Olympics Could Be Just What Japan's Economy Needs

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange.
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The International Olympic Committee has announced that Tokyo will host the 2020 summer games. (Istanbul and Madrid were the runners-up.) Japan's stock market is up on the news --although positive growth revisions also helped.

Commentators have already started warning of the Olympic "curse": that the costs associated with hosting the games are often far higher than anticipated and that the benefits are less substantial and long-lasting than advertised. But Tokyo 2020 just may prove to be an exception to this rule. The IOC's decision could help Japan implement Prime Minister Shinzo Abe's economic agenda by boosting business confidence and increasing domestic investment spending.

In theory, the Olympics are an opportunity for cities to invest in their transportation infrastructure, clean up dilapidated areas and promote tourism. Sometimes this works. I've been regularly visiting Park City, Utah, over the past two decades and can attest that it has gotten visibly richer since it hosted many events during the 2002 Winter Olympics.

Usually, however, hosting the games is a hassle. The Economist reports that "every single Games since 1960 has failed to meet the cost target" and that "the average overrun has been a whopping 179" percent. PricewaterhouseCoopers did a study on the costs and benefits of the Olympics and found that most host cities lose money. Montreal got so badly burned from the 1976 summer games that citizens had to pay a special excise tax for 40 years. Los Angeles earned a hefty profit from the 1984 event, but only because it refrained from making the kinds of investments that are supposed to boost the host city's long-term economic growth.

Unlike Park City, Lillehammer, Norway overinvested in hotels and ski resorts in the years leading up to its 1994 games, resulting in widespread bankruptcies and distressed-asset sales. Many of the stadiums built for the 2004 Athens Olympics lie abandoned and vandalized, while the security measures for the 2012 London Olympics deprived many small businesses of traffic and even forced some to close.

This record could be worrying for Tokyo. After all, Japan has spent decades wasting money on valueless construction projects. But the psychological boost from hosting the games could prove to be exactly what Japan needs. Japan's debt-fueled investment bubble collapsed more than 20 years ago -- long enough for many businesses to repay their debts. Unfortunately, businesses remain too risk-averse to make new investments. Similarly, households continue to keep more than half of their savings in physical cash and bank deposits. On net, local savers have refused to buy into Japan's impressive stock-market rally.

Ideally, the news that Tokyo will be hosting the Olympics will push businesses out of their torpor and complement the existing fiscal, monetary and deregulatory policies designed to boost spending. This may already be happening. Bloomberg News reports that international gambling conglomerates are scouting locations to build casinos in Tokyo as a result of the IOC decision. Those investments could increase Japanese household incomes and lead to further domestic spending.

Hosting the Olympics could also serve as a useful signal of the Japanese government's determination to open up its economy. According to a 2009paper by economists at the University of California, Berkeley and the Federal Reserve Bank of San Francisco, "bidding to host an international mega-event such as the Olympics is part of a costly strategy that signals trade liberalization and results in increased openness." That explanation fits with Abe's push to join the Trans-Pacific Partnership,despite oppositionfrom the influential farmers who back his Liberal Democratic Party. (The scholars note that there isn't much of a difference between being a finalist and winning, so Turkey and Spain should also benefit.)

All told, Japan has plenty of reasons to be excited that the Olympic torch is coming to Tokyo.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.