Japan’s $200BN Pachinko Industry Bracing for Anti-Addiction Regulation

Japan’s recently passed IR Implementation Bill, which allows three new casino resorts to be built in the country, has been hailed as a potentially huge revenue generator for the government. It has also set off a stampede among casino firms looking to score a piece of the action, but there’s a traditional type of gambling game in Japan that could see its fortunes sag in the coming years as a result: pachinko.

Pachinko Overview

Pachinko is a game in which players fire metal balls – similar to pinballs – onto a vertically aligned playing surface. The balls bounce around the machine, ricocheting off of obstacles, until they drop down to the bottom where they fall into slots, and depending upon which slots the balls enter, the customer can win additional balls. In order to acquire the balls needed to play, the user must first purchase them with money.

Any balls won can be traded in for prizes with each prize costing a specified number of balls. Players then take these “winnings” to a separate part of the establishment, or sometimes even a location entirely outside of the pachinko parlor, and exchange them for cash.

The reason for this convoluted system of cash, balls and prizes is to circumvent Japan’s strict gambling laws. Wagering for real money directly is not allowed in the country apart from a few exceptions, like certain racing events and municipal lotteries. Pachinko is the most popular form of Japanese gambling with revenues estimated to be in the $200 billion range.

New Gambling Addiction Law

As part of the political wrangling involved in getting the IR Implementation Bill passed, Prime Minister Shinzo Abe’s government promoted the Basic Bill on Gambling Addiction Countermeasures. It cleared the House of Representatives May 25 and then proceeded to the House of Councillors where it was approved on July 6. Having been OKed by both houses of the Japanese Diet, this anti-problem gambling legislation became official law.

The Gambling Addiction Countermeasures bill will fund research into gambling addiction, promote educational campaigns about this topic, and establish cooperative meetings between problem gamers, casino management, and expert authorities. Some of the details of the bill are left for the national and local governments to fill in later, and many observers believe that new restrictions on pachinko will almost certainly be contained in the regulations drafted.

The pachinko industry is already upset at a separate rule that recently reduced the maximum payout from the machines to less than ¥50,000 (about $450) per four-hour session from the previous cap of ¥100,000 (about $900).

Pachinko History

Early forms of pachinko were developed in the 1920s, but the eruption of World War II in the ’30s and ’40s put a halt to the game. It was only in the post-war period that it gained much traction in the marketplace. Most pachinko parlors opened during this era were owned by members of Japan’s Korean minority, a pattern that holds true to this day. The first pachinko systems were almost entirely mechanical in nature with only a few electrical features, like lights that activated when the user scored a big win.

During the ’80s and ’90s, electronic elements became widespread, and additions were made to the standard gameplay, including bonus rounds and random jackpots. The pachinko industry reached a peak during the mid-90s and 2000s with estimated annual revenues in the ballpark of ¥30 trillion (approximately $270 billion) and more than 17,000 pachinko parlors throughout Japan at the height of its popularity.

Steady Decline

In 2004, pachinko became the subject of serious regulatory attention for the first time. It’s no coincidence that its profitability began to decline after that point. Today, there are fewer than 11,000 pachinko establishments in Japan: perhaps as few as 9,600 depending on which figures you look at. The total haul from the industry currently amounts to ¥20 trillion ($180 billion) a year, down significantly from a decade ago.

Many pachinko establishments have begun catering to high rollers who are willing to gamble hundreds of dollars per session. This has helped to ensure the viability of these businesses even as the overall population of players has decreased by two-thirds since 1995. However, the maximum payout limits now in effect hinder parlors’ ability to satisfy this group of free-spending consumers.

There are other factors at play besides anti-gambling laws. It’s also true that the population of players is getting older as young people are gravitating instead to video games and alternate betting pastimes. As retirees on fixed incomes replace cash-loaded salarymen as pachinko customers, the future seems to hold even more challenges lying in wait for the beleaguered industry. The opening of the first Japanese casinos in the next few years will introduce another form of competition for customers’ gambling cash.

Some Stand to Gain

Though most proprietors of pachinko halls are against any new regulations that would put heavier burdens on them, this is not a universal viewpoint by any means. Chains like Dynam and Maruhan operate hundreds of locations, so they possess the wherewithal and business acumen to thrive and expand even as their smaller rivals consider closing their doors. Manufacturers too may benefit from any new regulations on machine design because parlor owners who wish to remain in compliance must often replace outdated units with new ones that meet all the legal criteria. These large companies also have a better chance of diversifying their income streams by clawing their way into the nascent casino scene.