The Economic Impact of The 2021 Tokyo Summer Olympics

By Dr. Brian Jacobsen, CFA, CFP® and Brian Neuman

With the opening ceremonies of the Summer Olympics Games slated to begin in Tokyo on Friday, July 23, this conversation will take a deeper look at the economic impact of hosting the Olympics. With us to discuss is Brian Jacobsen, Senior Investment Strategist on the Multi-Asset Solutions Team.

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Brian Neuman: I’m Brian Neuman and you’re listening to On the Trading Desk®. In this episode, we’re talking with Brian Jacobsen, Senior Investment Strategist with the Multi-Asset Solutions Team.

With the opening ceremonies of the Summer Olympics Games slated to begin this Friday the 23rd, we thought it would be interesting to take a deeper look at the economic impact of hosting the Olympics. Welcome back to the program, Brian.

Brian Jacobsen: Yes, I’m happy to be here.

Brian Neuman: So the 2021 Summer Olympic Games hosted in Tokyo, Japan are expected to be anything but ordinary. They have been postponed an entire year and amidst continued COVID challenges, few, if any, spectators are expected to be allowed at the Olympic venues. From a markets perspective, does anything clearly stand out to you with all of this as a backdrop?

Brian Jacobsen: I think that it really highlights the disparate recovery from the COVID-19 shock. There are some areas like the U.S. and the U.K. where vaccinations have been rolled out and economies are reopening.

There are then other areas, like Japan, where they seem to be emerging from and then submerging into again lockdowns and restrictions. And after the announcements in November 2020 about how effective vaccines are against COVID-19, the markets seemed to begin to price in a synchronized global recovery, like it would be synchronized swimming events, but the recovery hasn’t been all that synchronized. It’s been more like the 200-meter individual medley where the U.S., China, and the U.K. have really dominated the podium.

Brian Neuman: That’s a great analogy. What can be said about the massive amount of infrastructure spending that typically takes place ahead of hosting an Olympic Games?

Brian Jacobsen: That’s one of the biggest costs. That’s a huge part of winning the bid to host the Olympics.

Cities need to have the sports venues, transportation, security, housing for the spectators, media, athletes, and then also, all of their coaches and family. And the bids are accepted about a decade in advance to give time for all the work that needs to be done to build this infrastructure.

I think back to a city like L.A. in 1984 that they were able to actually turn a profit on the games when they hosted, but it was mainly because they were able to use existing stadiums and infrastructure.

Now other cities that hosted the games, they’ve ended up with kind of specialized stadiums that are either vacant or decaying.

Building so much housing capacity can also be a challenge. If it’s in the form of hotels, then you get very high occupancy during the games, but then very low occupancy afterwards and sometimes that leads to depressed prices, and it can be a real challenge to operate those hotels profitably.

Local governments, they love the extra sales tax revenue. Bars and restaurants like the visitors. But the economic record isn’t really all that favorable towards hosting these events. Even if it brings in a lot of guests, it might just displace visitors that otherwise would have attended but don’t because of the crowds and costs.

And some studies have suggested that that’s the experience that London had. They had the surge of guests coming for the games, but it was actually during peak tourist season and maybe it just displaced the people who otherwise would have shown up.

Looking at Tokyo, they won the bid to host the 2020 games, but maybe they’ll suffer from what’s in the economics literature called the “Winner’s Curse” where they perhaps overpaid for the privilege, right? They are the ones who made the best bid, but when you’ve done that, maybe you might start thinking that perhaps I overpaid? And some cities, like Munich and Krakow, they didn’t have the public support so they didn’t even pursue a bid for the 2020 games.

Brian Neuman: That’s interesting. So if we take that a step further, is there anything historical that suggests that these dollars create economic prosperity and/or any measurable return on investment?

Brian Jacobsen: The track record isn’t really all that great.

There are few that broke-even, or maybe turned a profit, like L.A. in 1984. Barcelona in 1992 is another example of a city that’s widely-viewed as being successful in hosting the Olympics.

For L.A., they were the only bidder for that event and so they actually got a large chunk of the revenue from the broadcasts. Barcelona reported that their tourism picked up afterwards and it helped revitalize the city.

But others didn’t do quite as well. Montreal took about 30 years to pay off the debt that it incurred to host the games. Athens, they took on a massive amount of debt to host the games, and Greece ended up in a recession the next year. That wasn’t just due to the games. You also had that whole Greek debt crisis thing that took place, so some conflating factors were taking place there. But then Brazil, they went into a recession after they hosted the games in 2016.

It seems like the ones who bid for the games, so the individuals responsible for really advocating for it, maybe they benefit from it economically, maybe politically. But then the broader public, when you look at the cities or the regions that end up paying the price, they might not get the same benefit.

Brian Neuman: So now thinking ahead, what might we expect in the aftermath of this Summer Olympics Games? Is there an opportunity for sustained economic growth? You talked about recession. What do we think is on the horizon?

Brian Jacobsen: Yeah, like most things in this COVID-tainted world, it’s hard to tell.

The traditional arguments in favor of hosting are that the areas benefit from improved infrastructure, improved tourism, and improved prestige as being known as a world-class city. So those are the three classic arguments about the infrastructure, tourism, and then the status of the city.

But when I look at it, I think Tokyo already has all of that, right? They have great infrastructure. Tourism is a function of restrictions on travel more than it is a function of how desirable it is to go to Tokyo. And it’s already known as one of the most cosmopolitan cities in the world.

Japan already had very low unemployment, so it’s not like they had a lot of spare or idle capacity, as far as the labor force, that needed mobilizing in order to build the facilities or run the games.

Historically, the largest source of revenue is typically from the television broadcasting rights. The International Olympic Committee, they typically keep more than half of that and so the rest of it gets to go to the hosts. But then the next biggest source comes from sponsorships, then ticket sales, and then licensing.

And since Tokyo really won’t have ticket sales, that immediately kind of tarnishes the revenue generating prospects of the games. They can try to make up for it with maybe more corporate sponsorship.

So from a purely dollars and cents—or maybe in this case, a yen—perspective, it, to me, doesn’t look all that promising, but maybe the COVID recovery is going to help offset some of this possible drag from hosting the Olympics.

Brian Neuman: So the evidence you point out is pretty clear in one direction that the games are typically money losers for the host country. Is that just something that we forget every four years or is there a selling point to hosting?

Brian Jacobsen: Yeah, the four-year cycle does help keep it fresh every time that it happens. It seems unique. It would be very different if they were doing this every year. But it does seem like it’s maybe enough time in between so people can forget the lessons from the previous one and maybe think that next time will be different since a lot can change over four years.

I think it’s important to remember there can be lots of vested interests in winning the games as people like shiny new stadiums and they can see people busy at work, even if the money could have been spent on higher value-added activities.

It could be a function of the horizon of the decision makers, the politicians and civic leaders who might get a boost in popularity for winning the games versus the horizon over which the cost needs to be paid back.

I think that there are really four big lessons from previous games.

The first is that taking on a lot of debt to finance it might not be that great of an idea.

Second, if you already have full employment, you might not get much of an economic boost.

Third, you always have to think about what’s next for the stadiums and hotels since the games will go away, so having a flexible purpose facility is better than a highly-specialized facility or having maybe some overbuilding in the hotel area.

And then fourth, as far as what can sometimes make or break the games, corporate sponsorships. You get the revenue from the broadcast rights and ticket sales and licensing, but to the extent that cities have relied more on corporate sponsorship, that can tilt it into a little bit more favorable direction for the return on investment.

Brian Neuman: Well, despite the economic impact, positive or negative, of hosting the Olympic Games, a few things are for certain.

Over the next couple of weeks and amidst a lingering global pandemic, it’s estimated that over 3 billion people worldwide will tune into the Tokyo Summer Olympics where athletes from all over the globe will compete for Olympic glory and, in many cases, national fame. Brian, is there a last thought you’d like to leave our listeners with today?

Brian Jacobsen: I love watching the Olympics. I think it’s really exciting. I was really disappointed when it was cancelled in 2020 and so I’m looking forward to this. To me, it’s another sign that life is returning back to some sense of normality.

But like most people, watching a game where there aren’t spectators in the crowd for that live reaction of what’s going on in real-time that can really reduce the appeal of tuning in. It’s, to me, going to be really interesting to see what that broadcast actually looks like and the extent to which people are going to continue the pattern that we saw, let’s say, with the National Football League in the United States when they were playing in 2020 where fewer people tuned in. It was still, to me, an exciting game but not quite as exciting when you don’t have the fans in the stands.

So maybe I’ll watch short clips or highlights of people doing amazing things on the internet instead of tuning in. But if you do tune in, enjoy the spectacle and hopefully, maybe as a result of this podcast, you can have a deeper appreciation of some of the economics behind hosting the games.

Brian Neuman: Well said, and thanks for sharing your insights today, Brian.

Brian Jacobsen: Oh, my pleasure. Thanks for having me.

 Brian Neuman: That wraps up this episode of the On the Trading Desk podcast. If you’d like to read more market insights and investment perspectives from our investment teams, you can find them on our AdvantageVoice® blog.

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Originally Posted on July 22, 2021 – The Economic Impact of The 2021 Tokyo Summer Olympics

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