move, Nakajima said.
“If the cashing issue is cleared, it makes it possible for pachinko parlors to get listed,” he said in an interview on June 17. “There are 10-20 companies wanting to do IPO, and they are all preparing.”
Some pachinko operators are hesitant to embrace casinos. Masato Kishino, president at Towa Sangyo Co., which operates 26 parlors around Tokyo, said it was possible that casinos could speed up pachinko’s decline.
“I can’t think of any positive factor,” for the pachinko industry if casinos are legalized, Kishino said. “We don’t have stores nationwide like Dynam or Maruhan. We will have to find a way to survive in this war.”
If nothing else, casinos could provide pachinko a chance to expand beyond Japan’s graying population. These days, many players are likely to be like 84-year-old Eiko Murata, who was exchanging her prizes for cash outside a parlor in Tokyo’s Mitaka district.
“Casinos are fine, but pachinko is better for me,” said Murata, who has been playing pachinko for 20 years. “Pachinko involves a lot of finger movements, so it’s good for my brain. It gets stimulated.”
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