A billion-dollar industry in the balance
Online gambling in Japan has enjoyed some of the most dramatic growth of any gambling sector anywhere in the world, but its era of operating in shadows with affiliate assistance and amid tenuous law enforcement may be nearing a turning point.
In this forensic explainer, VIXIO GamblingCompliance's contributing editor for Asia, Martin Williams, paints the picture of a booming Japanese online casino sector and explores evidence and legal expertise to understand how long this grey market can survive.
Is Japan's online casino sector getting too big for lawmakers to ignore?
Within a few short years, Japanese traffic at foreign-based gambling websites has grown from tens of thousands of hits per day to almost 3m a day, testament to the illegal segment’s revenue potential amid the worst pandemic in a century.
With online revenue now approaching billions of dollars a year, the question for Japanese affiliates and their foreign partner websites has only become more pressing: When might the government act to enforce the law against affiliates and users, or else legalise the segment?
Legal opinion varies on the viability of the status quo and, as the industry waits for signs of government movement, pressure is building between bureaucratic and online gambling market forces — a problem that will ultimately rely on a legislative solution.
But with Japanese gamblers making some 83m visits to offshore websites a month, with next to zero chance of legal fallout for players, a proxy regulatory function may be cohering in the consumer affairs bureaucracy until the pressure becomes unsustainable for lawmakers in the Diet.
A Bizarre Equilibrium
Online casino in Japan is a market dominated by affiliates, many of which openly acknowledge its dubious legal status.
Akin to the reality-defying, look-the-other-way legal protections that dub pachinko a non-gambling activity or the Macau of old in which massive growth was rooted in cross-border lawbreaking, the Japanese online industry has attained a bizarre equilibrium.
Japan-based gambling websites are taboo, but Japanese-language affiliate websites that solicit, educate and direct players to gaming websites have been allowed to take hold, nurturing and delivering millions of gamblers to foreign interests.
All of this is in violation of the Criminal Code, according to police statements and legal analysis provided to VIXIO GamblingCompliance.
Indeed, Japanese players are in some cases urged by affiliate websites to tread very softly in the online gambling space.
Gamblers are advised to be circumspect with personal data, avoid websites with live gaming tables and Japanese-speaking dealers and resist the urge to discuss gambling in online forums. All such suggestions point to a gaming segment that is fully conscious of the grey market reality of a nominally illicit activity.
For example, the “Online Casino Beginner’s Navi” website states that because of legal uncertainty, customers should proceed “at your own risk” and refrain from using conspicuously Japanese-facing websites, referring to one’s online gaming activity in blogs and social networking services, sharing details of casino websites online or making “personally identifiable statements” in online casino chatrooms.
With any gambling sub-culture comes a sub-culture of caution.
But the exploding growth of the Japanese market and its greater strength in the pandemic era threaten its equilibrium and could amount to a provocation for police, conservative media and lawmakers that cannot be indefinitely dodged by the caution of millions of users.
Further complicating the environment is massive growth that has seen a proliferation of corporate interest, both mainstream and fringe, with a diversity now encompassing cryptocurrencies and promotional crossover with Japan’s enormous and ubiquitous porn industry.
Online gambling in Japan flourishes in the space between poor law enforcement and canny affiliate operations.
A user culture of circumspection may prove to be less protective over time as foreign interests ramp up investment.
Virtual currencies and cross-pollination with insalubrious content could trigger formal, rigorous scrutiny.
Why does Pachinko matter?
Once the world’s largest gaming market, pachinko serves as something of a model for online gambling’s success, in that the law and the authorities have long ignored its reality as a gambling juggernaut.
To this day, pachinko and its cousin pachislot are classed as forms of entertainment, not gambling, thus avoiding decades of specialist regulation that addictive behaviour mandates, as well as avoiding gaming taxes.
With the advent of integrated resorts, however, the public eye has focused on the consequences of land-based problem gambling to such a degree that pachinko operators have been unable to avoid fallout, including long overdue scholastic research on addiction and pachinko administration.
At the same time, pachinko has been shielded from reform, despite and because of factors such as police and gangster patronage and a long-standing intersection of operations with Japan’s ethnic Korean community, including the transfer of significant amounts of revenue to North Korea.
Japan’s disinclination to aggressively reform almost any aspect of public policy gives sectors such as pachinko and online gambling several degrees of protection.
The disadvantage for online gambling is that it is outside the system rather than deeply inside it, providing it with much less protection and weaker channels of communication when policymakers eventually lumber into view.
Too Big To Ignore…
The sector's almost unfathomable rate of growth threatens to draw attention from regulators and lawmakers.
Kyodo News, Japan’s largest news agency, published a report in December 2021 that updated growth metrics for the industry.
It cited a survey by Israeli digital intelligence service Similarweb, which found that online gaming volume between December 2018 and September 2021 increased by a factor of almost 119, or an 11,800 percent increase.
Similarweb survey data noted around 700,000 monthly visits to gambling websites by Japanese users at the end of December 2018.
A sharp increase in volume was detected in February 2019, and this momentum was super-charged as the coronavirus pandemic began, reaching 78.2m visits per month in January 2020.
A downward plunge was then followed by another jump from August 2020 and by September 2021 the volume had reached 83m monthly visits, 119 times the volume at the end of 2018.
This extraordinary acceleration has made Japan the third-largest market by volume in the world after the United States (258m visits per month) and Germany (104m), Kyodo quoted the survey as saying.
The timing of the spurts in growth suggests the sector has been driven in part by homebound individuals over the course of the pandemic and in part by increasingly sophisticated affiliate networks.
But unlike the United States and Germany, which have windows for legal online casino gambling, Japan’s rise has turned it into an “illegal casino superpower”, Kyodo said.
The survey did not make it clear if the Similarweb data included legal domestic websites for horseracing and sports betting, which have also made inroads during the pandemic.
But the overwhelming increase in overall volume cannot be attributed to modest revenue gains in regulated markets.
Online casino Vera & John, whose smartphone customers dominated the Japanese market until late 2020, now faces competitors with Japan-facing webpages who are pulling 10m visits per month, the survey said.
But Vera & John retains a major presence, ranking no. 1 for Japan in December 2021, according to Similarweb data seen by VIXIO GamblingCompliance.
International Casino Research Institute (ICRI) director Takashi Kiso told Kyodo News that Japan is now targeted as an online growth market with virtually no legal or regulatory impediments.
He said the market now boasts more than 2m customers a year and hundreds of millions of dollars in outbound spend, a situation demanding discussion of how to regulate and tax the sector, and how to implement countermeasures combating addiction.
The Kyodo report followed an Asahi Shimbun report in February 2021 that also cited Similarweb data, noting that by July 2020, sports-betting platform bet365 was leading foreign bookmaking sites with 13.2m visits per month.
Citing the National Police Agency and archaic gambling articles in the Criminal Code, Kyodo News, the Asahi Shimbun and other mainstream media now explicitly warn readers that gambling on foreign websites is illegal.
The police went so far as to issue a statement, reported by the Asahi Shimbun in February 2021, that “we will round up as many users as possible”.
Yet online gamblers are almost entirely below the police radar as long as they are reasonably discreet, online and offline, about their gaming.
Growth in online gambling volume has been steep but irregular, with the pandemic proving beneficial overall.
Only a few years of market expansion has made Japan one of the globe's largest illegal gambling markets.
Police, the government and now the media maintain the sector is illegal, but volume continues to expand.
The ‘Subordinate’ Defence
One legal victory for an online gambler was key in triggering the wave of gambling growth.
Although discretion may be a gamer watchword, police action against the sector overall may also have been discouraged by a 2016 legal incident that tested the enforceability of gambling provisions in the Criminal Code.
Takahiro Tsuda, a managing partner with the Kyoto and Tokyo-based law firm Call Green Office, emerged as an unlikely hero for the sector when he defended an online gambler arrested in Kyoto.
One of three men arrested for online gaming offences at the time, the client refused to follow the other two in accepting summary prosecution and paying a fine.
Attorney Tsuda, a specialist in motor accident claims and a mahjong enthusiast, noted in a 2017 blog entry that online gamers who got into trouble would ordinarily pay a ¥200,000 ($1,750) fine uncontested, as if it were a traffic violation to be disposed of as quickly and as quietly as possible.
But Tsuda’s client challenged his summary prosecution, which would generate a criminal record. And instead of taking the matter to trial, prosecutors dropped the charges and released him from custody.
On the basis of this incident and the reality on the ground, Tsuda concluded that no prosecution of an online gambler could be possible unless the amount gambled was very large and police presented evidence of betting activity on overseas websites.
Tsuda argued in this blog that his client was a non-commercial user and committed a simple gambling offence that did not warrant detention.
He said it was inappropriate for his client to be prosecuted for a simple gambling offence, given that the website he allegedly used was operating legally and registered in a foreign jurisdiction.
He also argued that punishment did not make sense in a nation filled with pachinko parlours and that was committed to legalising casinos in integrated resorts (IRs).
The prosecutors have not publicised their reasons for dropping the charges, but Tsuda said they seemed to think it would be difficult to convict an individual undertaking a “de facto subordinate relationship” with a legally registered foreign corporate party.
On the basis of this incident and the reality on the ground, Tsuda concluded that no prosecution of an online gambler could be possible unless the amount gambled was very large and police presented evidence of betting activity on overseas websites that would be almost impossible to obtain.
Japan’s pragmatic mixture of civil and common law may have also fortified any protection for online gamblers as a result of this incident.
Although traditionally regarded as a civil law jurisdiction in which legal precedent and case law exact limited influence, Japan’s ongoing reluctance to codify updates to gambling crime means the Tsuda defence has had the potential to weigh on decisions to prosecute gamers in adjacent courts.
And events since 2016 offer some support to Tsuda’s thesis. No online gambler has been sent to jail, affiliates have prospered and foreign companies continue to carve up a pandemic-proof Japanese pie.
The dropping of charges against a single online gambler in 2016 has helped to boost industry confidence.
The lawyer in the case says the prosecutors' decision has dramatically decreased accountability of gamblers.
No online gambler has ever been jailed, and no affiliate has ever been prosecuted for gambling offences alone.
A Legal Rebuttal
This legal victory, however, may not be the solid foundation it appears to be, and relying on it could trigger a major reversal of fortune.
Analysis provided to VIXIO by Japan-based gaming law specialists has disputed the strength of Tsuda’s “subordinate” defence and the contention that licensed offshore websites protect Japanese from legal peril.
“The impact of Attorney Tsuda’s report that he got the charges dropped against his client … has been monumental to the extent that offshore gambling sites and their affiliates have seized on the urban legend Attorney Tsuda has created around the fact that he believes that the prosecutor accepted his/the accused’s argument,” according to the analysis, which was submitted on condition of anonymity.
We do not believe that the decision by the prosecutor not to indict Attorney Tsuda’s client demonstrates any overall recognition by the Japanese criminal enforcement agencies that gambling by Japanese residents on overseas operated casino/gambling sites is lawful.
The analysis uses the word “monumental” because, it says, a 2021 research report by ICRI director Takashi Kiso uncovered a “bizarre oxymoron”: although 59 percent of respondents thought gambling on offshore casino sites was either legal or “grey”, 78 percent said gambling on offshore mahjong sites was entirely “illegal”.
In any case, “while the dropping of the charges may have been a personal coup for Attorney Tsuda, we do not believe that the decision by the prosecutor not to indict Attorney Tsuda’s client demonstrates any overall recognition by the Japanese criminal enforcement agencies that gambling by Japanese residents on overseas operated casino/gambling sites is lawful, as regards either the gambler or the gambling site operator”, the analysis says.
“We are not aware that there has been any change in the government’s position since the response by the government to questions” that were raised in the Diet in 2013.
The analysis adds that, regardless of the prosecutors’ position, publicity surrounding Tsuda’s defence “has clearly fuelled the perception that gambling on offshore internet casino sites is a ‘grey area’, [the perception of which] has been further aided by statements in the Japanese language by offshore operators that online betting is not illegal”.
“This appears to have led not only to a massive increase in online casino gambling by Japanese residents … but to a spawning of schemes to invest in such overseas affiliate sites”, including “a host of pyramid-type investment schemes [among] offshore online casino affiliates”.
Still, in view of the rapid rise of online gambling, enforcement is the barest exception rather than the rule.
Interim cases in which police have charged suspects with offences relating to online gambling have not focused on private gambling activity.
Two of the most recent cases, as reported by the Yomiuri Shimbun newspaper, illustrate this.
In October 2021, two men were arrested in Saitama Prefecture for fraudulently soliciting investment in online casino operations, but no gamblers were implicated.
Later that month, Tokyo police arrested the 41-year-old manager of a 24-hour internet casino store known as “Candy”, along with two employees.
Operational since March, the store had generated a modest ¥108m in volume from its 300 members.
But the Yomiuri Shimbun reported that only three customers were charged with simple gambling offences and each of these men had already had a criminal record.
Legal analysis says the background to the dropping of charges is murky and the law is clear on illegal gaming.
Even so, the dropped-charges incident appears to have super-charged industry growth and profitability.
Arrests and prosecutions of online gamblers since 2016 are associated with additional incriminating factors.
Consumer Proxy Police
There is little sign of enhanced police enforcement or legal crackdowns as yet, but pressure on affiliates is building among other government agencies and activists.
In the absence of a material law enforcement deterrent and political conviction to regulate, the debate vacuum on online gambling and its impacts on society has been filled for the moment by consumer affairs specialists.
The Cabinet-level Consumer Affairs Agency (CAA) in recent months issued a warning to online affiliates in general — although not specifically referring to gambling affiliates — that guidelines for affiliate advertising will be ready by the end of 2022.
The CAA is continuing a series of working group meetings on affiliate policy, with the sixth such meeting held on January 28.
Meetings to date have discussed consumer risk when affiliates create advertisements and prize incentives on behalf of advertisers without their authority, and what regulatory counter-measures would be necessary if misrepresentation occurs.
Policy suggestions under consideration include a dedicated complaint mechanism for affiliate misbehaviour, business suspension orders for those creating “improper” content, and creating an inventory of advertiser content to verify distortions in displayed material.
Targeted products include health food and hair growth agents, but it remains to be seen if the CAA will cover gaming affiliates given that the advertiser-affiliate relationship in gaming extends across borders, places “advertisers” outside the substantial reach of the law and serves an illegal domestic market.
But the CAA is most definitely aware of the activities of gambling affiliates and has investigated individual cases of possible fraud relating to affiliate activity.
On June 23 last year the CAA responded to more than 2,200 complaints over three years directed at the purportedly Cyprus-registered “NO-VA” affiliate networking website, which remains online in English and Japanese versions.
It seems spurious to argue that the offshore operator [could be] exonerated simply because it may have some sort of’ ‘licence’ elsewhere.
Officials ordered two men based in Tokyo and Osaka associated with the website to suspend all transactions and cease trading for 15 months over violations of the Specified Commercial Transactions Act.
The CAA probe found that the men generated business for gambling websites, but the Asahi Shimbun newspaper also reported on June 23 that the men had misled their members on how much they would need to invest and what was required to generate returns.
NO-VA’s website itself acknowledged the “complaints from consumer protection groups” that its members had misrepresented cash generation mechanisms to other members and had encouraged other members to sign up “under the name of their family members”.
Therefore, although Japan’s affiliate websites are avoiding the reach of gambling articles in the Criminal Code, it is clear that the remit of the CAA has, to some limited extent, begun to regulate the sector by proxy.
So, with lawmakers yet to face up to an unregulated segment potentially generating billions of dollars, consumer affairs advocates within and outside the government have become some of the most vocal on the risks of online gaming.
Five days after the CAA handed down its finding in the NO-VA case, Tokyo-based consumer affairs consultant and local government adviser Hiroshi Ikemi wrote in an online opinion piece that the public should avoid the “malicious” business model of online gambling affiliates.
Ikemi acknowledged the low likelihood of prosecution for illegal online gambling and that a criminal record is unlikely to follow police action, but he added that police arrest records will remain.
He concludes by urging readers to contact the consumer affairs hotline 188 and consult local consumer affairs service centres if they are solicited by online casinos or foreign bookmakers.
The legal analysis provided to VIXIO also raises the possibility of proxy agency targeting of foreign gambling interests, if only through a name-and-shame mechanism.
It notes that the Financial Instruments and Exchange Act (FIEA) permits the “public notification of the names and addresses of foreign entities that [illegally] solicit and conduct securities business with residents of Japan without registration”, despite a lack of associated punishment of Japanese customers.
“It seems spurious to argue that the offshore operator [could be] exonerated simply because it may have some sort of ‘licence’ elsewhere, which is not regarded as an excuse under the FIEA,” it says.
Affiliates may need to monitor pending regulation of the wider affiliate space by the Consumer Affairs Agency.
An affiliate website linked to allegedly fraudulent marketing has already been in the agency's cross-hairs.
Consumer rights activists have also begun warning the public of aberrant impacts of affiliate operations.
An Uneasy Horizon
Legal experts believe Japan will eventually take a hard look at online casino gambling, but short-term action is unlikely.
Although the government reiterated to lawmakers in 2020 that the legal status of online gambling was unchanged, and although it has expressed no interest in liberalisation, it has also shown no interest in mobilising the significant resources it would need to move against the sector.
“Public agencies currently have their hands full with the coronavirus pandemic,” the legal analysis says.
However, “if it becomes clear that there has been a significant increase in the social costs of online gambling while the government is losing millions in tax revenue, we are likely to see regulatory action of some sort — most likely zero tolerance with maximum fines imposed on resident site users to the extent that such gambling activity can be detected”.
“We can also expect severe punishment of those who are found to be engaged in soliciting pyramid scheme investments from Japanese consumers in such overseas sites/affiliates,” it says.
In the end, an unsustainable combination of social aberration and massive volume of lost tax revenue is likely to force the government’s hand — once another key gambling matter is safely dealt with, the analysis says.
“One would expect the government to put together a task force to examine the issue,” it said.
“This will most likely occur once the IR project is effectively out of the reach of public dissent because of the tendency for people to conflate the two issues.”
The pandemic is a boon for online gambling in directing traffic overseas and obstructing any government response.
Legal analysis says online gaming will eventually be put under the microscope, either punitively or for tax.
Neutralisation of integrated resort controversies will likely augur an era of reckoning for online gambling.
From key standpoints, online gambling has had the opposite experience of integrated resorts in Japan.
IRs have a solid legislative foundation and bureaucratic backup in the form of regulation and regional government mechanics, but their political burden has been so relentless that real-world outcomes have been mediocre — in terms of candidate locations, flexible governance and revenue prospects.
Online gambling, on the other hand, has taken hold and flourished in the absence of political engagement and in an environment of barely enforced law.
Although the murky legal status for online gamblers and affiliates has, if anything, permitted construction of a formidable market, the sector’s de facto reliance on an exceptional legal incident to reassure users cannot compete with expert land-based lobbying and relationship building with the Japanese establishment.
The challenge for the sector is this: Will Japan’s online industry unite in the manner of India’s online skill gaming segment and work the political networks for a transition to regulation, rather than seek safety in obscurity and an indefinite status quo?
If and when the day comes that the central government turns its full attention to online gambling, the wise money will back the first option.