Will Tokyo's 2020 Olympics kick-start Japan's economy?

The 1964 Games showed how the company had progressed. Now it has a chance to show its recovery, says Simon Read

The opening ceremony for the last time Japan staged the Olympic Games, in 1964 (Getty Images)

One of the key tricks to being a successful investor is to be ahead of the herd. And there's a possibility of doing just that by acting upon this week's Olympic vote, which saw Tokyo emerge as the chosen destination for the 2020 Olympics.

The move has already boosted construction stocks on the anticipation of generous contracts being awarded, but further ahead the 2020 Olympics should prove beneficial for Japan's tourism and travel industries. But is it a good idea to invest now for anticipated growth?

Two questions spring to mind: first, does the Olympics actually help investors? Second, Japan has been in a long-term slump, so does a sporting event seven years ahead mean you should think differently about investing in the nation?

For the Olympic investment question, we can refer back to research prepared last year ahead of the London Games. Analysis of the investment performance of the previous five countries to host the Olympics painted a depressing picture. Only Greece and the US reported a small gain, but in China, Australia and Spain, the market fell over the period one month before the Games until their end. The Barcelona Olympics actually saw an almost 15 per cent fall in Spanish stock markets.

But, frankly, you'd have expected markets to have factored in any Olympics boost long before the Games began, so it follows that there could be a slump around the time of the Games, although that would of course depend on what else is happening to dent or boost market confidence.

More than 12 months after the London Olympics the sentiment is much more positive than in the immediate aftermath. Trade and investment minister Lord Green said recently that there was "a large pipeline of future business contracts going forward" which had resulted from the Olympics.

But, again, investors are likely to have seen most gains in the years following London winning the Games in 2005, rather than before, during or after the Olympics.

Will the same be true for Japan? "Being awarded the 2020 Olympics is good for sentiment and will have some real economic effects in due course," says Tom Stevenson, investment director at Fidelity.

"Construction stocks were notable beneficiaries of the announcement, although the impact will obviously be spread over the next seven years.

"The Olympic boost adds to growing evidence of economic recovery with annualised GDP growth of nearly 4 per cent representing a significant turn around for a country which has been in the deflationary doldrums for the best part of 20 years."

Juliet Schooling Latter, head of research at Chelsea Financial Services, agrees.

"Being named host for the Olympics is largely viewed as being positive, the only negative being that they usually require significant amounts of government investment. As Japan is widely regarded as being reasonably indebted this may cause some concerns," she warns.

"However, the Japanese government does have substantial assets too and there has been talk of selling them down in the next two to three years, which should help the deficit. But the construction and retail benefits of the Olympics should be a further boost to Abenomics and his aim to reflate the economy. Certainly the feelgood factor should help."

"Abenomics" is the term coined to describe the policies being pushed through by Japan's prime minister Shinzo Abe, pictured right. It is an initiative which consists of "three arrows" – named after the Japanese legend that individual arrows can break, but three held together are very strong. The three policies he's backing are bold monetary relaxation, flexible fiscal stimulus, and a growth strategy to revive the private sector.

There are many sceptics about the approach but, to date, the policies are having a more positive impact than many people expected. Winning the Olympics could help the prime minister, believes Simon Somerville, manager of the Jupiter Japan Income fund.

"It will improve confidence among the Japanese and the feelgood factor should make prime minister Abe even more popular," he predicts. "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."

Some optimistic commentators have already termed the Olympics the fourth arrow, believing that it will bring greater prosperity to the country.

"But in the short term, the key to Japan is whether or not the prime minister goes ahead with a proposed increase from next April in the consumption tax (which is similar to VAT) from 5 per cent to 8 per cent, points out Mr Stevenson.

"This is very controversial in Japan because recovery in the late 1990s was snuffed out by a premature tax hike. Proponents of the tax argue that if Japan does not demonstrate that it is getting to grips with reducing its deficit the bond market could react badly, with yields rising which would make it harder for the government to service its sky-high debts."

Mr Stevenson believes it would be better if the sales tax were introduced gradually, say by 1 per cent a year for over three years.

"This would avoid a big surge in demand as people buy things before the tax rate goes up followed by a slump after it is introduced."

Further ahead, spending on Olympic buildings and facilities is expected to be ¥455bn (£2.9bn). The main costs will be a new, iconic Olympic stadium, nine other venues and the athletes' village, but the plan is to re-use many of the facilities built for the last time Tokyo held the Olympics in 1964.

However, the Olympic costs may not have much effect on the economy.

"Securities company Nomura estimates that the impact of the Olympics will be 0.5 per cent of GDP, which in number terms is pretty negligible," points out Mr Somerville.

"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," he adds.

So given all that, is now an attractive time to invest?

"The market is still cheap versus long-term history, although not as cheap as it was at the start of the year," says Ms Schooling Latter.

"Earnings per share growth is strong and margins should improve substantially as all companies have reduced their cost bases so much in recent years. There is still lots of potential for the market to move higher.

"There will continue to be periods of nervousness though so won't be in a straight line!"

But the legacy of the economic crisis still looms large over Japan, warns Brian Dennehy of FundExpert.com.

"The financial state of Japan makes Greece look like a paragon of financial virtue," he says. "Japan is the most indebted developed country in the world!"

So should you invest in Japan?

"That depends on valuation, and whether you believe the Olympic boost can help it bounce from two decades of economic torpor," Mr Dennehy says.