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2020 Olympics: A Fourth Arrow for Abenomics?

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2020 Olympics: A Fourth Arrow for Abenomics?

Tokyo’s successful bid should boost Japan’s economy, and may help Abe get other reforms done.

Tokyo’s success in securing the 2020 Olympic Games has given Japan another confidence boost as the world’s third-biggest economy wrestles with much-needed reform. Has the International Olympic Committee helped fire a fourth arrow for “Abenomics?"

With banners in the capital city proclaiming "Japan Needs the Power of This Dream Now!" the announcement early Sunday morning Japan time that the nation would host its first Summer Games in 56 years was greeted with jubilation, not least by Prime Minister Shinzo Abe.

"For 15 years, Japan has stagnated because of deflation and a recessionary trend. I am convinced we can accelerate growth in the economy if we all work toward the dream and goals we were just granted," Abe told reporters in Buenos Aires after the announcement.

“The anticipated increase in foreign visitors will have a significant effect on the Japanese economy,” an official from travel agency JTB Corp told Jiji.

The travel industry expects up to 8.5 million tourists for the Games, which would help deliver the government’s target of 30 million tourists a year by 2030.

Tokyo expects the Games to add about 0.3 percent to GDP, with a total gain of around 3 trillion yen, while creating 150,000 jobs. The government expects the Games to cost around 400 billion yen, including 380 billion yen in construction-related spending.

However, Robert Feldman of Morgan Stanley MUFG Securities said the Games effect could be even greater.

“Our rough view is that the impact could be at least similar to [Britain], at around 0.7-0.8 percent of GDP over 7 years, or about 3-4 trillion yen on a value added basis,” he wrote in a September 4 report cited by Bloomberg.

Tokyo real estate and construction-related stocks rose Monday in response to the result, with an Olympics-related stock index compiled by Okasan Securities already having climbed 45 percent in the year through September 6 on anticipation.

On Monday, the prime minister received another boost with the Cabinet Office revising upwards GDP growth data for the second quarter to an annualized rate of 3.8 percent on higher business investment, compared with the previous estimate of 2.6 percent.

According to a Nikkei survey, the Japanese economy is expected to expand by 2.8 percent in fiscal 2014, well ahead of the economy’s estimated potential growth rate of 0.7 percent.

Tax hike

For the prime minister, the Olympics announcement has come at a welcome time, amid the debate over April’s planned hike in the consumption tax rate from 5 to 8 percent. Abe is expected to announce his decision on October 1, the same day the Bank of Japan releases its quarterly “tankan” survey of business confidence.

While Abenomics has boosted Japanese equities and weakened the yen, higher corporate profits have yet to translate into the increased wages and consumer spending necessary to stimulate activity and end deflation. Consumer sentiment fell for a third straight month in August, while the Economy Watchers Survey has fallen for five consecutive months, influenced by higher commodities prices.

The government has also battled to contain the crisis at the stricken Fukushima Daiichi nuclear plant, delaying plans for a restart of nuclear power elsewhere that would cut energy costs.

Critics have also questioned Abe’s commitment to firing Abenomics’ third arrow of economic reform on top of monetary and fiscal stimulus, despite the prime minister stating that the next Diet session from October would be devoted to the strategy.

However, Japan analyst Devin Stewart, Senior Fellow at the Carnegie Council, told The Diplomat that the Olympics announcement was yet another sign that Japan “is getting its groove back.”

“Abe took a big risk by making the bid personally and his risk will likely pay off in his popularity and political capital, which he can use to pass policies, such as the consumption tax increase and TPP [Trans-Pacific Partnership] legislation. Moreover, the successful Olympic bid will help Japan's national confidence and self-esteem, and the psychological elements of economic recovery cannot be dismissed,” he said.

“Strong GDP, stock market, bank lending and business confidence may now be joined by a likely rise in consumer confidence that would come from this good news for Japan. With the wind at his back, Abe has a much better chance at passing ambitious initiatives like the TPP. With this background, if Abe is able to manage the Fukushima crisis, he will probably be seen as the most politically successful prime minister since [Junichiro] Koizumi.”