The Tokyo 2020 Olympics , postponed due to Covid-19, will finally open on July 23 – with the Paralympics following from August 24 – although the organising committee has decided there will be no foreign fans and volunteers . This is not the first time Japan has experienced Olympic disruption. The 1940 Tokyo Olympics were a non-event, overshadowed by the war with China and World War II. The Olympic and Paralympic Games of 1964 symbolised Japan’s dramatic recovery from war, fuelled its subsequent economic growth and empowered the Japanese people to become contributing members of global society. The Japanese government had expected long-lasting social, economic and cultural benefits from the 2020 Olympic and Paralympic Games. Before the onset of the pandemic, the events had been billed as the “recovery games”, as the authorities wished to showcase Japan’s resilience and reconstruction following the 2011 earthquake, tsunami and nuclear disaster . The term has since taken on a second meaning. Given the continuing global Covid-19 crisis, economists at the Daiwa Institute of Research estimate that domestic consumption expenditure will decrease by 60-70 billion yen (US$544 million to US$635 million) due to the absence of overseas visitors to the games, compared to what it would have been under normal circumstances. Also, if Japanese spectators are limited to 50 per cent of capacity , the decrease could reach 130 billion yen. Even so, the economic impact of excluding foreign spectators from the Olympics looks likely to be a price worth paying provided that the events proceed. More importantly, it is desirable from an economic and health perspective that the games be held with safety in mind. Meanwhile, various parallel activities that showcase advanced technology, such as autonomous driving, will still take place, albeit on a smaller scale. Many sustainable initiatives surrounding the games signal the positive change Japan is seeking. These include making medals for the games out of metal recycled from mobile phones , for example, and podiums out of recycled plastic. Venues will be built using timber borrowed from local governments across Japan, with plans to return the timber. Torches have been made of the aluminium previously used in temporary housing for the survivors of the 2011 earthquake and tsunami, while 500 fuel cell electric vehicles will be used as passenger cars for stakeholders. Such projects aim to highlight sustainability, which could help catalyse behavioural change in the global audience. Besides the games, there are several reasons Japan is well-positioned for a solid recovery in 2021, potentially outpacing other industrialised nations. Japan’s Covid-19 caseload is relatively mild, compared to that of other developed markets. In the manufacturing sector, machinery orders (a kind of heartbeat sensor for Japan) have picked up nicely in the past several months, similar to global orders for machine tools and industrial robots. America’s 1980s Japanese lesson for today’s China There have been a number of structural changes to our daily lives following Covid-19 outbreaks, such as the move to online shopping , streaming entertainment and working from home. The shift to cloud computing will accelerate in many more areas. Meanwhile, many companies have benefited from the acceleration in trends that were already taking shape, including online medical service providers, software providers and components suppliers for data centres and factory automation . Evaluation of management is critical to stock selection. Only quality management teams will continue responding to the ongoing acceleration of digitalisation with sufficient agility. In addition to these structural changes, we are witnessing the increasing importance of blending online and offline environments. Companies that can swiftly adopt such a model are likely to better survive and emerge stronger from this economic downturn. This is true not only in the consumer space, such as retailers of apparel and household goods, but also in the business-to-business space, such as sales of corporate hardware and software and supply of remote maintenance services. With the Japanese government’s commitment to investing in environmental projects, business opportunities are arising. That said, stock selection will play a key role as profitability differs from project to project. Importantly, the latest round of quarterly earnings in Japan has, on average, shown improvement from the previous quarter. Starting from 2021, profit growth year on year should materialise as fundamentals have been recovering after leading indicators mostly hit bottom around May 2020 . The equity market should react positively to the improving trajectory. It is expected to make a sharp earnings recovery this year, and earnings may reach a new historic high in the 2022-2023 financial year after the previous peak in 2018. Ultimately, the Japanese equity market is set to deliver positive performance in 2021. The recovery has just started. Despite the disruption, the “recovery” Tokyo Olympics and Paralympics will leave a legacy for future games. We look forward to watching over 10,000 inspiring athletes from around the world compete. Notably, these will be the first gender-balanced games in history – a landmark in gender equality on and off the field of play, paving the way for a more equal and inclusive society. Reiko Mito and Ernst Glanzmann are investment directors for Japan equities at GAM Investments