Do North Koreans, who own many of Japan’s 15,000 pachinko parlors, funnel the proceeds back home to finance illegal activities? Professor Toshio Miyatsuka, a leading authority on Korean-Japanese relations, estimates that around 75% of pachinko parlors are run by ethnic Koreans. Other sources suggest that around 90% of parlors are owned by Koreans with the remaining operated by Japanese and Chinese.

Of the parlors owned by Koreans, the commonly accepted estimate is that 30% are operated by ethnic North Koreans and 70% by South Koreans.

In 1994, Japanese police testified in court that about 30% of the pachinko machine industry was controlled by North Koreans. In total $600 million is sent from Japan to North Korea each year, and it would seem that much of that comes from pachinko.

The pachinko industry as a whole is illegal, and its grey status has led to it to develop into a hotbed of shady activities. Article 23 of the Entertainment and Amusement Trades Rationalisation Act specifically prohibits pachinko parlors from providing cash or marketable securities as merchandise or buying back goods that are offered to the customer. This includes the steel balls used to play the game, and prizes.

To circumvent this law, winning players cash in balls or tokens for prizes, which are often small plastic boxes or cards. These prizes are then exchanged for cash at a separate location. There is also a third shop that acts as an intermediary between pachinko machine parlors and exchange stores – these are like wholesale clearing houses.

The yakuza (the Japanese mafia) used to be involved in pachinko parlors, and their role dates back to being the first to establish exchange shops where prizes could be converted to cash. However, these exchange shops have increasingly been taken over by retired police officers and this has pushed the Yakuza out of their involvement in pachinko.

The Japanese government is also a pachinko loser since it cannot tax an illegal industry. That’s 30 trillion yen of money wagered a year that ain’t being taxed, and ain’t going to the yakuza – Kim Jong-il must be cackling away!

So what exactly are the characteristics of this Japanese leisure industry that the Koreans have such a grip on? Some fast facts:

• There are in excess of 17 million pachinko players, but the number of players is declining and is expected to continue to decrease in low single-digit terms per annum over the next 15 years
• The average expenditure per player has increased by 2% per annum over the past 10 years
• Players have been switching from the pachinko to the higher volatility pachislot machines
• New legislation aims to curb the trend towards heavy-use high-spend gamblers who have been driving the growth in pachislot
• Amounts wagered have been flat since the 1990s, but nascent economic growth is expected to be a driver in increasing amounts wagered
• Despite flat revenues there has been an increase in machine sales, which implies a lower level of revenue per machine for the operators and a higher turnover rate of costly machines. The extent to which this has been offset by the trend towards heavy-use high-spend gamblers is unknown as data on pachinko operators is limited
• There has been a strong trend towards industry consolidation which is expected to continue under regulatory pressure
• Financing for pachinko is more limited that for standard real estate asset classes
• Pachinko operators are increasing turning to the capital markets, in the form of securitzations, to finance their voracious appetite for investment in new machines, and for the opening of new parlors

Although there are in excess of 17 million pachinko players, this number has declined by 5% a year over the past 10 years. However, at the same time heavy-use players, who have been attracted to the gambling elements of pachislot, have increased in importance. These heavy-use players spending more has prompted stiffer regulation, known as Regulation 5, to cut the gambling element of the higher volatility pachislot machines.

Following the implementation of Regulation 5 pachislot has become less popular and generates lower revenue per machine for hall operators. According to a 2006 Leisure White Paper, pachinko-player numbers will continue to decrease in low single-digit terms per annum over the next 15 years. The intention of Regulation 5 is to better control the pachislot industry, and force the industry to return to low return/low risk machines.