Olympics may boost Japan much more than official predictions say fund managers

10th September 2013

Japan is likely to benefit from the Olympics more than the official predictions says Taku Arai, Japanese Equities Product Manager at Schroders.

Official forecasts put the positive economic impact at only 0.3% of GDP between 2013-2020 and this has been compared in an unfavourable light with the equivalent estimate of 3.6% at the time of the 1964 Tokyo Olympics.

However Arai says: “Whilst it is probably correct that the impact will be less, it’s worth bearing in mind this figure relates only to specific Olympics expenditure and does not take into account related infrastructure investment prompted by the Olympics. Indeed some of Tokyo’s infrastructure does date back to 1964 and Tokyo 2020 is precisely the catalyst required to modernise it. In addition, Tokyo would be the exception not the rule if initial cost estimates were not exceeded significantly”.

Detailing some of these costs, Simon Somerville, manager of the Japan Income fund outlines the costs. His note says that spending on Olympic buildings and facilities is expected to be ¥455bn[1] (£2.9bn). The main costs are the new iconic Olympic stadium, nine other venues and the athletes’ village. Tokyo’s bid envisages a low-impact compact Olympics with many of the 1964 facilities being reused. 85% of the venues are within 8km of the Olympic village, which will be situated in the Tokyo Bay area.

A further ¥552bn1 (£3.6bn) has been earmarked for transport expenditure, some of which is already in progress. The total budget of approximately ¥1 trillion is about 0.2% of Japan’s current GDP. Somerville note that securities company Nomura estimates that the impact of the Olympics will be 0.5% of GDP, which, he says is pretty negligible though it is higher than the official estimate.

Arai adds that in addition to these ‘hard’ economic benefits, the intangible affect on sentiment is also important, with consumer spending a likely beneficiary.

“Sentiment indicators had just been starting to flag, so this would be a timely boost if it materialises. It is another success for Mr Abe who made a well received speech at the final presentation and completes a remarkable 12 months for him. The immediate impact is likely to boost his popularity further and put him in a stronger position to implement ‘third arrow’ measures eagerly anticipated by the stock market. Indeed optimists are already referring to the Olympics as the ‘fourth arrow’.”

Somerville also believes the social impact is likely to be much more positive. “I believe winning the Olympic bid will improve confidence among the Japanese and the feel good factor should make Prime Minister Abe even more popular. This increased sense of confidence and purpose among Japanese people should also mean that Abe’s and Bank of Japan Governor Kuroda’s pro-growth policies will become much more effective. The Olympic bid decision will, in my view, also give increased force to Abe’s “third arrow” reform policy and further drive his initiatives for PFI (private finance initiative) and PPP (public private partnership) funding”.

So, just as the 1964 Olympics demonstrated that Japan had joined the ranks of industrialised nations, by 2020 I expect that the Olympics should enable Japan to show that the economy is back in shape following the 2011 tsunami and the decades-long economic crisis.

Arai also believes that increase in confidence could pave the way to allowing Abe to levy a consumption tax.

“Uncertainty around Abe’s decision on the consumption tax increase has had a negative influence on the Japanese equity market for the last month. We expect such uncertainty to fade as we see further development of positive macroeconomic measures in Japan. The consumption tax increase may create some headwinds next year (albeit a necessary move from a long term perspective) but for today, at least, a feel-good factor was the dominant sentiment owing to the weekend’s announcement. Our view on Japanese equities remains positive given solid earnings prospects of Japanese companies and steady economic recovery exiting from deflation,” he adds.

Spending on Olympic buildings and facilities is expected to be ¥455bn[1] (£2.9bn). The main costs are the new iconic Olympic stadium, nine other venues and the athletes’ village. Tokyo’s bid envisages a low-impact compact Olympics with many of the 1964 facilities being reused. 85% of the venues are within 8km of the Olympic village1, which will be situated in the Tokyo Bay area.

A further ¥552bn1 (£3.6bn) has been earmarked for transport expenditure, some of which is already in progress. The total budget of approximately ¥1 trillion is about 0.2% of Japan’s current GDP. Overall, securities company Nomura estimates that the impact of the Olympics will be 0.5% of GDP, which in number terms is pretty negligible.

However, the social impact is likely to be much more positive. I believe winning the Olympic bid will improve confidence among the Japanese and the feel good factor should make Prime Minister Abe even more popular. This increased sense of confidence and purpose among Japanese people should also mean that Abe’s and Bank of Japan Governor Kuroda’s pro-growth policies will become much more effective. The Olympic bid decision will, in my view, also give increased force to Abe’s “third arrow” reform policy and further drive his initiatives for PFI (private finance initiative) and PPP (public private partnership) funding.

So, just as the 1964 Olympics demonstrated that Japan had joined the ranks of industrialised nations, by 2020 I expect that the Olympics should enable Japan to show that the economy is back in shape following the 2011 tsunami and the decades-long economic crisis.

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