Waterhouse VC: Land of the Rising Sums

Every month, industry investors Waterhouse VC publish an article that spotlights different aspects of the ecosystem. This month, Tom Waterhouse delves into the land of the rising sums.

In 1854, American Commodore Matthew Perry’s "Black Ships" forced open Japan’s ports, ushering in unequal treaties that drained gold, placed foreigners beyond Japanese law and threatened economic sovereignty. The 1868 Meiji Restoration was Japan's response: modernise institutions, adopt Western technology on Japanese terms, and reclaim control over their economic destiny.

Today, Japan's wagering market faces a similar challenge. Gambling has been banned for more than a century, with only tightly managed exceptions. Legalised betting on horse racing predates the war and after 1945, three further public sports were given carve-outs to fund reconstruction and local finance: horse racing dominates at ¥4.4 trillion (US$29.7 billion) in turnover; boat racing adds ¥2.5 trillion; keirin cycling ¥1.3 trillion; with motorcycle ("auto race") comprising the remainder. These state-sanctioned pari-mutuel sports generated ¥8.5 trillion (US$57 billion) in turnover in 2024.

Yet an estimated ¥6.4 trillion (US$45 billion) of bets were placed with online operators offering products Japan's century-old framework cannot match. Like gold flowing through Yokohama's treaty ports 170 years ago, this is a loss of control.

This month we examine Japan's wagering paradox: how the world's third-largest economy became one of the world's largest sources of unregulated betting revenue, why generational change makes the status quo unsustainable, and where the opportunity lies for those positioned to help Japan modernise its wagering market.

Monopoly Money

Japanese racing has become the global gold standard, with success stemming from a crucial advantage: monopoly power. Racing is able to capture betting turnover that would otherwise flow to sports betting or online gaming. Liquidity is propelled by scale and wealth: ~120 million people, high incomes, and few legal alternatives.

The Japan Racing Association (JRA) returns 75% of pools to winning bettors. Of the 25% deduction, 10% goes to the national treasury and the balance funds operations and prize money. The ¥4.4 trillion (US$29.7 billion) of horse-racing turnover (JRA + NAR) sustains world leading prize purses, draws deep, quality fields, and creates an engaging product.

While liquidity runs deep, Japan is hard for professional syndicates to access. Most avoid it because of the complexity. Those who do enter have two routes: bet in cash and manage repatriation, or establish a Japanese company with domestic banking and pay local tax. Pools are domestic only (no international commingling) and rebates aren’t offered. For the few willing to build that capability, it’s highly rewarding, particularly as there’s less sharp competition.

Japan’s four codes all grew in 2024. Keirin turnover rose 11%, boat racing 4.1% and motor racing 7.8%. There is clear intent from each sport to engage younger audiences but with such limited legal betting options it is unsurprising that the overall pie is growing.

Pachinko to Plinko

Pachinko reveals the scale of the appetite beyond sport. This noisy pinball variant operates through a legal loophole that predates modern sweepstakes. Players combine skill and luck to win metal balls; Pachislot players use tokens on machines resembling physical slots. Both exchange winnings for prizes in-parlor, then swap prizes for cash at "unrelated" shops nearby.

¥15.7 trillion (US$110 billion) was wagered on these machines in 2023: ¥8.2 trillion pachinko, ¥7.5 trillion pachislot. Nearly double the legal sports market, yet technically, not gambling.

The model is dying. From 18,000 parlors in the 1990s peak to under 8,000 today (Source: AGB). COVID accelerated the decline, but demographics and a thriving offshore market will seal it. Young players won't tolerate physical tokens when digital alternatives exist where users can bet with one-tap deposits, gain instant settlement, and have unlimited product choice. When the legal path requires three physical steps, players choose the single click.

Product Gap

Japan's sports passion runs far beyond the four pari-mutuel codes. Baseball is a national staple. J-League football fills stadiums. Sumo, volleyball, basketball, and rugby all have loyal followings. Yet outside the four codes and pachinko parlors, the only sanctioned option is Toto, officially called the Sports Promotion Lottery, which launched in 2001.

Toto offers various football pools, such as predicting match results for the main games each round, or goal totals for selected matches – all at ¥100 per ticket. By law, the prize pool cannot exceed 50% of sales, making the house edge a minimum 50% compared to racing's 25% take. There's also "BIG," where a computer randomly picks for you.

With payouts that would make a bookmaker blush and no ability to bet on individual matches or specific outcomes, Toto lacks any features that resemble a modern sportsbook.

Meiji Moment

In June 2025, the national legislature of Japan revised law to ban the launch and promotion of online casino services targeting Japan, enabling takedowns, pressure on payment intermediaries, and cooperation with overseas regulators. Tokyo has asked foreign licensing hubs to block Japan-based users, and removal requests are being sent to offshore sites, affiliates, and influencers. These steps raise friction but will not reverse behaviour without a competitive legal product.

Japan stands at its Meiji moment for gambling. When value leaked through treaty ports, Japan modernised. Today the leak is digital, and the answer is the same.

It is too soon to judge the crackdown, but Japan’s starting point is unlike mature markets. Online sites did not steal share. They built the market because there was no domestic alternative. Habits formed online are hard to unwind, and VPNs keep the path open. Enforcement can raise friction, but only competitive legal options will change behaviour.

Hong Kong offers a useful case study. The Hong Kong Jockey Club, the territory’s exclusive wagering outlet, handled US$41 billion in 2025, including a record US$22 billion from football (up 7.8% YoY), with basketball now approved to roll out next. Breadth of product grows the regulated market and keeps money onshore.

If Japan opens, control will come first. Expect a selective regime with few licences and high bars on KYC, local presence, payments, integrity, and advertising. The advantage will sit with groups that already own the fan relationship and can pair it with credible local partners and access to government.

Japan's offshore leakage dwarfs other markets, but the solutions are consistent. Waterhouse VC backs the infrastructure that makes regulated betting competitive: reducing friction while maintaining compliance.

Japan won't abandon control for revenue. When reform comes, it will demand infrastructure that delivers both - offshore convenience within Japanese standards. Those building that bridge today will own tomorrow's market.