As Japan gears up for Olympic euphoria later this summer, some fret that the country could experience a sense of deja vu, recalling the significant economic downturn that followed the hosting of the 1964 Tokyo Games.
However, it is unlikely that Japan will face such a slump this time around. Rather than fearing an Olympic hangover, Japan should carefully observe other risks, economists say, such as trade conflicts, the U.S. presidential election and fallout from October’s consumption tax hike.
“If the economy were to slow down after the Olympics, we would have seen the economy booming more prior to it,” said Takayuki Miyajima, senior economist at Mizuho Research Institute, adding that Japan’s economic growth rates in recent years do not indicate such a scenario.
In the lead-up to the 1964 Games, Japan invested massively in infrastructure and built modern transportation networks such as the Tokaido Shinkansen and the Metropolitan Expressway. According to the Japanese Olympic Committee, spending on infrastructure totaled ¥960 billion, which at the time was worth 3 percent of the country’s GDP.
As a result, the economy grew by 11.2 percent in 1964, but the growth rate plunged the following year to 5.7 percent due to the excessive construction demand before the games. The number of bankruptcies more than tripled to 6,141 compared with the year before the games.
Construction demand is a large part of the short-term economic benefit derived from the games, Miyajima said, but “Japan is seeing no construction investment rush this time,” as Tokyo already boasts mature and modern infrastructure.
“For a deep downturn to occur, there has to be a boom before that, but the situation is nothing like that now,” Miyajima said.
Takuto Murase, senior economist at the Japan Research Institute, said the concerns about a slowdown in construction demand are unwarranted at this point.
“Because of labor shortages, (the construction industry) has not been able to meet all the demand,” he said, adding that some developers are even waiting for the Olympics to finish before launching other projects.
As for public works, it is true that projects related to the games, such as new stadiums, have helped drive demand. But even if demand in Tokyo returns to pre-2013 levels, when the capital won the bid to host the games, it is expected to decline by about ¥460 billion, just about 0.1 percent of GDP, according to Murase.
People tend to focus on the short-term economic effects of the Olympics, Mizuho Research’s Miyajima said, but they should instead be looking at the long-term impact.
In that sense, “the 2020 Tokyo Olympics has strengthened Japan’s tourism industry,” a major long-term benefit, Miyajima said.
Since Tokyo was officially selected to be the host nation, many started to see business opportunities in the rise of inbound tourism, prompting more facilities to provide multilingual support and spurring the construction of hotels. The industry has seen new tourism businesses such as minpaku (private lodging) spring up as well.
Japan can capitalize on the Olympic legacy and keep attracting foreign visitors in the longer term, Miyajima said.
Even when it comes to short-term economic ups and downs, the end of the Olympic is a rather small factor, he said.
Observing the growth rates in the past seven countries to host the games, the figures retreated in four nations in the years following the event, which could indicate a risk of post-games downturns.
But in many cases, factors unrelated to the Olympics had more impact.
Spain, which hosted the 1992 Games, was hit by the U.K.’s Black Wednesday currency crisis. In 2000, host Australia was hit by the bursting of the tech bubble, and in 2008, China was hit by the global financial crisis.
In that sense, the U.S. presidential election, the development of the U.S.-China trade row and the risk of further deceleration of the Chinese economy will likely impact Japan’s economy, said Murase of the Japan Research Institute. As for foreign demand, which has been weak because of the trade war, this year’s outlook has some positives, such as an expected jump in semiconductor demand thanks to the development of ultrafast 5G networks.
Domestically, it’s important that consumption is not dragged down from the 2 percentage-point consumption tax hike implemented in October, Murase said.
Since the government prepared some countermeasures, such as a rebate program for cashless payments, free public preschool education and reduced tax rates for foods and beverages, there is a consensus among many economists that consumption will pick up next year.
But “if the impact is deeper than expected, it will intensify the sluggish mood,” said Murase.
As foreign demand has continued to slump due to the trade war, Japan’s economy has largely been sustained by domestic demand over the past few years. But Miyajima said the outlook for employment and income is less than rosy.
Amid a dearth of manpower, the number of overall jobs in Japan has been increasing, but the number of new job openings, especially in the manufacturing sector, has been in a declining trend from last year. Plus, income growth will likely remain weak due to dwindling corporate earnings.
“Since the growth of employment and income seems to be hitting the ceiling, it may hurt consumption,” said Miyajima.