Tokyo Summer Olympics To Provide Major Boost To Economy…. Maybe

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Hosting the Olympic games, either Summer or Winter Olympics, is a huge image booster for cities, but also for the whole country. Many politicians and governors are keen to point to the economic impulse the Olympics bring, for instance due to a large number of tourists which will visit the city and country. Now, the Bank of Japan (BoJ) calculated that the 2020 Summer Olympics hosted by Tokyo will bring as much as 30 trillion yen ($249 billion) to the land of the rising sun. Driven by construction investment and an increasing number of tourists, Japan’s gross domestic product (GDP) will grow at least an additional 0.2-0.3% per year, according to the central bank. Especially 2017-2018 will see higher growth, up an additional 0.6% compared to 2014 due to the preparations.

That is exactly the kind of boost the Japanese economy can use. Struggling with a long period of absent growth and the threats of deflation, higher demand is very welcome. The higher growth may offset the negative effects of a sales tax increase planned in 2017. The Japanese government, which requested the BoJ-study may be pleased with the report. Total investment related to the games will likely reach 10 trillion yen ($83 billion). However, it is to believe that this number will come in much higher, since many of the projects, such as new venues and infrastructural works, are keen for cost overruns. This already led to a new cheaper main stadium design, where the original price-tag increased to 6 times the original estimate.

Due to higher costs than expected, not all economists are convinced of the benefits of hosting major events such as the Olympics. For example, the European Bank for Reconstruction and Development stated that the $50 billion costs of the Sochi Winter Olympics 2014 didn’t provide a boost for Russia’s national economy. Nevertheless, the EBRD pointed to the fact that the infrastructure created by the event lasts for years to come. In addition, the image boost for the city did bring in other events, such as the Russia Formula 1 Grand Prix which was held in 2014 and 2015. The race is on next season’s calendar as well and attracts a large crowd (including President Putin!) to the city.

Next to that, economists point to the temporarily character of job creation. After the event is over, many of these jobs are no longer feasible since the tourists have left. Fortunately, in many cases tourist numbers do not decrease to old levels but are likely at a higher level than before the games. For instance, the 2002 Olympics in Salt Lake City caused a 25% increase in hotel room rents in the period from 2002 to 2009. 10 years after the Games, Utah has seen a 42% increase in skier visits. Official state estimates highlight a total profit of $100 million due to hosting the Winter Olympics.

But also these figures do not convince sceptics. Some economists, such as Professor Matheson of the College of the Holy Cross, believe that many official studies overstate the economic gains. Keep in mind, most of these studies are often made on (local) government’s request by state bodies. As a result, independent economists criticize the overly optimistic multipliers. For instance, Matheson says that indirect impact is often much smaller. Most studies ‘forget’ that many of the profits are not earned by local owners, but by (inter)national players. That has a huge impact on local circulation of proceeds. As a result, a large chunk of direct earnings is not spent locally and therefore does not lead to indirect earnings. Hence, the used multiplier may overstate the total amount of earnings.

Nevertheless, the clear winners of this type of events are the construction companies. But also this may not be of benefit for investors. As many projects in the past proved, especially the Sochi Olympics, corruption lures. In addition, due to the prestige involved, most contractors are keen to bid at low levels just to get their name on the poster. As a result, the bidding process is a sport in itself, unfortunately without spectators…

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