Japan recently found out that it would be holding the 2020 Olympics, and the country may have more to celebrate than the initial burst in revenue. If the Olympics are able to stoke consumer and business sentiment like Societe Generale analysts Comtakuji Aida and Kiyoko Katahira think they will, then it could be the final piece of the puzzle to finally pulling Japan out of recurrent deflation.
Japan generating revenue from Olympics
Holding the Olympics is big business, and the Tokyo Municipal Government expects to get about 3 trillion Yen in direct profits from the event. There will be “capital investment (such as the construction of game sites, related buildings and the Olympic village) and consumption expenditures on operations (for the opening/closing ceremonies, transportation, security etc), together with spending by audiences and consumers alike (such as Olympic souvenirs and TV purchases),” explain Aida and Katahira.
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But in the grand scheme of things, that’s a boost of about 0.6 percent GDP. It’s nice, but it doesn’t have lasting ramifications. “The real effect of hosting the Olympics lies more in the improved Japanese business sentiment,” say Aida and Katahira. Assuming Abe’s ‘Three Arrows’ play out as he wants, or at least close enough that the country doesn’t fall back into a deflationary spiral, the Olympics could be the final boost that ends deflation once and for all, making it the unnamed ‘fourth arrow’ in Abe’s plans.
Hurdles in Japan’s recovery
As with any prediction that’s still seven years away, this assumes a lot. There are plenty of pitfalls (likely including some that we are unaware of right now) that could upset Japan’s recovery before 2020 arrives. But if everything else goes according to plan, then “the improvement in business sentiment boosted by Abenomics and the Olympics will together amount to 2 trillion yen per year between 2014 and 2019,” say Aida and Katahira. “Against this backdrop, the Tokyo Olympics will boost the Abenomics effect and serve to help Japan to exit from deflation as well as solving economic structural problems.”
That’s a lot to lay on a sporting event, but it may turn out that the final blow against Japan’s deflationary problem is a cultural event with only secondary economic importance.