OTARU/SASEBO, Japan (Reuters) - Ageing and shrinking, Japan's country towns want to gamble away their economic and demographic woes. With lawmakers planning to submit legislation soon to open Japan to casino gambling, likely in time for the 2020 Olympics, several small cities, hot spring towns and tourist destinations are pushing to get one of the coveted licenses. Japan is one of the world's last untapped gaming markets and, with a wealthy population and proximity to China, could generate $15 billion annually from casinos, industry experts say. That would make it the world's second-largest gambling destination after Macau. So far, the cities of Tokyo and Osaka have garnered much of the attention, but even towns like Sasebo, a once-proud shipbuilding center in southern Japan, and the ageing port city of Otaru to the north, are hoping to set up casinos to draw tourists, generate tax revenues and reverse demographic decline. Hot springs, Japanese cuisine, Mt. Fuji and geisha (female entertainers) - these traditional Japanese things alone are not enough," said Kanekiyo Morita, a hotel executive who has proposed a pyramid-shaped casino in Atami, a hot springs town in central Japan. Japan's population is rapidly declining and, for tourist towns, getting foreigners to visit is extremely important. Lawmakers are planning to submit an initial bill aimed at legalizing casinos by December 6 - when the current session of parliament ends - and enact concrete laws in 2015. The bill is thought to have a decent chance of passing with the business-friendly Liberal Democratic Party in power and Prime Minister Shinzo Abe backing the move. The lawmakers have proposed two types of licenses - one for large integrated resorts run by global operators featuring convention and entertainment facilities in addition to expansive gambling floors, and another for more compact gambling resorts in the countryside. But they have also recommended that Japan limit the number of licenses, prioritizing locations promising the biggest economic impact and with the capacity to attract overseas tourists. "I don't mean to negate Tokyo and Osaka," said Keiichi Kimura, who heads a consultancy and advises local governments and casino operators interested in Japan. But it's just not right to be focusing the debate on those two places only. Las Vegas Sands Corp and MGM Resorts International have made it clear that Osaka and the Tokyo region are their primary targets. "These are the locations you can drive that kind of business tourism into and are known as commercial and financial hubs," George Tanasijevich, president of Las Vegas Sands unit Marina Bay Sands, told Reuters after a presentation in Setpember in which he showed a mock-up for a casino resort on Tokyo Bay. While lawmakers have not indicated how many locations would be given the right to develop a casino, some politicians involved in the discussions have suggested that one or two licenses might be allocated to big cities and one or two to regional economies. In Sasebo in Nagasaki Prefecture, business and political leaders want to secure one of those spots for a proposed casino alongside the windmills and canals of Huis Ten Bosch, a theme park modeled on a 17th century Dutch town. The complex, which would include a hotel and entertainment facilities in addition to gaming tables and slot machines, would generate nearly $1 billion in annual revenues, the local group estimates, jolting new life into a region that once had a vibrant manufacturing sector but is increasingly reliant on tourism. The plan is to attract tourists from nearby South Korea, China and Taiwan in addition to locals. "Tokyo shouldn't absorb everything," said Hideo Sawada, the chairman of travel agent H.I.S., which owns Huis Ten Bosch. We need balanced growth between Tokyo and the local cities. In contrast to the massive resorts of Las Vegas and Singapore, aspiring hosts outside the big cities are looking to the more compact facilities of Europe as a guide. The German spa town of Baden-Baden, which also has casinos, is serving as a model for casino proponents in two traditional hot springs towns - Atami, in Shizuoka Prefecture, and Naruto, in southwestern Japan's Tokushima Prefecture. Casinos Austria AG and Switzerland's Grand Casino Luzern, both of which say they are considering entering the Japanese market with a local partner but don't have billions of dollars to spend. To cut costs, they could use existing hotels and buildings. There are buildings that could be re-utilized and rejuvenated in Japan. That's a key feature of the European model," Grand Casino Luzern CEO Wolfgang Bliem, who recently spoke at casino conferences in Naruto and Tokyo, told Reuters. The casino operation should blend into the community. Big-ticket casinos set up in recent years have cost billions of dollars. The Marina Bay Sands, built on the mouth of the Singapore River, cost $6 billion while the Sands Cotai Central that opened in Macau last year cost $5 billion. Las Vegas magnate Steve Wynn has said his new Macau luxury resort, set to include a large lake with dancing water fountains and air conditioned gondolas, will cost $4 billion. The northernmost island of Hokkaido is shaping up as one of the key casino battlegrounds with three locations - the port towns of Otaru and Tomakomai and Kushiro on the eastern coast - officially putting themselves forward as aspiring hosts. Hokkaido, which draws tourists seeking a cooler location in the summer and skiers in the winter, has been cited by casino executives as one of the most attractive spots outside Tokyo and Osaka, along with the beaches of Okinawa in the south. Caesars Entertainment Corp said both Hokkaido and Okinawa were on its radar screen. It has visited officials in Kushiro, a Hokkaido city of 200,000 that is proposing a casino built around a hot springs resort that would also promote the culture of the indigenous Ainu people. Caesars is qualified to run a casino in Japan regardless of whether it is "an urban resort in Tokyo or Osaka, a beach resort in Okinawa, or a mountain resort in Hokkaido," said Steven Tight, head of the company's international development division. Casinos Austria is one of the global casino operators that has shown an interest in Otaru, a harbor town whose proximity to Sapporo, the biggest city on Hokkaido, is considered a key asset in the casino stakes. While Otaru attracts nearly 7 million tourists a year, too many pass through, spending a fraction of what they would if they stayed overnight. Otaru Mayor Yoshiharu Nakamatsu thinks a casino - perhaps one along the town's canal district or inside a retired cruise ship in the harbor - would change that. Without a catalyst, he warns Otaru faces a bleak future. A third of its residents are above the age of 65, well above the national average and the highest among cities in Hokkaido. "Our economy faces a negative spiral," Nakamatsu said in an interview last month. Otaru is not the only place with these problems. Additional reporting by Farah Master in Hong Kong; Editing by Raju Gopalakrishnan