(Bloomberg) -- Casino executives who have long salivated over Japan as a potential $20 billion gaming market are beginning to question whether that jackpot is worth all the trouble.

Japan legalized casino gambling in 2016 to great excitement in the industry. Companies including MGM Resorts International and Las Vegas Sands Corp. have spent heavily to get access to a gaming market that could become Asia’s second-largest after Macau.

Three years later, some of that enthusiasm is wearing off. A number of casino executives, who declined to speak publicly because of the sensitive nature of the casino approval process, told Bloomberg News that the process in Japan has been more difficult compared with other markets that have built gaming industries. At least one company, Caesars Entertainment Corp., has pulled out.

Gaming operators are becoming frustrated by unclear tax and gaming policies, as well as delays that are likely to push the opening of any casino beyond a 2025 target. A lack of interest among local governments and companies, as well as residents’ worries about addiction and crime, is also slowing the process.

Complicating Calculations

While most casino operators are still pursuing Japan resorts, the difficulties are complicating the calculations for the potential costs and eventual payoff associated with a Japanese integrated resort.

“There’s so many different hurdles, it’s really called into question the feasibility of these projects,” said Bloomberg Intelligence contributing analyst David Bonnet. “You have this element where it’s ‘hey we passed this law,’ but no one wants to embrace it, and that’s the biggest issue.”

Caesars gave up on a Japan casino in August, opting instead to focus on its current businesses and a merger with Eldorado Resorts Inc. Others have seen carefully laid plans suddenly upended, as when Hokkaido said last month it wouldn’t pursue a bid in the current round for a license. The region in northern Japan was considered a front-runner to host a casino, with Hard Rock International Inc. actively seeking to establish a resort there.

When Hokkaido announced it was opting out for now, Japan’s Chief Cabinet Secretary Yoshihide Suga declined to comment on the decision, but said he would like to see casinos open quickly so their benefits can be realized.

In the initial stage of the development process, the Japanese national government will award three casino licenses. It will take applications in the first half of 2021 from municipalities that have selected an operator to work with on establishing a resort.

So far, Japan’s second-largest metropolitan hub of Osaka has been the furthest in the process of selecting an operator, hoping to use an integrated resort as part of its efforts in hosting the World Expo in 2025. Yokohama, just south of Tokyo, has also raised its hand, but faces vocal opposition from its residents.

Lukewarm Support

Some municipalities have been slow or reluctant in selecting an operator, and industry watchers have pointed to an apparent lack of coordination between national and local governments. Japanese businesses have also been lukewarm in providing crucial support or financing for the plans.

Operators have estimated it could take $10 billion or more to build out large integrated resorts with hotel and meeting spaces. In a conference call in October, Las Vegas Sands President Robert Goldstein compared that cost for a single casino in Japan against developing several locations in China for the same price.

“No matter how good you are at this business, that must give you pause and stop and think, ‘is that prudent?’” Goldstein said on the call. “Can you really deploy, can you get the return?”

The estimates have become clouded by a lack of clarity on government policies governing casinos. In the past month, the national government floated and then shelved a proposal to tax foreigner’s gaming winnings. Such a practice, which doesn’t take place in Macau or Las Vegas, would have created a major burden for casino operators.

Onerous Conditions

The uncertainty in regulations adds to conditions some operators have already considered onerous. A 30% tax on gross gaming revenue is viewed as steep, while limits on casino gaming space and a five-year renewal period for the licenses could hinder project financing.

With the majority of Japanese residents opposing casinos, lawmakers have attempted to address gambling addiction and crime. As a result, junkets -- which bring in high-rollers and are a key driver of revenue in Macau -- won’t be allowed in Japan, and operators will have to go through background checks through a casino commission to win a license.

“Japan is a fairly costly market in terms of taxes and government requirements,” said Goldman Sachs Group analyst Masaru Sugiyama. “It’s essentially a balancing act between that costly government and tax structure versus the potentially attractive market.”

It’s hard to ignore how lucrative the business could be. Brian Sterz, an investment adviser at Miracle Mile Advisors in Los Angeles, said the opportunity in the island nation is just too big for the major U.S. players to pass up. “When you’re talking about a new market like this, there’s enterprise value to be had,” he said.

But casino operators are willing to go only so far. Executives at Wynn Resorts Ltd., in a November earning conference call, said the company is taking a disciplined approach, looking at the cost structure, return profile and shareholder enthusiasm for the projects.

“We are going to pursue Japan with vigor,” said Chief Executive Officer Matt Maddox. “But we will not pursue it if it does not make financial sense.”

--With assistance from Christopher Palmeri, Grace Huang and Isabel Reynolds.

To contact the reporter on this story: Lisa Du in Tokyo at ldu31@bloomberg.net

To contact the editors responsible for this story: Rachel Chang at wchang98@bloomberg.net, Jeff Sutherland

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