The one event that counts for Japan this weekend

Tomohiro Ohsumi | Bloomberg| Getty Images

While the world will be focused on the G20 Summit and U.S. non-farm payrolls this weekend, there is one event that will top all others for Japan: the vote on who will host the 2020 Olympic Games.

A victory for the Japanese capital would likely boost optimism in the country's economic outlook and could fuel further gains in Japanese stocks.

(Read more: Is Japan's economic recovery gaining traction?)

"Here in Japan, there's tremendous anticipation that Japan will win the Olympic bid, so there is some good news being factored in to the market," Charles Beazely, chief executive and president at Nikko Asset Management told CNBC, adding that he expected the Nikkei to rally to 18,000 over the next 18 months or so.

Tokyo is the favorite to win the bid over rival cities Madrid and Istanbul, given recent anti-government protests in Istanbul and continued concerns over the recession and social unrest in Spain.

Japanese Prime Minister Shinzo Abe even made an early departure from the G20 meeting of world leaders in Russia on Thursday to make a personal bid to the International Olympic Committee, which will announce the outcome of the vote in Buenos Aires on Saturday.

However, while sectors such as construction and tourism have gained recently in anticipation of Tokyo winning the Olympic bid, Japan's blue-chip Nikkei stock index was down 0.9 percent at about 13,940 on Friday, with traders citing caution before the Olympic vote.

(Read more: Stocks that may do well if Japan wins the 2020 Olympic bid)

News that hundreds of tons of radioactive water are pouring into the Pacific Ocean each day from the damaged Fukushima nuclear plant have cast a shadow over Tokyo's Olympic bid.

"The talk today is that the market is nervous about the 2020 Olympic bid. Although polls earlier in week had Tokyo as the big favorite," said Chris Weston, chief markets strategist at IG, a trading firm.

(Read more: Fukushima radiation readings hit new high near contaminated tanks)

Online betting site Paddy Power rates Tokyo as the favorite to win the Olympic bid with odds of 8-to-15, compared with odds of 2-to-1 for Madrid and 9-to-2 for Istanbul, Reuters reported on Friday, adding that people close to the selection process say the Spanish bid is quickly gathering pace.

Win or lose, the Nikkei is still the best performing major equity market globally. Japanese stocks are up roughly 60 percent this year due to a powerful boost from Abe's pro-growth economic policies and aggressive monetary stimulus.

—By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC